project report intro hdfc bank

8/2/2019 PROJECT REPORT Intro Hdfc Bank

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PROJECT REPORT

ON

{Commercial Credit Appraisals}

It Revolves around Character, Collateral &Capacity

FOR

{HDFC Bank}

BY

()

Submitted in partial fulfillment of requirements for award of

Post Graduate Diploma in Management

ATHARVA SCHOOL OF BUSINESS

Marve Road, Charkop Naka, Malad (W), Mumbai 400 095


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DECLARATION

I hereby declare that the Project titled "{Commercial Credit Appraisals With HDFC Bank Ltd} " submitted as a part of the study of Post Graduate Diploma in Management (PGDM) is myoriginal work. The Project has not formed the basis for the award of any other degree, diploma,associate ship, fellowship or any other similar titles.

Place: Mumbai

Date:


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CERTIFICATE

This is to certify that () has completed the Project "{Commercial Credit Appraisals}" under theguidance of Prof. in partial fulfillment of the requirements for the award of Post GraduateDiploma in Management for the academic period 2009-11.

Signature of the Guide Signature of the Director

Place: Mumbai

Date:


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ACKNOWLEDGEMENTS

I take this opportunity to express my gratitude and extend my thanks to all those whose help andguidance made this endeavor successful.

I extend my sincere thank to Shri Sunil Rane, Executive President, Atharva Education Trust; Shri N. S. Rajan, Dean, and Dr. S. K. Bhattacharya, Director, Atharva School of Business, for providing me the opportunity to work on this Project. I also thank my Project Guide, Prof. ManishaSanghvi, for giving her support and guidance in successful completion of the Project.

I cannot end this page without thanking my family for their encouragement and support whileundertaking this Project.


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EXECUTIVE SUMMARY

< This page is to be written at the end of completion of the Project, giving an overview andsummary of the Project>


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TABLE OF CONTENTS

Sr. No. Topic Page No.

1.

2.

3.

4.

5.

6

7.

8.

9.

10.

11.

List of Annexure

List of Tables

List of Figures


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AN OVERVIEW

Banking Sector

There have been major structural changes in the financial sectorsince banking sector reforms were introduced in India in 1992.Since then Banks have been lending aggressively providing fundstowards infrastructure sector. Major policy measures includephased reductions in statutory pre-emption like cash reserve andstatutory liquidity requirements and deregulation of interest rateson deposits and lending, except for a select segment. Thediversification of ownership of banking institutions is yet another

feature which has enabled private shareholding in the publicsector banks, through listing on the stock exchanges, arising fromdilution of the Government ownership. Foreign direct investmentin the private sector banks is now allowed up to 74 per cent.

The co-existence of the public sector, private sector and theforeign banks has generated competition in the banking sectorleading to a significant improvement in efficiency and customerservice.

The rapid turnaround, after the global financial crisis inducedslowdown, evidences the resilience of the Indian economy as wellas Indian banking system. The monetary and fiscal stimulusmeasures initiated in the wake of the global financial crisis, whichincluded appropriate steps taken by the Government as well asRBI, in mitigating the adverse impact from contagion andensuring that the financial sector in general and banking sector inparticular tide over the global financial crisis. Over the lastseveral years, RBI has undertaken wide ranging financial sectorreforms which ensured stability of the Indian banking system intimes of global crisis which underlines the significance of theregulatory regime in India. The banking industry recorded depositgrowth of 17%. The subdued growth in deposits of the bankingindustry reflected the higher growth in currency demand duringthe year. The disparity between the growth rate of credit andaggregate deposits of banking industry widened during the year.With economic growth consolidating around the pre-crisis levels,


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credit growth continued at an accelerated pace. On account of rise in bank credit and correspondingly lower deposit growth,banks investments in Government bonds and other approvedsecurities was relatively lower.

MONETARY POLICY HIGHLIGHTS (update the data as perdate)

In the RBI Monetary Policy issued, RBI strongly expressed its viewthat controlling inflation is imperative to sustaining growth overthe medium-term. As such, RBI signaled that the conduct of monetary policy will continue to condition and containperceptions of inflation in the range of 4.0-4.5% to be in line withthe medium-term objective of 3.0% inflation consistent withIndias broader integration into the global economy. Instead of itsearlier calibrated approach to fighting inflation, RBI took a largestep hiking key policy rates by 50 basis points. Accordingly, theRepo and Reverse Repo rates have moved up to 7.50% and6.50% respectively. RBI has moderated its GDP growth projectionaround 8% for F.Y. 2011-12 from the 8.6% last year. Moneysupply (M3 growth) has been estimated at 16%. Aggregate bankdeposit growth is projected at 17% and bank credit growth at

19%. WPI Inflation has been estimated at 6% with an upward biasfor end March 2012.


