credit rating procedure for smes

8/7/2019 credit rating procedure for SMEs

1/47

CHAPTER 1

INTRODUCTION TO THE PROJECT

1


2/47

1.1 Concept and Significance of the Study

The purpose of the project was to prepare loan proposals, both new and review, in order

to assess a firms or individuals capability to be able to repay those loans within the said

duration and adhere to the terms of the agreement.

The project consisted of two parts.

1. Preparation of loan proposal statements for SME clients.

2. Preparation of loan review proposal statements for the Banks Retail

customers(availing housing loan facilities only)

1.1.1 SME Clients.

SME clients require 2 types of loans: Fund Based and Non Fund Based.

Fund based loans include: Term loan (working capital) as well as Cash Credit

facilities.

Non Fund based loans include : Issuing Bank Guarantees and Letters of Credit.

2


3/47

Loan processing for SME customers is undertaken in a detailed manner

wherein detailed annual reports, balance sheet statements, MSOD statements,

utilization of funds, the securities as well as their CRISIL rating if any, asset codes etc

are carefully scrutinized before accepting the firms proposal to sanction limits.

1.1.2 Retail Customers (Housing Loan)

The accounts of customers who have availed housing loans from Bank of India are

reviewed on an annual basis. During this review their current outstanding amount, no. of

EMIs due and their present drawing limit is calculated in order to check whether the account

is overdue or not. Also when any LIC policy has been provided as a collateral security, the

account is checked for proper payment of annual premiums to keep the policy from lapsingand accordingly recorded in the review statement.

Proper documentation of security statements as well as original sanction limits as well

as progress of the housing project is tracked and recorded in the review proposal. Also an

annual review of the mortgaged property kept as security with the bank is undertaken by one

of the authorized officials of the bank and the inspection date along with relevant findings is

also recorded.

1.2 Scope & Limitations of the Study.

3


4/47

1.2.1 Scope

This study was undertaken at a branch in Pune. The scope of the project is as follows.

1. The study was undertaken in the credit department of the branch.

2. Preparation of new and review proposals for SME customers was the main focus

of the project.

3. A small part of the retail segment was also covered by way of preparation of

housing loan review proposals.

1.2.2 Limitations

1. As the study was undertaken in a branch, some operations in credit rating

procedures which are only undertaken at Zonal level were not handled by me.

2. In the retail segment, only housing loan proposals were handled without delving

into other types of loans within that segment.

3. Only the financial credit rating was carried out under this project as managementand business risk rating is carried out by higher authorities.

1.3 Objectives of the study

The study was undertaken in order to fulfil the following objectives.

1. To prepare loan proposals in order to determine the repayment capacity of a SME or retail

client.

2. To carry out financial credit rating of SME firms to analyse past and future trends.

3. To prepare review proposals for customers availing housing loans.

4


5/47

At the outset of the project, various loan proposals that had been sanctioned under the

existing credit appraisal procedure were studied in order to determine the basis for approval

and sanctioning of these loans. Nearly 5 proposals of various industries ranging from Auto

parts retailers and distributors to pharmaceutical distributers to food products manufacturers

were studied. These industries differed in their working capital and non fund based needs

depending on the growth of the business and the export orientation of the company

respectively.

5


6/47

CHAPTER 2

IINTRODUCTION TO THE INDUSTRY

2.1 Banking revisited

The first bank in India, though conservative, was established in 1786. From 1786 till

today, the journey of Indian Banking System can be segregated into three distinct phases. They

are as mentioned below:

Early phase from 1786 to 1969 of Indian Banks.

Nationalisation of Indian Banks and up to 1991 prior to Indian banking sector Reforms.

New phase of Indian Banking System with the advent of Indian Financial & Banking Sector

Reforms after 1991.

Phase I

The General Bank of India was set up in the year 1786. Next came Bank of Hindustan

and Bengal Bank. The East India Company established Bank of Bengal (1809), Bank of

Bombay (1840) and Bank of Madras (1843) as independent units and called it PresidencyBanks. These three banks were amalgamated in 1920 and Imperial Bank of India was

6


7/47

established which started as private shareholders banks, mostly Europeans shareholders.

In 1865 Allahabad Bank was established and first time exclusively by Indians, Punjab

National Bank Ltd. was set up in 1894 with headquarters at Lahore. Between 1906 and 1913,

Bank of India, Central Bank of India, Bank of Baroda, Canara Bank, Indian Bank, and Bank

of Mysore were set up. Reserve Bank of India came in 1935.

During the first phase the growth was very slow and banks also experienced periodic

failures between 1913 and 1948. There were approximately 1100 banks, mostly small. To

streamline the functioning and activities of commercial banks, the Government of India came

up with The Banking Companies Act, 1949 which was later changed to Banking Regulation

Act 1949 as per amending Act of 1965 (Act No. 23 of 1965). Reserve Bank of India was

vested with extensive powers for the supervision of banking in India as the

Central Banking Authority. During those days public has lesser confidence in the banks. As

an aftermath deposit mobilisation was slow. Abreast of it the savings bank facility provided

by the Postal department was comparatively safer. Moreover, funds were largely given to

traders.

