Credit Appraisel

1
RESEARCH METHODOLOGY

Introduction to Credit Appraisal:
Credit appraisal means an investigation/assessment done by the bank prior beIore providing any loans &
advances/project Iinance & also checks the commercial, Iinancial & technical viability oI the project
proposed its Iunding pattern & Iurther checks the primary & collateral security cover available Ior
recovery oI such Iunds.
Problem Statement:
To study the Credit Appraisal System in SME sector, at State Bank oI India (SBI), Uttarsanda.
Objectives:
To study the Credit Appraisal Methods.
To understand the commercial, Iinancial & technical viability oI the project proposed & it`s
Iunding pattern.
To understand the pattern Ior primary & collateral security cover available Ior recovery oI such
Iunds.

Research Design:
Analytical in nature
Data Collection:
Primary Data:
O InIormal interviews with Branch Manager and other staII members at SBI bank.
O E-circulars oI SBI

2

Secondary Data:
O Books and magazines
O Database at SBI
O Internal reports oI the banks
O ibrary research
O ebsites

Expected contribution oI the study:
This study will help in understanding the credit appraisal system at SBI & to understand how to reduce
various risk parameters, which are broadly categorized into Iinancial risk, business risk, industrial risk &
management risk associated in providing any loans or advances or project Iinance.
BeneIiciaries:
Researcher:
This report will help researcher in improving knowledge about the credit appraisal system and to have
practical exposure oI the credit appraisal scenario in SBI.
Management student:
The project will help the management student to know the patterns oI credit appraisal in SBI
bank.

SBI Bank:
The project will help bank in reducing the credit risk parameters and to improve its eIIiciencies.
It will also help to reduce risk associated in providing any loans & advances or project Iinance in
Iuture and to overcome the loopholes.

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Short write-up on the researcher and reason Ior taking up the project:
O The researcher are MBA 2
nd
year students, studying in N.R.INSTITUTE OF BUSINESS
MANAGEMENT(GS),AHMEDABAD.
O The reason Ior taking up the project is to know and understand the credit appraisal system in
banking sector.
O Credit appraisal is the major Iocus oI banking industries these days, so the project will help in
understanding and analyzing the situation prevailing currently.

Limitations of the study:
O As the credit rating is one oI the crucial areas Ior any bank, some oI the technicalities are not
revealed which may have cause destruction to the inIormation and our exploration oI the
problem.
O As some oI the inIormation is not revealed, whatever suggestions generated, are based on certain
assumptions.
O Credit appraisal system includes various types oI detail studies Ior diIIerent areas oI analysis, but
due to time constraint, our analysis was oI limited areas only.

4

CHAPTER-1
INTRODUCTION TO BANKING SECTOR AND SBI
snapshot of the banking industry:
The Reserve Bank oI India (RBI), as the central bank oI the country, closely monitors
developments in the whole Iinancial 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
oI 51 scheduled urban co-operative banks and 16 scheduled state co-operative banks.
Scheduled commercial banks touched, on the deposit Iront, a growth oI 14 as against 18 registered in
the previous year. And on advances, the growth was 14.5 against 17.3 oI the earlier year.
Higher provisioning norms, tighter asset classiIication norms, dispensing with the concept oI past due`
Ior recognition oI NPAs, lowering oI 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 oI banks
to absorb losses and the ratio has subsequently been raised Irom 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 Ior nearly two-
third oI the total retail portIolio oI the bank. According to one estimate, the retail segment is expected to
grow at 30-40 in the coming years.
Net banking, phone banking, mobile banking, ATMs and bill payments are the new buzz words that
banks are using to lure customers.
ith a view to provide an institutional mechanism Ior sharing oI inIormation on borrowers / potential
borrowers by banks and Financial Institutions, the Credit InIormation Bureau (India) td. (CIBI) was set
up in August 2000. The Bureau provides a Iramework Ior collecting, processing and sharing credit
inIormation on borrowers oI credit institutions. SBI and HDFC are the promoters oI the CIBI.
3

The RBI is now planning to transIer oI its stakes in the SBI, NHB and National bank Ior Agricultural and
Rural Development to the private players. Also, the Government has sought to lower its holding in PSBs
to a minimum oI 33 oI total capital by allowing them to raise capital Irom the market.
Banks are Iree to acquire shares, convertible debentures oI corporate and units oI equity-oriented mutual
Iunds, subject to a ceiling oI 5 oI the total outstanding advances (including commercial paper) as on
March 31 oI the previous year.
The Iinance ministry spelt out structure oI the government-sponsored ARC called the Asset
Reconstruction Company (India) imited (ARCI), this pilot project oI the ministry would pave way Ior
smoother Iunctioning oI 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 Iirst phase oI Iinancial reIorms resulted in the nationalization oI 14 major banks in 1969 and resulted
in a shiIt Irom Class banking to Mass banking. This in turn resulted in a signiIicant growth in the
geographical coverage oI banks. Every bank has to earmark a minimum percentage oI their loan portIolio
to sectors identiIied as 'priority sectors. The manuIacturing sector also grew during the 1970s in
protected environs and the banking sector was a critical source. The next wave oI reIorms saw the
nationalization oI 6 more commercial banks in 1980. Since then the number scheduled commercial banks
increased Iour-Iold and the number oI banks branches increased eight-Iold.
AIter the second phase oI Iinancial sector reIorms and liberalization oI the sector in the early nineties, the
Public Sector Banks (PSB) s Iound it extremely diIIicult to complete with the new private sector banks
and the Ioreign banks. The new private sector banks Iirst made their appearance aIter 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-oI-the-art technology, which in turn helps them to
save on manpower costs and provide better services.
During the year 2000, the State Bank oI India (SBI) and its 7 associates accounted Ior a 25 share in
deposits and 28.1 share in credit. The 20 nationalized banks accounted Ior 53.5 oI the deposits and
47.5 oI credit during the same period. The share oI Ioreign banks ( numbering 42 ), regional rural banks
and other scheduled commercial banks accounted Ior 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 oI India, 1949 can be
broadly classiIied into two major categories, non-scheduled banks and scheduled banks. Scheduled banks
comprise commercial banks and the co-operative banks. In terms oI ownership, commercial banks can be
Iurther grouped into nationalized banks, the State Bank oI India and its group banks, regional rural banks
and private sector banks (the old / new domestic and Ioreign). These banks have over 67,000 branches
spread across the country. The Indian banking industry is a mix oI the public sector, private sector and
Ioreign banks. The private sector banks are again spilt into old banks and new banks.

Banking System in India
Reserve bank oI India (Controlling Authority)

Development Financial institutions Banks

IFCI IDBI ICICI NABARD NHB IRBI EXIM Bank SIDBI

Commercial Regional Rural and Development Co-operative
Banks Banks Banks Banks

Public Sector Banks Private Sector Banks

SBI Groups Nationalized Banks Indian Banks Foreign Bank

7

ABOUT SBI:

1nL LACL 1C SnAkL 1nL NLWS
SnAkL 1nL VILWS
The State Bank oI India, the country`s oldest Bank and a premier in terms oI balance sheet size, number
oI branches, market capitalization and proIits is today going through a momentous phase oI Change and
TransIormation the two hundred year old Public sector behemoth is today stirring out oI its Public
Sector legacy and moving with an agility to give the Private and Foreign Banks a run Ior their money.
The bank is entering into many new businesses with strategic tie ups Pension Funds, General Insurance,
Custodial Services, Private Equity, Mobile Banking, Point oI Sale Merchant Acquisition, Advisory
Services, structured products etc each one oI these initiatives having a huge potential Ior growth.
The Bank is Iorging ahead with cutting edge technology and innovative new banking models, to expand
its Rural Banking base, looking at the vast untapped potential in the hinterland and proposes to cover
100,000 villages in the next two years.
It is also Iocusing at the top end oI the market, on whole sale banking capabilities to provide India`s
growing mid / large Corporate with a complete array oI products and services. It is consolidating its
global treasury operations and entering into structured products and derivative instruments. Today, the
Bank is the largest provider oI inIrastructure debt and the largest arranger oI external commercial
borrowings in the country. It is the only Indian bank to Ieature in the Fortune 500 list.
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The Bank is changing outdated Iront and back end processes to modern customer Iriendly
processes to help improve the total customer experience. ith about 11448 oI its own branches
and another 6500 branches oI its Associate Banks already networked, today it oIIers the largest
banking network to the Indian customer. Banking behemoth State Bank oI India is planning to
set up 15,000 ATMs in the country by March 2010 investing more than Rs 1,000 crore.
RP Sinha, deputy managing director (inIormation technology) oI the bank, said: "e plan to
have 25,000 ATMs in the country by March 2010. e will add 15,000 ATMs to the existing
ones by end oI this Iiscal." The bank has almost 10,300 ATMs in the country at present.
According to a senior SBI oIIicial, the spot Ior an ATM counter is taken on lease. It requires Rs
5.2-5.5 lakh to set up the inIrastructure and almost Rs 3.5 lakh Ior an ATM machine. "All put
together, the cost is around Rs 9 lakh per counter," he said. Going by the estimate, SBI would
require a whopping Rs 1,350 crore Ior setting up 15,000 ATMs.
The Bank is also in the process oI providing complete payment solution to its clientele with its ATMs,
and other electronic channels such as Internet banking, debit cards, mobile banking, etc.
ith Iour national level Apex Training Colleges and 54 learning Centres spread all over the country the
Bank is continuously engaged in skill enhancement oI its employees. Some oI the training programes are
attended by bankers Irom banks in other countries.
The bank is also looking at opportunities to grow in size in India as well as internationally. It presently
has 82 Ioreign oIIices in 32 countries across the globe. It has also 8 Subsidiaries in India SBI Capital
Markets td, SBI Mutual Funds, SBI Iactor and commercial services td, SBI DFHI td, SBI Cards and
Payment Services td, SBI iIe Insurance Company td, SBI Fund Management Pvt. td, SBI Canada -
Iorming a Iormidable group in the Indian Banking scenario. It is in the process oI raising capital Ior its
growth and also consolidating its various holdings.

9

Background:
State Bank oI India is the largest and one oI the oldest commercial bank in India, in existence Ior more
than 200 years. The bank provides a Iull range oI corporate, commercial and retail banking services in
India. Indian central bank namely Reserve Bank oI India (RBI) is the major share holder oI the bank with
59.7 stake. The bank is capitalized to the extent oI Rs.646bn with the public holding (other than
promoters) at 40.3.
SBI has the largest branch and ATM network spread across every corner oI India. Thebank has a branch
network oI over 17000 branches (including subsidiaries). Apart IromIndian network it also has a network
oI 73 overseas oIIices in 30 countries in all time zones, correspondent relationship with 520 International
banks in 123 countries. In recent past, SBI has acquired banks in Mauritius, Kenya and Indonesia. The
bank had total staII strength oI 198,774 as on 31st March, 2008. OI this, 29.51 are oIIicers, 45.19
clerical staII and the remaining 25.30 were sub-staII. The bank is listed on the Bombay Stock
Exchange, National Stock Exchange, Kolkata Stock Exchange, Chennai Stock Exchange and Ahmedabad
Stock Exchange while its GDRs are listed on the ondon Stock Exchange.
SBI group accounts Ior around 25 oI the total business oI the banking industry while itaccounts Ior 35
oI the total Ioreign exchange in India. ith this type oI strong base, SBI has displayed a continued
perIormance in the last Iew years in scaling up its eIIiciency levels. Net Interest Income oI the bank has
witnessed a CAGR oI 13.3 during the last Iive years. During the same period, net interest margin (NIM)
oI the bank has gone up Irom as low as 2.9 in FY02 to 3.40 in FY06 and currently is at 3.32.

10

KEY AREAS OF OPERATION:
The business operations oI SBI can be broadly classiIied into the key income generating areas such as
National Banking, International Banking, Corporate Banking, & Treasury operations. The Iunctioning oI
some oI the key divisions is enumerated below:

a) Corporate banking
The corporate banking segment oI the bank has total business oI around Rs1,193bn. SBI has created
various Strategic Business Units (SBU) in order to streamline its operations.
These SBUs are as Iollows:
a.1) Corporate Accounts
a.2) easing
a.3) Project Finance
a.4) Mid Corporate Group
a.5) Stressed Assets Management

b) National banking
The national banking group has 14 administrative circles encompassing a vast network oI 9,177 branches,
4 sub-oIIices, 12 exchange bureaus, 104 satellite oIIices and 679 extension counters, to reach out to
customers, even in the remotest corners oI the country. Out oI the total branches, 809 are specialized
branches. This group consists oI Iour business group which are enumerated below:
b.1) Personal Banking SBU
b.2) Small & Medium Enterprises
b.3) Agricultural Banking
b.4) Government Banking
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c) International banking
SBI has a network oI 73 overseas oIIices in 30 countries in all time zones and correspondent relationship
with 520 international banks in 123 countries. The bank is keen to implement core banking solution to its
international branches also. During FY06, 25 Ioreign oIIices were successIully switched over to Finacle
soItware. SBI has installed ATMs at Male, Muscat and Colombo OIIices. In recent years, SBI acquired
76 shareholding in Giro Commercial Bank imited in Kenya and PT Indomonex Bank td. in
Indonesia. The bank incorporated a company SBI Botswana td. at Gaborone.

d) Treasury
The bank manages an integrated treasury covering both domestic and Ioreign exchange markets. In recent
years, the treasury operation oI the bank has become more active amidst rising interest rate scenario,
robust credit growth and liquidity constraints. The bank diversiIied its operations more actively into
alternative assets classes with a view to diversiIy the portIolio and build alternative revenue streams in
order to oIIset the losses in Iixed income portIolio. Reorganization oI the treasury processes at domestic
and global levels is also being undertaken to leverage on the operational synergy between business units
and network. The reorganization seeks to enhance the eIIiciencies in use oI manpower resources and
increase maneuverability oI banks operations in the markets both domestic as well as international.

e) ssociates & Subsidiaries
The State Bank Group with a network oI 14,061 branches including 4,755 branches oI its seven Associate
Banks dominates the banking industry in India. In addition to banking, the Group, through its various
subsidiaries, provides a whole range oI Iinancial services which includes iIe Insurance, Merchant
Banking, Mutual Funds, Credit Card, Factoring, Security trading and primary dealership in the Money
Market.
e.1) Associates Banks:
SBI has six associate banks namely
State Bank oI Indore
State Bank oI Travancore
12

State Bank oI Bikaner and Jaipur
State Bank oI Mysore
State Bank oI Patiala
State Bank oI Hyderabad

e.2) Non-Banking Subsidiaries/Joint Ventures
i) SBI Capital Markets td,
ii) SBI Mutual Funds,
iii) SBI Iactor and commercial services td,
iv) SBI DFHI td,
v) SBI Cards and Payment Services td,
vi) SBI iIe Insurance Company td,
vii) SBI Fund Management Pvt. td, SBI

13

CHAPTER 2
INDUSTRY ANALYSIS

Competitive forces modeI in the banking industry
(PORTER'S FIVE-FORCE MODEL)
rof Mlchael orLer's compeLlLlve forces Model applles Lo each and every company as well as lndusLry
1hls model wlLh regards Lo Lhe 8anklng lndusLry ls presenLed below

(2)
otent|a| Lntrants ls hlgh as
developmenL flnanclal
lnsLlLuLlons as well as prlvaLe
and forelgn banks have
enLered ln a blg way
(3)
Crgan|z|ng power of the
supp||er ls hlgh WlLh Lhe
new flnanclal lnsLrumenLs
Lhey are asklng hlgher
reLurn on Lhe lnvesLmenLs
(1)
k|va|ry among ex|st|ng f|rms
has lncreased wlLh
llberallzaLlon new producLs
and lmproved cusLomer
servlces ls Lhe focus

(4)
8arga|n|ng power of buyers
ls hlgh as corporaLe can ralse
funds easlly due Lo hlgh
compeLlLlon
(3)
1hreat from subst|tute ls hlgh
due Lo compeLlLlon from
n8lCs and lnsurance
companles as Lhey offer a hlgh
raLe of lnLeresL Lhan banks
14

Rivalry among existing firms
ith the process oI 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 oI
services provided by banks has improved drastically.
Potential Entrants
Previously the Development Financial Institutions mainly provided project Iinance and development
activities. But they now entered into retail banking which has resulted into stiII competition among the
exiting players.
Threats from Substitutes
Banks Iace threats Irom Non-Banking Financial Companies. NBFCs oIIer a higher rate oI interest.
Bargaining Power of Buyers
Corporate can raise their Iunds through primary market or by issue oI GDRs, FCCBs. As a result they
have a higher bargaining power. Even in the case oI personal Iinance, the buyers have a high bargaining
power. This is mainly because oI competition.
Bargaining Power of Suppliers
ith the advent oI new Iinancial instruments providing a higher rate oI returns to the investors, the
investments in deposits is not growing in a phased manner. The suppliers demand a higher return Ior the
investments.
verall nalysis
The key issue is how can banks leverage their strengths to have a better Iuture. Since the availability oI
Iunds is more and deployment oI Iunds 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. Funding corporate at a
low cost oI capital is a special requisite.

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SWOT ANALYSIS
The banking sector is also taken as a proxy Ior the economy as a whole. The perIormance oI bank should
thereIore, reIlect 'Trends in the Indian Economy. Due to the reIorms in the Iinancial sector, banking
industry has changed drastically with the opportunities to the work with, new accounting standards new
entrants and inIormation technology. The deregulation oI the interest rate, participation oI banks in
project Iinancing has changed in the environment oI banks.
The perIormance oI banking industry is done through SOT Analysis. It mainly helps to know the
strengths and eakness oI the industry and to improve will be known through converting the
opportunities into strengths. It also helps Ior the competitive environment among the banks.

a) STRENGTHS

vailability of Funds
There are seven lakh crore wroth oI deposits available in the banking system. Because oI the recession in
the economy and volatility in capital markets, consumers preIer to deposit their money in banks. This is
mainly because oI liquidity Ior investors.
Banking network
AIter 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.
Large Customer Base
This is mainly attributed to the large network oI the banking sector. Depositers in rural areas preIer banks
because oI the Iailure oI the NBFCs.
Low Cost of Capital
Corporate preIers borrowing money Irom banks because oI low cost oI capital. Middle income people
who want money Ior personal Iinancing can look to banks as they oIIer at very low rates oI interests.
Consumer credit Iorms the major source oI Iinancing by banks.

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b) ENESS

Loan Deployment
Because oI the recession in the economy the banks have idle resources to the tune oI 3.3 lakh crores.
Corporate lending has reduced drastically
Powerful Unions
Nationalization oI banks had a positive outcome in helping the Indian Economy as a whole. But this had
also proved detrimental in the Iorm oI strong unions, which have a major inIluence in decision-making.
They are against automation.
Priority Sector Lending
To upliIt the society, priority sector lending was brought in during nationalization. This is good Ior the
economy but banks have Iailed to manage the asset quality and their intensions were more towards
IulIilling government norms. As a result lending was done Ior non-productive purposes.
High Non-Performing ssets
Non-PerIorming Assets (NPAs) have become a matter oI concern in the banking industry. This is because
oI change in the total outstanding advances, which has to be reduced to meet the international standards.

c) PPRTUNITIES

Universal Banking
Banks have moved along the valve chain to provide their customers more products and services. For
example: - SBI is into SBI home Iinance, SBI Capital Markets, SBI Bonds etc.
Differential Interest Rates
As RBI control over bank reduces, they will have greater Ilexibility to Iix their own
interest rates which depends on the proIitability oI the banks.