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Objective of Study

Offering credit is an operation fraught with risk. Before offering

credit to an organization, its financial health, justified end use,financial need, customer asset quality if offered as collateral mustbe analyzed. Credit should be disbursed only after ascertainingsatisfactory financial performance. Based on the financial healthof an organization, banks assign credit ratings. These creditratings are used to fix the interest rate and quantum of installment.

This study aims to analyze the credit health of organizations thatapproach The Shamrao- Vithal Co-Op Bank Ltd for credit facilities.After analyzing credit health, the credit rating is determined. Onthe basis of credit rating, the interest rate guidelines circular isconsulted to fix a price for the credit facilities i.e. determine theinterest rate.


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About the Company

Founded in 1906, this unique financial institution rests on thepillars of thrift, fellowship, character, accommodation and theselfless service of all individuals and organizations who wish tohelp themselves progress. Company sees itself as a family of honest, loyal and committed professionals, harmoniouslyemploying technology, innovation and the human touch toachieve customer satisfaction and goodwill-the corner- stones of our success and the focus of all their efforts.

The prosperity of their customers is the engine of their success

and customers will find in them a fast, timely, flexible, co-operative and competitive partner in their progress. Bank shallreach out to their customers anywhere and at any time to maketheir dealings with company a pleasure. Company warmlywelcomes them into their aesthetic surroundings or takes bankingservices to their doorsteps. At SVC the staff is committed toapproachability, simplicity and transparency in their dealings withall their stake holders and shall be a temple of their trust.

They use their employee involvement and sense of togethernessto generate high levels of teamwork, efficiency, excellence andprofits. They mobilize aggressively, invest wisely, disburseprudently, recover assiduously, reduce costs and create alearning organisation that offers products and services in tunewith and ahead of the times.

Exponential Growth

The Bank has an avowed mission to provide highly advancedbanking and allied services to customers in the most beneficialmanner and in an environment of business focused friendliness.

The Banks perspective has always been global. As the decadesunfolded, varied services were introduced to address an ever-widening spectrum of retail, corporate and institutional clients.


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Stupendous growth followed most evident since the turn of themillennium.

Innovation- the ripple effect

Innovation has been in evidence in every aspect of the Banksoperations. Administratively, in nurturing human resources and apositive work environment. Operationally, by enhancing securityexponentially at various levels. Managerially, through astute goal-definition and an emphasis on transparency. And at corporatelevel, through network expansion and mergers and acquisitions.

Yet, perhaps, the most significant aspect of innovation has beenthe development and roll-out of Genius internally constructedbanking software that has increased operational efficiency acrossour entire branch network manifold.

CORPORATE GOVERNANCE

The Bank has a sound corporate governance mechanism in place.Professionalism at all levels ensures high level of skills andstandards in performing entrusted tasks. The Bank ensuresappropriate internal control systems and devotes adequateattention to maximizing returns on every unit of resources

through an effective funds management strategy and mechanism.Management is well-versed with all aspects of the guidelinesissued by the Reserve Bank of India and ensures that, the Profit &Loss Account and Balance Sheet are prepared in a transparentmanner and reflect the true state of affairs. It is ensured thatnecessary statutory provisions and appropriations out of profitsare made as required in terms of Multi-State Act/Rules and theBye-laws of the Bank. With elements of good corporategovernance, sound investment policy, appropriate internal controlsystems, better credit risk management, focus on newly-emerging business areas, commitment to better customerservice, adequate mechanization and proactive policies on house-keeping issues, the Bank has internally strengthened its wholestructure.


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What does credit mean?

1. A contractual agreement in which a borrower receives something of value nowand agrees to repay the lender at some date in the future, generally with interest.The term also refers to the borrowing capacity of an individual or company.

2. An accounting entry that either decreases assets or increases liabilities andequity on the company's balance sheet. On the company's income statement, adebit will reduce net income, while a credit will increase net income.

3. The amount of money available to be borrowed by an individual or a company isreferred to as credit because it must be paid back to the lender at some point in thefuture. For example, when you make a purchase at your local mall with your VISAcard it is considered a form of credit because you are buying goods with theunderstanding that you'll need to pay for them later.For example, on a company's balance sheet, a debit will increase the inventory

account (an asset) if the company buys merchandise for resale on credit. On theother hand, a credit will increase the company's accounts payable (a liability).