Phase II

Government took major steps in this Indian Banking Sector Reform after

independence. In 1955, it nationalised Imperial Bank of India with extensive banking

facilities on a large scale especially in rural and semi-urban areas. It formed State Bank of

India to act as the principal agent of RBI and to handle banking transactions of the Union and

State Governments all over the country.

Seven banks forming subsidiary of State Bank of India were nationalised in 1960 on

19th July, 1969, major process of nationalisation was carried out. It was the effort of the then

Prime Minister of India, Mrs. Indira Gandhi. 14 major commercial banks in the country were

nationalised.

Second phase of nationalisation Indian Banking Sector Reform was carried out in 1980

with seven more banks. This step brought 80% of the banking segment in India under

7
http://finance.indiamart.com/investment_in_india/banking_in_india.htmlhttp://finance.indiamart.com/investment_in_india/banking_in_india.htmlhttp://finance.indiamart.com/investment_in_india/banking_in_india.htmlhttp://finance.indiamart.com/investment_in_india/banking_in_india.html


8/47

Government ownership. The following are the steps taken by the Government of India to

Regulate Banking Institutions in the Country:

1949 : Enactment of Banking Regulation Act.

1955 : Nationalisation of State Bank of India.

1959 : Nationalisation of SBI subsidiaries.

1961 : Insurance coverextended to deposits.

1969 : Nationalisation of 14 major banks.

1971 : Creation of credit guarantee corporation.

1975 : Creation of regional rural banks.

1980 : Nationalisation of seven banks with deposits over 200 crore.

After the nationalisation of banks, the branches of the public sector bank India rose to

approximately 800% in deposits and advances took a huge jump by 11,000%. Banking in the

sunshine of Government ownership gave the public implicit faith and immense confidence

about the sustainability of these institutions.

Phase III

This phase has introduced many more products and facilities in the banking sector in

its reforms measure. In 1991, under the chairmanship of M Narasimham, a committee was set

up by his name which worked for the liberalisation of banking practices.

The country is flooded with foreign banks and their ATM stations. Efforts are being

put to give a satisfactory service to customers. Phone banking and net banking is introduced.

The entire system became more convenient and swift. Time is given more importance than

money. The financial system of India has shown a great deal of resilience. It is sheltered from

any crisis triggered by any external macroeconomics shock as other East Asian Countries

suffered. This is all due to a flexible exchange rate regime, the foreign reserves are high, the

capital account is not yet fully convertible, and banks and their customers have

limited foreign exchange exposure.

8
http://finance.indiamart.com/investment_in_india/banking_in_india.htmlhttp://finance.indiamart.com/investment_in_india/banking_in_india.htmlhttp://finance.indiamart.com/investment_in_india/banking_in_india.htmlhttp://finance.indiamart.com/investment_in_india/banking_in_india.html


9/47

The nationalisation ofbanks in India took place in 1969 by Mrs. Indira Gandhi the

then prime minister. It nationalised 14 banks then. These banks were mostly owned by

businessmen and even managed by them.

Central Bank of India

Bank of Maharashtra

Dena Bank

Punjab National Bank

Syndicate Bank

Canara Bank

Indian Bank

Indian Overseas Bank

Bank of Baroda

Union Bank

Allahabad Bank

United Bank of India

UCO Bank

Bank of India

Before the steps of nationalisation of Indian banks, only State Bank of India (SBI) was

nationalised. It took place in July 1955 under the SBI Act of 1955. Nationalisation of Seven State

Banks of India (formed subsidiary) took place on 19th July, 1960. The State Bank of India is

India's largest commercial bankand is ranked one of the top five banks worldwide. It serves 90

million customers through a network of 9,000 branches and it offers -- either directly or through

subsidiaries -- a wide range of banking services.

The second phase of nationalisation of Indian banks took place in the year 1980. Seven

more banks were nationalised with deposits over 200 crores. Till this year, approximately 80% of

the banking segment in India were under Government ownership. After the nationalisation of

banks in India, the branches of the public sector banks rose to approximately 800% in deposits

and advances took a huge jump by 11,000%.

9
http://finance.indiamart.com/investment_in_india/nationalisation_banks.htmlhttp://finance.indiamart.com/investment_in_india/central_bank_india.htmlhttp://finance.indiamart.com/investment_in_india/punjab_national_bank.htmlhttp://finance.indiamart.com/investment_in_india/canara_bank.htmlhttp://finance.indiamart.com/investment_in_india/indian_overseas_bank.htmlhttp://finance.indiamart.com/investment_in_india/allahabad_bank.htmlhttp://finance.indiamart.com/investment_in_india/united_bank_india.htmlhttp://finance.indiamart.com/investment_in_india/bank_of_india.htmlhttp://finance.indiamart.com/investment_in_india/nationalisation_banks.htmlhttp://finance.indiamart.com/investment_in_india/nationalisation_banks.htmlhttp://finance.indiamart.com/investment_in_india/nationalisation_banks.htmlhttp://finance.indiamart.com/investment_in_india/central_bank_india.htmlhttp://finance.indiamart.com/investment_in_india/punjab_national_bank.htmlhttp://finance.indiamart.com/investment_in_india/canara_bank.htmlhttp://finance.indiamart.com/investment_in_india/indian_overseas_bank.htmlhttp://finance.indiamart.com/investment_in_india/allahabad_bank.htmlhttp://finance.indiamart.com/investment_in_india/united_bank_india.htmlhttp://finance.indiamart.com/investment_in_india/bank_of_india.htmlhttp://finance.indiamart.com/investment_in_india/nationalisation_banks.htmlhttp://finance.indiamart.com/investment_in_india/nationalisation_banks.html


10/47

1955 : Nationalisation of State Bank of India.