High Household Savings
Household savings has been increasing drastically. Investment in Iinancial assets has also increased.
Banks should use this opportunity Ior raising Iunds.
17

verseas Markets
Banks should tape the overseas market, as the cost oI capital is very low.
Interest Banking
The advance in inIormation technology has made banking easier. Business can eIIectively carried out
through internet banking.

d) THRETS

NBFCs, Capital Markets and Mutual funds
There is a huge investment oI household savings. The investments in NBFCs deposits, Capital Market
Instruments and Mutual Funds are increasing. Normally these instruments oIIer better return to investors.
Change in the Government Policy
The change in the government policy has proved to be a threat to the banking sector.
Inflation
The interest rates go down with a Iall in inIlation. Thus, the investors will shiIt his investments to the
other proIitable sectors.
Recession
Due to the recession in the business cycle the economy Iunctions poorly and this has proved to be a threat
to the banking sector. The market oriented economy and globalization has resulted into competition Ior
market share. The spread in the banking sector is very narrow. To meet the competition the banks has to
grow at a Iaster rates and reduce the overheads. They can introduce the new products and develop the
existing services.

18

CHAPTER 3
INTRODUCTION TO SME

1 Concept:
The small-scale industries (SSI) produce about 8000 products, contribute 40 oI the industrial output and
oIIer the largest employment aIter agriculture. The sector, thereIore, presents an opportunity to the nation
to harness local competitive advantages Ior achieving global dominance.

19

2 From SSI to SME:
DeIining the New Paradigm2.1 Government policy as well as credit policy has so Iar concentrated on
manuIacturing units in the small-scale sector. The lowering oI trade barriers across the globe has
increased the minimum viable scale oI enterprises. The size oI the unit and technology employed Ior
Iirms to be globally competitive is now oI a higher order. The deIinition oI small-scale sector needs to be
revisited and the policy should consider inclusion oI services and trade sectors within its ambit. In
keeping with global practice, there is also a need to broaden the current concept oI the sector and include
the medium enterprises in a composite sector oI Small and Medium Enterprises (SMEs). A
comprehensive legislation, which would enable the paradigm shiIt Irom small-scale industry to small and
medium enterprises under consideration oI Parliament. The Reserve Bank oI India had meanwhile set up
an Internal Group which has recommended: Current SSI/tiny industries deIinition may continue. Units
with investment in plant and machinery in excess oI SSI limit and up to Rs.10 crore may be treated as
Medium Enterprises (ME). The deIinition may be reviewed aIter enactment oI the Small and Medium
Enterprises Development Bill.
3 Definition of SMEs-
' At present, a small scale industrial unit is an undertaking in which investment in plant and machinery,
does not exceed Rs.1 crore, except in respect oI certain speciIied items under hosiery, hand tools, drugs
and pharmaceuticals, stationery items and sports goods, where this investment limit has been enhanced to
Rs 5 crore. Units with investment in plant and machinery in excess oI SSI limit and up to Rs. 25 crore
may be treated as Medium Enterprises (ME). '
The Government oI India has enacted the Micro, Small and Medium Enterprises Development (MSMED)
Act 2006 which was notiIied on October 2, 2006. The deIinition oI the small and medium enterprises as
provided in the Act (Annex VII) will have immediate eIIect.

20

4 Eligibility criteria
(i) These guidelines would be applicable to the Iollowing entities, which are viable or potentially viable:
a) All non-corporate SMEs irrespective oI the level oI dues to banks.
b) All corporate SMEs, which are enjoying banking Iacilities Irom a single bank, irrespective oI the level
oI dues to the bank.
c) All corporate SMEs, which have Iunded and non-Iunded outstanding up to Rs.10 crore under multiple/
consortium banking arrangement.
(ii) Accounts involving willIul deIault, Iraud and malIeasance will not be eligible Ior restructuring under
these guidelines.
(iii) Accounts classiIied by banks as 'oss Assets will not be eligible Ior restructuring.
(iv) In respect oI BIFR cases banks should ensure completion oI all Iormalities in seeking approval Irom
BIFR beIore implementing the package.

SME: At present, a small scale industrial unit is an industrial undertaking in which investment in plant
and machinery, does not exceed Rs.1 crore except in respect oI certain speciIied items under hosiery,
hand tools, drugs and pharmaceuticals, stationery items and sports goods where this investment limit has
been enhanced to Rs.5 crore. A comprehensive legislation which would enable the paradigm shiIt Irom
small scale industry to small and medium enterprises is under consideration oI Parliament. Pending
enactment oI the above legislation, current SSI/tiny industries deIinition may continue. Units with
investment in plant and machinery in excess oI SSI limit and up to Rs.10 crore may be treated as Medium
Enterprises (ME). Only SSI Iinancing will be included in Priority Sector.
All banks may Iix selI-targets Ior Iinancing to SME sector so as to reIlect a higher disbursement over the
immediately preceding year, while the sub-targets Ior Iinancing tiny units and smaller units to the extent
oI 40 and 20 respectively may continue. Banks may arrange to compile data on outstanding credit to
SME sector as on March 31, 2005 as per new deIinition and also showing the break up separately Ior tiny,
small and medium enterprises.
8anks may lnlLlaLe necessary sLeps Lo raLlonallze Lhe cosL of loans Lo SML secLor by adopLlng a
LransparenL raLlng sysLem wlLh cosL of credlL belng llnked Lo Lhe credlL raLlng of enLerprlse
21

Slu8l has developed a CredlL Appralsal 8aLlng 1ool (CA81) as well as a 8lsk AssessmenL Model (8AM)
and a comprehenslve raLlng model for rlsk assessmenL of proposals for SMLs 1he banks may conslder Lo
Lake advanLage of Lhese models as approprlaLe and reduce Lhelr LransacLlon cosLs
In order to increase the outreach oI Iormal credit to the SME sector, all banks, including
Regional Rural Banks may make concerted eIIorts to provide credit cover on an average to at
least 5 new small/medium enterprises at each oI their semi urban/urban branches per year.
A debt restructuring mechanism Ior nursing oI sick units in SME sector and a One Time Settlement
(OTS) Scheme Ior small scale NPA accounts in the books oI the banks as on March 31, 2004 are being
introduced.
Challenges faced by SME:
The challenges being Iaced by the small and medium sector may be brieIly set out as Iollows-
a) Small and Medium Enterprises (SME), particularly the tiny segment oI the small enterprises
have inadequate access to Iinance due to lack oI Iinancial inIormation and non-Iormal business
practices. SMEs also lack access to private equity and venture capital and have a very limited
access to secondary market instruments.
b) SMEs Iace Iragmented markets in respect oI their inputs as well as products and are
vulnerable to market Iluctuations.
c) SMEs lack easy access to inter-state and international markets.
d) The access oI SMEs to technology and product innovations is also limited. There is lack oI
awareness oI global best practices.
e) SMEs Iace considerable delays in the settlement oI dues/payment oI bills by the large scale buyers.
ith the deregulation oI the Iinancial sector, the ability oI the banks to service the credit requirements oI
the SME sector depends on the underlying transaction costs, eIIicient recovery processes and available
security. There is an immediate need Ior the banking sector to Iocus on credit and SMEs.

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CHAPTER 4
OVERVIEW OF CREDIT APPRAISAL
Brief overview of credit:
Credit Appraisal is a process to ascertain the risks associated with the extension oI the credit Iacility. It is
generally carried by the Iinancial institutions which are involved in providing Iinancial Iunding to its
customers. Credit risk is a risk related to non repayment oI the credit obtained by the customer oI a bank.
Thus it is necessary to appraise the credibility oI the customer in order to mitigate the credit risk. Proper
evaluation oI the customer is perIormed which measures the Iinancial condition and the ability oI the
customer to repay back the loan in Iuture. Generally the credit Iacilities 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 Ilows are
ascertained to ensure the timely payment oI principal and the interest.
It is the process oI appraising the credit worthiness oI a loan applicant. Factors like age, income, number
oI dependents, nature oI employment, continuity oI employment, repayment capacity, previous loans,
credit cards, etc. are taken into account while appraising the credit worthiness oI a person. Every bank or
lending institution has its own panel oI oIIicials Ior this purpose.
However the 3 C` oI credit are crucial & relevant to all borrowers/ lending which must be kept in mind at
all times.
Character
Capacity
Collateral

II any one oI these are missing in the equation then the lending oIIicer must question the viability oI
credit.
23

There is no guarantee to ensure a loan does not run into problems; however iI proper credit evaluation
techniques and monitoring are implemented then naturally the loan loss probability / problems will be
minimized, which should be the objective oI every lending oIIicer.
Credit is the provision oI resources (such as granting a loan) by one party to another party where that
second party does not reimburse the Iirst party immediately, thereby generating a debt, and instead
arranges either to repay or return those resources (or material(s) oI equal value) at a later date. The Iirst
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 Ior them later. e use credit to buy things
with an agreement to repay the loans over a period oI time. The most common way to avail credit is by
the use oI 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 Irom another party and promises
to repay him on a Iuture date along with interest. In simple terms, a credit is an agreement oI postponed
payments oI goods bought or loan. ith the issuance oI a credit, a debt is Iormed.

Basic types of credit
There are Iour basic types oI credit. By understanding how each works, you will be able to get the most
Ior your money and avoid paying unnecessary charges.
Service credit is monthly payments Ior utilities such as telephone, gas, electricity, and water. You oIten
have to pay a deposit, and you may pay a late charge iI your payment is not on time.
Loans let you borrow cash. oans can be Ior small or large amounts and Ior a Iew days or several years.
Money can be repaid in one lump sum or in several regular payments until the amount you borrowed and
the Iinance charges are paid in Iull. oans can be secured or unsecured.
Installment credit may be described as buying on time, Iinancing through the store or the easy payment
plan. The borrower takes the goods home in exchange Ior a promise to pay later. Cars, major appliances,
and Iurniture are oIten purchased this way. You usually sign a contract, make a down payment, and agree
24

to pay the balance with a speciIied number oI equal payments called installments. The Iinance charges are
included in the payments. The item you purchase may be used as security Ior the loan.
Credit cards are issued by individual retail stores, banks, or businesses. Using a credit card can be the
equivalent oI an interest-Iree loan--iI you pay Ior the use oI it in Iull at the end oI each month.

Brief overview of loans:

oans can be oI two types Iund base & non-Iund base:

FUND BASE includes:

orking Capital
Term oan

NON-FUND BASE includes:

etter oI Credit
Bank Guarantee
Bill Discounting

23

FUND BSE: -

ORKING CAPITA: -
General
The objective oI running any industry is earning proIits. An industry will require Iunds to acquire
'Iixed assets like land, building, plant, machinery, equipments, vehicles, tools etc., & also to run the
business i.e. its day to day operations.
Funds required Ior day to-day working will be to Iinance production & sales. For production, Iunds are
needed Ior purchase oI raw materials/ stores/ Iuel, Ior employment oI labour, Ior power charges etc., Ior
storing Iinishing goods till they are sold out & Ior Iinancing the sales by way oI sundry debtors/
receivables.
Capital or Iunds required Ior an industry can thereIore be biIurcated as Iixed capital & working capital.
orking capital in this context is the excess oI current assets over current liabilities. The excess oI current
assets over current liabilities is treated as net working capital or liquid surplus & represents that portion oI
the working capital, which has been provided Irom the long-term source.

DEFINITIN
orking capital is deIined as the Iunds required to carry the required levels oI current assets to enable the
unit to carry on its operations at the expected levels uninterruptedly.

Thus orking Capital Required is dependent on
(a) The volume oI activity (viz. level oI operations i.e. Production & sales)
(b) The activity carried on viz. mIg process, product, production programme, the materials &
marketing mix.

26

Methods & pplication

SEGMENT LIMITS METHD

SSI Upto Rs 5 cr Traditional Method & Nayak Committee method
Above Rs 5 cr Projected Balance Sheet Method

SBF All loans Traditional / Turnover Method

C&I Trade &
Services
Upto Rs 1 cr Traditional Method Ior Trade &
Projected Turnover Method
Above Rs 1 cr
& upto Rs 5 cr
Projected Balance Sheet Method &
C&I Industrial
Units
Below
Rs 25 lacs
Traditional Method
Rs 25 lacs &
Over but upto
Rs 5 cr
Projected Balance Sheet Method &

perating cycle method

Any manuIacturing activity is characterized by a cycle oI operations consisting oI purchase oI
purchase oI raw materials Ior cash, converting these into Iinished goods & realizing cash by sale oI
these Iinished goods.

Diagrammatically, the PERTING CYCLE is represented as under

The time that lapses between cash outlay & cash realization by sale oI Iinished goods &
realization oI sundry debtors is known as the length oI the operating cycle.

27

That is, the operating cycle consists oI:

Time taken to acquire raw materials & average period Ior which they are in store.
Conversion process time
Average period Ior which Iinished goods are in store &
Average collection period oI receivables (Sundry Debtors)

Operating cycle is also called the cash-to-cash cycle & indicates how cash is converted into
raw materials, stocks in process, Iinished goods, bills (receivables) & Iinally back to cash.
orking capital is the total cash that is circulating in this cycle. ThereIore, working capital
can be turned over or redeployed aIter completing the cycle.

cash
8aw
maLerlals
Workln
progress
llnlshed
goods
debLors
28

The length oI the operating cycle abcd (as in 4.4)

II a 60 days
b 10 days
c 20 days
d 30 days

The operating cycle is 120 days (nearly 4 months). This means there are 365/120 3 cycles oI
operations in a year.

Sales Rs. 1,00,000 per annum
Operating expenses Rs. 72,000 per annum

But the working capital requirement, as you know, is not Rs. 72,000.

In these cases, there are 3 operating cycles in a year. That means each rupee oI working
deployed in the unit is turned over 3 times in a year. (This is also known as working capital
turnover ratio).
ThereIore CR Operating Expenses Rs. 72,000/- Rs. 24,000/-
No. oI cycles per annum 3

CR is thereIore not Rs. 72,000/- but only Rs. 24,000/-

Assessment oI orking Capital Requirement & Permissible Bank Finance using Operating Cycle
Concept

et us consider a case oI a unit where:

Sales Rs. 20,000 p.m. (A)
Raw Materials Rs. 14,000 p.m.
29

ages Rs. 2,000 p.m.

Other manuIacturing
Expenses Rs. 3,000 p.m.
Total expenses Rs. 19,000 p.m. (B)
ProIit Rs. 1,000 P.m. (C)

The operating cycle is
Raw Materials 15 days
Stock in Process 2 days
FG 3 days
Sundry Debtors 15 days
The total length oI
Operating cycle 35 days (D)

CR B * D 19,000 * 35 Rs. 22,167/- (approx.)
30 30
here B Operating Expenses; &
D ength oI Operating cycle

The length oI the operating cycle is diIIerent Irom industry to industry and Irom one Iirm to another
within the same industry. For instance, the operating cycle oI a pharmaceutical unit would be quite
diIIerent Irom one engaged in the manuIacture oI machine tools. The operating cycle concept enables us
to assess the working capital need oI each enterprise keeping in view the peculiarities oI the industry it is
engaged in and its scale oI operations. Operating cycle is an important management tool in decision-
making.

30

Traditional Method of ssessment of orking Capital Requirement
The operating cycle concept serves to identiIy the areas requiring improvement Ior the purpose oI control
and perIormance review. But, as bankers, we require a more detailed analysis to assess the various
components oI working capital requirement viz., Iinance Ior
stocks, bills etc. Bankers provide working capital Iinance Ior holding an acceptable level oI current assets,
viz. raw materials, stocks-in-process, Iinished goods and sundry debtors Ior achieving a predetermined
level oI production and sales. QuantiIication oI these Iunds required to be blocked in each oI these items
oI current assets at any time will, thereIore provide a measure oI the working capital requirement (CR)
oI an industry.

It can thus be summarized as Iollows:

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Projected nnual Turnover Method for SSI units (Nayak Committee)
For SSI units which enjoy Iund based working capital limits up to Rs.5 cr, the minimum working capital
limit should be Iixed on the basis oI projected annual turnover. 25 oI the output or annual turnover
value should be computed as the quantum oI working capital required by such unit .The unit should be
required to bring in 5 oI their annual turnover as margin money and the Bank shall provide 20 oI the
turnover as working capital Iinance. Nayak committee Guidelines correspond to working capital limits as
per the Operating Cycle method where the average production / processing cycle is taken to be 3 months
(i.e. working capital would be turned over 4 times in a year).

Projected nnual Turnover Method for C & I industrial units (limits upto Rs cr)
Bank has decided to extend Nayak Committee approach Ior assessment oI limits to C&I industrial units
requiring credit limits upto Rs.5 cr. That is, credit requirement up to Rs.5 crores oI C&I borrowers
(industrial units) may be assessed at a minimum oI 20 oI projected annual turnover. In other words, the
working capital requirement will be assessed at 25 oI projected annual turnover, oI which 5 should be
borne by entrepreneur as margin and 20 would be allowed as Bank Drawings. hile accepting
projected annual sales turnover, a cap oI 25 over actual annual sales turnover in the immediately
preceding year should be set, except where production capacity has been substantially increased.

Projected nnual Turnover Method for Business Enterprises in Trade & Services
Sector:
i) For working Capital limits up to Rs. 5 cr to C&I(Trade) sector, the assessment oI credit limit is to be
based upon annual turnover. Thus, an across the board credit limit equal to 15 oI projected annual
turnover be oIIered to business enterprises in the T&S sector. It would be available Ior utilization
generally as a cash credit limit. However, where needed an C limit (as a sub-limit oI total), may also be
allowed.
ii) The credit limit would be secured by hypothecation charge on the current assets oI the enterprise.
Periodical stock statements are to be obtained and margin oI 25 be retained.
iii) Credit limits under this assessment method may be oIIered to established (at least 3 years old) proIit
making business enterprises, eligible Ior credit rating oI SB-4 and above. Mortgage oI property valued at
32

least at 33 oI the limit is to be prescribed. Further, an interest rebate oI 0.50 p.a. may be given to
borrowers who oIIer mortgage oI property valued at over 75 oI the credit limit.
iv) hile accepting projected annual sales turnover, a cap oI 25 over actual annual sales turnover in the
immediately preceding year should be set. hen circumstances warrant its breach, reasons thereIor
should be recorded.
v) here borrowers indicate need Ior credit limits which are higher than the amount indicated above,
assessment under the traditional PBS method may be resorted to.
Projected Balance Sheet Method (PBS)
The PBS method oI assessment will be applicable to all C&I borrowers who are engaged in
manuIacturing, services, and trading activities, including merchant exports and who require Iund based
working capital Iinance oI Rs. 25 lacs and above. In the case oI SSI borrowers, who require working
capital credit limit up to Rs.5 cr, the limit shall be computed on the basis oI Nayak Committee Iormula as
well as that based on production and operating cycle oI the unit and the higher oI the two may be
sanctioned. Fund based working capital credit limits beyond Rs 5 cr Ior SSI units shall be computed in the
same way as Ior C&I units. For business enterprises in Trade and Services Sector, where the projected
turnover method is not applicable, PBS method shall be Iollowed.
8 In the Projected Balance Sheet (PBS) method, the borrower`s total business operations, Iinancial
position, management capabilities etc. are analyzed in detail to assess the working capital Iinance required
and to evaluate the overall risk oI the exposure. The Iollowing Iinancial analysis is also to be carried out:

Analysis oI the borrower`s ProIit and oss account, Balance Sheet, Funds Flow etc. Ior the
past periods is done to examine the proIitability, Iinancial position, Iinancial management, etc.
in the business.
Detailed scrutiny and validation oI the projected income and expense in the business, and
projected changes in the Iinancial position (sources and uses oI Iunds) are carried out to
examine iI these are acceptable Irom the angle oI liquidity, overall gearing, eIIiciency oI
operations etc.

