RESEARCH METHODOLOGY

 INTRODUCTION: Credit appraisal means investigation/assessment done by the bank before providing any loans and advances/project finance and also checks the commercial, financial &industrial viability of the project proposed its funding pattern and further checks the primary & collateral security cover available for recovery of such funds.  PROBLEM STATEMENT: To study the credit appraisal system in SME sector, at AXIS Bank Ahmadabad.  OBJECTIVES: y y To study the credit appraisal methods. To understand the commercial, financial & technical viability of the proposal proposed and its finding pattern.

 RESEARCH DESIGN: Analytical in nature.

 DATA COLLECTION:

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

Secondary data:

 Books  websites  database at Axis Bank  library research

 BENEFICIARIES: y Researchers:

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

The project will help the management student to know the patterns of credit appraisal in Axis bank.  LIMITATION OF THE STUDY: As the credit appraisal is one of the crucial areas for any bank, some of the Technicalities are not revealed. y Credit appraisal system includes various types of detail studies for different areas of analysis, but due to time constraint, our analysis was of limited areas only.

CHAPTER 1 INTRODUCTION TO BANKING SECTOR

A snapshot of the banking industry

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

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

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

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

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

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

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

Reforms in the Banking sector

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

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

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

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

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

Development Financial institutions

Banks

IFCI IDBI ICICI NABARD NHB IRBI

EXIM Bank

SIDBI

Commercial Banks

Regional Rural Banks

Land Development Banks

Cooperative Banks

Public Sector Banks SBI Groups Nationalized Banks

Private Sector Banks Indian Banks Foreign Banks

CHAPTER 2 GLOBAL AND LOCAL SCENARIO OF BANKING SECTOR

Indian Banking System: The Current State & Road Ahead

Introduction
Recent time has witnessed the world economy develop serious difficulties in terms of lapse of banking & financial institutions and plunging demand. Prospects became very uncertain causing recession in major economies. However, amidst all this chaos Indias banking sector has been amongst the few to maintain resilience. A progressively growing balance sheet, higher pace of credit expansion, expanding profitability and productivity akin to banks in developed markets, lower incidence of nonperforming assets and focus on financial inclusion have contributed to making Indian banking vibrant and strong. Indian banks have begun to revise their growth approach and reevaluate the prospects on hand to keep the economy rolling. The way forward for the Indian banks is to innovate to take advantage of the new business opportunities and at the same time ensure continuous assessment of risks.

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

Thus, it has become far more imperative to contemplate the role of the Banking Industry in fostering the long term growth of the economy. With the purview of economic stability and growth, greater attention is required on both political and regulatory commitment to long
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term development programme. FICCI conducted a survey on the Indian Banking Industry to assess the competitive advantage offered by the banking sector, as well as the policies and structures that are required to further the pace of growth. The results of our survey are given in the following sections.

General Banking Scenario

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

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

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

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

On being asked what is the major strength of the Indian banking industry, which makes it resilient in the current economic climate; 93.75% respondents feel the regulatory system to be the major strength, 75% economic growth, 68.75% relative insulation from external market, 56.25% credit quality, 25% technological advancement and 43.75% our risk assessment systems. Change is the only constant feature in this dynamic world and banking is not an exception. The changes staring in the face of bankers relates to the fundamental way of banking-which is going through rapid transformation in the world of today. Adjust, adapt and change should be the key mantra. The major challenge faced by banks today is the ever rising customer expectation as well as risk management and maintaining growth rate. Following are the results of the biggest challenge faced by the banking industry as declared by our respondents (on a mode scale of 1 to 7 with 1 being the biggest challenge):

They also asked their respondents to rate India on certain essential banking parameters (Regulatory Systems, Risk Assessment Systems, Technological System and Credit Quality) in comparison with other countries i.e. China, Japan, Brazil, Russia, Hong Kong, Singapore, UK and USA. The recent financial crisis has drawn attention to under-regulation of banks (mainly investment banks) in the US. Though, the Indian story is quite different. Regulatory systems of Indian banks were rated better than China, Brazil, Russia, and UK; at par with Japan, Singapore and Hong Kong where as all our respondents feel that we are above par or at par with USA. On comparing the results with their previous survey where the respondents had rated Indian Regulatory system below par the US and UK system, they see that post the financial crisis Indian Banks are more confident on the Indian Regulatory Framework.

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

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

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Global Expansion of Indian Banking

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

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

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We see from the above graph that amongst organic means of expansion, branch expansion finds favor with banks while strategic alliances is the most popular inorganic method for
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banks considering scaling up their operations. On the other hand, new ventures and buyout portfolios are the least popular methods for bank expansion.

Scope for New Entrants

81.25% also felt that there was further scope for new entrants in the market, in spite of capital management and human resource constraints, as there continue to remain opportunities in unbanked areas. With only 30-35% of the population financially included, and the Indian banking industry unsaturated with CAGR of well above 20%, participants in their survey felt that the market definitely has scope to accommodate new players. While there has been prior debate, they questioned banks on NBFCs and Industrial houses being established as banking institutions and find opinion to be marginally against the notion, with 35.71% in favour while 42.86% were against them being established as banks.