1959 : Nationalisation of SBI subsidiaries.

1969 : Nationalisation of 14 major banks.

1980 : Nationalisation of seven banks with deposits over 200 crores

2.2 About Bank of India

A group of eminent businessmen from Mumbai started the Bank of India (also known as

BoI) on 7th September, 1906. Initially the bank was owned privately till it was nationalized in

July 1969. Bank of India began its operations with just Rs. 50 lakh and 50 employees. Over the

years, the bank has made rapid progress and has become a one of the leading financial

institutions in the country with presence both in and outside the country. The bank has over

3000 branches spread all over the country consisting of 136 specialized branches. Among the

nationalized banks in the country, the business volume of the Bank of India occupies a premier

position.

10


11/47

Beginning with one office in Mumbai, with a paid-up capital of Rs.50 lakh and 50

employees, the Bank has made a rapid growth over the years and blossomed into a mighty

institution with a strong national presence and sizable international operations. In business

volume, the Bank occupies a premier position among the nationalised banks. The Bank has

3101 branches in India spread over all states/ union territories including 141 specialised

branches. These branches are controlled through 48 Zonal Offices . There are 29 branches/

offices (including three representative offices) abroad.

The Bank came out with its maiden public issue in 1997 and follow on Qualified

Institutions Placement in February 2008. . Total number of shareholders as on 30/09/2009 is

2,15,790. While firmly adhering to a policy of prudence and caution, the Bank has been in the

forefront of introducing various innovative services and systems. Business has been

conducted with the successful blend of traditional values and ethics and the most modern

infrastructure. The Bank has been the first among the nationalised banks to establish a fully

computerised branch and ATM facility at the Mahalaxmi Branch at Mumbai way back in

1989. The Bank is also a Founder Member of SWIFT in India. It pioneered the introduction

of the Health Code System in 1982, for evaluating/ rating its credit portfolio.

The Bank's association with the capital market goes back to 1921 when it entered into

an agreement with the Bombay Stock Exchange (BSE) to manage the BSE Clearing House. It

is an association that has blossomed into a joint venture with BSE, called the BOI

Shareholding Ltd. to extend depository services to the stock broking community. Bank of

India was the first Indian Bank to open a branch outside the country, at London, in 1946, and

also the first to open a branch in Europe, Paris in 1974. The Bank has sizable presence

abroad, with a network of 29 branches (including five representative office) at key banking

and financial centres viz. London, Newyork, Paris, Tokyo, Hong-Kong and Singapore. The

international business accounts for around 17.82% of Bank's total business.

2.2.1 Mission and Vision

11


12/47

Mission

to provide superior proactive banking services to niche markets globally, while

providing cost effective, responsive services to others in our role as a development bank, and

in so doing, meet the requirements of our stakeholders.

Vision

to become the bank of choice for corporate, medium businesses and upmarket retail

customers and to provide cost effective developmental banking for small business, mass

market and rural market.

Shri Alok Kumar Mishra has taken over as Chairman and Managing Director of Bank

of India with effect from 5gh August, 2009. Shri Mishra was the Chairman & Managing

Director of Oriental Bank of Commerce prior to the present assignment.Shri Misra held the

post of the Executive Director of Canara Bank from 24th March 2006 to 3rd June 2007 and

the Chairman & Managing Director of Oriental Bank of Commerce from 4th June 2007.

2.3 SME Sector in India.

The small and medium enterprises (SME) sector in India plays a vital role in the

growth of the country. The SME sector in India accounts for around 95% of the industrial

units, almost 40% of the gross industrial value-added in the Indian economy, 34% of exports

and provides direct employment to 20 million persons in around 3.6 million registered SME

units. The SME sector in India contributes to about 7% of India's gross domestic product

(GDP).

2.3.1 Impact of Liberalization

12


13/47

Owing to liberalization and opening up of the economy, the SMEs are facing stiff

competition from imports and need technological upgrading to produce cheaper and better

quality products. Globalization can also act as a tool for development of the SME sector.

SMEs engaged in the manufacturing of engineering and automobile products have shownexcellent growth in the past years due to their expertise in supplying original equipment

manufacturer (OEM) assemblies and subassemblies, components, etc.

As a result of policy reforms, the Indian SME sector is in a better position to take on

competition from the globalised world than ever before. This can be attributed to not only

policy changes, but also a new found confidence amongst entrepreneurs who are taking a

more global view of their businesses just like SMEs from many other countries including

Italy, South Korea, Taiwan and China to name a few.