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The Credit Appraisals

Credit appraisal is the assessment of risk that can impact on therepayment of loan. In short it is to determine, whether we will getour money back?Depending on the purpose of the loan & the quantum, theappraisal process may be simple or elaborate.For small personal loans credit scoring based on income, life style,existing liabilities may suffice.For project financing, the project comprises technical,commercial, marketing, financial, managerial appraisals, etcIt is the process by which the lender assesses the credit

worthiness of borrower. It revolves around character, collateraland capacity.Credit Appraisal is the process by which a lender appraises thetechnical feasibility, economic viability and bankability includingcreditworthiness of the prospective borrower. Credit appraisalprocess of a customer lies in assessing if that customer is liable torepay the loan amount in the stipulated time, or not. Here bankhas their own methodology to determine if a borrower iscreditworthy or not. It is determined in terms of the norms andstandards set by the banks. Being a very crucial step in thesanctioning of a loan, the borrower needs to be very careful inplanning his financing modes. However, the borrower alonedoesnt have to do all the hard work. The banks need to becautious, lest they end up increasing their risk exposure. All banksemploy their own unique objective, subjective, financial and non-financial techniques to evaluate the creditworthiness of theircustomers.

While assessing a customer, the bank needs to know the following

information: Incomes of applicants and co-applicants, age of applicants, educational qualifications, profession, experience,additional sources of income, past loan record, family history,employer/business, security of tenure, tax history, assets of applicants and their financing pattern, recurring liabilities, otherpresent and future liabilities and investments (if any). Out of these, the incomes of applicants are the most important criteria


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to understand and calculate the credit worthiness of theapplicants. As stated earlier, the actual norms decided by banksdiffer greatly. Each has certain norms within which the customerneeds to fit in to be eligible for a loan. Based on these

parameters, the maximum amount of loan that the bank cansanction and the customer is eligible for is worked out. The broadtools to determine eligibility remain the same for all banks.

Key points from Credit Policy of the company.Maximum exposure for Individuals 15% of Capital funds i.e. Rs.

72.72 cr (2010)Maximum exposure for Group 40% of Capital funds i.e. Rs.

193.93 cr (2011)(Group to be defined at the perception of bank)1) Prohibited to advance against banks own shares.2) Prohibited to advance to directors and their relatives.3) Maximum ceiling on advance to nominal member is 1 lakhs.4) Desist from advance against FD by other banks.5) Prohibition on bridge loan/ interim finance.6) Loans & Advances permitted on securities, except to stock-brokers,- 5 Lakhs in physical form.- 10 Lakhs in Demat form.

- Margin of 50% to be maintained.7) Prohibition to finance Non- Banking Financial/ Micro FinancialCompany except when engaged in hire purchase/ leasingactivities.8) Financing for Agricultural Activities:- Direct finance to be provided & not through any agencies likecredit societies, land development banks, etc.- Credit to be extended only after obtaining no due certificatefrom existing credit agencies in area.

- To follow the scale of finance & security as per guidance fromRBI/ NABARD.9) Restrictions on Advances to defaulters of statutory dues.10) Maximum limit of Unsecured advances.- Rs. 2lakhs for single party/ group.- Bank should ensure that aggregate outstanding should notexceed 15% of its time & demand deposits (liabilities).


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- No bank to finance a borrower who is enjoying credit facilitiesfrom other institutions, without obtaining NOC from suchinstitutions. (Exceptions included).

The central bank of India has listed out priority sectors in whichthey have lend:Agriculture & Allied activities, Small Scale Industries, SmallBusiness, Small road transport operators, Professional & self employed, Housing, Others

The Central bank had given the target of 40% to be achieved forthe priority sector, The Shamrao Vithal Co- Op Bank achieved40.86% (2011).


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Various Credit facilities offered by SVC

Credit disbursement at SVC

(Commercial Credit, Term Loan undertaken for study)


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Retail Credit

A financing method which provides loan services to retail

consumers for goods and services. Retail credit facilities lendfunds to consumers wishing to purchase high ticket items but areshort on capital. Thus, retail credit facilities may enable a greaternumber of consumers access to a retailer's goods. Retail creditfacilities can take the form of point of sale finance options in retailoutlets. For example a $10,000 motorcycle might be a lot for aconsumer to pay up front. Retail credit facilities will loan the$10,000 to the consumer, who will then pay it back with interestin monthly installments over several years. Some offer low oreven no payments over an initial time period, but then chargeabove average interest.

Retail credit facilities give the option of consuming now orconsuming in the future. Higher interest rates may be acceptableto some consumers, depending on the consumers' uniqueconsumption utilities. The risk of default is a factor thatdetermines the interest rate that retail credit facilities charge.

Housing Loan

The Shamrao Vithal Co- Op Bank at present gives home loans toits customers under the name, GOOD HOMZ. An individual canborrow either singly or jointly, for a maximum of Rs. 50 Lacssubject to;For salaried applicants: Total deductions including installments of proposed loan not exceed 60 % of gross salary.For applicants having Business: Minimum debt service ratioshould be 1.5:1

The rate of interest to be charged will be based on the rate chart,

exceptions to be made strictly by the corporate office. The fundscould be borrowed to purchase flat, construction of new house,bungalows on ownership basis. The borrower has to repay theamount in maximum of 180 months, i.e. 15 years.An individual to be eligible for the loan has to atleast of 21 yearsof age & an Indian resident, should be an income tax assessee,


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need to be employed or engaged on in lawful activity, and shouldhave a savings account with bank for atleast past 6 months.