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

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

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Their survey finds that within retail operations, banks rate product development and differentiation; innovation and customization; cost reduction; cross selling and technological up gradation as equally important to the growth of their retail operations. Additionally a few respondents also find pro-active financial inclusion, credit discipline and income growth of individuals and customer orientation to be significant factors for their retail growth. There is, at the same time, an urgent need for Indian banks to move beyond retail banking, and further grow and expand their fee- based operations, which has globally remained one of the key drivers of growth and profitability. In fact, over 80% of banks in their survey have only up to 15% of their total incomes constituted by fee- based income; and barely 13% have 20-30% of their total income constituted by fee-based income.

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

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

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Financial Inclusion and Expansion of Banking Services

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

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

Credit Flow and Industry

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

(Source: Annual survey, February 2010)

(FEDERATION OF INDIAN CHAMBERS OF COMMERCE & INDUSTRY)

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CHAPTER 3 INDUSTRY ANALYSIS

Competitive Forces Model (Porters Five Force Model)

(2) Potential Entrants is high as development financial institutions as well as private and Foreign Banks have entered in a big way

(5) Organizing power of the supplier is high. With the new financial instruments they are asking higher return on the investments

(1) Rivalry among existing firms has increased with liberalization. New products and improved customer services is the focus.

(4) Bargaining power of buyers is high as corporate can raise funds easily due to high Competition.

(3) The threat of substitute product is very high like credit unions and investment houses. There are other substitutes as well banks like mutual funds, stocks, government securities, debentures, gold, real estate etc.
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1. Rivalry among existing firms With the process of liberalization, competition among the existing banks has increased. Each bank is coming up with new products to attract the customers and tailor made Loans are provided. The quality of services provided by banks has improved drastically.

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

3. Threats from Substitutes Competition from the non-banking financial sector is increasing rapidly. The threat of substitute product is very high like credit unions and in investment houses. There are other substitutes as well banks like mutual funds, stocks, government securities, debentures, gold, real estate etc. 4. Bargaining Power of Buyers Corporate can raise their funds through primary market or by issue of GDRs, FCCBs. As a result they have a higher bargaining power. Even in the case of personal finance, the buyers have a high bargaining power. This is mainly because of competition.

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

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

SWOT Analysis
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The banking sector is also taken as a proxy for the economy as a whole. The performance of bank should therefore, reflect Trends in the Indian Economy. Due to the reforms in the financial sector, banking industry has changed drastically with the opportunities to the work with, new accounting standards new entrants and information technology. The deregulation of the interest rate, participation of banks in project financing has changed in the environment of banks. The performance of banking industry is done through SWOT Analysis. It mainly helps to know the strengths and Weakness of the industry and to improve will be known through converting the opportunities into strengths. It also helps for the competitive environment among the banks.

a) STRENGTHS 1. Greater securities of Funds Compared to other investment options banks since its inception has been a better avenue in terms of securities. Due to satisfactory implementation of RBIs prudential norms banks have won public confidence over several years.

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

3. Large Customer Base This is mainly attributed to the large network of the banking sector. Depositors in rural areas prefer banks because of the failure of the NBFCs. 4. Low Cost of Capital Corporate prefers borrowing money from banks because of low cost of capital. Middle income people who want money for personal financing can look to banks as they offer at very low rates of interests. Consumer credit forms the major source of financing by banks.

b) WEAKNESS

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1. Basel Committee The banks need to comply with the norms of Basel committee but before that it is challenge for banks to implement the Basel committee standard, which are of international standard. 2. Powerful Unions Nationalization of banks had a positive outcome in helping the Indian Economy as a whole. But this had also proved detrimental in the form of strong unions, which have a major influence in decision-making. They are against automation.

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

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

c) OPPORTUNITIES 1. Universal Banking Banks have moved along the value chain to provide their customers more products and services. like home finance, Capital Markets, Bonds etc. Every Indian bank has an opportunity to become universal bank, which provides every financial service under one roof.

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

3. High Household Savings Household savings has been increasing drastically. Investment in financial assets has also increased. Banks should use this opportunity for raising funds. 4. Untapped Foreign Markets
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Many Indian banks have not sufficiently penetrated in foreign markets to generate satisfactory business therefore, it can be concluded clear opportunity exists in such markets. 5. Interest Banking The advance in information technology has made banking easier. Business can Effectively carried out through internet banking.

d) THREATS 1. NBFCs, Capital Markets and Mutual funds There is a huge investment of household savings. The investments in NBFCs deposits, Capital Market Instruments and Mutual Funds are increasing. Normally these instruments offer better return to investors.