2.3.2 Exports performance of SMEs

SME Sector plays a major role in India's present export performance. 45%-50% of the

Indian Exports is contributed by SSI Sector. Direct exports from the SSI Sector account for

nearly 35% of total exports. Besides direct exports, it is estimated that small-scale industrial

units contribute around 15% to exports indirectly. This takes place through merchant

exporters, trading houses and export houses. They may also be in the form of export orders

from large units or the production of parts and components for use for finished exportable

goods. It would surprise many to know that non-traditional products account for more than

95% of the SSI exports.

13


14/47

The exports from SSI sector have been clocking excellent growth rates in this decade.

It has been mostly fuelled by the performance of garments, leather and gems and jewellery

units from this sector. The product groups where the SSI sector dominates in exports, are

sports goods, readymade garments, woollen garments and knitwear, plastic products,

processed food and leather products.

2.3.3 Micro, Small & Medium Enterprises Development Act (MSMED act 2006)

The MSMED act 2009 is superior to the provisions for SSI under the IRDA in many

ways. However only the capital structure segregation has been mentioned here.

Enterprises classified broadly into:

i) Enterprises engaged in the manufacture/production of goods pertaining to any industry &

ii) Enterprises engaged in providing/rendering of services.

Manufacturing Enterprises:

Defined in terms of investment in plant and machinery (excluding land & buildings) and

further classified into:

Micro Enterprises - investment up to Rs.25 lakh.

Small Enterprises - investment above Rs.25 lakh & up to Rs.5 crore.

Medium Enterprises - investment above Rs.5 crore & up to Rs.10 crore.

Service Enterprises:

Defined in terms of their investment in equipment and further classified into:

14


15/47

Micro Enterprises - investment up to Rs.10 lakh.

Small Enterprises - investment above Rs.10 lakh & up to Rs.2 crore.

Medium Enterprises - investment above Rs.2 crore & up to Rs.5 crore.

15


16/47

CHAPTER 3

LITERATURE REVIEW

3.1 Types of Loan facilities for SMEs

SME customers require 2 types of loan facilities.

1. Fund based

2. Non Fund based

3.1.1 Fund based facilities/limits.

In fund based facilities there is an actual outlay of cash by a bank to the company/firmrequesting for these limits.

16


17/47

Fund based limits can be broadly categorized as:

1.Cash credit is a short-term cash loan to a company. A bank provides this type of

funding, but only after the required security is given to secure the loan. Once a security

for repayment has been given, the business that receives the loan can continuously draw

from the bank up to a certain specified amount. This type of financing is similar to a line

of credit.

2.Overdraft

The word overdraft means the act of overdrawing from a Bank account. In other

words, the account holder withdraws more money from a Bank Account than has

been deposited in it. In the case of Cash Credit, a proper limit is sanctioned which

normally is a certain percentage of the value of the commodities/debts pledged by

the account holder with the Bank. Overdraft, on the other hand, is allowed against

a host of other securities including financial instruments like shares, units of

mutual funds, surrender value of LIC policy and debentures etc. Some overdrafts

are even granted against the perceived worth of an individual. Such overdrafts are

called clean overdrafts.

3. Bill Discounting

Bill discounting is a major activity with some of the smaller Banks. Under this

type of lending, Bank takes the bill drawn by borrower on his (borrower's)customer and pays him immediately deducting some amount as

discount/commission. The Bank then presents the Bill to the borrower's customer

on the due date of the Bill and collects the total amount. If the bill is delayed, the

borrower or his customer pays the Bank a pre-determined interest depending upon

the terms of transaction.

4. Term Loan

17


18/47

Term Loans are the counter parts of Fixed Deposits in the Bank. Banks lend money in

this mode when the repayment is sought to be made in fixed, pre-determined instalments.

This type of loan is normally given to the borrowers for acquiring long term assets i.e.

assets which will benefit the borrower over a long period (exceeding at least one year).

Purchases of plant and machinery, constructing building for factory, setting up new

projects fall in this category. Financing for purchase of automobiles, consumer durables,

real estate and creation of infra structure also falls in this category.

3.1.2 Non Fund Based limits

The credit facilities given by the banks where actual bank funds are not involved are

termed as 'non-fund based facilities'. They are mainly credit security instruments.

They are again broadly classified as

1. Deferred payment guarantees

These are required for acquisition of Capital goods (Plant & Machinery

including Generators) where there is provision for Suppliers Credit by the

Manufacturer/Supplier. A deferred payment guarantee is a contract under which a

bank promises to pay the supplier the price of machinery supplied by him on deferred

terms, in agreed instalments with stipulated interest in the respective due dates, in case

of default in payment thereof by the buyer.

As far as the buyer of the plant and machinery is concerned, it serves the same

purpose as term loan. The Primary security is 1st charge on fixed assets financed.

Collateral security and Third party guarantee as per Bank policy.

2. Letter of Credit

A letter of credit is an obligation taken on by a bank to make a payment once

certain criteria are met. Once these terms are completed and confirmed, the bank will

18


19/47

transfer the funds. This ensures the payment will be made as long as the services are

performed. A letter of credit could be used in the delivery of goods or the completion

of a service. The seller may request that the buyer obtain a letter of credit before the

transaction occurs. The buyer would purchase this letter of credit from a bank and

forward it to the seller's bank. This letter would substitute the bank's credit for that of

its client, ensuring correct and timely payment.