Vehicle Loan

The company gives Vehicle loan to individuals, proprietaryconcerns, partnership firms & companies. The Bank has notspecified a maximum amount of loan but it is decided on thebasis of the financials of the applicant.

The rate of interest to be charged will be based on the rate chart,exceptions to be made strictly by the corporate office. The fundscan be borrowed for purchase of vehicles; the bank hypothecatesthe same vehicle. The borrower has to repay the loan inmaximum of 60 months.As prerequisites a borrower should be banking with the companyfor last 6 months and should have a satisfactory track record.

Personal loan

The Shamrao Vithal Co- Op Bank gives personal loans to itscustomers under the name, Lifestyle Finanz. An individual canborrow a maximum amount as per limits laid down for singleparty, group and as per financials of specified party.

The rate of interest to be charged will be based on the rate chart,exceptions to be made strictly by the corporate office. The fundscan be borrowed for the purpose of acquisition of Consumerdurables, household articles etc. The Bank hypothecates thearticle financed by it.

The repayment schedule here varies from 24 months to 60months depending on the amount sanctioned. As prerequisitesthe borrower should be an Indian resident with 21 complete years

of age. If employed should be in 3 continuous years of servicewith the firm & should have fair repayment capacity. If engagedin business or profession then should have sound financials inpast 3 years.


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Industrial Credit

What Does Industrial Credit Mean?

A pre-approved amount of money issued by a bank to acompany that can be accessed by the borrowing company at anytime to help meet various financial obligations. Commercial creditis commonly used to fund common day-to-day operations and isoften paid back once funds become available.Commercial credit is often used by companies to help fund newbusiness opportunities or to pay for unexpected charges. Forexample, imagine that XYZ Manufacturing Inc. has the chance tobuy a piece of much needed machinery at a deep discount. Let'sassume that the piece of equipment normally costs $250,000, butis being sold for $100,000 on a first-come, first-serve basis. In thisexample, XYZ Manufacturing could access its commercial creditagreement to get the required funds immediately. The firm wouldthen pay the borrowed amount back at a later date.

Term loan

Term loans to industries are granted to assist industries to meettheir needs of capital expenditure on land, buildings, plant andmachinery required for setting up of a new industrial unit forexpansion of an existing unit or modernization or renovation of existing units to augment production.

The Shamrao- Vithal Bank Ltd provides term loan to its clientunder the name of, Asset Finance, Own Your Office, & HelloDoctor

Under Asset Finance, the company lends to proprietary

concerns, partnership firms, & companies up to a maximum of Rs.10 crores. The rate of interest to be charged will be based on therate chart, exceptions to be made strictly by the corporate office.

The funds can be borrowed for the purpose of long term workingcapital requirement, supplementary working capital requirement,expansion of business, repayment of unsecured loans, paymentto retiring directors, partners, etc, restructuring of existing


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borrowing, product launch or promotion, advertisement andpublicity, research & development.

The borrowers need to keep the existing unencumbered assets of the borrowing unit such as plant and machinery, land andbuilding, factory shed, etc as security. Personal guarantee of theproprietor/ partner/ or director may be required. The loan is to berepaid in maximum up to 84 months.As a prerequisites concerns should have earned profits in duringpreceding three financial years, the concerns should not be indefault in payment of their dues with financial institutions/ banksduring the last 3 years.

Under Own Your Office, the company lends to those business

units/ firms/ companies/ individuals who plan and wish to run theirbusiness from their own premises. The company lend maximumup to Rs. 50 lacs for office premises & Rs. 5 lacs for itsfurnishings. The rate of interest will be charged by the bank asper the norms declared by bank from time to time. There will bean equitable mortgage of office premises and hypothecation of office equipment and fixtures to be financed.Personal guarantee of the proprietor, partners, and directors maybe required. The repayment schedule may be 60 months but canbe extended up to 7 years subject to strict discretion of the bank.

Under Hello Doctor, the company lends to medicalprofessionals with/ without specialization planning to set up a newclinic/ polyclinic/ nursing home/ expand the existing premises. Amedical professional planning to install latest medical/paramedical equipments. An existing clinic/ nursing home/hospital planning to expand/ diversify its range of medicalservices/ or acquire new medical equipments. Maximum loanamount depends on the regulations laid down by the RBI from

time to time for individual and group and as per the financials of the applicant. The rate of interest to be charged will be based on the rate chart,exceptions to be made strictly by the corporate office. Anequitable mortgage of land & building, hypothecation of plant andmachinery, furniture and fixtures, stocks and consumables maybe required. The repayment schedule may be up to 60 months.