33

8 There will not be a prescription like mandatory minimum current ratio or maximum level oI a current
asset (inventory and receivables holding level norms) under PBS method. Under the PBS method,
assessment oI C requirement will be carried out in respect oI each borrower with proper examination oI
all parameters relevant to the borrower and their acceptability.

TERM LN:
A term loan is granted Ior a Iixed term oI not less than 3 years intended normally Ior Iinancing
Iixed assets acquired with a repayment schedule normally not exceeding 8 years.
A term loan is a loan granted Ior the purpose oI capital assets, such as purchase oI land,
construction oI, buildings, purchase oI machinery, modernization, renovation or rationalization oI
plant, & repayable Irom out oI the Iuture earning oI the enterprise, in installments, as per a
prearranged schedule.
From the above deIinition, the Iollowing diIIerences between a term loan & the working capital
credit aIIorded by the Bank are apparent:
The purpose oI the term loan is Ior acquisition oI capital assets.
The term loan is an advance not repayable on demand but only in installments ranging over
a period oI years.
The repayment oI term loan is not out oI sale proceeds oI the goods & commodities per se,
whether given as security or not. The repayment should come out oI the Iuture cash
accruals Irom the activity oI the unit.
The security is not the readily saleable goods & commodities but the Iixed assets oI the
units.
It may thus be observed that the scope & operation oI the term loans are entirely diIIerent Irom
those oI the conventional working capital advances. The Bank`s commitment is Ior a long period
& the risk involved is greater. An element oI risk is inherent in any type oI loan because oI the
uncertainty oI the repayment. onger the duration oI the credit, greater is the attendant
uncertainty oI 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 deIinite repayment programme unlike short term loans Ior working
capital (especially the cash credits) which are being renewed year aIter year. Term loans would be
repaid in a regular way Irom the anticipated income oI the industry/ trade.
34

These distinctive characteristics oI term loans distinguish them Irom the short term credit granted
by the banks & it becomes necessary thereIore, to adopt a diIIerent approach in examining the
applications oI borrowers Ior such credit & Ior appraising such proposals.
The repayment oI a term loan depends on the Iuture income oI the borrowing unit. Hence, the
primary task oI the bank beIore granting term loans is to assure itselI that the anticipated income
Irom the unit would provide the necessary amount Ior the repayment oI the loan. This will
involve a detailed scrutiny oI the scheme, its Iinancial aspects, economic aspects, technical
aspects, a projection oI Iuture trends oI outputs & sales & estimates oI cost, returns, Ilow oI Iunds
& proIits.

ppraisal of Term Loans
Appraisal oI term loan Ior, say, an industrial unit is a process comprising several steps. There
are Iour broad aspects oI appraisal, namely

Technical Feasibility - To determine the suitability oI the technology selected & the
adequacy oI the technical investigation & design;

Economic Feasibility - To ascertain the extent oI proIitability oI the project & its
suIIiciency in relation to the repayment obligations pertaining to term assistance;

Financial Feasibility - To determine the accuracy oI cost estimates, suitability oI the
envisaged pattern oI Iinancing & general soundness oI the capital structure; &

Managerial Competency To ascertain that competent men are behind the project to
ensure its successIul implementation & eIIicient management aIter commencement oI
commercial production

33

Technical Feasibility
The examination oI this item consists oI an assessment oI the various requirement oI the actual
production process. It is in short a study oI the availability, costs, quality & accessibility oI all the
goods & services needed.
a) The location oI the project is highly relevant to its technical Ieasibility & hence special
attention will have to be paid to this Ieature. Projects whose technical requirements could
have been taken care oI in one location sometimes Iail because they are established in another
place where conditions are less Iavorable. One project was located near a river to Iacilitate
easy transportation by barge but lower water level in certain seasons made essential
transportation almost impossible. Too many projects have become uneconomical because
suIIicient care has not been taken in the location oI the project, e.g. a woolen scouring &
spinning mill needed large quantities oI good water but was located in a place which lacked
ordinary supply oI water & the limited water supply available also required eIIicient
soItening treatment. The accessibility to the various resources has meaning only with
reIerence to location. Inadequate transport Iacilities or lack oI suIIicient power or water Ior
instance, can adversely aIIect an otherwise sound industrial project.
b) Size oI the plant One oI the most important considerations aIIecting the Ieasibility oI a new
industrial enterprise is the right size oI the plant. The size oI the plant will be such that it will
give an economic product, which will be competitive when compared to the alternative
product available in the market. A smaller plant than the optimum size may result in
increased production costs & may not be able to sell its products at competitive prices.
c) Type oI technology An important Ieature oI the Ieasibility relates to the type oI technology
to be adopted Ior a project. A new technology will have to be Iully examined & tired beIore it
is adopted. It is equally important to avoid adopting equipment or processes which are
absolute or likely to become outdated soon. The principle underlying the technological
selection is that 'a developing country cannot aIIord to be the Iirst to adopt the new nor yet
the last to cast the old aside.
d) abour The labour requirements oI a project, need to be assessed with special care. Though
labour in terms oI unemployed persons is abundant in the country, there is shortage oI trained
personnel. The quality oI labour required & the training Iacilities made available to the unit
will have to be taken into account
e) Technical Report A technical report using the Bank`s Consultancy Cell, external
consultants, etc., should be obtained with speciIic comments on the Ieasibility oI scheme, its
36

proIitability, whether machinery proposed to be acquired by the unit under the scheme will be
suIIicient Ior all stages oI production, the extent oI competition prevailing, marketability oI
the products etc., wherever necessary.

Economic Feasibility
An economic Ieasibility appraisal has reIerence to the earning capacity oI the project. Since earnings
depend on the volume oI sales, it is necessary to determine how much output or the additional production
Irom an established unit the market is likely to absorb at given prices.
a) A thorough market analysis is one oI the most essential parts oI project investigation. This
involves getting answers to three questions.
a) How big is the market?
b) How much it is likely to grow?
c) How much oI it can the project capture?
The Iirst step in this direction is to consider the current situation, taking account oI the total output oI the
product concerned & the existing demand Ior it with a view to establishing whether there is unsatisIied
demand Ior the product. Care should be taken to see that there is no idle capacity in the existing
industries.
ii) Future possible Iuture changes in the volume & patterns oI supply & demand will have to be
estimated in order to assess the long term prospects oI the industry. Forecasting oI demand is a
complicated matter but one oI the vital importance. It is complicated because a variety oI Iactors aIIect
the demand Ior product e.g. technological advances could bring substitutes into market while changes in
tastes & consumer preIerence might cause sizable shiIts in demand.
iii) Intermediate product The demand Ior 'Intermediate product will depend upon the demand &
supply oI the ultimate product (e.g. jute bags, paper Ior printing, parts Ior machines, tyres Ior
automobiles). The market analysis in this case should cover the market Ior the ultimate product.

37

7.3 Financial Feasibility
The basis data required Ior the Iinancial Ieasibility appraisal can be broadly grouped under the Iollowing
heads
i) Cost oI the project including working capital
ii) Cost oI production & estimates oI proIitability
iii) Cash Ilow estimates & sources oI Iinance.

The cash Ilow estimates will help to decide the disbursal oI the term loan. The estimate oI proIitability &
the break even point will enable the banker to draw up the repayment programme, start-up time etc. The
proIitability estimates will also give the estimate oI the Debt Service Coverage which is the most
important single Iactor in all the term credit analysis.
A study oI the projected balance sheet oI the concern is essential as it is necessary Ior the appraisal oI a
term loan to ensure that the implementation oI the proposed scheme.
Break-even point:
In a manuIacturing unit, iI at a particular level oI production, the total manuIacturing cost equals the sales
revenue, this point oI no proIit/ no loss is known as the break-even point. Break-even point is expressed
as a percentage oI Iull capacity. A good project will have reasonably low break-even point which not be
encountered in the projections oI Iuture proIitability oI the unit.
Debt/ Service Coverage:
The debt service coverage ratio serves as a guide to determining the period oI repayment oI a loan. This is
calculated by dividing cash accruals in a year by amount oI annual obligations towards term debt. The
cash accruals Ior this purpose should comprise net proIit aIter taxes with interest, depreciation provision
& other non cash expenses added back to it.

Debt Service Cash accruals
Coverage Ratio Maturing annual obligations

38

This ratio is valuable, in that it serves as a measure oI the repayment capacity oI the project/ unit & is,
thereIore, appropriately included in the cash Ilow statements. The ratio may vary Irom industry to
industry but one has to view it with circumspection when it is lower than the benchmark oI 1.75. The
repayment programme should be so stipulated that the ratio is comIortable.

Managerial Competence
In a dynamic environment, the capacity oI an enterprise to Iorge ahead oI its competitors depends to a
large extent, on the relative strength oI its management. Hence, an appraisal oI management is the
touchstone oI term credit analysis.
II there is a change in the administration & managerial set up, the success oI the project may be put to
test. The integrity & credit worthiness oI the personnel in charge oI the management oI the industry as
well as their experience in management oI industrial concerns should be examined. In high cost schemes,
an idea oI the unit`s key personnel may also be necessary.

39

NN-FUND BSE: -
LETTER F CREDIT
Introduction
The expectation oI the seller oI any goods or services is that he should get the payment immediately on
delivery oI the same. This may not materialize iI the seller & the buyer are at diIIerent places (either
within the same country or in diIIerent countries). The seller desires to have an assurance Ior 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 oI etter oI Credit (Cs). The objective oI C is to provide a
means oI payment to the seller & the delivery oI goods & services to the buyer at the same time.
Definition
A etter oI Credit (C) is an arrangement whereby a bank (the issuing bank) acting at the request & on
the instructions oI the customer (the applicant) or on its own behalI,
i. is to make a payment to or to the order oI a third party (the beneIiciary), or is to accept & pay
bills oI exchange (draIts drawn by the beneIiciary); or
ii. authorizes another bank to eIIect such payment, or to accept & pay such bills oI exchanges
(draIts); or
iii. authorizes another bank to negotiate against stipulated document(s), provided that the terms &
conditions oI the credit are complied with.

Basic Principle:
The basic principle behind an C is to Iacilitate orderly movement oI trade; it is thereIore necessary that
the evidence oI movement oI goods is present. Hence documentary Cs is those which contains
documents oI title to goods as part oI the C documents. Clean bills which do not have document oI title
to goods are not normally established by banks. Bankers and all concerned deal only in documents & not
in goods. II documents are in order issuing bank will pay irrespective oI whether the goods are oI
expected quality or not. Banks are also not responsible Ior the genuineness oI the documents &
quantity/quality oI goods. II importer is your borrower, the bank has to advice him to convert all his
requirements in the Iorm oI documents to ensure quantity & quality oI goods.

40

Parties to the LC
) Applicant The buyer who applies Ior opening C
) BeneIiciary The seller who supplies goods
) Issuing Bank The Bank which opens the C
) Advising Bank The Bank which advises the C aIter conIirming authenticity
) Negotiating Bank The Bank which negotiates the documents
) ConIirming Bank The Bank which adds its conIirmation to the C
) Reimbursing Bank The Bank which reimburses the C amount to negotiating bank
8) Second beneIiciary The additional beneIiciary in case oI transIerable Cs
ConIirming bank may not be there in a transaction unless the beneIiciary demand conIirmation by his
own bankers & such a request is made part oI C terms. A bank will conIirm an C Ior his beneIiciary iI
opening bank requests this as part oI C terms. Reimbursing bank is used in an C transaction by an
opening bank when the bank does not have a direct correspondent/branch through whom the negotiating
bank can be reimbursed. Here, the opening bank will direct the reimbursing bank to reimburse the
negotiating bank with the payment made to the beneIiciary. In the case oI transIerable C, the C may be
transIerred to the second beneIiciary & iI provided in the C it can be transIerred even more than once.
BN GURNTEES:
A contract oI guarantee is deIined as a contract to perIorm the promise or discharge the liability oI the
third person in case oI the deIault`. The parties to the contract oI guarantees are:
a) Applicant: The principal debtor person at whose request the guarantee is executed
b) BeneIiciary: Person to whom the guarantee is given & who can enIorce it in case oI deIault.
c) Guarantee: The person who undertakes to discharge the obligations oI the applicant in case oI his
deIault.
Thus, guarantee is a collateral contract, consequential to a main contract between the applicant & the
beneIiciary.
Purpose of Bank Guarantees
Bank Guarantees are used to Ior both both preventive & remedial purposes. The guarantees executed by
banks comprises both perIormance guarantees & Iinancial guarantees. The guarantees are structured
according to the terms oI agreement, viz., security, maturity & purpose.
Branches may issue guarantees generally Ior the Iollowing purposes:
41

a) In lieu oI security deposit/earnest money deposit Ior participating in tenders;
b) Mobilization advance or advance money beIore commencement oI the project by the contractor
& Ior money to be received in various stages like plant layout, design/drawings in project Iinance;
c) In respect oI raw materials supplies or Ior advances by the buyers;
d) In respect oI due perIormance oI speciIic contracts by the borrowers & Ior obtaining Iull payment
oI the bills;
e) PerIormance guarantee Ior warranty period on completion oI contract which would enable the
suppliers to realize the proceeds without waiting Ior warranty period to be over;
I) To allow units to draw Iunds Irom time to time Irom the concerned indenters against part
execution oI contracts, etc.
g) Bid bonds on behalI oI exporters
h) Export perIormance guarantees on behalI oI exporters Iavouring the Customs Department under
EPCG scheme.

Guidelines on conduct of Bank Guarantee business
Branches, as a general rule, should limit themselves to the provision oI Iinancial guarantees & exercise
due caution with regards to perIormance guarantee business. The subtle diIIerence between the two types
oI guarantees is that under a Iinancial guarantee, a bank guarantee`s a customer Iinancial worth,
creditworthiness & his capacity to take up Iinancial risks. In a perIormance guarantee, the bank`s
guarantee obligations relate to the perIormance related obligations oI the applicant (customer).
hile issuing Iinancial guarantees, it should be ensured that customers should be in a position to
reimburse the Bank in case the Bank is required to make the payment under the guarantee. In case oI
perIormance guarantee, branches should exercise due caution & have suIIicient experience with the
customer to satisIy themselves that the customer has the necessary experience, capacity, expertise, &
means to perIorm the obligations under the contract & any deIault is not likely to occur.
Branches should not issue guarantees Ior a period more than 18 months without prior reIerence to the
controlling authority. Extant instructions stipulate an Administrative Clearance Ior issue oI BGs Ior a
period in excess oI 18 months. However, in cases where requests are received Ior extension oI the period
oI BGs as long as the Iresh period oI extension is within 18 months. No bank guarantee should normally
have a maturity oI more than 10 years. Bank guarantee beyond maturity oI 10 years may be considered
against 100 cash margin with prior approval oI the controlling authority.
42

More than ordinary care is required to be executed while issuing guarantees on behalI oI customers who
enjoy credit Iacilities with other banks. Unsecured guarantees, where Iurnished by exception, should be
Ior a short period & Ior relatively small amounts. All deIerred payment guarantee should ordinarily be
secured.
ppraisal of Bank Guarantee Limit
Proposals Ior guarantees shall be appraised with the same diligence as in the case oI Iund-base limits.
Branches may obtain adequate cover by way oI margin & security so as to prevent deIault on payments
when guarantees are invoked. henever an application Ior the issue oI bank guarantee is received,
branches should examine & satisIy themselves about the Iollowing aspects:
a) The need oI the bank guarantee & whether it is related to the applicant`s normal trade/business.
b) hether the requirement is one time or on the regular basis
c) The nature oI bank guarantee i.e., Iinancial or perIormance
d) Applicant`s Iinancial strength/ capacity to meet the liability/ obligation under the bank guarantee
in case oI invocation.
e) Past record oI the applicant in respect oI bank guarantees issued earlier; e.g., instances oI
invocation oI bank guarantees, the reasons thereoI, the customer`s response to the invocation, etc.
I) Present o/s on account oI bank guarantees already issued
g) Margin
h) Collateral security oIIered

Format of Bank Guarantees
Bank guarantees should normally be issued on the Iormat standardized by Indian Banks Association
(IBA). hen it is required to be issued on a Iormat diIIerent Irom the IBA Iormat, as may be demanded
by some oI the beneIiciary Government departments, it should be ensured that the bank guarantee is
a) Ior a deIinite period,
b) Ior a deIinite objective enIorceable on the happening oI a deIinite event,
c) Ior a speciIic amount
d) in respect oI bona Iide trade/ commercial transactions,
e) contains the Bank`s standard limitation clause
I) not stipulating any onerous clause, &
g) not containing any clause Ior automatic renewal oI the bank guarantee on its expiry
43

CREDIT PPRISL PRCESS

Receipt oI application Irom applicant
,
Receipt oI documents
(Balance sheet, KYC papers, DiIIerent govt. registration no., MOA, AOA, and
Properties documents)
,
Pre-sanction visit by bank oIIicers
,
Check Ior RBI deIaulters list, willIul deIaulters list, CIBI data, ECGC caution
list, etc.
,
Title clearance reports oI the properties to be obtained Irom empanelled advocates
,
Valuation reports oI the properties to be obtained Irom empanelled
valuer/engineers
,
Preparation oI Iinancial data
,
Proposal preparation
,
Assessment oI proposal
,
Sanction/approval oI proposal by appropriate sanctioning authority
,
44

Documentations, agreements, mortgages
,
Disbursement oI loan
,
Post sanction activities such as receiving stock statements, review oI accounts,
renew oI accounts, etc
(on regular basis)

43

CHAPTER-5
SBI NORMS FOR CREDIT APPRAISAL

Loan policy - n Introduction
State Bank oI India`s (SBI) oan Policy is aimed at accomplishing its mission oI retaining the
bank`s position as a Premier Financial Services Group, with orld class standards & signiIicant
global business, committed to excellence in customer, shareholder & employee satisIaction & to
play a leading role in the expanding & diversiIying Iinancial services sector, while continuing
emphasis on its Development Banking role.

The oan Policy oI the any bank has successIully withstood the test oI time and with inbuilt
Ilexibilities, has been able to meet the challenges in the market place. The policy exits & operates at
both Iormal & inIormal levels. The Iormal policy is well documented in the Iorm oI circular
instructions, periodic guidelines & codiIied instructions, apart Irom the Book oI Instructions, where
procedural aspects are highlighted.

The policy, at the holistic level, is an embodiment oI the Bank`s approach to sanctioning, managing
& monitoring credit risk & aims at making the systems & controls eIIective.

The oan Policy also aims at striking a balance between underwriting assets oI high quality, and
customer oriented selling. The objective is to maintain Bank`s undisputed leadership in the Indian
Banking scene.

The Policy aims at continued growth oI assets while endeavoring to ensure that these remain
perIorming & standard. To this end, as a matter oI policy the Bank does not take over any Non-
PerIorming Asset (NPA) Irom other banks.
46

The Central Board oI the Bank is the apex authority in Iormulating all matters oI policy in the bank.
The Board has permitted setting up oI the Credit Policy & Procedures Committee (CPPC) at the
Corporate Centre oI the Bank oI which the Top Management are members, to deal with issues
relating to credit policy & procedures on a Bank-wide basis. The CPPC sets broad policies Ior
managing credit risk including industrial rehabilitation, sets parameters Ior credit portIolio in terms
oI exposure limits, reviews credit appraisal systems, approves policies Ior compromises, write oIIs,
etc. & general management oI NPAs besides dealing with the issues relating to Delegation oI
Powers.