A letter of credit is a banks DIRECT undertaking to the supplier (called the

beneficiary) to pay. When a letter of credit is in use, the issuing bank does not wait for

the buyer to default, and for the seller to invoke the undertaking.

3. Bank Guarantee

A bank guarantee guarantees a sum of money to a beneficiary. The sum is only

paid if the opposing party does not fulfil the stipulated obligations under the contract.

This can be used to essentially insure a buyer or seller from loss or damage due to non

performance by the other party in a contract. A bank guarantee might be used when a

buyer obtains goods from a seller then runs into cash flow difficulties and can't pay

the seller. The bank guarantee would pay an agreed-upon sum to the seller. Similarly,

if the supplier was unable to provide the goods, the bank would then pay the

purchaser the agreed-upon sum. Essentially, the bank guarantee acts as a safety

measure for the opposing party in the transaction.

A bank guarantee, therefore, is more risky for the merchant and less risky for

the bank. But this is not the case with a letter of credit (LC). With a bank guarantee, ifa client defaults the bank assumes liability. With a letter of credit, liability rests solely

with the issuing bank (this being the key difference and the key advantage in an LC)

which then must collect the money from its client.

3.2 Credit Risk

19


20/47

Credit risk is an investor's risk of loss arising from a borrower who does not

make payments as promised. Such an event is called a default. Another term for credit

risk is default risk. In other words, the risk of loss of principal or loss of a financial

reward stemming from a borrower's failure to repay a loan or otherwise meet acontractual obligation. Credit risk arises whenever a borrower is expecting to use future

cash flows to pay a current debt. Investors are compensated for assuming credit risk by

way of interest payments from the borrower or issuer of a debt obligation.

Credit risk is closely tied to the potential return of an investment, the most notable

being that the yields on bonds correlate strongly to their perceived credit risk. The higher

the perceived credit risk, the higher the rate of interest that investors will demand for

lending their capital. Credit risks are calculated based on the borrowers' overall ability to

repay. This calculation includes the borrowers' collateral assets, revenue-generating

ability and taxing authority (such as for government and municipal bonds).

Credit risks are a vital component of fixed-income investing, which is why ratings

agencies such as CRISIL, SMERA, ONECRA, FITCH etc evaluate the credit risks of

thousands of corporate issuers and municipalities on an ongoing basis.

3.2.1 Why is Credit Risk Rating important?

A credit rating is an assessment of the creditworthiness of an issuer of financial

securities. It tells investors the likelihood of default, or non-payment, by the issuer of its

financial obligations. Credit analysis is the financial analysis used to determine the

creditworthiness of an issuer. It examines the capability of a borrower, or issuer of

financial obligations, to repay the amounts owing on schedule or at all.

20
http://en.wikipedia.org/wiki/Defaulthttp://en.wikipedia.org/wiki/Default


21/47

Rating systems measure credit risk and differentiate individual credits and groups

of credits by the risk they pose. This allows bank management and examiners to monitor

changes and trends in risk levels. The process also allows bank management to manage

risk to optimize returns.

The regulatory agencies use a common risk rating scale to identify problem

credits. The regulatory definitions are used for all credit relationships commercial,

retail, and those that arise outside lending areas, such as from capital markets. The

regulatory ratings special mention, substandard, doubtful, and loss identify different

degrees of credit weakness. Credits that are not covered by these definitions are pass

credits, for which no formal regulatory definition exists.

1. Special mention (SM) "A special mention asset has potential weaknesses

that deserve managements close attention. If left uncorrected, these potential

weaknesses may result in deterioration of the repayment prospects for the asset or in

the institutions credit position at some future date. Special mention assets are not

adversely classified and do not expose an institution to sufficient risk to warrant

adverse classification

2. Substandard C A substandard asset is inadequately protected by the current

sound worth and paying capacity of the obligor or of the collateral pledged, if any.

Assets so classified must have a well-defined weakness, or weaknesses, that

jeopardize the liquidation of the debt. They are characterized by the distinct possibility

that the bank will sustain some loss if the deficiencies are not corrected.

3. Doubtful C An asset classified doubtful has all the weaknesses inherent inone classified substandard with the added characteristic that the weaknesses make

collection or liquidation in full, on the basis of currently existing facts, conditions, and

values, highly questionable and improbable.

4. Loss C Assets classified loss are considered uncollectible and of such little

value that their continuance as bankable assets is not warranted. This classification

does not mean that the asset has absolutely no recovery or salvage value, but rather

21


22/47

that it is not practical or desirable to defer writing off this basically worthless asset

even though partial recovery may be affected in the future.

22


23/47

CHAPTER 4

FLOW OF THE PROJECT

4.1 Flowchart of Loan sanctioning for an SME customer.

The proposal put up for appraisal goes through a number of channels before it is finally

sanctioned.

23

Date of application

received at branch

Date of branch

proposal


24/47

4.2 List of documents required

1. Company Annual Report along with Audited & estimated balanced sheet and P&L statements

with annexure to the same for 3 years.

24

Date clarifications

received at Pune

CBB

Date of proposal

received at H.O

Date of proposalreceived at Pune

Corporate Banking

Branch (PCCB)

Date of Pune CBB

proposal

Remarks


25/47

2. CBD-23 statement A statement of assets and liabilities for the main promoters of the

company or firm.

