cooperative credit

8/14/2019 Cooperative Credit

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Cooperative Credit /

Cooperative Banks


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Nature of Development Banking

- Originated with enactment of Cooperative Credit Societies

Act 1904.

- Establishment of Cooperative Central banks in 1912.

- Objective: Attracting deposits from non-agriculturists,

Using excess funds of some societies temporarily to makefor shortage in other banks, and to supervise and guide the

affiliated societies.

- State Cooperative Apex Bank was established according to

the recommendations of Maclagan Committee.


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D F Is (57 DFI as on by the end of 2007 financial year)

Developmental Banks

State Level Institutions Other InstitutionsAll India Level Institutions

All India

Devpt.

Banks

IDBI

IFCI

IIBI

SIDBI

ICICI

Specia-

lised FIs

Exim BankRCTFC

TFCI

IDFC

NEDFC

Invest-

ment

Institutions

UTI

LIC

GIC

Refinance

Institutions

NABARD

NHB

SFCs SIDCs

ECGC DICGC


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DFIs

A.All India Level

Industrial Development Bank of India (IDBI)Industrial Finance Corporation of India Ltd (IFCI)Small Industries Development Bank of India (SIDBI)

Industrial Credit and Investment Corporation of India Ltd. (ICICI)

Life Insurance Corporation of India (LIC)

General Insurance Corporation (GIC)

Unit Trust of India (UTI)

National Housing Bank (NHB)

Export Import Bank of India (EXIM Bank)

NAtioanl Bank for Agriculture and Rural Development (NABARD)

Industrial Investment Bank of India Ltd. (IIBI),

Infrastructure Development Finance Company Co. Ltd (IDFC)Risk Capital and Technology & Information Company of India Ltd. (RCTFC)

Technology Development and Information Company of India Ltd. (TDICI)

North-eastern Development Finance Corporation (NEDFC)

Tourism Finance Corporation of India Ltd. (TFCI)

Indian Renewable Energy Development Agency (IREDA)


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DFIs

B. State Level (IDBI is the apex institution which

coordinates the activities of all other DFIs at the nationaland State levels)

State Financial Corporations (SFCS: 18 in operation)

State Industrial Development Corporation (SIDCs: 28 inoperation)

Technical Consultancy Organization (TCOs: 17 in operation)

C. OthersExport Credit Guarantee Corporation (ECGC)

Deposit Insurance and Credit Guarantee Corporation

(DICGC)


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Project Identification

A Project is a proposal for capital investment to develop

facilities to provide goods and services.

The investment proposal may be for setting up a new unit,expansion or improvement of existing facilities.

The project idea can be conceived either from the input or

output side.


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Input-based projects are identified on the basis of

information about agricultural raw materials, forestproducts, animal husbandry, fishing products, mineral

resources, human skills and new technical processes

evolved in the country or elsewhere.

Out-based projects are identified on the basis of needs

of the population as revealed by family budget studies

or industrial units as found by market studies and

statistics relating to imports and exports.


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Contents of Business plan Define business clearly

Identify target market

Understand industry in which product compete

Outline management abilities

Outline financial frame work

Do not consider unrealistic market projections

Consider source of risk

Length should be 25 to 30 pages

Use simple clear language

Aim business plan for non-specialists


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The Stages of Project Selection

1. Acquiring motivation

2. Identification of various project ideas

3. Preliminary screening

4. Evaluation of project idea:

Market analysis:Financial analysis: Inflow and Outflow;

Technical analysis:

Economic analysis:

Ecological analysis:

Social cost benefit analysis.

5. Project report


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Step 1 : Acquiring MotivationStep 1 : Acquiring Motivation

Influences

Culture

Sub-Culture

Family / Peers / Education

Support

Govt.

Financial institutions

Venture Capital/Banks etc.