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Business MoneyUnder Business Money the Bank lends to individuals, proprietaryconcerns, partnership firms, companies in form of working capitalrequirement and non fund based facilities such as bankguarantee, letter of credit. The maximum loan amount dependson the norms laid down by RBI and also on the financials of thecompany. The rate of interest depends on rate chart, exception tobe made by head office. Personal guarantee of proprietor,partner, and directors may be required. An existing profit makingunit is preferably SSI, A successful entrepreneur with expansion/diversification plans preferably in SSI segment is required as aprerequisites.


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The credit appraisals with The Shamrao- Vithal Co-OpBank ltd.

The company before approving any credit facility to its customersdoes a detailed feasibility study.Feasibility study of Industrial Credit and Retail CreditIndustrial Credit Assessment.Retail Credit Assessment.

1) INDUSRTIAL CREDIT ASSESSMENT

- Technical Analysis

Technical analysis is essential to ensure that necessaryphysical facilities required for production will be available and thebest possible alternatives are selected to procure them. These areto be assessed by analysis, common sense, experience anddiscussions with the promoters and taking expert whereverwarranted.

A) Manufacturing process/ Technology:- If a product can be manufactured by using alternative rawmaterials with alternative process routs, a comparative study bedone to chose the most suitable process depending upon thequality of product required and its end use.- if a product is to be manufactured by a particular process for thefirst time in the country, necessary study should be done aboutthe success of the process in other countries.

B) Technical arrangements:- Technical arrangement made to obtain technical knowhow

required for the proposed project.- Support to be provided by technical collaborators in planningand operations of the plant, training etc.- Collaborator has agreed to provide the benefits of research anddevelopment.- Any restriction imposed by collaborators.


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C) Size of the plant:- Size of plant depends on the manufacturing process, availability

of raw material, capital investment and size of the market.D) Product Mix:- Product mix depends upon market requirement of certain itemsand may have done in different sizes and quality to suit differentconsumers.- If plant may have flexibility to change product mix according tochanges in the market conditions, such flexibility may needadditional investment, its impact on the viability of the project beanalyzed.

E) Selection of Plant and Machinery:- Selection of plant and machinery should be done according tomanufacturing process and size of the unit. Different stages of manufacturing process should have proper balance of capacity.- Equipment for utilities should also have sufficient capacity tomeet the requirements of main plant and machinery.- Adequate provisions should be made for tools and spares.

F) Procurement of Plant and Machinery:- The machinery suppliers should be decided keeping in view thequality of the machines, the reputation of the suppliers, deliveryschedule, payment terms, performance guarantee and otherrelevant matters.- It is not always necessary to procure machinery from supplierswhose quotations are the lowest.-If promoters proposes to import second hand machinery acertificate from chartered engineer giving details of its history,present performance, valuation, economic life and suitability of second hand machinery should be obtained.-In order to have uninterrupted production, it should be ensured

that satisfactory arrangement for repairs have been made andnecessary spare parts will be available in time.

G) Plant Layout:


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- Proper plant layout can reduce manufacturing cost by savingtime and money.- Plant layout is done in such a way that minimum time is taken inhandling equipment, raw material, consumables, goods- in-

process and finished goods.H) Location of Plant:

1) Land:-It should be sufficient for the proposed project and the futureexpansion plans.- Load bearing capacity of the land should be purchased.- Proposed land should be non agriculture and approved forindustrial use.

2) Raw Material:- The requirement of raw material at full capacity should beascertained and it should be ensured that necessary raw materialwill be available at reasonable price.- If raw material is bulky and difficult to transport, it is better tolocate the plant near the source of raw material.- Regular supply of raw material is very necessary for thesuccessful operation of the plant.

3) Market:- While deciding location of the project, a comparative studyregarding transportation of raw material and finished productsshould also be done.- If transportation of finished products is more difficult than its rawmaterial, it may be better to set up project near to the market.

4) Labor:- Some times skilled labor is not available at a particular place. If labor has to be obtained from outside, arrangement to providehousing facilities analyzed.

5) Utilities:


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- Arrangement for utilities power, water, fuel etc to be ensured. If there is shortage of power supply alternative arrangement by wayof Gen Sets etc ensured.

6) Efficient Disposal:- The problem of effluent differs from industry to industrydepending on nature and quantity of effluent.- It should be ensured that necessary treatment is provided theeffluent unit.

7) Transportation:- If the proposed site is not connected with main road, anapproach road may have to be laid from the site to the main road.- The quality of road may be decided keeping in view thequantum of goods to be transported.- If the unit proposes to buy their own vehicles cost benefitanalysis be made, by calculating depreciation, interest and otherexpenses of maintaining vehicle compared to vehicles engagedon hire basis.