3. Hypothecation cum loan agreement

4. L444C Statement of acknowledgement of debt and securities from the borrower to the

bank.

5. MSOD statements Monthly select operational data.

6. Credit Rating of the SME by any credit rating agency like CRISIL, SMERA, ONECRA,

FITCH etc.

7. Details of float available.

8. Stock audit statements.

After obtaining the required documents, Bank of India (hereinafter referred to as the

Bank) carries out its credit rating procedure based on its unique credit rating model.

4.3 Credit rating done for XYZ Distributers.

25


26/47

The following is the proposal format for exposures up to 100 lacs.

A) Borrowers Profile:

1. Name of the Account : XYZ Distributers

2. Business/Activity: Retailer in automobile spare parts.

3. Established in 1989 Advance since: 1999

4. If account is new, name of earlier banker: N.A.

5. External Credit rating: AA

6. Asset code(No./description): 11/standard

7. Details of promoters, Directors: Mr. S. K Chawla

8. Multiple Banking Arrangements: No.

B) Issues for Consideration:

9. Present Request: New WC limits of 7,00,000 and BG limits of 40 lacs.

10.Last sanction/ review: BG limits of 15 lacs.

C) Facilities and Security Cover

14.

Limits Existing Proposed Inc(+)/dec(-)

Term Loan N.A N.A -

26


27/47

WC(FB) 0.00 7.00 7.00

BG(NFB) 15.00 40.00 25.00

15. Security

Security Particulars Date of valuation Present value(Banks

Share)

Principal

TDRs

Hypothecation of stocks

and book debts

25% of margin money

31/05/2010 20.91

Collateral EQM of shop 31/05/2010 30.07

16. Guarantors profile.

Gives guarantors net worth as recorded in the CBD-23 statement.

D) Conduct/ value of account:

a) Cheques returned during the year under review for financial reasons: NIL

b) LC devolved and BG invoked: NIL

27


28/47

17. Utilization of funds.

BG limits: 100%

E) Financial position

18.

Audited

31.03.09

Audited

31.03.10

Estimated

31.03.11

Estimated

31.03.12

a) Paid up Capital

-equity

-preference share

8.02

b) TNW 9.71c) Investment in co.s

which are

associated co.s/

subsidiaries

-

d) Adjusted TNW 9.71

e) Capital employed 9.71

f) Net Block 0.41

g) Net Sales:

-Domestic

-Exports

45.50

Total

h) Other Income

i) Depreciation -

j) Gross profit/Loss 1.69

k) Net Profit/Loss 1.69

28


29/47

l) Cash

Accruals(i+k)

1.69

m) Net profit/ Capital

employed(%)

17.40

n) Current Assets 29.30

o) Current Liabilities 20.00

19. Ratios

p) Current Ratio: 1.46

q) Debt Equity ratio : 2.06

r) PAT/Net Sales(%) : 3.71

s) DSCR : NA as no term loan

t) ICR : NA as no interest payment towards long term debt.

u) Inventory + receivables / Sales : 0.64

H. Working Capital Assessment

a) Gross Sales 45.50

b

)

25% of Gross Sales 11.38

c) 5% of Gross Sales 2.28

d

)

Actual Projected net working capital N.A.

e) (b-c) 9.10

f) (b-d) N.A.

g

)

MBPF 9.10

21. We certify as under:

29


30/47

i) Method of assessment: Turnover method

ii) MSOD Submission: Regular

iii) Current assets/ liab. As per RBI norms: YES

iv) Conduct of Account: satisfactory

v) Position of accounts : In order

FLOW CHART

Date of application received at Branch: 17/06/2010

Date of Branch Proposal: 22/06/2010

Date Proposal received at Zonal Office: 23/06/2010

Remarks

22. Z.O Recommendations: Not made available till end of tenure of project.

30


31/47

4.4 Learning from the process

1. Consortium Banking : In case of multiple banking arrangement, first pari passu charge has to

be stated on all assets. In case of liquidation of the firm, the liabilities will be in accordance

with amount of limits sanctioned by each bank.

2. Hypothecation on Stocks and Book Debts.

25% margin on closing stocks & 30% on sundry debtors is hypothecated under the

banks lien.

3. D/E ratio for an SME account should be 4:1

In case of a trading account it can be 3:1.

4. If investment in subsidiary co. by parent co. is more than 10% of the TNW, then it should be

adjusted in the Financial rating of the parent co.

5. DSCR

There is no depreciation in trading accounts. Hence DSCR cannot be calculated. Also

there is no DSCR for accounts which have not availed term loan as there is no repayment of long

term debt to be covered.

6. ISCR

31


32/47

No ISCR calculated in accounts without term loan as there is no interest paymeny

towards long term debt.

7. Conversion of Demand Loan into Cash Credit facility

At the will and discretion of the bank, when there are increase in orders for the company

exceeding current demand loan limit, then the demand loan account may be converted into a cash

credit account.

8. Valuation of stocks.

Valuation of stocks is done at cost/ invoice/ market value whichever is lower.

9. NFBs

Non Fund Based limits are to be secured by 25% margin money in the form of Banks

TDRs, LCs. NFBs for 180 days are secured by stocks.