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

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

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

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CHAPTER 4 INTRODUCTION TO AXIS BANK

Axis Bank was the first of the new private banks to have begun operations in 1994, after the Government of India allowed new private banks to be established. The Bank was promoted jointly by the Administrator of the specified undertaking of the Unit Trust of India (UTI - I), Life Insurance Corporation of India (LIC) and General Insurance Corporation of India (GIC) and other four PSU insurance companies, i.e. National Insurance Company Ltd., The New India Assurance Company Ltd., The Oriental Insurance Company Ltd. and United India Insurance Company Ltd. The Bank today is capitalized to the extent of Rs. 403.63 crores with the public holding (other than promoters and GDRs) at 53.72%. The Bank's Registered Office is at Ahmedabad and its Central Office is located at Mumbai. The Bank has a very wide network of more than 896 branches and Extension Counters (as on 31st December 2009). The Bank has a network of over 4055 ATMs (as on 31st December 2009) providing 24 hrs a day banking convenience to its customers. This is one of the largest ATM networks in the country. The Bank has strengths in both retail and corporate banking and is committed to adopting the best industry practices internationally in order to achieve excellence.

Mission
 Customer service and product innovation tuned to diverse needs of individual and corporate clientele.  Continuous technology up gradation while maintaining human values.  Progressive globalization and achieving international standards.

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Core values
 Customer satisfaction through y y y y Providing quality service effectively and efficiently smile, it enhances your face value a service quality stressed on Periodic customers service audits Maximization of stakeholder value

Business divisions
 Treasury management Treasury is responsible for the maintenance of the statutory requirements such as the cash reserve ratio (CRR), statutory liquidity ratio (SLR) and the investment of such funds. It also manages the assets and liabilities of the bank. Primary dealing activities can be classified into y y y Money market operations Foreign exchange operations Derivatives

 Merchant Banking and capital markets Axis Bank is a registered merchant Banker. The services offered are: y y y y y Private placement/syndication Issue management Debenture trustees Depository services Project advisory services, capital market services, advisory on Mergers & Acquisition

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

 Corporate and institutional banking Cash management Services Business current Accounts Correspondent Banking Government Business

y y y y

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

 International banking Major functions include y Handling regulatory issues which include compliance with regulations of various authorities such as RBI regulatios, FEMA etc y Keeping a track of the business volumes being generated by the branches and controlling the margins y Maintaining relationship with correspondent Banks outside India

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

Board of Directors:
Shri N.C. Singhal Shri J.R. Varma Dr. R.H. Patil Smt. Rama Bijapurkar Shri R.B. L. Vaish Shri M.V. Subbiah Shri Ramesh Ramanathan Shri K.N. Prithviraj

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CHAPTER 5 INTRODUCTION TO SME

In the Indian context, the small and medium enterprises (SME) sector is broadly a Term used for small scale industrial (SSI) units and medium-scale industrial units. Any industrial unit with a total investment in its fixed assets or leased assets or hire-purchase asset of upto Rs 10 million, can be considered as an SSI unit and any investment of upto Rs 100 million can be Termed as a medium unit. An SSI unit should neither be a subsidiary of any other industrial unit nor be owned or controlled by any other industrial unit. An SME is known by different ways across the world. In India, a standard definition surfaced only in October 2, 2006, when the Ministry of Micro, Small and Medium Enterprises, Government of India, imposed the Micro, Small and Medium enterprises Development (MSMED) Act,2006. This definition, however was changed according to the changing economic scenario and thus has separate definitions to it. For instance, an SME definition for manufacturing enterprises is different from what an SME definition for service enterprises has to say.

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

Though, it commenced on a small scale, it gradually gained significance, because it employed a considerable number of people.

When it started gaining momentum, this sector was defined as an enterprise with investment

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in plant and machinery of up to Rs 1 lakh and situated in towns and villages with strength of less than 50,000 people. The policy statement put in place special legislation to recognize and protect self employed people in cottage and home industries. District industries canters (DICs) were set up and made the focal point of SSI development, bypassing large cities and state capitals. Also, the government started providing special services akin to product standardization, quality control and marketing surveys in order to assist the SSIs in enabling them to market their products in an underdeveloped market.

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

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

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

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Description of SME in the manufacturing sector

The Term enterprise in the manufacturing context stands for an industrial undertaking or a business concern involved in the production, processing or preservation of goods for the list of eligible industries in the First Schedule to the Industries (Development and Regulation Act), 1951. For the Manufacturing Sector, the MSMED Act 2006 defines micro, small and medium enterprises (MSMEs) as mentioned below:  A micro enterprise is an enterprise where investment in plant and machinery does not exceed Rs 25 lakh.  The investment in plant and machinery in a small enterprise is more than Rs 25 lakh, but does not exceed Rs 5 crore.  A medium enterprise is one where the investment in plant and machinery is more than Rs 5 crore, but does not exceed Rs 10 crore. In all these, the cost excludes that of land, building and the items specified by the Ministry of Small Scale Industries with its notification No SO 1722 (E) dated October 5, 2006.