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Step 2 : Identify and Evaluate OpportunityStep 2 : Identify and Evaluate Opportunity

Opportunity Analysis:Opportunity Analysis: It should include A descriptionIt should include A description

of the product or service; an assessment of theof the product or service; an assessment of the

entrepreneur and the team; specification of all theentrepreneur and the team; specification of all the

activities and resources; sources of capital; as well asactivities and resources; sources of capital; as well as

its growth.its growth.The assessment of the opportunity requires answering theThe assessment of the opportunity requires answering the

following questions:following questions:- What market need does it fill?What market need does it fill?

- What personal observations have you experienced orWhat personal observations have you experienced or

recorded with regard to that market need?recorded with regard to that market need?

- What social condition underlies this market need?What social condition underlies this market need?

- What market research data can be marshalled to describe.What market research data can be marshalled to describe.


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Is it a good idea? 5 questions to ask

Is the number of potential customers, in other words the

market, large and growing? Who is your customer and what is his or her problem,

specifically, that you plan to solve?

How are these people currently solving their problem, that

is, what is your competition? How much better or cheaper are you than your potential

customers' current solution, and can you maintain that

advantage?

And, most importantly: are you and your team suited tothis task - do you have the right knowledge and network in

this industry? Are you passionate about the problem or

industry?


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Created need Garment

Solving the problem Mixie

Creating the problem Mixie with larger cap

New application Roofing sheets

Modification Mixie with top handle

Special Feature Remote Control

Manipulation of Technology (miniatureversion)

Roof top Green Houses

Tailor-made Opportunities based on

Technologies

Foolproof Security Systems

Waste Utilization Compost from Market Waste

Cooking High Speed Cooker


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Criteria

Market Issues

Potential

Profit Margins

Competitors: Barriers to entry

Financial Issues

Capital RequiredTaxation

ROI


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Step 3 : Develop Business PlanStep 3 : Develop Business Plan

Business plan is the description of the future directionof the business.

Provides promoters with logical framework within

which to plan and pursue a business strategy

Basis for discussion with 3rd parties such as Govt.,

Banks, Investors

Benchmark against which actual performance can be

measured and reviewed.


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Step 4 : Determine the Resources RequiredStep 4 : Determine the Resources Required

Men

Plant & Machines

Land & Building

Materials

Money / Funding

Debt: Friends, relatives, indigenous banks, banks,

financial institutions, public deposits, debentures, private

equity, venture capital.

Equity: Equity and own funds


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Step 5 : Manage the EnterpriseStep 5 : Manage the Enterprise

Planning

Decision Making/ Operational & Strategic

Budgets, P&L, B/S, Cash flow

Organising

Division of Work/ Org. Structure Allocating resources

Leading

Delegation / Motivation Control

Performance Evaluation / Review


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Promoters contribution

- Promoters contribution fixed at 22.5 per cent of the project cost.

- Concessional Norms: Available in terms of the location of the

project.

A areas: No industry Districts

B areas:Districts where industrial activity has started

C areas: Districts with industries are sufficiently well-developed

- Concession in promoters contribution:

A areas: 17.5 per cent

B areas: Projects above Rs. 25 crore in B areas 17.5 per cent

C areas: 20 per cent


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- Concessional norms are allowed purely at the discretion of the

financial institutions

- Contribution may vary depending up on the risk of the project.

- Deserved entrepreneurs who are unable to contribute can avail

seed capital assistance from State Financial Corporations (up

to specified limit), Industrial Development Bank of India, Risk

Capital and Technology Corporation of India Ltd., or Small

Industries Development Bank of India (depending up on the size

of the project Rs. 10 to Rs.30lakhs).

- For the purpose of promoters contribution, investments made

by mutual funds are considered if they are covered by non-

disposal / buy-back clause.


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Determination of the Equity Capital to be

raised from public

Eg: Project Cost: Rs. 10 crores; Promoters contribution is 22.5 per

cent; Debt-equity ratio 2:1.