Based on the present indications, following exposure levels are prescribed:

Individuals as borrowers

Maximum aggregate credit Iacilities oI
Rs. 20 crores
( Fund based & non-Iund based )

Non-corporates
( e.g. Partnerships, JHF, Associations )

Maximum aggregate credit Iacilities oI Rs.
80 crores
( Fund based & non-Iund based )
Corporates Maximum aggregate credit Iacilities as
per prudential norms oI RBI on exposures

O Term oans (loans with residual maturity oI over 3 years) should not in the aggregate exceed
35 oI the total advances oI SBI.
O The Bank shall endeavour to restrict Iund based exposure to a particular industry to 15 oI the
Bank`s total Iund based exposure.
47

O The Bank shall restrict the term loan exposure to inIrastructure projects to 10 oI Bank`s total
advances.
O The Bank shall endeavour to restrict exposure to sensitive sectors (i.e. to capital market, real
estate, and sensitive commodities listed by RBI) to 10 oI Bank`s total advances.
O The Bank`s aggregate exposure to the capital markets shall not exceed 5 oI the total outstanding
advances (including commercial paper) as on March 31 oI the previous year.

Credit ppraisal Standards
1 (A) Qualitative:
At the outset, the proposition is examined Irom the angle oI viability & also Irom the Bank`s prudential
levels oI exposure to the borrower, Group & Industry. ThereaIter, a view is taken about our past
experience with the promoters, iI there is a track record to go by. here it is a new connection Ior the
bank but the entrepreneurs are already in business, opinion reports Irom existing bankers & published
data iI available are careIully pursued. In case oI a maiden venture, in addition to the drill mentioned
heretoIore, an element oI subjectively has to be perIorce introduced as scant historical data weightage to
be placed on impressions gained out oI the serious dialogues with the promoter & his business contacts.

1 (B) Quantitative:
(a) orking capital:
The basis quantitative parameters underpinning the Bank`s credit appraisal are as Iollows:-
Sector/ Parameters MIg Others
iquidity
Current Ratio (min.)
1.33 1.20
(For FBC limits above Rs. 5 cr.)
1.00
(For FBC limits upto Rs. 5 cr.))
Financial Soundness
TO/TN (max.)
3.00 5.00
DSCR
48

Net (min.)
Gros (min.)
2:1
1.75:1
2:1
1.75:1
Gearing
D/E (max.)

2:1

2:1
Promoters` contribution (min.) 30 oI equity 20 oI equity

(i) iquidity:
Current Ratio (CR) oI 1.33 will generally be considered as a benchmark level oI liquidity. However the
approach has to be Ilexible. CR oI 1.33 is only indicative & may not be deemed mandatory. In cases
where the CR is projected at a lower than the benchmark or a slippage in the CR is proposed, it alone will
not be a reason Ior rejection Ior the loan proposal or Ior the sanction oI the loan at a lower level. In such
cases, the reason Ior low CR or slippage should be careIully examined & in deserving cases the CR as
projected may be accepted. In cases where projected CR is Iound acceptable, working capital Iinance as
requested may be sanctioned. In speciIic cases where warranted, such sanction can be with the condition
that the borrower should bring in additional long-term Iunds to a speciIic extent by a given Iuture date.
here it is Ielt that the projected CR is not acceptable but the borrower deserves assistance subject to
certain conditions, suitable written commitment should be obtained Irom the borrower to the eIIect that he
would be bringing in required amounts within a mutually agreed time Irame.
(ii) Net orking Capital:
Although this is a corollary oI current ratio, the movements in Net orking Capital are watched to
ascertain whether there is a mismatch oI long term sources vis-a-vis long term uses Ior purposes which
may not be readily acceptable to the Bank so that corrective measures can be suggested.
(iii) Financial Soundness:
This will be dependent upon the owner`s stake or the leverage. Here again the benchmark will be diIIerent
Ior manuIacturing, trading, hire-purchase & leasing concerns. For industrial ventures a Total Outside
iability/ Tangible Net worth ratio oI 3.0 is reasonable but deviations in selective cases Ior
understandable reasons may be accepted by the sanctioning authority.

49

(iv) Turn-Over:
The trend in turnover is careIully gone into both in terms oI quantity & valve as also market share
wherever such data are available. hat is more important to establish a steady output iI not a rising trend
in quantitative terms because sales realization may be varying on account oI price Iluctuations.
(v) ProIits:
hile net proIit is ultimate yardstick, cash accruals, i.e., proIit beIore depreciation & taxation conveys the
more comparable picture in view oI changes in rate oI depreciation & taxation, which have taken place in
the intervening years. However, Ior the sake oI proper assessment, the non-operating income is excluded,
as these are usually one time or extraordinary income. Companies incurring net losses consistently over 2
or more years will be given special attention, their accounts closely monitored, and iI necessary, exit
options explored.
(vi) Credit Rating:
herever the company has been rated by a Credit Rating Agency Ior any instrument such as CP / FD this
will be taken into account while arriving at the Iinal decision. However as the credit rating involves
additional expenditure, we would not normally insist on this and only use this tool iI such an agency had
already looked into the company Iinances.

(b) Term oan
(i) In case oI term loan & deIerred payment guarantees, the project report is obtained Irom the
customer,
(ii) which may be compiled either in-house or by a Iirm oI consultants/ merchant bankers. The
technical Ieasibility & economic viability is vetted by the bank & wherever it is Ielt necessary,
the Credit OIIicer would seek the beneIit oI a second opinion either Irom the Bank`s Technical
Consultancy cell or Irom the consultants oI the Bank/ SBI Capital Markets td.
(iii)Promoter`s contribution oI at least 20 in the total equity is what we normally expect. But
promoters` contribution may vary largely in mega projects. ThereIore there cannot be a deIinite
benchmark. The sanctioning authority will have the necessary discretion to permit deviations.
(iv) The other basic parameter would be the net debt service coverage ratio i.e. exclusive oI interest
payable, which should normally not go below 2. On a gross basis DSCR should not be below
1.75. These ratios are indicative & the sanctioning authority may permit deviations selectively.
30

(v) As regards margin on security, this will depend on Debt: Equity gearing Ior the project, which
should preIerably be near about 1.5: 1 & should not in any case be above 2:1, i.e., Debt should
not be more than 2 times the Equity contribution. The sanctioning authority in exceptional cases
may permit deviations Irom the norm very selectively.
(vi) Other parameters governing working capital Iacilities would also govern Term Credit Iacilities to
the extent applicable.

(C) ending to Non-Banking Financial Companies (NBFCs)

(D) Financing oI inIrastructure projects

(E) ease Finance

(F) etter oI Credit, Guarantees & bills discounting

(G) Fair Practices Ior lenders

31

Documentation standards
: The systems and procedures Ior documentation have been laid down keeping in view
the ultimate objective oI documentation which is to serve as primary evidence in any dispute between the
Bank and the borrower and Ior enIorcing the Bank's right to recover the loan amount together with
interest thereon (through a court oI law as a Iinal resort), in
the event oI all other recourses proving to be oI no avail. In order that this objective is achieved, our
documentation process attempts to ensure that:
O The owing oI the debt to the Bank by the borrower is clearly established by the documents.
O The charge created on the borrower's assets as security Ior the debt is maintained and enIorceable
O The Bank's right to enIorce the recovery oI the debt through court oI law is not allowed to
become time-barred under the aw oI imitation.

: Documentation is not conIined to mere obtention oI security documents at the outset. It is a continuous
and ongoing process covering the entire duration oI an advance comprising the Iollowing stages :
(i) Pre-execution Iormalities:
These cover mainly searches at the OIIice oI Registrar oI Companies and search oI the Register oI
Charges (applicable to corporate borrowers), also capacity oI borrowers to borrow and the Iormalities to
be completed by the borrowers, searches at the oIIice oI the sub-Registrar oI Assurances or and Registry
to check the existence or otherwise oI prior charge over the immovable property oIIered as security,
besides taking other precautions beIore creating equitable / registered mortgage.
(ii) Execution oI Documents
This covers obtention oI proper documents, appropriate stamping and correct execution thereoI as per
terms oI the sanction oI the advance and the internal directives oI a corporate borrower such as
Memorandum and Articles oI Association, etc.
(iii) Post-execution Iormalities
This phase covers the completion oI Iormalities in respect oI mortgages, iI any, registration with the
Registrar oI Assurances, wherever applicable, and the registration oI charges with the Registrar oI
Companies within the stipulated period, etc..
32

(iv) Protection Irom imitation / SaIeguarding Securities
These measures aim at saving the documents Irom getting time-barred by limitation and protecting the
securities charged to the Bank Irom being diluted by any charge that might be created by the borrower to
secure his other debts, iI any. These objectives are sought to be achieved by:
(a) Obtention oI revival letter within the stipulated period
(b) Obtention oI Balance ConIirmation Irom the borrower at least at annual intervals
(c) Making periodical searches at the OIIice oI the Registrar oI Companies.
(d) Insurance oI Assets charged - (unless speciIically waived) to insure the Bank against the risk oI
Iire, other hazards, etc..

3. Keeping the above broad objectives and the documentation process in view, the Bank
has devised standard documents in most cases Ior various types oI loans given to the borrowers.
herever standard specimens have not been evolved, these are suitably draIted on a case-by-case basis
with the help oI in-house legal department and, on occasions, with the help oI reputed outside solicitors.
Furthermore, changes in the documentation procedures and the implications involved are circularised
Irom time to time to all the branches/oIIices so that those who are responsible Ior obtaining and
saIeguarding the documents are made Iully conversant with them. This is Iurther strengthened through
on-the-job training at the branches as well as at the Bank's training colleges / centres, where the oIIicials
are brieIed on the documentation procedures so that the Bank's interest is protected in this crucial area.
4. In respect oI consortium advances, the documents are generally executed in consultation with the other
member banks in accordance with the guidelines laid down by RBI /IBA in the matter. Similarly, where
advances are extended jointly with the Iinancial institutions, documents are specially draIted in
consultation with the solicitors / in-house legal experts to ensure pari passu charge and / or second charge,
whichever is applicable, oI the movable / immovable assets oI the borrower to protect the Bank's
interests.

3 hile it is the Bank's endeavor to standardize documents Ior all types oI Iacilities, in cases where
documents have to be specially draIted, the ocal Head OIIices are empowered to vet and approve
such documents Ior Iacilities which are sanctioned at Lhelr level lor faclllLles requlrlng sancLlon of
CCCC / LCC8 such speclally drafLed documenLs are cleared by Lhe CorporaLe CenLre

33

Requirement of documents for process of loan

Application Ior requirement oI loan

Copy oI Memorandum & Article oI Association

Copy oI incorporation oI business

Copy oI commencement oI business

Copy oI resolution regarding the requirement oI credit Iacilities

BrieI history oI company, its customers & supplies, previous track records, orders in
hand. Also provide some inIormation about the directors oI the company

Financial statements oI last 3 years including the provisional Iinancial statement Ior the
year 2008-09

8 Copy oI PAN/TAN number oI company

Copy oI last Electricity bill oI company

Copy oI GST/CST number

Copy oI Excise number

Photo I.D. oI all the directors
34

Address prooI oI all the directors

Copies related to the property such as 7/12 & 8A utara, lease/ sales deed, 2R permission,
Allotment letter, Possession

Bio-data Iorm oI all the directors duly Iilled & notarized

Financial statements oI associate concern Ior the last 3 years

Delegation of powers
1. A scheme oI Delegation exercise by the various Iunctional Powers comprehensively
documented in 1985 and amended Irom time to time is in operation in the Bank in respect oI
Iinancial and administrative matters Ior rise. This is based on the premise that an executive is
required to exercise only those powers which are related to the responsibilities and duties
entrusted to him/her. In exercising the powers, the authorities concerned are required to ensure
compliance also with the relevant provisions oI the State Bank oI India Act and the State Bank oI
India General Regulations and any rules, regulations, instructions or orders issued Irom time to
time by appropriate controlling authorities.

2. The Executive Committee oI the Central Board (ECCB) has Iull powers Ior sanctioning all credit
Iacilities.
3. The Scheme oI Delegation oI Financial powers Ior advances and allied matters in the Bank has a
graded authority structure. The Executive Committee oI the Central Board (ECCB) has Iull powers Ior
sanctioning credit Iacilities. The sanctioning powers have been delegated down the line to Committees oI
oIIicials at various administrative oIIices and individual line Iunctionaries.
33

4. An appropriate control system is also in operation in tune with the Delegation structure. The powers,
exercised by various Iunctionaries, are required to be reported to the next higher authority as laid down in
the Scheme oI Delegation oI Financial Powers.
5. A system oI loan review styled 'Credit Audit' which inter alia covers audit oI credit sanction decisions
at various levels has been implemented. Presently, all accounts with total Iund based indebtedness oI Rs.5
cr. and above are subjected to credit audit. The audit system serves as an eIIective control on the system
oI sanction oI loans in the bank through widely delegated powers.

36

SCHEME F DELEGTIN F FINNCIL PER

S
L
PRTICULRS LIMITS CCCC BCC CCC-I CCC-II NLCC GM

CRPRTES
SB- &
SB-
ver
all
500.00 250.00 100.00 50.00 FBL 7.50 2.00
(TL) NA NA (35.00) (15.00) (TL) (5.00) (1.25)
(C-1.00)
thers ver
all
400.00 200.00 70.00 35.00 NFBL 7.50 1.00
(TL) NA NA (20.00) (10.00) verall

NN-
CRPRTES
SB- &
SB-
ver
all
60.00 60.00 40.00 20.00 FBL 5.00 1.00
(TL) NA NA (10.00) (5.00) (TL) (3.00) (1.00)
(C-0.60)
thers ver
all
50.00 50.00 30.00 15.00 NFBL 5.00 0.60
(TL) NA NA (8.00) (4.00) verall

INDIVIDULS
SB- &
SB-
ver
all
15.00 15.00 15.00 6.00 FBL 2.00 1.00
(TL) NA NA - - (TL) - (1.00)
(C-0.60)
thers ver
all
10.00 10.00 10.00 5.00 NFBL 2.00 0.60
(TL) NA NA - - verall

37

Pricing (Factors deciding interest rates and other charges)
1. Pricing in the Bank can be divided into interest pricing and non-interest pricing. Pricing oI loans up to
Rs.2 lacs will be as prescribed by RBI. In line with RBI guidelines, he Bank announces Irom time to time
its single Benchmark Prime ending Rate (BPR), i.e., reIerence / indicative rates at which the Bank
would lend to its best customers. The BPR would be reIerred to as State Bank Advance Rate (SBAR) in
our Bank. Interest rate without reIerence to SBAR could be charged in respect oI certain categories oI
loan / credit like discounting oI bills, lending to intermediary agencies etc. Interest rates below SBAR
could be oIIered to exporters or other credit worthy borrowers including public enterprises on the lines oI
a transparent and objective policy approved by the Bank's Board. All other loans are to be priced on the
basis oI Bank's SBAR with the pricing being linked to grade oI the risk in the exposure. The maximum
spread over SBAR which could be charged by the Bank will be decided by the Bank Irom time to time.
ithin such ceiling, the pricing Ior various credit Iacilities, schemes, products, credit related services etc.,
including sub-SBAR pricing would be determined by ACO or COCC, as considered appropriate. Bank
may also price Iloating rate products by using market benchmarks (e.g. G-Sec rates, MIBOR etc.) in a
transparent manner as per Board approved policies.
2. An internal Credit Risk Rating system covering all advances oI Rs.25 lacs and above in C&I, SSI and
AG segments has been put in place to Iacilitate structured assessment oI credit risks. The system enables
evaluation oI the Iundamental strength oI the borrower so as to charge a graded rate oI interest based on
diIIerent ratings. However, taking into consideration the trends in movement oI interest rates and market
competition, the Bank has also adopted an appropriate authority structure to Iacilitate competitive pricing
oI loan products linked both to risk rating and overall business considerations.
3. Bank has introduced Iixed interest rates in respect oI certain categories oI loans in personal segment,
e.g. housing term loans to individuals. Fixed interest rates are also extended Ior commercial loans, albeit
highly selectively.
4. Market related charges and a discretionary structure that enables branches to eIIectively Iace
competition are in place. These would be reviewed periodically based on Ieedback Irom operating units
and the market.
5. Pricing oI Bank's Iunds and services while being basically market driven is also determined by two
important considerations, i.e., minimum desired proIitability and risk inherent in the transaction. At the
corporate level, the applicable price Ior a particular advance or service is Iixed taking into account the
marginal cost oI Bank's Iunds and desired rate oI return as calculated Irom indices like proIitability levels
38

and return on capital employed. In case oI corporate relationship where the value oI connections and
overall potential Ior proIitability Irom a particular account are more important than a particular
transaction, the price is Iine tuned even to level oI no-loss-no-proIit in the transaction. For long term
exposures, the Iactors that weigh are the rate charged by the Iinancial institutions, the period oI exposure,
the pattern oI volatility in the interest rates and the expected movement oI the rates in the long term
perspective.
Review / Renewal of advances
1. orking capital Iacilities are granted by the Bank Ior a period oI 1 year and thereaIter they are required
to be renewed each year, i.e., Iresh sanction is accorded Ior the limits. here, however, renewal is not
possible Ior some reason, sanction Ior the continuance oI the limits is obtained in each case by reviewing
the Iacilities.
2. Term loans which are irregular will be reviewed once in six months. (However, review oI Term oans
will be included in the periodical review oI Special Mention Accounts.)
A separate authority structure, as given below, has been prescribed Ior above noted halI-yearly review oI
term loans:

3. In the case oI all listed companies with credit rating oI SB4/SBT4 and below, a brieI review is to be
put up on the basis oI halI-yearly working results published by them duly incorporating comments such as
extent oI exposure, conduct oI the account etc. Such review is to be submitted to the respective GE in
39

respect oI ECCB sanctions, to the CGM (Circle) / CGM (CAG-Cen.) in respect oI COCC-I&II sanctions
and to the GM (Network) in all other cases.
4. There will be no CRA rating review Ior term loans. However, in respect oI term loans, the Iollowing
set oI Iinancial covenants is to be stipulated:
(i) Current Ratio
(ii) TO/TN
(iii) Interest Coverage Ratio
(iv) DeIault in payment oI interest / installment
(v) Cross DeIault (deIault in payment oI instalment/ interest to other institutions/ banks)

DeIault oI these covenants would attract penal interest oI 1 as under:
(a) Any adverse deviation by more than 20 Irom the stipulated levels in respect oI any two oI the
items (i) to (iii) above - penal interest to be levied Ior the period oI non-adherence subject to a
minimum period oI 1 year.
(b) DeIault in payment oI interest/installments to the Bank or to other FI/Banks-penal interest to be
levied Ior the period oI such deIaults.

Takeover of advances
Bank needs to aggressively market Ior good quality advances. One oI the strategies Ior increasing good
quality assets in the Bank's loan portIolio, would be to take over advances Irom other banks/FIs. Keeping
this in view and with the prime objective oI adding only good quality assets, a common set oI norms /
guidelines Ior C&I, SSI and AG segments has been laid down Ior take over oI advances.

dvances under SSI / C&I Segments
(i) The advance to be taken over should be rated SB3/SBT3 or above.