10. Drawing limits

Drawing power is calculated after deducting unpaid creditors and outstanding balance. No

drawings are allowed on sister concerns unless specifically agreed.

11. Banks Lien

It is a bank norm to display banks hypothecation plate/ board at the firms unit or

business premises. All assets to be charged to the bank are to be kept fully insured. A stock audit

is carried out on yearly basis.

12. Commission and interests

32


33/47

Commission is charged on guarantees @ 0.77% and interest on CC and Demand loan

accounts depending upon credit rating and relationship with the Bank.

- Commission is charged for the claim period

- Concession for guarantees with cash margins

- Additional commission is charged for guarantees issued for government departments.

13. Watch and Substandard accounts

a. Watch accounts: accounts overdue over 30 days to 90 days.

b. Substandard accounts: accounts overdue 91 days onwards.

4.4.1 L444Cs Acknowledgment of debt and security statements

L444Cs are statements acknowledged by the Promoter/ Guarantor to the Bank in

terms of the following:

a) Demand promissory note (Gives the balance in the account secured by it)

b) Letter of continuing security

c) Letter of guarantee

d) Agreement of pledge

e) Agreement of hypothecation

f) Equitable/ legal mortgage of immovable property.

33


34/47

4.4.2 Types of Guarantees issues by the Bank.

a) In lieu of earnest money deposits.

b) In lieu of tender deposits.

c) In lieu of security deposit.

d) To obtain advance payments (generally exports).

e) To obtain mobilization advance (generally domestic).

f) Towards direct and indirect taxes to the government in respect of specific

transactions.

g) For direct/ indirect tax disputes with tax authorities.

h) For payment for suppliers/ services made/ rendered.

i) For bidding/ tendering for project contracts.

j) For performance in terms of any agreed contract.

k) For securing retention amount.

l) In favour of customs/ excise/ tax authorities towards tax/ duties payment etc.

m) Favouring courts for release of amounts.

n) For guaranteeing loan repayments.

4.5 Housing Loan review proposals.

34


35/47

A small part of the project involved making of review proposals for housing loan

accounts i.e, assessing whether the account is in order, calculation of drawing limit and EMI

repayments dues etc. A total of 52 review proposals were made during the course of the

internship.

The format for the review proposals is given as under:

Review Proposal No. :.......................

Date:......................

STAR HOME LOAN: REVIEW OF ACCOUNT

A/c: Mr. ABC reddy

Review Limit : 1.43 lacs

Account Name Worth (in lacs)

Borrower Mr. ABC Reddy 3.16

Co Borrower Mrs. ABC Reddy 0.76

Guarantor

Guarantor XYZ 10.76

Purpose of loan Purchase of flat

Limit Amount sanctioned (Rs Lacs) Authority Date of sanction

Original 6.64 Z.M Pune 29/12/1997

35


36/47

Last review 1.65 S.M Cr. Branch 04/08/2009

Security Details Value in Rs lacs

Mortgage EQM of Flat at 101 Mayur Villa, Nigdi 30.00

Collateral

Guarantee XYZ 10.76

Position of Account

Sanction limit Amt Disb. Drawing

Limit

Outstanding Prop Review Limit

6,64,000 6,64,000 1.43 1.51 1.43

Repayment No. of EMIs due No. of EMIs paid

EMI Rs 6780/- w.e.f

Mar 1998 131 130

Security Original security documents dated L444Cs Dated

8/1/1998

ROI 7.5% Margin 15%

Insurance Rs 8,00,000 Policy valid upto: 17/06/2011

4.5.1 Learning from this project.

1. The account is overdue by roughly Rs 8000 as the borrower had not repaid the

last EMI before the review.

36


37/47

2. Home loan sanctioning is done in accordance with the stages of completion of

the project.

i. The sanctioned amount is transferred to the borrowers account or to the

builders account as the stages of the project complete according the

agreement between the bank and the borrower.

ii. Eg. If sanctioned limit is 20,00,000 and only 2,00,000 has been paid to the

developer in accordance with the stage of completion of the project then the

borrower has an option to either pay only the interest towards that disbursed

amount or the entire EMI of that month to the bank.

3. A Cushion or Moratorium period is provided to the borrowers in case of semi

completion of the project wherein the borrower is subjected to pay only the amount

towards the interest of the disbursed amount.

4. In case of finished projects (flat ready for possession), the entire amount may

not be disbursed at the same time in case some of the required documents have not

been furnished to the bank.

5. Special schemes are available for members or ex members of the bank and

relatives to that person for housing loan schemes.

6. NPA The Net NPA to a branch is calculated as

Net NPA = Total NPA net of provisions / Total Advances * 100

Rephasing or restructuring of NPA accounts is done by adjusting the EMI or

the tenure of the loan period. Accordingly either the tenure of the Loan repayment is

increased with a restructured EMI or the EMI is changed keeping the same repayment

period.