Debt: Rs.1,00,00,000 x 1/3 = Rs.66,66,667

Equity: Rs.1,00,00,000 x 2/3 = Rs.33,33,333

Promoters contribution (Rs.1,00,00,000 x 0.225 ): Rs.22,50,000

Equity to be raised: Equity capital Promoters contribution

Rs.33,33,333 Rs.22,50,000 = Rs. 10,83,333


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Guidelines for Financing- Priority should be given projects contributing to:

Agriculture & rural development Projects locating in rural

areas

Generation of employment Export oriented

Advanced technology New material modernization

Infrastructural facilities (including rural areas infrastructure)

Export intensive and thrust industries for export development

Imports substitution (including requiring additional capacity)

Commercially proven indigenous technology

Upgradation of technology of existing unitsProjects involving Energy conservation and utilisation of non-

conventional sources of energy

Projects by new entrepreneurs

Technocrats and non-resident Indians.


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- Projects should not fall under negative list:

Cigarettes Beer and Alcohol

New jute mills Power looms (for mfg of itemsreserved for handloom) Fan and V Belts

LP Gas cylinders HDPE woven socks

Bright bars Tin and metal containers

Drums and Barrels PlaywoodCalcium carbide Hamilton poles

Tabular poles AAC/CSR conductors

Hand operated sewing machines

Conveyor belting (rubber and PVC based)Toilet and Cosmetics preparations

Commercial and decorative veneers

Blackboards and flush doors


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Process of Evaluation of Application

- Preliminary meeting should be fixed with the FI- Submit application for term loan (if DFI agrees to consider the

proposal)

- The loan application would require details of promoters

background, technical skills, relevant experience and

financial soundness

- The market research study for the project has to establish the

contribution of the project to existing and estimateddemand.

- Aspects of technical, financial, and economic would be

covered.


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- Cash flow statements for 7 to 10 year period would be

required

- The land for the project, plans foe building and quotations

for the machinery from two manufacturers.

- The production process has to be depicted.

- Estimated working capital need to be given.

- Submit MoU, AoA, Certificate of incorporation, latest

annual report and statement of accounts in any have to be

filed.

- Documents of guarantor company need to be enclosed.


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Appraising Term Loans

Financial structure of financing emerges after taking into

account:

- Promoters contribution

-Debt equity ratio (3:1 for small industrial units and 2:1 formedium and large firms)

Equity: Includes loans from friends, relatives, and capital

incentives

- Debt service coverage ratio (DSCR): 1.6 to 2 times

- Security margin: 25 per cent (Fixed deposits)


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Terms and Conditions for Grant of Loans- Clean title of land as security

- Insurance of assets, building, and machinery separately

- Scrutiny of AoA (It does not contain covenants of the FIs)

- Lien on all fixed assets

- Personal and corporate guarantees of major shareholders and

associate concerns

- Undertaking from promoters to finance shortfalls in funds (cost

overrun)

- Approval of appointment of managerial personnel by DFI

- Further capital expenditure only on the approval of DFI- Payment of dividend and issue of bonus shares subject to the

approval period of the FI

- Undertaking for non-disposal of promoters shareholding for a

period of 3 years.


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After the loan is sanctioned, the

requirements to be met are:

- Acceptance of terms and conditions of loans- Deposit of legal charges

- Details for plot or land for project

- Search report and title seeds for the land- General body resolution for creation of charge over assets

- Pollution clearance

- Legal documents to create a charge in proposed assets

- Personal guarantees and undertakings along with income tax

and wealth tax clearance of the promoters and director

- Architects and auditors certificate for civil construction.


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Disbursement of Loan

- Stamp duty and registration fee have to be paid

- Subscribed and paid-up capital is to be brought in by the

promoters as required by DFI

- Creation and registration of charge on the present and

future assets of the company

After the above requirements are complied with,disbursement made on the basis of assets created at the site.

In case of large projects, disbursement are need based, and

promoters have to bring in their entire contribution first.

In some case bridge loan is granted against bank guarantee(when there is no physical inspection is possible).

Disbursement is made after physical verification of assets

created.