I) Schedule of Project Implementation:- The Project Evaluation and Review Technique or Critical Path

Method helps in proper planning, scheduling and controllingvarious activities essential for the execution of the project.- All possible activities from project identification tocommencement of production should be listed.- It should be ensured that all the activities have been includedand the time schedule given by the promoter is reasonable.- Arrangement should be made to procure necessary raw materialinput like raw material, power, labor etc at an appropriate time sothat plant does not remain idle and the implementation maycommence soon as the installation of the plant is completed.


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Commercial & market Analysis

Major Headings Information needed

Demand Product, Uses, theConsumers, actualconsumption, likelyconsumption in future andexports

Supply Production Capacity, actualproduction, Capacityutilization, Imports and likelyfuture capacity

Distribution Channels of Distributioninvolved, the cost of distribution and mode of transport

Pricing Domestic and internationalprice trends, control onprocess.

External factors Government policiesregarding industrialization,exports imports, foreigncollaboration, competition,plan outlay etc

Financial Analysis

1) Capital Cost of Project:- Land and site development.

- Buildings- Plant and machinery- Engineering and consultation fees- Miscellaneous Fixed assets- Preliminary and Pre operative Expenses- Provisions for contingencies- Margin Money for working capital


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Estimation of capital cost of the project provides the basicinformation to decide its pattern of financing and viability. It costof project is not estimated correctly, the preparation of cash flowand profitability estimated correctly, the preparation of cash flow

and profitability estimates will be a futile exercise because theamount of depreciation, interest and dividend will change with thechange in the capital cost of the project.

Lenders generally are taking an undertaking from the promoter tomeet the cost overrun, if any, in the implementation of theproject. But such an undertaking does not have much practicalmeaning. Many a times a promoter is not in a position to bringadditional resource to finance the overrun, ultimately lendershave to provide the additional resource to safeguard the moneyalready invested in the project.

Overestimation of the cost of the project is also equally bad asunderestimation. If the cost of a project is overestimated, thefinancial institution may have to make unnecessarily highercommitments and the promoters may divert resources for otherpurposes.

Means of Finance- Promoters Contribution: The minimum promoters contribution envisaged in the project isworked out on the basis of Debt- Equity norm and the securitynorm applicable at the time of sanction of the loan. The Debtequity ratio is the ratio of loan component and the equitycontribution of in the total project cost. The maximum amount of assistance shall be lower of the two amounts worked out on thebasis of Debt- Equity norm and the security margin norm. Thenormal lending norm for debtequity in 2:1. However in somespecific schemes this norm may be flexible.

The entire promoters contribution envisaged in the project isdesired to be raised by way of capital before first disbursement of the loan installment. However in case the promoters are short of own capital, some amount may be raised as unsecured loan in


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form of quasi- capital. The quantum is ascertained during theappraisal of loan proposal.

Debt equity ratio is generally allowed about 2:1 depending upon

nature of the project, its location, promoters background etc.Higher debt equity is allowed for project promoted by

Technocrats, capital intensive project, projects located inbackward area etc.

Profitability Estimates

Profitability estimates are estimates of expected sales realizationsand expenses to be incurred by the units. Excess of salesrealization over expenses indicates the expected profit of theunit.

Items to be considered in profitability estimates are:Sales, raw materials & Consumable Stores, Utilities, Repair andmaintenance, wages and salaries, rent and insurance,depreciation, administrative expenses, selling expenses, intereston term loan, interest on bank borrowing, profit, etc

CASH FLOW ESTIMATESCash flow estimates are prepared to ensure that unit will havenecessary cash with it and it will not face liquidity problems.While profitability estimates are prepared only from the year inwhich unit is likely to commence production, Cash flow estimatesare necessary for the construction period also to ensureavailability of cash according to the requirement of the project.

Projected Balance sheet

Projected balance sheet is prepared on the basis of profitabilityestimates and cash flow estimates.


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The position of share capital, term loans, sundry creditors, bankborrowings, current assets etc is ascertained at the end of eachyear, according to the movement shown in cash flow andprofitability estimates.

Fixed assets taken after deducting depreciation provided inprofitability estimates.Preliminary expenses are taken after deducting the amount whichis already written off from the expected profits of the unit.Cumulative surplus shown in profitability estimate represents theposition of reserve at the end of each year.Closing balance shown in cash flow estimates represents theposition of cash and bank balance at the end of each year.Ratio Analysis

Debt equity ratio: debt/ equity

Current ratio: current assets/ current liabilities

Debt service ratio: Net assets+ Depreciation + Interest onterm loan/Term loan installment + interest on term loan

The ratio indicates the capacity of the unit to repay term debt andinterest there on.

The ratio is calculated for the entire repayment period separately

for each year and also as an average for the entire repaymentperiod.