(ii) The unit should score the minimum scores as prescribed, under the various risk
segments, in the Credit Risk Assessment.
60

(iii) The account should have been a standard asset in the books oI the other bank/FI during the
preceding 3 years. (II this inIormation is not Iorthcoming Irom the bank/FI, a certiIicate should be
obtained Irom the borrower`s Auditor that the loan has been a standard asset during the preceding
3 years in the books oI the bank/FI in terms oI the asset classiIication norms oI RBI. The services
oI statutory auditors oI our Bank may also be sought Ior this purpose). However, iI a unit is not
having a track record Ior 3 years, as it has been in existence Ior a shorter duration, takeover can
be considered based on the track record Ior the available period, which should be at least one
year.

(iv) The unit should have earned net proIits (post tax) in each oI the immediately preceding 3 years.
However, iI the unit has been in existence Ior a lesser period, it should have earned net proIit
(post tax) in the preceding year oI operation.

(v) The Term oan proposed to be taken-over should not have been rephased, generally, by the
existing FI/Bank aIter commencement oI commercial production. However, iI a rephasement was
necessitated due to external Iactors and viability oI the unit is not in doubt, such proposals may
also be considered Ior sanction on a case to case basis.

(vi) The remaining period oI scheduled repayment oI the term loan should be at least 2 years, when
only Ts are taken over.

For takeover oI existing Ts, while the original time Irame Ior repayment will be generally adhered to,
Ilexibility may be allowed in the quantum oI periodical repayments. II sanction oI Iresh term loan is
proposed along with the takeover, the schedule oI repayment Ior the existing term loans, iI necessary,
may be permitted to extend up to 8 years. |The norms at (v), (vi) and (vii) above are not applicable Ior
take-over oI working capital advances.
Note : In the case oI take-over proposals involving advances up to Rs.25 lacs, the rating
should be carried out, as per the scoring model prescribed under SME Smart Score (ReIer page 170,
Chapter 34, Part III, Volume III oI Manual on oans & Advances). Other Iactors that may be kept in view
are: -
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O Continued viability
O Track record
O Standing in the market oI the unit/ promoter.

Note : Take-over oI units Irom our Associate Banks is not permitted.
Note : In the cases oI working capital Iinance through consortium or multiple banking, increasing our
share, and joining a consortium (or when a member bank exits consortium and we join the consortium in
its place), are not reckoned as take-over oI advances Irom other banks.

B dvances under Trade and Services Sector:
i) The current ratio and TO/TN ratio should be at acceptable levels, as per audited balance sheet not
older than 12 months. Current ratio oI not below 1 is acceptable up to FBC limit oI Rs.5 cr. For FBC
limits oI above Rs.5 Cr. the current ratio oI 1.33 will be indicative. It may be considered acceptable up to
1.20, depending on the activity. TO/TN ratio higher than 3 would be permissible depending on the
type oI activity.
ii) The unit should have earned post-tax proIits in each oI the immediately preceding 3 years. However, iI
the unit has been in existence Ior a lesser period, it should have earned net proIit (post-tax) in the
preceding year oI operation.

C ther Guidelines:
(i) In all cases oI take-over oI advances Irom other banks, the credit inIormation report in the Iormat
prescribed by IBA should be obtained. The experience oI the present banker (item 13 oI the Iormat)
should show satisIactory dealings with the unit. here, Irom the point oI competition, it is necessary not
to alert the bank concerned, the report may be obtained aIter the sanction oI Iacilities but beIore release oI
the Iacilities.
(ii) In all cases oI take-over, branches should ensure proper documentation and other Iormalities to protect
the interest oI our Bank.
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(iii) In all cases oI take-over, branches should assess the requirements oI the borrower and obtain sanction
Ior the proposed limits beIore actually taking over the outstanding liability oI the borrower to their
existing bank/ FI.
(iv) The Iollowing aspects should invariably be examined in each case oI take-over.
O Reasons Ior take-over
O Market perception including the existing bank`s/FI`s perception regarding the unit and its
management. (For this, the appraising oIIicials may record brieIly on their enquiries with
market sources/other bank/FI);
O Potential ancillary business accruing to the Bank;
O Terms and conditions stipulated by the existing bank and those proposed by our Bank,
particularly to ensure against dilution oI security cover. No takeover oI advances Irom
any Public Sector Bank will be resorted to by quoting Iiner rates

(v) The credit rating should be done based on the audited balance sheet which is not older
than 12 months. However iI the audited balance sheet is more than 12 months old and the proposal has to
be considered Irom the business angle, then a provisional balance sheet as on a recent date may be
obtained Irom the unit and the CRA exercise done based on these Iigures, additionally. Unit should clear
the stipulated hurdle rate in both the exercises.
D dministrative Clearance (C)
In all the cases oI take-over proposals, AC is required to be obtained. For this purpose, a brieI proposal
containing, inter alia, the comments on compliance with the norms and the other guidelines as above
should be submitted to the appropriate authority as under:
(i) For take-over oI units complying with all the norms prescribed:

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(ii) For take-over oI units not complying with any one or more oI the norms prescribed:

E hile takeover oI 'P' segment advances is not generally encouraged, in consideration oI larger
business interests / valuable connections, takeover oI housing loans is considered selectively aIter due
diligence and precautions, in cases where possession oI the house / Ilat has been taken, repayment oI
existing loan has already commenced and installments have been paid as per terms oI sanction.
Credit Iacilities to companies whose directors are in the deIaulters' list oI RBI:
1. The Directors oI any company may be classiIied as promoter / elected / proIessional/ nominee /
honorary directors. RBI has been collecting and circulating inIormation on deIaulting companies amongst
banks / FIs, including names oI directors oI such companies. Though RBI's deIaulters' list is given due
cognizance in the appraisal process, a general policy on the issues relating to sanction / continuation oI
credit Iacilities to such companies whose directors are in the RBI's deIaulters' list needs to be put in place.
Accordingly, it has been decided to adopt the Iollowing approach:

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The above policy on deIaulters will be a broad Iramework Ior sanction / continuation oI credit Iacilities to
companies whose directors are in the RBI's list oI deIaulting borrowers oI banks / FIs with dues oI Rs.1
Cr. and above. hen the list oI such deIaulters is circulated by CIBI instead oI RBI), the same Policy
would continue to apply.
2. illIul deIault & action there against - The penal measures would be made applicable to all borrowers
identiIied as willIul deIaulters or the promoters involved in diversion / siphoning oI Iunds with
outstanding balance oI Rs.25 lacs or more without any exception. Similarly, the limit oI Rs.25 lacs will
also be applied Ior the purpose oI taking cognizance oI instances oI siphoning and diversion oI Iunds.
3. here a etter oI ComIort or guarantee Iurnished by the companies within a Group in Iavour oI a
willIully deIaulting unit is not paid when invoked by the Bank, such Group companies also may be
reckoned as willIul deIaulters.
4. In cases oI project Iinancing, Bank would endeavor to ensure end-use oI Iunds by, inter alia, obtaining
certiIication Irom Chartered Accountants. In case oI short term corporate/clean loans, such an approach
would be supplemented by due diligence on the part oI the Bank. It shall be the endeavor oI the Bank to
ensure that such loans are limited to borrowers whose integrity and reliability are above board. Bank will
also retain the right to get investigative audit conducted whenever it is prima Iacie satisIied that there is a
case Ior such investigative audit to detect siphoning/ diversion oI Iunds or other malIeasance.
5. No additional Iacilities shall be granted by the Bank to the listed willIul deIaulters. Further,
entrepreneurs / promoters oI companies where the Bank has identiIied siphoning /diversion oI Iunds, mis-
representation, IalsiIication oI accounts and Iraudulent transactions shall be debarred Irom Bank Iinance
Ior Iloating new ventures Ior a period oI 5 years Irom the date the name oI the willIul deIaulter is
published by RBI / CIBI.
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6. The legal process, wherever warranted, against the borrowers / guarantors and Ioreclosure oI recovery
oI dues should be initiated expeditiously. The Bank may also initiate criminal action against willIul
deIaulters, where necessary.
7. here possible, Bank shall adopt a proactive approach Ior a change oI management oI the willIully
deIaulting borrowing unit.

Credit Monitoring & Supervision
1. Broadly, the objectives oI post-sanction Iollow up, supervision and monitoring are as under:
(a) Follow up Iunction:
O To ensure the end-use oI Iunds
O To relate the outstandings to the assets level on a continuous basis
O To correlate the activity level to the projections made at the time oI the
O sanction / renewal oI the credit Iacilities
O To detect deviation Irom terms oI sanction.
O To make periodic assessment oI the health oI the advances by noting some oI the key indicators
oI perIormance like proIitability, activity level, and management oI the unit and ensure that the
assets created are eIIectively utilized Ior productive purposes and are well maintained.
O To ensure recovery oI the installments oI the principal in case oI term loans as per the scheduled
repayment programme and all interest.
O To identiIy early warning signals, iI any, and initiate remedial measures thereby averting the
incidence oI incipient sickness.
O To ensure compliance with all internal and external reporting requirements covering the credit
area.

(b) Supervision Iunction:
O To ensure that eIIective Iollow up oI advances is in place and asset quality oI good order is
maintained.
O To look Ior early warning signals, identiIy incipient sickness` and initiate proactive remedial
measures.
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(c) Monitoring Iunction:
O To ensure that eIIective supervision is maintained on loans / advances and appropriate responses
are initiated wherever early warning signals are seen.
O To monitor on an ongoing basis the asset portIolio by tracking changes Irom time to time.
O Chalking out and arranging Ior carrying out speciIic actions to ensure high percentage oI
Standard Assets`.

2. Detailed operative guidelines on the Iollowing aspects oI eIIective credit monitoring are in place:
O Post-sanction responsibilities oI diIIerent Iunctionaries
O Reporting Ior control
O Security documents, Statement oI stocks and book debts
O Computation oI drawing power (DP) on eligible current assets and maintaining oI DP register
O VeriIication oI assets
O Inspection by branch Iunctionaries Irequency, reporting, register etc.
O Stock Audit
O Follow up based on inIormation systems
O Follow up during project implementation stage
O Follow up post-commercial production
O Monitoring and control
O Detection and prevention oI diversion oI working capital Iinance
O Monitoring oI large withdrawals
O Allocation oI limit
O Handling oI NPA accounts etc.

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Loan dministration - Pre-Sanction process
ppraisal, ssessment and Sanction functions
PPRISL
Preliminary appraisal
1.1 Sound credit appraisal involves analysis oI the viability oI operations oI a business and the capacity oI
the promoters to run it proIitably and repay the bank the dues as and then they Iall
1.2. Towards this end the preliminary appraisal will examine the Iollowing aspects oI a proposal.
O Bank`s lending policy and other relevant guidelines/RBI guidelines,
O Prudential Exposure norms,
O Industry Exposure restrictions,
O Group Exposure restrictions,
O Industry related risk Iactors,
O Credit risk rating,
O ProIile oI the promoters/senior management personnel oI the project,
O ist oI deIaulters,
O Caution lists,
O Acceptability oI the promoters,
O Compliance regarding transIer oI borrower accounts Irom one bank to another, iI
applicable;
O Government regulations/legislation impacting on the industry; e.g., ban on
Iinancing oI industries producing/ consuming Ozone depleting substances;
O Applicant`s status vis-a-vis other units in the industry,
O Financial status in broad terms and whether it is acceptable

The company`s Memorandum and Articles oI Association should be scrutinized careIully to ensure (i)
that there are no clauses prejudicial to the Bank`s interests, (ii) no limitations have been placed on the
Company`s borrowing powers and operations and (iii) the scope oI activity oI the company.

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1.3. Further, iI the proposal is to Iinance a project, the Iollowing aspects have to be examined:
hether project cost is prima facie acceptable
Debt/equity gearing proposed and whether acceptable
Promoters` ability to access capital market Ior debt/equity support
hether critical aspects oI project - demand, cost oI production, proIitability, etc. are prima facie in
order
1.4. AIter undertaking the above preliminary examination oI the proposal, the branch will arrive at a
decision whether to support the request or not. II the branch (a reIerence to the branch includes a
reIerence to SECC/CPC etc. as the case may be) Iinds the proposal acceptable, it will call Ior Irom the
applicant(s), a comprehensive application in the prescribed proIorma, along with a copy oI the
proposal/project report, covering speciIic credit requirement oI the company and other essential data/
inIormation. The inIormation, among other things, should include:
Organisational set up with a list oI Board oI Directors and indicating the qualiIications, experience and
competence oI the key personnel in charge oI the main Iunctional areas e.g., purchase, production,
marketing and Iinance; in other words a brieI on the managerial resources and whether these are
compatible with the size and scope oI the proposed acLlvlLy
Demand and supply projections based on the overall market prospects together with a copy oI the
market survey report. The report may comment on the geographic spread oI the market where the unit
proposes to operate, demand and supply gap, the competitors` share, competitive advantage oI the
applicant, proposed marketing arrangement, etc.
Current practices Ior the particular product/service especially relating to terms oI credit sales,
probability oI bad debts, etc.
Estimates oI sales, cost oI production and proIitability.
Projected proIit and loss account and balance sheet Ior the operating years during the currency oI the
Bank assistance.
II request includes financing of project(s), branch should obtain additionally

69

(i)Appraisal report Irom any other bank/Iinancial institution in case appraisal has been done by them,
(ii) No Objection CertiIicate` Irom term lenders iI already Iinanced by them and
(iii) Report Irom Merchant bankers in case the company plans to access capital market, wherever
necessary.
1.5. In respect oI existing concerns, in addition to the above, particulars regarding the history oI
the concern, its past perIormance, present Iinancial position, etc. should also be called Ior. This
data/inIormation should be supplemented by the supporting statements such as:

a) Audited proIit loss account and balance sheet Ior the past three years (iI 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 oI market segment, enjoying credit
limits oI Rs.10 lacs and above Irom the banking system, audited balance sheet in the IBA
approved Iormats should be submitted by the borrowers.

b) Details oI existing borrowing arrangements, iI any,
c) Credit inIormation reports Irom the existing bankers on the applicant Company, and
d) Financial statements and borrowing relationship oI Associate Iirms/Group Companies.
B Detailed ppraisal
1.6 The viability oI a project is examined to ascertain that the company would have the ability to service
its loan and interest obligations out oI cash accruals Irom the business. hile appraising a project or a
loan proposal, all the data/inIormation Iurnished by the borrower should be counter checked and,
wherever possible, inter-Iirm and inter-industry comparisons should be made to establish their veracity.
1.7 The Iinancial analysis carried out on the basis oI the company`s audited balance sheets and proIit and
loss accounts Ior the last three years should help to establish the current viability.
1.8 In addition to the Iinancials, the Iollowing aspects should also be examined:
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The method oI depreciation Iollowed by the company-whether the company is Iollowing straight line
method or written down value method and whether the company has changed the method oI depreciation
in the past and, iI so, the reason thereIor;
hether the company has revalued any oI its Iixed assets any time in the past and the
present status oI the revaluation reserve, iI any created Ior the purpose;
Record oI major deIaults, iI any, in repayment in the past and history oI past sickness,
iI any;
The position regarding the company`s tax assessment - whether the provisions made
in the balance sheets are adequate to take care oI the company`s tax liabilities;
The nature and purpose oI the contingent liabilities, together with comments thereon;
Pending suits by or against the company and their Iinancial implications (e.g. cases
relating to customs and excise, sales tax, etc.);
QualiIications/adverse remarks, iI any, made by the statutory auditors on the
Company`s accounts;
Dividend policy;
Apart Irom Iinancial ratios, other ratios relevant to the project;
Trends in sales and proIitability, past deviations in sales and proIit projections, and
Estimates/projections oI sales values;
Production capacity & use: past and projected;\
Estimated requirement oI working capital Iinance with reIerence to acceptable build up
oI inventory/ receivables/ other current assets;
Projected levels: whether acceptable; and
Compliance with lending norms and other mandatory guidelines as applicable
71

1.9. Project financing:
II 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 Irom various Government Depts./ Agencies
icenses/permits/approvals/clearances/NOCs/Collaboration agreements, as applicable
Details oI sourcing oI energy requirements, power, Iuel etc.
Pollution control clearance
Cost oI project and source oI Iinance
Build-up oI Iixed assets (requirement oI Iunds Ior investments in Iixed assets to be critically examined
with regard to production Iactors, improvement in quality oI products, economies oI scale etc.)
Arrangements proposed Ior raising debt and equity
Capital structure (position oI Authorized, Issued/ Paid-up Capital, Redeemable PreIerence Shares, etc.)
Debt component i.e., debentures, term oans, deIerred payment Iacilities, unsecured loans/ deposits. All
unsecured loans/ deposits raised by the company Ior Iinancing a project should be subordinate to the term
loans oI the banks/ Iinancial institutions and should be permitted to be repaid only with the prior approval
oI all the banks and the Iinancial institutions concerned. here central or state sales tax loan or
developmental loan is taken as source oI Iinancing the project, Iurnish details oI the terms and conditions
governing the loan like the rate oI interest (iI applicable), the manner oI repayment, etc.
Feasibility oI arrangements to access capital market
Feasibility oI the projections/ estimates oI sales, cost oI production and proIits covering
the period oI repayment
Break Even Point in terms oI sales value and percentage oI installed capacity under a normal production
year
Cash Ilows and Iund Ilows
Proposed amortization schedule
72

hether proIitability is adequate to meet stipulated repayments with reIerence to Debt
Service Coverage Ratio, Return on Investment
Industry proIile & prospects
Critical Iactors oI the industry and whether the assessment oI these and management
Plans in this regard are acceptable
Technical Ieasibility with reIerence to report oI technical consultants, iI available
Management quality, competence, track record
Company`s structure & systems
Applicant`s strength on inter-Iirm comparisons
For the purpose oI inter-Iirm comparison and other inIormation, where necessary, source data Irom Stock
Exchange Directory, Iinancial journals/ publications, proIessional entities like CRIS-INFAC, CMIE, etc.
with emphasis on Iollowing aspects:
Market share oI the units under comparison
Unique Ieatures
ProIitability Iactors
Financing pattern oI the business
Inventory/Receivable levels
Capacity utilization
Production eIIiciency and costs
Bank borrowings patterns
Financial ratios & other relevant ratios
Capital Market Perceptions
Current price
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52week high and low oI the share price
P/E ratio or P/E Multiple
Yield ()- halI yearly and yearly

Also examine and comment on the status oI approvals Irom other term lenders, market view (iI
anything adverse), and project implementation schedule. A pre-sanction inspection oI the project
site or the Iactory should be carried out in the case oI existing units. To ensure a higher degree oI
commitment Irom the promoters, the portion oI the equity / loans which is proposed to be
brought in by the promoters, their Iamily members, Iriends and relatives will have to be brought
upIront. However, relaxation in this regard may be considered on a case to case basis Ior genuine
and acceptable reasons. Under such circumstances, the promoter should Iurnish a deIinite plan
indicating clearly the sources Ior meeting his contribution. The balance amount proposed to be
raised Irom other sources, viz., debentures, public equity etc., should also be Iully tied up.

C Present relationship with Bank:
Compile Ior existing customers, proIile oI present exposures:
Credit Iacilities now granted
Conduct oI the existing account
Utilization oI limits - FB & NFB
Occurrence oI irregularities, iI any
Frequency oI irregularity i.e., number oI times and total number oI days the account
was irregular during the last twelve months
Repayment oI term commitments
Compliance with requirements regarding submission oI stock statements, Financial Follow-up
Reports, renewal data, etc.