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SOURCES OF FUNS OF DFIs

- Equity share capital

- Preference share capital

- Bonds

- Government

- Refinance facility

- Special finance


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Form of Loans- Rupee loans

- Foreign currency loans

- Rupee plus foreign currency loans

Operations and Trends

- DFIs can choose become a bank or NBFC

- Uniform supervisory regime for banks and NBFCs (on-

site and off-site monitoring; and periodic external

auditing.

- Consolidation


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Year Sanctions GrowthRate (%)

Disbursements GrowthRate (%)

1990-91 191961.0 32.8 128101.0 32.9

1991-92 223148.0 16.2 162729.0 27.0

1992-93 331933.0 48.8 231525.0 42.3

1993-94 409870.0 23.5 266243.0 15.0

1994-95 578324.0 41.1 335772.0 26.1

1995-96 599363.6 3.6 386979.7 15.3

1996-97 501418.2 (-) 16.3 429427.4 11.0

1997-98 749355.0 49.4 536560.1 24.9

1998-99 837943.5 11.8 583947.2 8.80

1999-00 1043407.6 24.5 684804.2 17.3

Cumulativeupto end March

2000

6181747.2 4354065.1

Assistance Sanctioned and Disbursement by DFI


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Critical Assessment of DFIs

The role of DFI has been praiseworthy in the following areas:

- Promotion of SSIs

- Promotion of Entrepreneurs

- Development of Backward Areas

- Industrial Development

- Investment substantial portion of equity

- Maintained sound financial position


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The weaknesses of DFIs rare many. The major among

them are:

Low profitability

The act like a cartel (with investment banks)

More Government control & political influence

Shows interest in purchase of shares than providing initial

capital or underwriting issueRegional imbalance (huge funds given to in 1994-95:Gujarat,

Maharastra, Tamil Nadu, West Bengal)

Not able to tackle growing sickness.

Seizing assets of borrowers in case of overdue (particularlySFCS)

Directors (nominees from DFIs) not playing proactive role inrunning the companies successfully.


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Narasimham Committee on DFIs

Submitted report in 1991has both appreciation and criticism:

Appreciation:

- Successful in meeting their primary objective of providing

funds for industrial investment.

- Successful in channalizing assistance industrially lessdeveloped states and backward areas.

- Build image (extent corporate sector relay on DFI)

- Increasing their share in equity of the Pvt. Sector

- Represented in the Boards of mgt. of companies and

played a major role in M&A


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Weaknesses

- Licensing Policy: DFIs induced to finance unviable projects

by entrepreneurs without proven competence, and unwantedrelaxation in the appraisal standards.

- Govt. Policy: DFIs forced to provide financial support to

sick units against their better commercial judgments

- State level DFI working as wings of State Governments

rather than as autonomous financial institutions

- No Competition: Total Absence of Competition to DFIs

- Consortium Finance: DFIs have been operating almost like

a cartel since different FIs join together and offer

consortium finance


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Recommendations

- Ownership pattern of DFI should be broad based, like that

of ICICI

- Government should workout an action plan to be

implemented in the next 3 years which would usher in a

measure of autonomy of the DFIs in matters of internal

consideration

- Appointment of Chief Executives of DFIs (banks) should be

men of proven professional competence and should be

selected on the recommendations of a panel of eminentpersons.

- The Boards of DFIs should include representatives from the

industrial sector.


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- Break the between SFCs and state government to improve the

efficiency of SFCs (take the only no. of projects that they can

efficiently follow up)

- DFIs should raise funds from the capital market at the marketrates. Also mobalise savings from household sector through

introduction of new schemes that should conflict with the

commercial banks.

- Each DFIs should have the sole responsibility (expertscommittee) in loan sanctions. And supervise their own loan

implementation.

- The present system of consortium funding should be given up.

- The role of IDBI should be changed. It should retain only its apexrefinancing role and its direct lending function should be

transferred to a separate institution which would be incorporated

as a company.

DFI h ld l d i i