Fixed asset ratio:..??(to be done) Term loan are generally against the security of fixed assets. Theexcess of fixed assets over term loans secured by them providesmargin on security. In order to find out the available securitycover, Fixed asset coverage Ratio is calculated as under:

Net Fixed Assets+ Capital Work in progress / Deferred credits+ Term Loan+ Secured Debentures + other loans having firstcharge on fixed assets

BREAK EVEN POINT


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Breakeven point is the point at which the unit is neither earnsprofit nor incurs losses. The cost of production is just recovered atbreakeven point.

The cost of production is divided into two categories: Fixed Cost &Variable Cost.

The break up fixed cost & variable cost:Fixed costSalaries and wagesRepairs and maintenanceAdministration and misc expensesFixed portion of selling expensesFixed royalty and know how paymentsInterest on term debtDeprecation on straight line basis

Variable costRaw materialsConsumable stores and sparesPacking materialPower fuel and water

Royalty payment linked to salesVariable selling expensesInterest on working capitalOther variable expenses varying directly in proportion to output

Breakeven point = Fixed cost/ contribution

Contribution: difference between sale price and variable cost iscalled contribution. The contribution helps a unit to recover itsfixed cost. The level of production at which the contributionrecovers entire fixed cost is called breakeven point.

Internal rate of return


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Internal rate of return (IRR) is that rate of discount which wouldequate the present value of investment (Cash outflow) to thepresent value of benefits (Cash inflows) over the life period of theproject.

IRR cannot be determined by just looking at the cash flow. It iscalculated by trial and error method. Various discounting ratesare applied to the present cash flow until a rate is found thatreduces the net present value to zero.

Management Analysis

A project which is considered technically feasible, economicallyviable and financially sound may run into difficulties if it is notbacked by sound and efficient management. Man behind theproject is very important. Experience shows that many of theprojects have been rendered sick owing to inefficient or dishonest

management. Therefore proper evaluation of management is ahighly essential part of appraisal.

Qualities of an entrepreneurHonesty and integrityInvolvement in the projectFinancial resourcesCompetenceInitiativeIntelligenceDrive and energySelf confidenceFranknessPatience


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Various Forms of organizationProprietary concernPartnership firmCorporate sector

Each promoter has to come in contact with the appraising officerseveral times for discussion regarding the project. Appraisingofficer should evaluate the qualities of the promoter afterinterviewing him two or three times.

Credit Evaluation and Decision

Based on the results of these verifications the bankers take acredit decision of / on whether or not to sanction the loan to theapplicant.

A specialized credit appraisal team manages credit evaluation

within banks. Credit decisions taken by this team are governed bythe detailed credit policies and operating notes issued regularlyfor the various product segments. The credit decision wouldusually ensure and address the following characteristics:- Whether the applicant has the capacity to repay the loan?- Whether the applicant has the required liquidity to pay theinstallments on the due dates?- Whether the applicant can comfortably pay off all theobligations?- Whether the applicant has the desired intention to repay theloan?- Whether the asset taken as collateral, for secured loans, servesas a good security cover?- Whether the application details of the applicant and theproposed loan are authentic?


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Findings

1> Gross NPA shows a positive figure from last 3 years i.e.For year ended 31/03/2009 = 3.94%For year ended 31/03/2010 = 3.11%For year ended 31/03/2011 = 2.67%

Non-Performing Asset(NPA) : An asset becomesNPA when it ceases to generate income for the bank. This wouldmean that interest, which is debited to borrowers account, has tobe realized by the bank. An account has to be classified as NPA onthe basis of record of recovery rather than security charged infavor of the bank in respect of such account. Thus, an ac-count of a borrower may be-come NPA if interest charged to that particularborrower is not realized despite the ac-count being fully secured.

RBI has laid down the regulations regarding the NPA ie when theasset has not serviced its interest or principal for more than 90days when its due then in such case it is to be recognized as NPA.


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2> Now, how the company managed to reduce the GrossNPA over the period of 3 years, various steps taken by thecompany

The bank has managed to bring its rate of Gross NPA downthrough various ways of post disbursement supervision i.e.

-Ensuring compliance with terms and conditions The bank has to first ensure that the borrower has complied withall the terms and conditions of sanction and disbursement of theloan. Most of the terms and conditions would have beenstipulated to minimize the risk associated with lending; however,its important that none of the terms and conditions are violated.

-Statement of stock and book debts To ensure adequate coverage of the outstanding, follow up forstocks statements is essential and should have the constantattention of the bank officials. As assessment of working capital isbased on the financial statement, valuation of stocks for the stockstatement should be done in the same manner and adopting thesame basis as for annual financial statement.Where cash credit has been sanctioned against book debts, astatement of book debts outstanding along with age wise

classification of the book- debts is to be obtained at stipulatedintervals. Drawing powers should be allowed only on such book-debts as are within the norms accepted at the time of sanction.Normally book debts that are more than six months old shouldnot be considered.