SME definition for Service Enterprises

A service sector enterprise is defined as one involved in providing services. The following points will explain how.  Small road and water transport operators that can now own a fleet of vehicles not exceeding ten in number.  Small business, whose original cost price of equipment used for business, does not exceed Rs 20 lakh.  Professional and self-employed persons, whose borrowing limits do not exceed Rs 10 lakh of which not more than Rs 2 lakh should be for working capital requirements  Professionally qualified medical practitioners setting up a practice in semi urban and rural areas, whose borrowing limits should not be less than Rs 15 lakh with a subceiling of Rs 3 lakh for working capital requirements.

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Challenges faced by SME

The challenges being faced by the small and medium sector may be briefly set out as Follows Small and Medium Enterprises (SME), particularly the tiny segment of the small enterprises have inadequate access to finance due to lack of financial information and non-formal business practices. SMEs also lack access to private equity and venture capital and have a very limited access to secondary market instruments.  SMEs face fragmented markets in respect of their inputs as well as products and are vulnerable to market fluctuations.  SMEs lack easy access to inter-state and international markets.  The access of SMEs to technology and product innovations is also limited. There is lack of awareness of global best practices.  SMEs face considerable delays in the settlement of dues/payment of bills by the large scale buyers. With the deregulation of the financial sector, the ability of the banks to service the credit requirements of the SME sector depends on the underlying transaction costs, efficient recovery processes and available security. There is an immediate need for the banking sector to focus on credit and SMEs

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CHAPTER 6 OVERVIEW OF CREDIT APPRAISAL

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

Brief overview of Credit

Credit Appraisal is a process to ascertain the risks associated with the extension of the credit facility. It is generally carried by the financial institutions, which are involved in providing financial funding to its customers. Credit risk is a risk related to non-repayment of the credit obtained by the customer of a bank. Thus it is necessary to appraise the credibility of the customer in order to mitigate the credit risk. Proper evaluation of the customer is performed this measures the financial condition and the ability of the customer to repay back the Loan in future. Generally the credits facilities are extended against the security know as collateral. But even though the Loans are backed by the collateral, banks are normally interested in the actual Loan amount to be repaid along with the interest. Thus, the customer's cash flows are ascertained to ensure the timely payment of principal and the interest. It is the process of appraising the credit worthiness of a Loan applicant. Factors like age, income, number of dependents, nature of employment, continuity of employment, repayment capacity, previous Loans, credit cards, etc. are taken into account while appraising the credit worthiness of a person. Every bank or lending institution has its own panel of officials for this purpose.

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

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 Character  Capacity  Collateral If any one of these are missing in the equation then the lending officer must question the viability of credit. There is no guarantee to ensure a Loan does not run into problems; however if proper credit evaluation techniques and monitoring are implemented then naturally the Loan loss probability / problems will be minimized, which should be the objective of every lending Officer. Credit is the provision of resources (such as granting a Loan) by one party to another party where that second party does not reimburse the first party immediately, thereby generating a debt, and instead arranges either to repay or return those resources (or material(s) of equal value) at a later date. The first party is called a creditor, also known as a lender, while the second party is called a debtor, also known as a borrower.

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

Basic types of credit

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

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

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

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

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

Brief overview of Loans

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

 Fund Base includes: y y Working Capital Term Loan

 Non-fund Base includes: Letter of Credit Bank Guarantee Bill Discounting

y y y

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 Fund Base: Working capital

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

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

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

Term Loan

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

A Term Loan is a Loan granted for the purpose of capital assets, such as purchase of land, construction of, buildings, purchase of machinery, modernization, renovation or

rationalization of plant, & repayable from out of the future earning of the enterprise, in installments, as per a prearranged schedule. From the above definition, the following differences between a Term Loan & the working capital credit afforded by the Bank are apparent:

o The purpose of the Term Loan is for acquisition of capital assets. o The Term Loan is an advance not repayable on demand but only in installments ranging over a period of years.

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o The repayment of Term Loan is not out of sale proceeds of the goods & commodities per se, whether given as security or not. The repayment should come out of the future cash accruals from the activity of the unit. o The security is not the readily saleable goods & commodities but the fixed assets of the units.

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

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

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

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

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 Non-fund Base: y Letter of credit

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

Definition A Letter of Credit (LC) is an arrangement whereby a bank (the issuing bank) acting at the request & on the instructions of the customer (the applicant) or on its own behalf, o Is to make a payment to or to the order of a third party (the beneficiary), or is to accept & pay bills of exchange (drafts drawn by the beneficiary); or o Authorizes another bank to effect such payment, or to accept & pay such bills of exchanges (drafts); or o Authorizes another bank to negotiate the Terms & conditions of the credit are complied with. against stipulated document(s), provided that

Bank Guarantees:

A contract of guarantee is defined as a contract to perform the promise or discharge the liability of the third person in case of the default. The parties to the contract of guarantees are: a) Applicant: The principal debtor person at whose request the guarantee is executed b) Beneficiary: Person to whom the guarantee is given & who can enforce it in case of default. c) Guarantee: The person who undertakes to discharge the obligations of the applicant in case of his default. Thus, guarantee is a collateral contract, consequential to a main co applicant & the beneficiary.
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Purpose of Bank Guarantees Bank Guarantees are used to for both both preventive & remedial purposes. The guarantees executed by banks comprise both performance guarantees & financial guarantees. The guarantees are structured according to the Terms of agreement, viz., security, maturity & purpose.