74

Stock turnover, realization oI book debts
Value oI account with break-up oI income earned
Pro-rata share oI non-Iund and Ioreign exchange business
Concessions extended and value thereoI
Compliance with other terms and conditions
Action taken on Comments/observations contained in RBI Inspection Reports:
CO Inspection & Audit Reports
VeriIication Audit Reports
Concurrent Audit Reports
Stock Audit Reports
Spot Audit Reports
ong Form Audit Report (statutory audit)
D Credit risk rating: Draw up rating Ior (i) orking Capital and (ii) Term Finance.
E pinion Reports: Compile opinion reports on the company, partners/ promoters and the proposed
guarantors.
F Existing charges on assets of the unit: II a company, report on search oI charges with
ROC.
G Structure of facilities and Terms of Sanction:
Fix terms and conditions Ior exposures proposed - Iacility wise and overall:
o imit Ior each Iacility sub-limits
o Security - Primary & Collateral, Guarantee
o Margins - For each Iacility as applicable
o Rate oI interest
73

o Rate oI commission/exchange/other Iees
o Concessional Iacilities and value thereoI
o Repayment terms, where applicable
o ECGC cover where applicable
o Other standard covenants
H Review of the proposal: Review oI the proposal should be done covering
(i) strengths and weaknesses oI the exposure proposed
(ii) risk Iactors and steps proposed to mitigate them
(iii) deviations, iI any, proposed Irom usual norms oI the Bank and the reasons thereIor.
I Proposal for sanction: Prepare a draIt proposal in prescribed Iormat with required backup details and
with recommendations Ior sanction.
1 ssistance to ssessment: Interact with the assessor, provide additional inputs arising
Irom the assessment, incorporate these and required modiIications in the draIt proposal and generate an
integrated Iinal proposal Ior sanction.

SSESSMENT: Indicative ist oI Activities Involved in Assessment Function is given below:
Review the draIt proposal together with the back-up details/notes, and the borrower`s
application, Iinancial 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/Iactory site.
Peruse the Iinancial analysis (Balance Sheet/ Operating Statement/ Ratio Analysis/ Fund Flow
Statement/ orking Capital assessment/Project cost & sources/ Break Even analysis/Debt
Service/Security Cover, etc.) to see iI this is prima facie in order. II any deIiciencies are seen, arrange
with the appraiser Ior the analysis on the correct lines.
76

Examine critically the Iollowing aspects oI the proposed exposure.
o Bank`s lending policy and other guidelines issued by the Bank Irom time to time
o RBI guidelines
o Background oI promoters/ senior management
o Inter-Iirm comparison
o Technology in use in the company
o Market conditions
o Projected perIormance oI the borrower vis-a-vis past estimates and perIormance
o Viability oI the project
o Strengths and eaknesses oI the borrower entity.
o Proposed structure oI Iacilities.
o Adequacy/ correctness oI limits/ sub limits, margins, moratorium and repayment schedule
o Adequacy oI proposed security cover
o Credit risk rating
o Pricing and other charges and concessions, iI any, proposed Ior the Iacilities
o Risk Iactors oI the proposal and steps proposed to mitigate the risk
o Deviations proposed Irom the norms oI the Bank and justiIications thereIor
To the extent the inputs/comments are inadequate or require modiIication, arrange Ior additional inputs/
modiIications to be incorporated in the proposal, with any required modiIication to the initial
recommendation by the Appraiser
Arrange with the Appraiser to draw up the proposal in the Iinal Iorm.
Recommendation Ior sanction: Recapitulate brieIly the conclusions oI the appraisal and state whether
the proposal is economically viable. Recount brieIly the value oI the company`s (and the Group`s)
77

connections. State whether, all considered, the proposal is a Iair banking risk. Finally, give
recommendations Ior grant oI the requisite Iund-based and non-Iund based credit Iacilities.

SNCTIN: Indicative list oI activities involved in the sanction Iunction is given below:
Peruse the proposal to see iI the report prima facie presents the proposal in a comprehensive manner as
required. II any critical inIormation is not provided in the proposal, remit it back to the Assessor Ior
supply oI the required data/clariIications.
Examine critically the Iollowing aspects oI the proposed exposure in the light oI corresponding
instructions in Iorce:
o Bank`s lending policy and other relevant guidelines
o RBI guidelines
o Borrower`s status in the industry
o Industry prospects
o Experience oI the Bank with other units in similar industry
o Overall strength oI the borrower
o Projected level oI operations
o Risk Iactors critical to the exposure and adequacy oI saIeguards proposed there against
o Value oI the existing connection with the borrower
o Credit risk rating
o Security, pricing, charges and concessions proposed Ior the exposure and covenants stipulated vis-a-vis
the risk perception.
ccord sanction oI the proposal on the terms proposed or by stipulating modiIied or additional
conditions/ saIeguards, or Defer decision on the proposal and return it Ior additional data/clariIications,
or Reject the proposal, iI it is not acceptable, setting out the reasons.

78

MNITRING DELY IN PRCESSING LN PRPSL :
Branches have to submit a report on credit proposals pending Ior more than 30 days in two parts. Part I
will comprise proposals requiring sanctions at the Branch/ SECC/ ZCC and Part II will contain sanctions
by CCC-II and above. Review reports to CCC-I and later to Group Executive Ior inIormation at
prescribed intervals will be coordinated by DGM (CCFO). The consolidated position in this regard in
respect oI all the Circles will be put up to MD & GE (NB) through GM (SME).

Loan dministration - Post sanction credit process
General
Need
ending decisions are made on sound appraisal and assessment oI credit worthiness. Past record oI
satisIactory perIormance and integrity are no guarantee Ior Iuture though they serve as a useIul guide to
project the trend in perIormance. Credit assessment is made based on promises and projections. A loan
granted on the basis oI sound appraisal may go bad because the borrower did not carry out his promises
regarding perIormance. It is Ior this reason that proper Iollow up and supervision is essential. A banker
cannot take solace in suIIiciency oI security Ior his loans. He has to -
a) make a proper selection oI borrower
b) Ensure compliance with terms and conditions
c) Monitor perIormance to check continued viability oI operations
d) Ensure end use oI Iunds.
e) Ultimately ensure saIety oI Iunds lent.
Stages of post sanction process
The post-sanction credit process can be broadly classiIied into three stages viz., Iollow-up, supervision
and monitoring, which together Iacilitate eIIicient and eIIective credit management and maintaining high
level oI standard assets. The objectives oI the three stages oI post sanction process are detailed below.
79

8 TYPES F LENDING RRNEMENTS

Introduction
Business entities can have various types oI 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 (oan Syndication)

ne Bank
The most Iamiliar amongst the above Ior smaller loans is the One Borrower-One Bank
arrangement where the borrower conIines all his Iinancial dealings with only one bank.
Sometimes, units would preIer to have banking arrangements with more than one bank on
account oI the large Iinancial requirement or the resource constraint oI his own banker or due to
varying terms & conditions oIIered by diIIerent banks or Ior 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 portIolio. In the case oI borrowing business entity, it is able to meet its Iunds
requirement without being constrained by the limited resource oI its own banker. Besides this,
consortium arrangement enables participating banks to save manpower & resources through
common appraisal & inspection & sharing credit inIormation.

The various arrangements under borrowings Irom more than one bank will diIIer on account oI
terms & conditions, method oI appraisal, coordination, documentation & supervision & control.
80

B Consortium lending
hen one borrower avails loans Irom several banks under an arrangement among all the lending
bankers, this leads to a consortium lending arrangements. In consortium lending, several banks
pool banking resourses & expertise in credit management together & Iinance a single borrower
with a common appraisal, common documentation & joint supervision & Iollow up. The
borrower enjoys the advantage similar to single window availing oI credit Iacalities Irom several
banks. The arrangement continues until any one oI the bank moves out oI the consortium. The
bank taking the highest share oI the credit will usually be the leader oI consortium. There is no
ceiling on the number oI banks in a consortium.

C Multiple Banking arrangement
Multiple Banking Arrangement is one where the rules oI consortium do not apply & no inter se
agreement among banks exists. The borrower avails credit Iacility Irom various banks providing
separate securities on diIIerent terms & conditions. There is no such arrangement called
Multiple Banking Arrangement` & the term is used only to donote the existence oI banking
arrangement with more than one bank.
Multiple Banking Arrangement has come to stay as it has some advantages Ior the borrower &
the banks have the Ireedom to price their credit products & non-Iund based Iacility according to
their commercial judgment. Consortium arrangement occasioned delays in credit decisions & the
borrower has Iound his way around this diIIiculty by the multiple banking arrangement.
Additionally, when units were not doing well, consensus was rarely prevalent among the
consortium members. II one bank wanted to call up the advance & protect the security, another
bank was interested in continuing the Iacility on account oI group considerations.

Points to be noted in case of multiple banking arrangements
Though no Iormal arrangement exists among the Iinancing banks, it is preIerable to have
inIormal exchange oI inIormation to ensure Iinancial discipline
Charges on the security given to the bank should be created with utmost care to guard
against dilution in our security oIIered & to avoid double Iinancing
CertiIicates on the outstandings with the other banks should be obtained on the periodical
basis & also veriIied Irom the Balance sheet oI the unit to avoid excess Iinancing.
81

D Credit Syndication
A syndicated credit is an agreement between two or more lending institutions to provide a
borrower a credit Iacility using common loan documentation. It is a convenient mode oI raising
long-term Iunds.
The borrower mandates a lead manager oI his choice to arrange a loan Ior him. The mandate
spells out the terms oI the loan & the mandated bank`s rights & responsibilities. The mandated
banker the lead manger prepares an inIormation memorandum & circulates among
prospective lender banks soliciting their participation in the loan. On the basis oI the
memorandum & on their own independent economic & Iinancial 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 &
Iinalises deal timing, management Iees, cost oI 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 oI banks
Borrower is not required to have interIace with participating banks, thus easy & hassle
Iee
arge loans can be raised through syndication by accessing global markets
For the borrower, the competition among the lenders leads to Iiner terms
Risk is shared
Small banks can also have access to large ticket loans & top class credit appraisal &
management

82

dvantages
Strict, time-bound delivery schedule & drawals
Streamlined process oI documentation with clearly laid down roles & responsibilities
Market driven pricing linked to the risk perception
Competitive pricing but scope Ior Iee-based income is also available
Syndicated portions can be sold to another bank, iI required
Fixed repayment schedule & strict monitoring oI deIault by markets which punish
indiscipline

83

CHAPTER 6
CREDIT RISK ASSESSMENT
For a bank, what is RIS

Risk is inability or unwillingness oI borrower-customer or counter-party to meet their
repayment obligations/ honor their commitments, as per the stipulated terms.

Lender` task

O IdentiIy the risk Iactors, and
O Mitigate the risk

How does risk arise in credit

In the business world, Risk arises out oI
DeIiciencies / lapses on the part oI the management (Internal Iactor)
Uncertainties in the business environment (External Iactor)
Uncertainties in the industrial environment (External Iactor)
eakness in the Iinancial position (Internal Iactor)

To put in another way, success factors behind a business are: -

Managerial ability
Favorable business environment
Favorable industrial environment
Adequate Iinancial strength

84

As such, these are the broad risk categories or risk Iactors built into our CRA models. CRA takes
into account the above types oI risks associated with the borrowal unit. The eventual CRA rating
awarded to a unit (based on a score oI 100) is a single-point risk indicator oI an individual credit
exposure, & is used to indentiIy, to measure & to monitor the credit risk oI an individual
proposal. At the corporate level, CRA is also used to track the quality oI Bank`s credit portIolio.

Credit & Risk
O Go hand in hand.
O They are like twin brothers.
O They can be compared to two sides oI the same coin.
O All credit proposals have some inherent risks, excepting the almost negligible volume oI
lending against liquid collaterals with adequate margin.

Lending despite risks:
O So, risk should not deter a Banker Irom lending.
O A banker`s task is to identiIy/ assess the risk Iactors/ parameters & manage / mitigate
them on a continuous basis.
O But it`s always prudent to have some idea about the degree oI risk associated with any
credit proposal.
O The banker has to take a calculated risk, based on risk-absorption/ risk-hedging capacity
& risk-mitigation techniques oI the Bank.

83

CREDIT RIS SSESSMENT (CR):

Credit is a core activity oI banks & an important source oI their earnings, which go to pay
interest to depositors, salaries to employees & dividend to shareholders
In credit, it is not enough that we have sizable growth in quantity/ volume, it is also necessary to
ensure that we have only good quality growth.
To ensure asset quality, proper risk assessment right at the beginning, that is, at the time oI
taking an exposure, is extremely important.
Moreover, with the implementation oI Basle-II accord4, capital has to be allocated Ior loan assets
depending on the risk perception/ rating oI respective assets. It is, thereIore, extremely important
Ior every bank to have a clear assessment oI risks oI the loan assets it creates, to become Basle-II
compliant.
That is why Credit Risk Assessment (CRA) system is an essential ingredient oI the Credit
Appraisal exercise.

Indian Scenario:
O In Indian banks, there was no systematic method oI Credit Risk Assessment till late
1980`s/ early 1990`s.
O Health Code System (1985) / IRAC norms (1993) are Asset (loan) classiIication systems,
not CRA systems.
O RBI came out with its guidelines on Risk Management Systems in Banks in 1999 &
Guidance Note on Management oI Credit in October, 2002.

SBI Scenario:
However, like in many other Iields, in the Iield oI Credit Risk Assessment too, our Bank played a
proactive & pioneering role. e had our Credit Rating System (CRA) in 1988. Then, the CRA
system was introduced in the Bank in 1996. The Iirst CRA model was rolled out in 1996 to take
care oI exposures to the C & I (ManuIacturing) segment. ThereaIter, separate models Ior SSI &
AG segments were introduced in 1998, when the C&I (MIg) CRA model was developed Ior
Non Banking Finance Companies (NBFCs).
86

As oI now, in SBI, CRA is the most important component oI the Credit Appraisal exercise Ior all
exposures ~ 25 lacs & a very important tool in decision-making (a Decision Support System) as
well as in pricing.

CREDIT RIS SSESSMENT (CR) - Minimum scores / Hurdle rates

The CRA models adopted by the Bank take into account all possible Iactors which go
into appraising the risks associated with a loan. These have been categorized broadly into
Iinancial, business, industrial & management risks and are rated separately. To arrive at
the overall risk rating, the Iactors duly weighted are aggregated & calibrated to arrive at a
single point indicator oI risk associated with the credit decision.

Financial parameters: The assessment oI Iinancial risk involves appraisal oI the
Iinancial strength oI the borrower based on perIormance & Iinancial indicators. The
overall Iinancial risk is assessed in terms oI static ratios, Iuture prospects & risk
mitigation (collateral security / Iinancial standing).

Industry parameters: The Iollowing characteristics oI an industry which pose varying
degrees oI risk are built into Bank`s CRA model:
Competition
Industry outlook
Regulatory risk
Contemporary issues like TO etc.

Management parameters: The management oI an enterprise / group is rated on the
Iollowing parameters:
Integrity (corporate governance)
Track record
Managerial competence / commitment
Expertise
Structure & systems
87

Experience in the industry
Credibility: ability to meet sales projections
Credibility: ability to meet proIit (PAT) projections
Payment record
Strategic initiatives
ength oI relationship with the Bank

Bank has introduced New Rating Scales Ior borrower Ior giving loans. Rating is given on the
basis oI scores out oI 100. Bank gives loans to the borrower as per their rating like SBI gives
loans to the borrower up to SB8 rating as it has average risk till SB8 rating. From SB9 rating the
risk increases. So banks do not give loans aIter SB8 rating.

The risk parameters as mentioned above are individually scored to arrive at an aggregate
score oI 100 (subject to qualitative Iactors negative parameters). The overall score thus
obtained (out oI a max. oI 100) is rated on a 8 point scale Irom SB1/SBT1 to SB 8
/SBT8.
O CRA model also stipulates a minimum score under Iinancial, business, industry and management
risk parameters Ior a proposal to be considered acceptable in a given Iorm.

The details oI such minimum scores are as under:
a. Minimum scores General
b. Minimum scores under Management Risk : (Integrity/Corporate Governance`, Track Record`
and Managerial Competence/ Commitment`)

An applicant unit will be required to score minimum 2 marks each (out oI 3) in the above three
parameters oI Management Risk to qualiIy Ior Bank`s assistance. In case oI existing accounts iI the
company scores less than this stipulated minimum marks (02), the Bank would explore all possibilities to
exercise exit option.
c. Minimum Score under Business Risk:

88

Compliance oI Environment Regulations To qualiIy Ior Iinancial assistance, an applicant unit would have
to secure Iull marks (02) under the parameter, ' Compliance oI Environment Regulations. In case, the
existing units in the books oI the bank do not secure Iull marks (02), the bank would explore all
possibilities Ior the exercise oI exit option.
Hurdle rates:
O No new connections are to be considered in respect oI accounts rated below SB4/
SBT4, subject to exceptions like availability oI Central Govt. guarantees and / or
availability oI a Corporate guarantee oI parent / group company with a CRA rating oI SB3 /
SBT3 and above.
O No enhancements in credit limits are to be considered in existing accounts rated below
SB4/SBT4. (Deviations may be permitted by CCC-I and above, as provided in the oan Policy.)
O Risk Management Dept., would issue advisories on the general outlook Ior the industry Irom time
to time.