37


38/47

CHAPTER 5

RESULTS AND CONCLUSIONS

38


39/47

5.1 Results

5.1.1 SME Proposal

1. The ratios for M/s XYZ distributors were as follows:

i. Current Ratio: 1.46

ii. Debt Equity ratio : 2.06

iii. PAT/Net Sales(%) : 3.71

2. The Maximum permissible bank finance was found out to be 9.10 lacs.

3. Utilization of funds (only BGs) for the previous year was 100%.

4. The increase from existing facility to proposed facility was 33 lacs.

5.1.2 Housing loan review proposal

1. The new review proposal was for a drawing limit of 1.43 lacs.

2. The account was outstanding by about Rs 8000/-.

3. No. of EMIs due was one less than no. of EMIs paid.

4. The LIC policy premium has been renewed for the next year.

39


40/47

5.2 Conclusions

5.2.1 SME proposal.

1. The current ratio is 1.46 which is within the RBI norms of 1.33. This ratio can fall up to

1:1 for the next 3 years so as to allow some relaxations and give a boost to this industry

according to RBI guidelines.

2. The Debt Equity ratio however was 2.06 which is considerably lower than the RBI norms

of 3:1. This account can be sanctioned the proposed limits by an authority higher to the

sanctioning authority which is the Senior Manager (Credit) in this case. This account may

be sanctioned at the discretion of the branch AGM.

3. The Maximum Permissible Bank Finance that can be provided to the enterprise for

working capital is 9.10 lacs whereas the required amount is only 7 lacs. Thus this limit

can be sanctioned.

4. The promoters are not under the RBI defaulters list.

5. The enterprise has requested for additional BG limits of 25 lacs on account of increasedbusiness. The earlier limit of 15 lacs was utilized upto the extent of 100%.

6. The conduct of the account had been satisfactory for the tenure during which BG facility

was availed. Also no cheques have been returned which are under review due to financial

reasons. There has been no devolvement of LC and invocation of BGs. Thus the account

has satisfactory functioning.

7. There were no adverse comments during stock audit inspection meaning that

hypothecated goods have been kept in the facility according to norms.

40


41/47

5.2.2 Housing loan review proposal.

1. The account was overdrawn to the extent of Rs 8000/- which was promised to be paid

within the next 15 working days.

2. As a result, one EMI was due from the borrowers hence the account drawing limit

was reduced to 1.43 lacs with an outstanding of 1.51 lacs.

3. If the account remains unpaid for a period of 30 days it will fall into the watch

category. The longer the unpaid amount, greater is the risk of the account becoming

an NPA.

4. The LIC policy given to the bank as collateral security has been renewed by the new

years premium.

41


42/47

Annexure

Std. No. SSID -28

P.A 10,000 Forms/08-2002

BANK OF INDIA

SMALL SCALE INDUSTRIES

APPLICATION FORM FOR CREDIT FACILITIES

OF OVER RS. 50 LAKHS & UPTO RS.2 CRORE

1.1 Name of the Unit

(In block letters)

1.2 Constitution : Proprietary / Partnership Firm / Private

Limited /

(Please strike out which are not applicable) Public Limited Company / Cooperative Society

1.3 Name of the Business

house/ group (if any)

2.1 Registration No.

(as given by the District Industries

42


43/47

Centre / Directorate of Industries)

2.2 Date on Incorporation / Commencement of Business

3. Business Address with Telephone / Telex No.

3.1 Registered Office

3.2 Administrative Office

3.3 Factory

4. Background of the Proprietor / Partners / Promoters/ Directors

(please furnish information for each person as per the Annexure - I)

Hindi version of this form is available separately

43


44/47

SMALL SCALE INDUSTRIES

APPLICATION FORM FOR CREDIT FACILITIES OF OVER RS. 50 LAKHS & UPTO RS.2

CRORE

5. Brief Description of the Industrial Activity

5.1 Existing

5.2 Proposed

6. How the Activity was financed so far

(to be filled up in case of existing unit only)

Source of Funds (*) Securit

y

Rate of

Int.

Repayment

per month

Present O/s

(in 000s of Rs.)

Amount of Default

(if any)

(*) (Indicate sources of funds with name & address, e.g., banks/ financialinstitutions/others (specify))

44


45/47

7. Past Performance(To be filed up in case of existing unit only)

(indicate in 000s ofRs.)

Particulars Last Year Last but one Years Last but Two years

Turnover

Net Profit

Retained Profit

Monthly Turnover of last twelve months

8. Means of Financing

(Please furnish details of sources of finance for meeting the cost under the

following heads)

(in 000s of Rs.)

Sr. no. Particulars Amount

Already

Raised

Amount

Proposed to be

Raised

Total

A Capital

(specify resources

contributing capital)

B Reserves

45


46/47

C Term Loans

(give full particulars)

D Unsecured Loans, and

deposits

(indicate sources, rate of

interest, repayment period

etc.)

E Deferred Payment

Arrangements

Including Suppliers Credit

F Subsidy

Central Govt.

State Govt.

G Seed capital

(indicate sources)

H Internal cash Accurals

I Other Sources (specify)

J Total

46


47/47

Bibliography

Bank of India Manual on loans and advances

http://bankofindia.com/

http://www.indianbank.in/

http://www.investopedia.com/
http://bankofindia.com/http://www.indianbank.in/http://www.investopedia.com/http://bankofindia.com/http://www.indianbank.in/http://www.investopedia.com/

credit rating procedure for smes

Documents