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

Bill discounting:

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

Discounting of bill of exchange:

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

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

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

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

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Credit Appraisal Process

Receipt of application from applicant

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

Pre-sanction visit by bank officers

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

Title clearance reports of the properties to be obtained from empanelled Advocates

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

Preparation of financial data

Proposal preparation

Assessment of proposal

Sanction/approval of proposal by appropriate sanctioning authority

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Documentations, agreements, mortgages

Disbursement of Loan

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

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Loan administration pre- sanction process

Appraisal, Assessment and Sanction functions

1. Appraisal

A. Preliminary appraisal  Sound credit appraisal involves analysis of the viability of operations of a business and the capacity of the promoters to run it profitably and repay the bank the dues as and when they fall  Towards this end the preliminary appraisal will examine the following aspects of a proposal.

y y y y y y y y y y y

Banks lending policy and other relevant guidelines/RBI guidelines, Prudential Exposure norms, Industry Exposure restrictions, Group Exposure restrictions, Industry related risk factors, Credit risk rating, Profile of the promoters/senior management personnel of the project, List of defaulters, Caution lists, Acceptability of the promoters, Compliance regarding transfer of borrower accounts from one bank to another, if applicable;

Government regulations/legislation impacting on the industry; e.g., ban on financing of industries producing/ consuming Ozone depleting substances;

y y

Applicants status vis--vis other units in the industry, Financial status in broad Terms and whether it is acceptable The Companys Memorandum and Articles of Association should be scrutinized carefully to ensure (i) that there are no clauses prejudicial to the Banks interests, (ii) no limitations have
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been placed on the Companys borrowing powers and operations and (iii) the scope of activity of the company.  Further, if the proposal is to finance a project, the following aspects have to be examined: Whether project cost is prima facie acceptable Debt/equity gearing proposed and whether acceptable Promoters ability to access capital market for debt/equity support Whether critical aspects of project - demand, cost of production, profitability, etc. are prima facie in order  Required Documents for Process of Loan a) Application for requirement of loan b) Copy of Memorandum & Article of Association c) Copy of incorporation of business d) Copy of commencement of business e) Copy of resolution regarding the requirement of credit facilities f) Brief history of company, its customers & supplies, previous track records, orders In hand. Also provide some information about the directors of the company g) Financial statements of last 3 years including the provisional financial statement for the year 2007-08 h) Copy of PAN/TAN number of company i) Copy of last Electricity bill of company j) Copy of GST/CST number k) Copy of Excise number l) Photo I.D. of all the directors m) Address proof of all the directors n) Copies related to the property such as 7/12 & 8A utara, lease/ sales deed, 2R Permission, Allotment letter, Possession o) Bio-data form of all the directors duly filled & notarized p) Financial statements of associate concern for the last 3 years

y y y y

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

Organizational set up with a list of Board of Directors and indicating the qualifications, experience and competence of the key personnel in charge of the main functional areas

e.g., purchase, production, marketing and finance; in other words a brief on the managerial resources and whether these are compatible with the size and scope of the proposed activity.

Demand and supply projections based on the overall market prospects together with a copy of the market survey report. The report may comment on the geographic spread of the market where the unit proposes to operate, demand and supply gap, the competitors share, competitive advantage of the applicant, proposed marketing arrangement, etc.

Current practices for the particular product/service especially relating to Terms of credit sales, probability of bad debts, etc.

y y y y

Estimates of sales cost of production and profitability. Projected profit and loss account and balance sheet for the operating years during the Currency of the Bank assistance. If request includes financing of project(s), branch should obtain additionally

a) Appraisal report from any other bank/financial institution in case appraisal has been done by them. b) No Objection Certificate from Term lenders if already financed by them and c) Report from Merchant bankers in case the company plans to access capital market, wherever necessary.