Sa||ent features of CkA mode|s
(a) 1ype of Mode|s
S
No
Lxposure Leve| (I8 + NI8 L|m|ts ) Non 1rad|ng Sector
(CI SSI AGL)
1rad|ng Sector
( 1rade Serv|ces)
(l) Cver 8s 300 crore 8egular Model 8egular Model
(ll) 8s 023 crore Lo 8s 300 crore Slmpllfled Model Slmpllfled Model
(b) 1ype of kat|ngs
S No Mode| 1ype of kat|ng
(l) 8egular Model (l) 8orrower 8aLlng
(ll) laclllLy 8aLlng
(ll) Slmpllfled Model 8orrower 8aLlng

89

(c) 1ype of k|sks Covered
(|) 8orrower kat|ng
S
No
k|sk Category Max|mum Score
kegu|ar Mode| S|mp||f|ed Mode|
Lx|st|ng
Company
New
Company
Lx|st|ng
Company
New
Company
(l) llnanclal 8lsk (l8) 63 23
(63 x 039)
70 33
(70/2)
(ll) CuallLaLlve lacLors ('ve) (10) (10) (10) (10)
(lll) 8uslness lndusLry 8lsk (88 l8)
/8uslness 8lsk (for 1radlng SecLor)
20 30
(20 x 13)
20 40
(20 x 2)
(lv) ManagemenL 8lsk (M8) 13 43
( 13 x 3)
10 23
( 10 x 23)
(v) CuallLaLlve arameLer
(LxLernal 8aLlng)
(+3) (+3) (+3) (+ 3)
1oLal 100 100 100 100
(vl) 8orrower 8aLlng based on Lhe
above Score

(vll) CounLry 8lsk (C8)
(vlll) llnal 8orrower 8aLlng afLer C8
(lx) llnanclal SLaLemenL CuallLy LxcellenL/Cood/SaLlsfacLory/oor
(x) 8lsk Score/8aLlng 1ranslLlon MaLrlx CommenLs on 1rend ln 8aLlng
90

(||) Iac|||ty kat|ng (kegu|ar Mode|)
S No arameter Max|mum Score
(a) k|sk Dr|vers for Loss G|ven Defau|t (LGD)

(l) CurrenL 8aLlo Worklng CaplLal/ nonlund 8ased
laclllLy (excepL Capex) Cr ro[ecL uebL/LqulLy1erm
Loan/nonlund 8ased laclllLy (for Capex)

6
(ll) naLure of Charge

4
(lll) lndusLry /(1rade for 1radlng SecLor) #

6
(lv) Ceography #

2
(v) unlL CharacLerlsLlcs
(a) Leverage/ LnforcemenL of CollaLeral4
(b) SafeLy value LxlsLence of AsseLs4

8
(vl) MacroLconomlc CondlLlons
(a) Cu CrowLh 8aLe lmpacL of 8uslness Cycle 2
(b) lnsolvency LeglslaLlon ln Lhe !urlsdlcLlon1

91

# no Scorlng under Lhese Lwo parameLers for ACL 1rade SegmenLs due Lo nonavallablllLy of relevanL
LCu uaLa Score ouL of 92 Lo be normallsed Lo 100 for Lhese segmenLs
[ Marks llnked Lo 8orrower 8aLlng Score of Lhe unlL

(c) lmpacL of SysLemlc/Legal lacLors on 8ecovery1
(d) 1lme erlod for 8ecovery1

3
(vll) 1oLal SecurlLy (rlmary + CollaLeral)

60
(b) k|sk Dr|vers for Lxposure at Defau|t (LAD)

(l) naLure of CommlLmenL
(8evolvlng/non8evolvlng)

1
(ll) CredlL CuallLy of 8orrower [

3
(lll) 1enor of laclllLy 3
1ota| Score 100
Iac|||ty kat|ng based on the above Score
92

(d) New kat|ng Sca|es 8orrower kat|ng 16 kat|ng Grades

S
No
8orrower
kat|ng
kange of
Scores
k|sk Leve| Comfort Leve|
1 S81 94100 vlrLually Zero rlsk vlrLually AbsoluLe safeLy
2 S82 9093 LowesL 8lsk PlghesL safeLy
3 S83 8689 Lower 8lsk Plgher safeLy
4 S84 8183 Low 8lsk Plgh safeLy
3 S83 7680 ModeraLe 8lsk wlLh AdequaLe Cushlon AdequaLe safeLy
6 S86 7073 ModeraLe 8lsk

ModeraLe SafeLy
7 S87 6469
8 S88 3763 Average 8lsk Above SafeLy 1hreshold
9 S89 3036
10 S810 4S49 Acceptab|e k|sk
(k|sk 1o|erance 1hresho|d)
Safety 1hresho|d

11 S811 4044 8orderllne rlsk lnadequaLe safeLy
12 S812 3339 Plgh 8lsk Low safeLy
13 S813 3034 Plgher 8lsk Lower safeLy
14 S814 2329 SubsLanLlal rlsk LowesL safeLy
13 S813 24 reuefaulL 8lsk (exLremely
vulnerable Lo defaulL)

nll
16 S816 uefaulL Crade
93

(e) New kat|ng Sca|es Iac|||ty kat|ng (Separate for each Iund 8ased ] Non Iund 8ased Iac|||ty) 16
kat|ng Grades
S
NC
IACILI1
GkADLS
kANGL
CI
SCCkLS
LGD LLVLL
(kecovery Leve|)
kISk LLVLL CCMICk1
LLVLL
1 l81 94100 vlrLually Zero LCu vlrLually Zero 8lsk vlrLually AbsoluLe
SafeLy
2 l82 8793 LowesL LCu
(PlghesL 8ecovery)
LowesL 8lsk PlghesL SafeLy
3 l83 8086 Lower LCu
(Plgher 8ecovery)
Lower 8lsk Plgher SafeLy
4 l84 7379 very Low LCu
(Plgh 8ecovery)
Low 8lsk Plgh SafeLy
3 l83 6672 Low LCu
(AdequaLe 8ecovery)
ModeraLe 8lsk wlLh
AdequaLe Cushlon
AdequaLe SafeLy
6 l86 3963 ModeraLe LCu
(ModeraLe recovery)
ModeraLe
8lsk
ModeraLe
SafeLy 7 l87 3238
8 l88 4331 Average LCu
(Average 8ecovery)
Average 8lsk Above SafeLy
1hreshold 9 l89 3844

10

Ik10

3137
LGD 1o|erance 1hresho|d
(kecovery 1o|erance
1hresho|d)
Acceptab|e k|sk
(k|sk 1o|erance
1hresho|d)
Safety 1hresho|d
11 l811 2430 Plgh LCu (Low recovery) Plgh 8lsk Low SafeLy
94

(f) Mapp|ng to Lx|st|ng 8orrower kat|ng 8ands
S No New CkA Mode| Lx|st|ng CkA Mode|
Score Grade Grade Score
1 94100 S81 S81 90
2 9093 S82
3 8689 S83
S82

73 4 8183 S84
3 7680 S83
6 7073 S86
S83

63 7 6469 S87
8 3763 S88 S84 30
9 3036 S89
10 4349 S810 S83 43
11 4044 S811 S86 33
12 l812 1723

Plgher LCu
(Lower 8ecovery)
Plgher 8lsk Lower SafeLy
13 l813 1116 SubsLanLlal LCu
(Small recovery)
SubsLanLlal 8lsk LowesL SafeLy
14 l814 310
13 l813 14 PlghesL LCu
(Mlnlmal/zero recovery
PlghesL 8lsk
nlL 16 l816 0
93

12 3339 S812
13 3034 S813 S87 23
14 2329 S814
13 24 S813 S88 23
16 S816

(g) ua||tat|ve arameter (Lxterna| kat|ng)
SollclLed 8aLlng by a recognlzed LxLernal CredlL 8aLlng Agency (LC8A) LranslaLes Lo addlLlonal Score
lollowlng LC8As recognlsed by 88l are consldered for Lhls purpose

S

1ype LCkA
1 uomesLlc

(a) CredlL Analysls 8esearch LlmlLed
(b) C8lSlL LlmlLed
(c) ll1CP lndla
(d) (d) lC8A LlmlLed
2 lnLernaLlonal

(a) ll1CP
(b) Moodys
(c) SLandard oor's

88l has clarlfled LhaL Cash CredlL Lxposures Lend Lo be generally rolled over and also Lend Lo be drawn
on an average for a ma[or porLlon of Lhe sancLloned llmlLs Pence even Lhough a cash credlL exposure
may be sancLloned for a perlod of one year or less Lhese exposures should be reckoned as Long 1erm
Lxposures and accordlngly Lhe Long 1erm 8aLlngs accorded by Lhe chosen CredlL 8aLlng Agencles wlll be
relevanL"
96

CHAPTER 7
CASE STUDY

Case Study-
Details of case:
Company:- Akshat Polymers

Firm:- Partnership Firm (M/S Umiya Polymers)
* Shrl AmruLbhal Lal[lbhal uesal
* Shrl CunvanLbhal Ambaramdas aLel
* Shrl naLvarlal Mohanlal aLel
* Shrl uharamslnhbhal Lallubhal uesal
* Shri Kanjibhai Maljibhai Desai

Industry:- ManuIacturing

ctivity:- MauIacturing oI HDPP woven sacks

Segment:- SSI

Date of Incorporation:- 19.11.07

Banking arrangement:- Sole Banking

Regd & dmin ffice:- RS No. 840,
Kadi Thol Road,
Tal-Kadi, Dist-Mehsana
97

1he unlL wlll have lnsLalled capaclLy of 2320 M1 1he unlL ls expecLed Lo sLarL commerclal producLlon
from flrsL week of SepLember 2008 1he capaclLy uLlllzaLlon for Lhe year 200809 has been pro[ecLed aL
70 of lnsLalled capaclLy ln Lerms of Lhe uLlllzaLlon of Lhe machlnes Accordlngly Lhe unlL ls pro[ecLed Lo
achleve a sale of 8s926 crores for Lhe year 200809 ln Lhe flrsL slx monLhs of operaLlons
lurLher Lhe unlL ls pro[ecLed Lo achleve capaclLy uLlllzaLlon of 80 durlng Lhe year 200910 (Lhe flrsL full
year of operaLlons) and accordlngly Lhe sale for Lhe year ls pro[ecLed aL 8s1977 crores 1he pro[ecLlons
are consldered accepLable ln vlew of Lhe followlng facLors
i) 1he unlL plans Lo lnlLlally markeL lLs producL ln Cu[araL MaharasLra 8a[asLhan and sale Lo
CenLral CovL who purchases Lhe Pu woven sacks for gralns Lhrough open Lenders 1he
unlL has sLarLed negoLlaLlng for booklng of Lhe orders for Lhe proposed planL and resulLs are
promlslng as advlsed
ii) Pu woven sacks are wldely used as packaglng maLerlal ln CemenL lerLlllser sLorage of
Lhe ACL commodlLles All Lhese segmenLs are reporLed Lo have good demand for Lhe
Pu/L woven sacks ln Lhe lndlan markeL
iii) As per lC8A reporL gradlng and research servlces (2006) llexlble packaglng secLor ls
expecLed Lo grow aL Lhe raLe of 1240
iv) 1he promoLers have sufflclenL experlence ln Lhe llne of acLlvlLy 1he promoLers had already
made negoLlaLlons of Lhe some of Lhe lndusLrles as deLalled under for selllng Lhe Pu
woven sacks
O lndlan larmers lerLlllzers Company LlmlLed
O Cu!CCMASCL
O 8lrla cemenL
O Sanghl CemenL
O Ambu[a cemenL
O varlous graln lood LxporL unlLs of Cu[araL eLc
v) The Iirm has also started marketing activity Ior their products by making personnel
contacts & writing introductory letters to potential customers & as the promoters are
in the same line oI business activity Ior the last 15 years they are having very good
market contacts Ior the sales oI the Finished Goods.
vi) 1he orders worLh 8s230 crores ls expecLed Lo be flnallzed by end of AugusL 2008 and
before commlsslonlng of Lhe planL as advlsed
98

Proposal:
Sanction Ior;
i) FBC limits oI Rs.2.25 crores
ii) Fresh Term oan oI Rs.2.00 crores
Approval Ior:
i) CRA rating oI SB- 6 (71 marks) based on projected Iinancials as on 31.03.2010.
ii) Pricing Ior C Iacilities 1.00 above SBAR as applicable Ior SB-5 minimum 13.75and Ior
T 1.50 above SBAR minimum 14.25

erformance I|nanc|a| Ind|cators (ks |n Crores)
Year 2009 2010 2011 2012 2013 2014
Installed cap Qty.
(MT/pa.)
2520

2520 2520 2520 2520 2520
Net Sales Qty.
(approx) (MT) 1029 2016 2091 2142 2217 2268
Net Sales (Value) 9.26 19.77 20.58 21.09 21.82 22.34
(Export) 0.00 0.00 0.00 0.00 0.00 0.00
Operating proIit 0.44 1.18 1.19 1.23 1.31 1.33
ProIit beIore tax

0.43 1.17 1.18 1.22 1.30 1.32
PBT/Net sales ()

4.64 5.92 5.73 5.78 5.96 5.91
ProIit aIter tax

0.29 0.78 0.79 0.82 0.87 0.88
Cash accruals

0.66 1.10 1.09 1.15 1.24 1.32
PBDIT

1.20 2.04 1.96 1.97 2.02 2.05
Paid up capital 0.95 0.95 0.95 0.95 0.95 0.95
99

Tangible net worth

1.23 2.01 2.80 3.62 4.49 5.38
Adjusted TN
1.73 2.51 3.30 4.12 4.99 5.88
TO/TN

4.11 2.50 1.67 1.19 0.88 0.66
TO/Adjusted TN
2.64 1.80 1.27 0.92 0.81 0.62
Current ratio

1.34 1.52 1.53 1.53 1.57 1.81
nWC 101 171 240 237 274 328

Balance Sheet: (Rs In crores)

Sources of funds
Share Capital 0.95 0.95
Reserves and Surplus 0.29 1.07
Secured oans : short term CC 2.25 2.25
: long term T 2.00 1.60
Unsecured oans 0.50 0.50
DeIerred Tax iability
Total
pplication of Funds
Fixed Assets (Gross Block) 2.67 2.67
ess Depreciation 0.37 0.69
Net Block 8
Capital ork in Progress
Investments
100

Inventories 1.73 2.13
Sundry debtors 1.85 2.40
Cash & bank balances 0.15 0.15
oans & advances to suppliers oI
Raw material / spares
0.14 0.12
Advance tax 0.10 0.23
( ess : Current liabilities ) 0.31 0.67
(ess : Provisions )
Net Current ssets
Misc. Expenditure
(To the extent not written oII or adjusted )

Non-Current Assets/ Deposits 0.03 0.03
Total

Movement in TN: -

Movement in TN Projected

pening TN
PAT 0.29 0.78 0.79
Inc. in Equity / Premium 0.95
/- Change in Int. Assets -0.01
/- Adj. oI prior year exp.
- Dividend payment
Closing in TN 8
101

8ank Income Ana|ys|s (ks |n crores)
From Projection

Projection

C Int. 0.16 0.27
T Int. 0.14 0.29
C - -
BG - -
Bill - -
Others loan processing 0.03 0.01
Total

Dev|at|ons |n Loan o||cy
Parameters Indicative Min/Max level

as per loan policy
Company's
level as on

Company's level as
on
iquidity 1.33 1.34 1.52
TO/TN
TO/Adj. TN
3.00 4.11
2.64
2.50
1.80
Average gross DSCR (T) 1.75 2.54 2.54
Debt / equity
Debt/Quasi equity
2:1 2.01:1
1.15:1
1.03:1
0.64:1
Any others - - -

102

Defaulters List:-

bout unit and the promoters:
AKSHAT POYMERS (AP) has been established as a partnership Iirm on 19
th
November, 2007
at Kadi. The partnership was constituted Ior manuIacturing and selling oI HDPP woven sacks to
be manuIactured Irom HDPP granules.

The Iirm consists oI total six partners. The brieI background oI the partners is as Iollows :

hether names oI promoters, directors, company, group concerns Iigure in :
RBI deIaulters` list dated 30.09.2007 No
ilIul deIaulters` list dated 31.12.2007 No
ECGC caution list No
arning signals / Major irregularities in
Credit audit:
inspection report :
Other audit reports :

Not applicable new unit
Adverse observations in Balance sheet Not applicable new unit
Adverse observations in Auditors report Nil.
Any NPAs among associate concerns None
103

Name Age BrieI Background
M/s Umiya Polymers 46

Sri Prahaladbhai Hargovandas Patel is the
main partner in M/s Umiya Polymers with 30
share. Sri Prahaladbhai is SSC and have 10
years oI experience as Production Manager
in Asia oven Sacks td., Kadi who are
engaged in similar activity. M/s Umiya
Polymers are engaged in plastic waste
recycling at Kadi.

Sri Amrutbhai aljibhai Desai 43 Sri Desai is SSC and have 15 years oI
experience as Production Manager in reputed
Gopala Polyplast td., Santej. He had good
contacts in the market and will look aIter
production department & raw material
purchases.
Shri Dharamsingbhai allubhai Desai 35 Sri Dharamsinhbhai is a partner in the local
unit M/s Ajay Ginning Industries, Kadi
Shri Kanjibhai Malibhai Desai 44 Sri Kanjibhai is a Iarmer by proIession and
sleeping partner.
Shri Gunvantbhai Ambaramdas Patel 42 Sri Gunvantbhai also is a partner in M/s Ajay
ginning Industires, Kadi and has been
inducted in the partnership as a investment
partner.
Shri Natvarlal Mohanlal Patel 48 Shri Natvarlal Patel is a B.Com. and has 10
years oI experience in accounting. He is also
partner in M/s Shiv Shakti Steel, Kadi. He
will be looking aIter general administration
and accounts oI the Iirm.
1he overall quallLy of Lhe managemenL ls consldered saLlsfacLory
104

Commercial viability: (Rs.in crores)
Year ending
st
March
8- - - - - - Total
Net Sales 9.26 19.77 20.58 21.09 21.82 22.34
Net ProIit 0.29 0.78 0.79 0.82 0.87 0.88
Cash Accruals 0.66 1.10 1.09 1.15 1.24 1.32 6.56
Interest on Ts 0.16 0.27 0.22 0.16 0.11 0.05 0.97
Sub Total () 8
Total repayment 0.00 0.40 0.40 0.40 0.40 0.40 2.00
Interest on T 0.16 0.27 0.22 0.16 0.11 0.05 0.97
Sub Total (B)
DSCR (Gross) 5.13 2.04 2.11 2.34 2.65 3.04
Net DSCR - 2.75 2.73 2.88 3.10 3.30
verage Gross
DSCR

verage Net
DSCR
8

8reakeven and sens|t|v|ty ana|ys|s and whether acceptab|e (ks |n crores)
Break even analysis 31/03/09 31-Mar-10 31-Mar-11 30-Mar-12 31-Mar-13 31-Mar-14
Capacity Utilization 70 80 83 85 88 90
Net Sales (A) 9.26 19.77 20.58 21.09 21.82 22.34
Variable costs
Raw material 8.74 17.13 17.77 18.20 18.84 19.27
Consumable spares 0.00 0.00 0.00 0.00 0.00 0.00
Power and Fuel 0.26 0.47 0.50 0.53 0.56 0.59
Other operating Exp. 0.09 0.13 0.15 0.16 0.17 0.18
Stock Changes 0.73 0.39 0.06 0.03 0.04 0.04
Total Variable Cost(B) 8 8 88
103

Fixed Costs
Direct abour 0.08 0.13 0.14 0.15 0.16 0.17
Selling, Admin. & General
Expenses 0.06 0.10 0.11 0.12 0.13 0.14
Interest Expenses 0.40 0.55 0.48 0.42 0.35 0.29
Depreciation 0.37 0.32 0.30 0.33 0.37 0.44
Total Fixed Cost ( C) 0.91 1.10 1.03 1.02 1.01 1.04
Contribution (DA-B) 0.90 2.43 2.22 2.23 2.29 2.34
Contribution ratio (ED/A) 0.10 0.12 0.11 0.11 0.10 0.10
BE sales (FC/E) 9.10 9.17 9.36 9.27 10.10 10.40
BE sales as of Net
Sales 8 8 8
Interf|rm Compar|son (1o be g|ven on|y where data from comparab|e un|ts |s ava||ab|e)
(Amt |n Cr)
name of Company l8L nl8L ?ear Sales 81 /
Sales
1CL /
1nW
C8
Ahmedabad ackaglng
lndusLrles LLd
330 120 2007 2311 216 147 116
Slnghal lndusLrles vL LLd 670 2010 1319 632 290
%
Asla Woven Sacks vL LLd 744 100 2008 2298 433 314
%
AkshaL olymers 423 2010 1977 392 230

106

Raw material The major raw material Ior this plant is HDPP in the Iorm oI granules. This raw
material is available locally by sales & distribution network oI the major suppliers as under:

O Reliance Industries imited
O Nand Agencies
O abdhi International
O Hadlia petrochemicals td.
O Sharada Polymers
O IPC

The raw materials are purchased Irom the suppliers against the advance payment only and cash
discounts are oIIered resulting in the increase n proIitability. Any variation in the cost oI raw
material is proposed to be passed on to the Iinished products and will not aIIect the proIitability.