-Physical inspection The physical inspection of the borrower unit cannot be merelychecking the existence of stocks. The inspecting banker needs tolook in to other aspects such as:Existence of security cover.Correctness of data declared in the stock statement.Quality of goods.Correctness of prices of purchases.Regular update of book keeping.Compliance with maintenance of statutory records.


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Realization pattern of book debts.Status of labor relations.Availability of raw materials.Changes in management set up.

-Monitoring performance The bank has monitored the operations to ensure that theoperations of the organisations are viable and profitable. For thispurpose, the banker has to carefully examine the operatingstatement, funds flow statement, and statement of current assetsand current liabilities. The bank also verifies that the performanceof the borrower is in tune with the projections made at the time of sanction of limits.

-Ensuring End Use This ensures that the finance given is used only for the purposefor which it was given and that the finance has not been divertedto any other use. Any such diversification affects the recovery of the loan.

-Follow up of the loansAs a loan is repayable out of the cash accruals generated over aperiod of time, it is essential that a project is monitored,

supervised and followed up on an ongoing basis throughout thecurrency of the term loan. The bank makes follow up duringimplementation stage and also during commencement of commercial production.

3> Net NPA is constant at Zero over the period of 3years.When a banking company has its NPA, at zero, it gets a upperrating from the Reserve bank, the prospective customers who aremuch risk averse check for these ratings, and net NPA beforekeeping deposits with any specific bank.

A bank to keep its NPA at Zero needs to be financially strong, itcan provide for gross NPA, only after meeting all other statutoryobligations.


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As per regulations there is no specific requirement to keep theNet NPA at zero, but the company engaged in banking businessshould make sure that its Gross NPA is within the band of 7%- 8%, or else the Reserve Bank asks the bank to wind up its

operations restricting it from accepting deposits from customers.

How the company manages to keep its NPA at Zero?- Provisions of various Kinds: The Company out of its profitsmaintains various kinds of reserves, to keep its NPA at zero, andget an upper rating in the market. This method of keeping NetNPA could be understood with the help of an example, supposethe Company had a Gross NPA of Rs.20, and the net profit of 80so here in this case the company will, reduce its profits to 60 andbring the Net NPA at Zero.

- Debt Restructuring : If in some uncertain condition a party failsto pay a installment to bank for a period of 90 days, and turns outto be a NPA in such situation when the party is genuine for thebank, the officials may restructure the debt only the failure torepay is due to, labor strike, machinery failure, shortage of rawmaterial, or any other genuine reason due to which the business

has came to a standstill. So in such conditions the debt can berestructured for the benefit of bank as well as for the party.Debt is not restructured for the parties, who have the intentionsto take the bank along with them.For example; M/S XYZ had taken a loan for Rs. 10 lac, tenure forwhich was 5 years after 2 years the party turned to be NPA due tosudden shortfall in raw materials so in this case the debt could berestructured at the opinion of bank officials. Suppose in this casethe party had paid nearly Rs. 2 lacs, so the party would be asked

to pay the balance 8 lacs along with interest in 5 more years orthe party may be asked to pay the interest part for 2 years, andthen pay the regular installments when the business starts asusual.

-SARAFEASI notice i.e. takeover of assets by bank : Whena party defaults on repayment of the debt then bank after


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reminders and final notice, goes ahead with legal action and takesover on the asset of the defaulter. The bank auctions the assettaken over and recovers its balance debt of the party.For example: A party has taken a loan for Rs 30 lacs for the period

of 10 years to purchase a commercial property, here in case of default by the party after 4 years the bank completes all theformalities of reminders, notice and legal action takes over thecommercial property and removes it for auction.


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CONCLUSIONS

The credit appraisal process carried out at SVC Bank Ltd is soundand bank has good parameters to appraise the project.The credit department thoroughly analyses the creditrequirement of the company and the capacity to service the debt.The bank has conservative norms to appraise the project.The credit appraisal passes through various stages andevaluations before it is appraised.

RECOMMENDATIONS

Process should be made faster.All the documents required to appraise the project should beasked at the time of application only rather than later by the bankThe bank must bring more transparency in appraisal of theproject there should be explanation for a appraisal of the projectthat was sanctioned by higher authority.The bank must not rely on software or information provided bythe client the bank should dig in for other sources in order to draw

a real picture for the company.At the time of projections due to lack of documents, theprojections are doneWithout any basis like depreciation in the audited years is notaccumulated depreciation.The bank already has a very trained and efficient team for theappraisals, and should take care that any new person included inthe team should have quality experience and knowledge incredits sanctions as well as recovery.


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Bibliography

project report intro hdfc bank

Documents