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

B. Detailed Appraisal  The viability of a project is examined to ascertain that the company would have the ability to service its Loan and interest obligations out of cash accruals from the business. While appraising a project or a Loan proposal, all the data/information furnished by the borrower should be counter checked and, wherever possible, interfirm and inter-industry comparisons should be made to establish their veracity.  The financial analysis carried out on the basis of the companys audited balance sheets and profit and loss accounts for the last three years should help to establish the current viability.  In addition to the financials, the following aspects should also be examined: The method of depreciation followed by the company-whether the company is following straight line method or written down value method and whether the company has changed the method of depreciation in the past and, if so, the reason therefore;

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Whether the company has revalued any of its fixed assets any time in the past and the present status of the revaluation reserve, if any created for the purpose;

y y y

Record of major defaults, if any, in repayment in the past and history of past sickness, If any; The position regarding the companys tax assessment - whether the provisions made in the balance sheets are adequate to take care of the companys tax liabilities;

y y

The nature and purpose of the contingent liabilities, together with comments thereon; Pending suits by or against the company and their financial implications (e.g. cases relating to customs and excise, sales tax, etc.);

Qualifications/adverse remarks, if any, made by the statutory auditors on the companys accounts;

y y y

Dividend policy; Apart from financial ratios, other ratios relevant to the project; Trends in sales and profitability, past deviations in sales and profit projections, and estimates/projections of sales values;

Production capacity & use: past and projected; o Estimated requirement of working capital finance with reference to acceptable build up of inventory/ receivables/ other current assets;

y y

Projected levels: whether acceptable; and Compliance with lending norms and other mandatory guidelines as applicable

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

y y y y y y

Statutory clearances from various Government Depts. / Agencies Licenses/permits/approvals/clearances/NOCs/Collaboration agreements, as applicable Details of sourcing of energy requirements, power, fuel etc. Pollution control clearance Cost of project and source of finance Build-up of fixed assets (requirement of funds for investments in fixed assets to be critically examined with regard to production factors, improvement in quality of products, economies of scale etc.)
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y y

Arrangements proposed for raising debt and equity Capital structure (position of Authorized, Issued/ Paid-up Capital, Redeemable Preference Shares, etc.)

Debt component i.e., debentures, Term Loans, deferred payment facilities, unsecured Loans/ deposits. All unsecured Loans/ deposits raised by the company for financing a project should be subordinate to the Term Loans of the banks/ financial institutions and should be permitted to be repaid only with the prior approval of all the banks and the financial institutions concerned. Where central or state sales tax Loan or developmental Loan is taken as source of financing the project, furnish details of the Terms and conditions governing the Loan like the rate of interest (if applicable), the manner of repayment, etc.

y y

Feasibility of arrangements to access capital market Feasibility of the projections/ estimates of sales, cost of production and profits covering the period of repayment

Break Even Point in Terms of sales value and percentage of installed capacity under a Normal production year

y y y

Cash flows and fund flows Proposed amortization schedule Whether profitability is adequate to meet stipulated repayments with reference to Debt Service Coverage Ratio, Return on Investment

y y

Industry profile & prospects Critical factors of the industry and whether the assessment of these and management plans in this regard are acceptable

y y y y

Technical feasibility with reference to report of technical consultants, if available Management quality, competence, track record Companys structure & systems Applicants strength on inter-firm comparisons

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

o Market share of the units under comparison

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o Unique features o Profitability factors o Financing pattern of the business o Inventory/Receivable levels o Capacity utilization o Production efficiency and costs o Bank borrowings patterns o Financial ratios & other relevant ratios o Capital Market Perceptions o Current price o 52week high and low of the share price o P/E ratio or P/E Multiple o Yield (%)- half yearly and yearly Also examine and comment on the status of approvals from other Term lenders, market view (if anything adverse), and project implementation schedule. A pre-sanction inspection of the project site or the factory should be carried out in the case of existing units. To ensure a higher degree of commitment from the promoters, the portion of the equity / Loans which is proposed to be brought in by the promoters, their family members, friends and relatives will have to be brought upfront. However, relaxation in this regard may be considered on a case to case basis for genuine and acceptable reasons. Under such circumstances, the promoter should furnish a definite plan indicating clearly the sources for meeting his contribution. The balance amount proposed to be raised from other sources, viz., debentures, public equity etc., should also be fully tied up.

C. Present relationship with Bank:

y y y y y

Compile for existing customers, profile of present exposures: Credit facilities now granted Conduct of the existing account Utilization of limits - FB & NFB Occurrence of irregularities, if any

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Frequency of irregularity i.e., number of times and total number of days the account was irregular during the last twelve months

y y y y y y y y y

Repayment of Term commitments Compliance with requirements regarding submission of stock statements, Financial Follow-up Reports, renewal data, etc. Stock turnover, realization of book debts Value of account with break-up of income earned Pro-rata share of non-fund and foreign exchange business Concessions extended and value thereof Compliance with other Terms and conditions Action taken on Comments/observations contained in RBI Inspection Reports: CO Inspection & Audit Reports

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

E. Opinion Reports: Compile opinion reports on the company, partners/ promoters and The proposed guarantors. F. Existing charges on assets of the unit: If a company, report on search of charges with ROC. G. Structure of facilities and Terms of Sanction: Fix Terms and conditions for exposures proposed - facility wise and overall: y y y y y y y y y Limit for each facility sub-limits Security - Primary & Collateral, Guarantee Margins - For each facility as applicable Rate of interest Rate of commission/exchange/other fees Concessional facilities and value thereof Repayment Terms, where applicable ECGC cover where applicable Other standard covenants

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

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

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

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

Review the draft proposal together with the back-up details/notes, and the borrowers application, financial statements and other reports/documents examined by the appraiser.

y y y y

Interact with the borrower and the appraiser. Carry out pre-sanction visit to the applicant company and their project/factory site. Peruse the financial analysis (Balance Sheet/ Operating Statement/ Ratio Analysis/ Fund Flow Statement/ Working Capital assessment/Project cost & sources/ Break Even analysis/Debt Service/Security Cover, etc.) to see if this is prima facie in order. If any deficiencies are seen, arrange with the appraiser for the analysis on the correct lines.