107

nalysis:-

The Iirm is into manuIacturing oI HDPP woven sacks which are widely used as
packaging material in cement, Iertilizer, etc.
As per ICRA report, grading and research services (2006) Flexible packaging sector is
expected to grow at the rate oI 12.40.
The promoters have suIIicient experience in the line oI activity. The promoters had
already made negotiations oI the some oI the industries as detailed under Ior selling the
HDPP woven sacks:
O GUJCOMASO
O 8lrla cemenL
O Sanghi cement
O Ambuja cement
O Various grain & Food Export Unit oI Gujarat

1he orders worLh 8s230 crores ls expecLed Lo be flnallzed by end of AgusL 2008 and before
commlsslonlng of Lhe planL as advlsed
1he company's borrower raLlng ls S86 based on pro[ecLed flnanclals as on 31032010 (Lhe flrsL
full year of operaLlons)
ro[ecLed flnanclals are ln llne wlLh Lhe flnanclals of Lhe some of Lhe unlL ln slmllar llne of acLlvlLy
and producLlon level
1he promoLers are havlng experlence of more Lhan 13 years ln Lhe llne of Lhe acLlvlLy
1he affalrs of Lhe flrm are expecLed Lo be managed on professlonal llnes based on Lhelr pasL
experlence
1he conducL of accounLs of assoclaLe wlLh Lhe exlsLlng bankers has been saLlsfacLory
1he shorL and medlum Lerm ouLlook for Lhe lndusLry ls sLable
AvallablllLy of collaLeral securlLy reflecLed ln collaLeral coverage of 30366
Cross average uSC8 of 234
Average securlLy margln of 48
1he company has adequaLe managemenL skllls and producLlon/markeLlng lnfrasLrucLure ln place
Lo achleve Lhe pro[ecLed Lra[ecLory 1here ls sLeady demand for Lhe producL
108

Case Study

() Details of case study
Company:- Janak Transport Co.

Firm:- Partnership
* Shri Harisinghbhai avjibhai Chaudhari;
* Shri Jesangbhai avjibhai Chaudhari;
* Shri Vinodkumar avjibhai Chaudhari;
* Shri Pratapbhai avjibhai Chaudhari;&
* Shri Janakkumar Jesangbhai Chaudhari

Industry:- Transport Activity

Segment:- C& I

Date of Incorporation:- 03.09.82

Banking with SBI since:- 16 years as a current A/C holder

Banking arrangement:- Multiple Banking Arrangement

Regd & dmin ffice:- Opp. Simandhar Flat,
Nr. Pashabhai Petrol Pump,
Highway, Mehsana.

109

Janak Transport Co. is a partnership Iirm established in 1982 Ior carrying a transport business.

As the company is in this business since incorporation & the unit has good contracts with ONGC
since last 26 years so it has a good repo with ONGC.

As the company has a good repo with ONGC, the ONGC outlook oI the business is considered
positive.

The Iirm has approached Ior term loan oI Rs. 295 lacs to Iinance the purchase oI Mahindra-
Bolero. The total project cost is estimated to be Rs. 363.44 lacs.

Brief of Contract:

(1). Fixed hire charges/ taxi/ month: Rs. 29150
(with Iixed 3000 Km run/ month & 12 hours duty/ day)

(2). Additional/ km charges beyond 3000 km. Rs. 3.57

(3). Duration oI contract 3 Years

Proposed Credit Requirement:

Fund Based Rs. 295 lacs

110

Performance Details
a) PERFORMANCE AND FINANCIA INDICATORS:
(Rs. in lacs)
Aud. Aud. Esti. Proj. Proj. Proj. Proj.
31
st
March 8
Net Sales 501.78 546.65 713.82 898.65 898.65 898.65 898.65
Operating ProIit (aIter
interest) 149.64 182.92 234.24 326.69 374.32 404.08 425.06
PBT 1.20 2.90 22.48 92.62 125.47 143.51 151.96
PBT/Sales () 0.24 0.53 3.15 10.31 13.96 15.97 16.91
PAT 1.20 2.90 22.48 92.62 125.47 143.51 151.96
Cash Accruals 39.05 40.51 129.25 233.74 224.25 212.66 200.36
PBDIT 54.44 52.41 150.01 266.99 247.21 226.20 203.72
Paid up Capital 21.04 22.56 91.00 113.48 181.10 256.57 340.08
TN 21.04 22.56 113.48 181.10 256.57 340.08 427.04
Adjusted TN 21.04 22.56 113.48 181.10 256.57 340.08 427.04
TO/TN 12.22 12.80 5.04 2.15 1.01 0.47 0.27
TO/Adjusted TN 12.22 12.80 5.04 2.15 1.01 0.47 0.27
Current Ratio 1.57 1.42 2.22 2.53 2.71 3.80 6.47
Current Ratio (Excl. T
instalments)
2.34 1.97 3.93 4.49 5.66 5.83 6.47
NC 100.20 103.87 386.14 349.18 323.80 361.29 438.25

111

b) Synopsis oI Balance Sheet :

Sources oI Iunds 31.03.2007 31.03.2008
Share Capital 21.04 22.56
Reserves and Surplus

Secured oans : short term 2.57 14.66
: long term 102.87 100.10
Unsecured oans 39.92 36.21
DeIerred Tax iability
Total
Application oI Funds
Fixed Assets (Gross Block)
ess Depreciation
Net Block
Capital ork in Progress
Investments 8
Inventories (Movable Assets) 110.59 134.66
Sundry debtors 92.61 78.70
Cash & bank balances 11.93 48.15
oans & advances to
subsidiaries and group companies

oans & advances to others 10.58 10.49
( ess : Current liabilities ) 109.22 136.74
(ess : Provisions ) 2.57 1.03
Net Current ssets
Misc. Expenditure
(To the extent not written oII or adjusted )

Total 166.40 173.53

112

c) Movement in TN (Rs in lacs)
8
Opening TN 17.63 21.04 22.56 113.48 181.10 256.57 340.08
Add PAT 1.20 2.90 22.48 92.62 125.47 143.51 151.96
Add. Increase in equity /
premium
8.42 10.17 68.44
Add./Subtract change in
intangible assets

Adjust prior year
expenses

Deduct Dividend
Payment /ithdrawals
6.21 11.55 25.00 50.00 60.00 65.00
Closing TN 8 8 8

113

ppraisal Memorandum for term loan:
Circle: hmedabad
Branch: Mehsana
Company: 1anak Transport Company(1TC)
Term Loan :
a) Proposal: Term oan oI Rs.295.00 lacs under the Transport Plus Scheme.
b) Project / Purpose: To purchase 59 new Mahindra Bolero under tie-up arrangement with
ONGC.
c) ppraised by: Inhouse examined by the Branch and Iound to be economically viable
d) Cost of Project & Means of finance:
Cost Means
MAHINDRA Bolero DI-2D 328.63 Equity :

68.44
Insurance 15.34
RTO Tax 19.47
C Margin Debt: 295.00
Total 363.44 Total 363.44

e) Remarks on Cost of project & Means of finance (in brief):
Each vehicle shall cost Rs. 6.16 lacs as per details given below:
Basic Price: Rs. 5.57 lacs
RTO : Rs. 0.33 lacs
Insurance : Rs. 0.26 lacs
The cost mentioned above is as per the quotation submitted by Shrijee Motors, Mehsana.
The Iirm is required to purchase 59 Mahindra Bolero Ior this purpose. Total cost oI
114

vehicle including the insurance and R.T.O. is Rs.363.44 lacs.
The project is proposed to be Iinanced by way oI medium term loan oI Rs.295.00 lacs
and Iirm shall raise capital oI Rs. 68.44 lacs as a margin.
Break-even and sensitivity analysis and whether acceptable:
Break even analysis // // // // //

Net Sales (A) 713.82 898.65 898.65 898.65 898.65
Variable costs
Power and Fuel 223.76 253.68 253.68 253.68 253.68
Other operating Exp. 44.89 47.39 48.89 50.89 55.98
Total Variable Cost(B) 268.65 301.07 302.57 304.57 309.66
Fixed Costs
Direct abour 72.40 85.52 87.52 90.72 94.07
Selling, Admin. & General
Expenses 8.50 9.50 10.50 11.50 12.50
Interest Expenses 20.76 33.25 22.96 13.54 3.36
Depreciation 106.77 141.12 98.78 69.15 48.40
Total Fixed Cost ( C) 208.43 269.39 219.76 184.91 158.33
Contribution (DA-B) 445.17 597.58 596.08 594.08 588.99
Contribution ratio (ED/A) 0.62 0.66 0.66 0.66 0.66
BE sales (FC/E) 336.18 408.17 332.97 280.17 239.89
BE sales as of Net Sales 8
Fixed cost with out
depriciation G 101.66 128.27 120.98 115.76 109.93
Contribution (HA-B) 445.17 597.58 596.08 594.08 588.99
Contribution ratio (ID/A) 0.62 0.66 0.66 0.66 0.66
Cash BE sales (JG/I) 163.97 194.35 183.30 175.39 166.56
CASHBE sales as oI Net
Sales 22.97 21.63 20.40 19.52 18.53
113

Commercial viability:
Year ending
st
March Total
Capacity utilization 100 100 100 100 100
Sales 713.82 898.65 898.65 898.65 898.65
Net ProIit 22.48 92.62 125.47 143.51 151.96 536.04
Depreciation 106.77 141.12 98.78 69.15 48.40 464.22
Cash Accruals 129.25 233.74 224.25 212.66 200.36 1000.26
Interest 20.76 33.25 22.96 13.54 3.36 93.87
TTL
T / DPG repayments 83.75 132.92 94.58 93.85 43.02 448.12
Interest 20.76 33.25 22.96 13.54 3.36 93.87
TTL 8
Gross DSCR 1.44 1.61 2.10 2.11 4.39
Net DSCR 1.54 1.76 2.37 2.27 4.66
verage Gross DSCR
verage Net DSCR

Deviations in Loan Policy/ Scheme:

Parameters Indicative
Min/Max level as per
Scheme
Company's level as on //8
iquidity Min. 1.33 1.42
TO/TN Max. 3.00 12.80*
Average gross DSCR (T) Min. 2.00 2.002
Promoters contribution (under tie-up) Min. 10 18.86
proIits in the last two Min. Rs.3.00 lacs with
rising trend
Actual proIit Rs. 1.20 lacs Ior
year 2006-07 and Rs.2.90 lacs Ior
year 2007-08*
Others Nil Nil

116

nalysis:-

Janak Transport Company is an existing proIit making unit

The main chunk behind giving loan is that Janak Transport Company is doing contract
with ONGC since incorporation

The promoters are having considerable experience as transport contractor with ONGC

The unit has got conIirm order/ tie-up with ONGC

A letter oI authority Irom ONGC was received, that iI Janak Transport Company will not
make the payment than ONGC will directly make the payment to the bank

The promoters contribution to the project is 18.86 which is above the margin
requirement

The current ratio is 1.42 that is satisIactory

ProIits in the last two years:-

Min. Rs. 3 lacs with rising trend

Actual proIit Rs. 1.20 lacs Ior year 2006-07 & Rs. 2.90 lacs Ior the 2007-08

II the partners remuneration & interest is included, the proIit Ior the year ended 31.03.07
& 31.03.08 is Rs. 4.81 lacs & Rs. 6.21 lacs

TO/TN should be max. 3 which is 12.80 here, as the co. has done multiple banking
arrangement it has o/s loans with other banks also but the co. is regularly making the
payment oI loans oI principal amount along with the interest so the loan is given.
117

Also the contract awarded is backed by guarantee Irom ONGC regarding direct payment
oI monthly bills to SBI. Hence, surety oI repayment is assured.

The bank also checks commercial viability oI the company & Iound that the DSCR Ior
term loan is 2.02 which is considered satisIactory

Despite that the bank has also done B.E. analysis & Iound that the B.E. sales was 47.10
oI net sales Ior this current year

The net sales & PAT oI the company is increasing year aIter year so overall proIitability
is good

The overall projected perIormance & Iinancial oI the unit are considered satisIactory.

118

CHAPTER 8
FINDINGS

Credit appraisal is done to check the commercial, Iinancial & technical viability oI the project
proposed its Iunding pattern & Iurther checks the primary or collateral security cover available
Ior the recovery oI such Iunds

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

Credit and risk go hand in hand

In the business world risk arises out oI:-
DeIiciencies /lapses on the part oI the management
Uncertainties in the business environment
Uncertainties in the industrial environment
eakness in the Iinancial position

SBI loan policy contains various norms Ior sanction oI diIIerent types oI loans

These all norms does not apply to each & every case

SBI norms Ior providing loans are Ilexible & it may diIIer Irom case to case

DiIIerent appraisal scheme has been introduced by the bank to cater diIIerent industries such as:-
Doctor plus scheme Ior doctors
Transport plus scheme Ior transport
School, colleges and educational institutions
Trader`s easy loan
arehouse receipt Iinancing Ior commodity traders
(agriculture related stock, cotton ginning, etc.)

119

Bank`s main Iunction is to lend Iunds/ provide Iinance but it appears that norms are taken as
guidelines not as a decision making

A banker`s task is to identiIy/ assess the risk Iactors/ parameters and manage/ mitigate them on
continuous basis

The CRA models adopted by the bank take into account all possible Iactors which go into
appraising the risk associated with a loan

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

The assessment oI Iinancial risk involves appraisal oI the Iinancial strength oI the borrower based
on perIormance & Iinancial indicators

AIter case study, we Iound that in some cases, loan is sanctioned due to strong Iinancial
parameters

From the case study analysis it was also Iound that in some cases, Iinancial perIormance oI the
Iirm was poor, even though loan was sanctioned due to some other strong parameters such as the
unit has got conIirm order, the unit was an existing proIit making unit and letter oI authority was
received Ior direct payment to the bank Irom ONGC which is public sector

120

CHAPTER 9
RECOMMENDATIONS AND SUGGESTIONS
1he problems faced by Lhe bank and Lhe suggesLlons glven are wlLh regards Lo lncrease credlL flow Lhe
SMLs noL only wlLh respecL Lo worklng caplLal flnance buL also pro[ecL flnance and asseL flnance
rob|ems faced by the 8ank for SML |end|ng and suggest|ons to overcome some of these prob|ems
Banks are now better equipped to handle the varied needs oI the SME sector due to better technology and
risk management. Thus, it recommends, may be achieved by extending banking services to recognize
SME clusters by adopting the 4-C approach: Customer Iocus, cost control, cross-selling and containing
risk.
To enable the banks take more objective decisions, the Government plans to introduce a rating
mechanism Ior designated industrial clusters; this may be designed jointly by CRISI, IBA, SIDBI and
SSI Associations. This would enable institutional Iunding to be channeled through homogenous
recognized clusters.
There is a critical need to devote substantial resources to improving the skills and capabilities oI banks'
lending oIIicers, especially with regard to the analysis oI the SMEs' Iinancial statements. Understanding
the nature oI the borrower's business and the cash-Ilow required is paramount to preventing the creation
oI NPAs.
Another way oI extending loans to the SMEs is the relationship-lending rule, where the lending partly
bases its decision on proprietary inIormation about the Iirm and its owner through a variety oI contacts
over time. The inIormation may be gathered Irom such stakeholders as suppliers and customers, who may
give speciIic inIormation about the owner oI the Iirm or general inIormation about the business
environment in which it operates.
InsuIIicient data on the SMEs, the lack oI credible published inIormation about their Iinancial health, the
high vulnerability oI small players in a liberalizing market and the inadequacy oI risk management
systems in banks are Iactors leading to higher NPAs and lower proIitability than potential in SME
lending. This can be overcome by collection oI authentic data on the SME segment, educating the
enterprises on the need Ior reliable Iinancial data, evolving suitable risk models and close monitoring oI
accounts by the bank.
121

SMEs are increasingly using products such as derivatives to manage their Iorex Ilows. Bank needs to
oIIer sophisticated products to the SMEs in a simpliIied manner.
They need to innovate their delivery platIorms by using Internet banking, mobile banking and card-based
platIorms Ior delivery oI transaction-banking as well as credit products, and enhance the service element.
SMEs look Ior convenience and simplicity in their banking requirements and banks should deliver these
through an eIIective use oI technology.
The Bank should keep on revising its Credit Policy which will help Bank`s eIIort to correct the course oI
the policies

The Chairman and Managing Director/Executive Director should make modiIications to the procedural
guidelines required Ior implementation oI the Credit Policy as they may become necessary Irom time to
time on account oI organizational needs.

Banks has to grant the loans Ior the establishment oI business at a moderate rate oI interest. Because oI
this, the people can repay the loan amount to bank regularly and promptly.

Bank should not issue entire amount oI loan to agriculture sector at a time, it should release the loan in
installments. II the climatic conditions are good then they have to release remaining amount.

SBI has to reduce the Interest Rate.

SBI has to entertain indirect sectors oI agriculture so that it can have more number oI borrowers Ior the
Bank.

122

CHAPTER 9
CONCLUSION
It is boom time Ior those working in the Iinancial sector. There are opportunities galore in Iinance and
more will come in the next Iew years so Iinance is exciting is exciting both as a subject and a career
option with the greater expansion oI the global economy.
Finance management is the backbone oI any organizations and hence yields a number oI job options
ranging Irom strategic Iinancial planning to sales.
SBI load policy contains various norms Ior sanction oI diIIerent types oI loans. There all norms does not
apply to each & every case. SBI norms Ior providing loans are Ilexible & it may diIIer Irom case to case.
The CRA models adopted by the bank take into account all possible Iactors, which go into appraising the
risk associated with a loan, these have been categorized broadly into Iinancial, business, industrial, and
management risks & are rated separately.
Usually, it is seen that credit appraisal is basically done on the basis oI Iundamental soundness. But, aIter
diIIerent types oI case studies, our conclusion was such that, in SBI, credit appraisal system is not only
looking Ior Iinancial wealth. Other strong parameters also play an important role in analyzing
creditworthiness oI the Iirm.
Morover, The study at SBI gave a vast learning experience to us and has helped to enhance our
knowledge. During the study e learnt how the theoretical Iinancial analysis aspects are used in practice
during the working capital Iinance assessment. e have realized during my project that a credit analyst
must own multi-disciplinary talents like Iinancial, technical as well as legal know-how.
The credit appraisal Ior working capital Iinance system has been devised in a systematic way. There are
clear guidelines on how the credit analyst or lending oIIicer has to analyze a loan proposal. It includes
phase-wise analysis which consists oI 5 phases:

123

1. Financial statement analysis
2. orking capital and its assessment techniques
3. Credit risk assessment
4. Documentation
5. oan administration
To ensure asset quality, proper risk assessment right at the beginning, is extremely important. That is why
Credit Risk Assessment system is an essential ingredient oI the Credit Appraisal exercise. The SBI was
the Iirst to Iormulate a Credit Risk Assessment model. It considers important parameters like proIitability,
repayment capacity, eIIiciency oI the unit, historical / industry comparisons etc. which were not
Iactored in other models. It is equally eIIicient as the SIDBI`s CART (Credit Assessment and Rating
Tool) model.
In all, the viability oI the project Irom every aspect is analyzed, as well as type oI business, industry,
promoters, past records, experience, projected data and estimates, goals, long term plans also plays crucial
role in increasing chances oI getting project approved Ior loan.

124

BIBLIOGRAPHY

EBSITES
wwwrblorgln
wwwsblcoln
wwwlndlanbankassoclaLloncom
wwwbankerslndlacom
wwwwlklpedlacom
wwwllbfcoln

BOOKS:
Vaidhyanathan, T.S., 'Credit Management
Internal circular oI SBI

'Credit and Banking
By: K. C. Nanda

JOURNAS:
1) Agarwal, R. G., 'Banking Finance A eading monthly oI Banking and Finance
Published by Sashi Publications

2) K.Ramakrishnan, 'Indian Bankers
Published by Indian Bank Association

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Parameters Indicative Min/Max level

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