Examine critically the following aspects of the proposed exposure.

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

To the extent the inputs/comments are inadequate or require modification, arrange for additional inputs/ modifications to be incorporated in the proposal, with any required modification to the initial recommendation by the Appraiser

y y

Arrange with the Appraiser to draw up the proposal in the final form. Recommendation for sanction: Recapitulate briefly the conclusions of the appraisal and state whether the proposal is economically viable. Recount briefly the value of the companys (and the Groups) connections. State whether, all considered, the proposal is a fair banking risk. Finally, give recommendations for grant of the requisite fundbased and non-fund based credit facilities.

3. Sanction: Indicative list of activities involved in the sanction function is given below:  Peruse the proposal to see if the report prima facie presents the proposal in a comprehensive manner as required. If any critical information is not provided in the proposal, remit it back to the Assessor for supply of the required data/clarifications.

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 Examine critically the following aspects of the proposed exposure in the light of corresponding instructions in force: y y y y y y y y y y y y Banks lending policy and other relevant guidelines RBI guidelines Borrowers status in the industry Industry prospects Experience of the Bank with other units in similar industry Overall strength of the borrower Projected level of operations Risk factors critical to the exposure and adequacy of safeguards proposed There against Value of the existing connection with the borrower Credit risk rating Security, pricing, charges and concessions proposed for the exposure and covenants o Stipulated vis--vis the risk perception.  Accord sanction of the proposal on the Terms proposed or by stipulating modified or additional conditions/ safeguards, or Defer decision on the proposal and return it for additional data/clarifications, or Reject the proposal, if it is not acceptable, setting out the reasons.

Loan administration - Post sanction Credit process

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

Stages of post sanction process

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

Types of Lending Arrangements

Introduction Business entities can have various types of borrowing arrangements. They are  One Borrower One Bank  One Borrower Several Banks (with consortium arrangement)  One Borrower Several Banks (without consortium arrangements Multiple  Banking
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 One Borrower Several Banks (Loan Syndication)  One Bank The most familiar amongst the above for smaller loans is the One Borrower-One Bank arrangement where the borrower confines all his financial dealings with only one bank.

Sometimes, units would prefer to have banking arrangements with more than one bank on account of the large financial requirement or the resource constraint of his own banker or due to varying terms & conditions offered by different banks or for sheer administrative convenience. The advantages to the bank in a multiple banking arrangement/ consortium arrangement are that the exposure to an individual customer is limited & risk is proportionate. The bank is also able to spread its portfolio. In the case of borrowing business entity, it is able to meet its funds requirement without being constrained by the limited resource of its own banker. Besides this, consortium arrangement enables participating banks to save manpower & resources through common appraisal & inspection & sharing credit information. The various arrangements under borrowings from more than one bank will differ on account of terms & conditions, method of appraisal, coordination, documentation & supervision & control.  Consortium Lending When one borrower avails loans from several banks under an arrangement among all the lending bankers, this leads to a consortium lending arrangements. In consortium lending, several banks pool banking recourses & expertise in credit management together & finance a single borrower with a common appraisal, common documentation & joint supervision & follow up. The borrower enjoys the advantage similar to single window availing of credit facilities from several banks. The arrangement continues until any one of the bank moves out of the consortium. The bank taking the highest share of the credit will usually be the leader of consortium. There is no ceiling on the number of banks in a consortium.  Multiple Banking Arrangement Multiple Banking Arrangement is one where the rules of consortium do not apply & no inter se agreement among banks exists. The borrower avails credit facility from various banks providing separate securities on different terms & conditions. There is no such arrangement
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called Multiple Banking Arrangement & the term is used only to denote the existence of banking arrangement with more than one bank. Banking Arrangement has come to stay as it has some advantages for the borrower & the banks have the freedom to price their credit products & non-fund based facility according to their commercial judgment. Consortium arrangement occasioned delays in credit decisions & the borrower has found his way around this difficulty by the multiple banking arrangement. Additionally, when units were not doing well, consensus was rarely prevalent among the consortium members. If one bank wanted to call up the advance & protect the security, another bank was interested in continuing the facility on account of group considerations.

Points to be noted in case of multiple banking arrangements y Though no formal arrangement exists among the financing banks, it is preferable to have informal exchange of information to ensure financial discipline y Charges on the security given to the bank should be created with utmost care to guard against dilution in our security offered & to avoid double financing y Certificates on the outstanding with the other banks should be obtained on the periodical basis & also verified from the Balance sheet of the unit to avoid excess financing  Credit Syndication A syndicated credit is an agreement between two or more lending institutions to provide a borrower a credit facility using common loan documentation. It is a convenient mode of raising long-term funds.

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

56

notice to the lead manger about loan drawal to enable him to tie up disbursements with the other lending banks.

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

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

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CHAPTER 7 CREDIT APPRAISAL MODEL AT AXIS BANK Credit to SME Sector

AXIS bank provides credit to SME sector under following Schemes  SME Schematic (Fast Track) It includes structured products basically to provide fast services to clients. It includes various products like:

y y y y y y y y

Mpower OD and Mpower Term Loan Business Loan for Property Power Rent Power Trade Zero Collateral Loans (ZCL) to MSE under CGS Card Power Enterprise Power Business Power

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

Business Loan for Property: The product is aimed at providing finance to business enterprises for acquition of an immovable property. The facility is in the form of a Term Loan repayable by EMIs. The maximum Loan amount under the product is Rs. 5 crores.
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Power Rent: The product generally known in market parlance as Lease Rental Discounting is aimed at providing a Term Loan to owners of properties against their lease rental receivables. The Loan amount is assessed on the basis of the net present value of the rental receivables over the lease period (after deducting margin and taxes). The lease rentals are hypothecated in banks favor and the Loan is further collateralized by charge over the property. The product specifies a minimumsecurity coverage of 1.5 times. Maximum Loan amount under the product is Rs. 20 crores.

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

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

Card Power: This is a scheme for financing credit/debit card receivables of units installing pour EDC machines. Both demand loan & term loan facilities are offered to the borrowers, subject to a maximum of Rs. 2.5 crores. All trading/ retailing activities (with a few exceptions like liquor, tobacco, seasonal business etc.), where credit/ debit cards are used are eligible for the loans.

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

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

 SME- Non Schematic (Standard) For a business on the growth phase with a wide range of opportunities to explore, timely availability of credit is an integral ingredient needed to scale new heights. Axis Bank understands this and endeavor to be not just a bank but also financing partner, so that focus on business needs becomes possible whereas Bank cater to meet financing needs. Their services ranging from Funded to Non-Funded, from Short Term to Long Term and from Credit to Trade Services ensures to get finance the way it is best suited for business. Services: y y y y y y y y y Cash Credit Working Capital Demand Loan Export Finance Short Term Loan Term Loan Clean Bill Discounting LC Backed Bill Discounting Co-Acceptance of Bills Credit Facilities against Guarantee or Stand By Letter of Credit issued by Foreign Banks y Letter of Credit
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y y

Bank Guarantee Solvency Certificates

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

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

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

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

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

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

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

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

Credit Facilities against Guarantee or Stand By Letter of Credit issued by Foreign Banks: Various foreign companies set up subsidiary in India. Bank provides funding to such companies against guarantees or SBLCs of acceptable foreign banks.

Letter of Credit: Apart from fund based working capital facilities Bank provides a range of NonFund Based facilities such as Letter of credit, Bank Guarantees, Solvency certificates, etc. Letter of Credit is provided to meet trade purchases. These are generally provided for 3-6 months depending upon Trade cycle. Apart from this it

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provides Import Letter of Credit for importing machinery or capital goods. Such LCs are for tenure ranging from 1-3 years depending upon the need of the borrower.

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

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

Sanctioning powers for schematic Loans under MSME and Mid Corporate
In order to have better control over the portfolio, it is felt that the budget for schematic advances should be allotted only to select branches, where the potential and manpower support exist for such business. Accordingly, the budget for FY 08 has been restricted to select branches, to be decided by Advances Cells. The Branch Heads of branches located at centers where Advances Cells have been set up will not have any sanctioning powers. Branch Heads of stand-alone branches where budgets have been allocated will have sanctioning powers as per delegation of powers given below. The Branch Heads of other stand-alone branches where budgets have not been allocated will not have any sanctioning powers. These branches would, however, continue to source business and such proposals would be processed / sanctioned at the respective Advances Cells. Review / renewal of existing Loans at such branches would also be done at the Advances Cells.

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Branches would continue to be responsible for all post sanction formalities, maintaining quality of assets held in their books, periodic updating of drawing power, obtention of stock statements and periodical inspection of borrowal units. The sanctioning powers, to be exercised by various officials would be as under.

Sanctioning Authority

Exposure Limits (in Rs. Lacs)

Interest rates Concessions NIL NIL Upto 100 bps Upto 100 bps

Reviewing Authority

Manager

50 250 1000 2000

AVP / VP-Advances at the Advances Cell VP-Advances SVP Advances Zonal Head

AVP VP SVP (Advances) at ZO

All requests for interest rate concessions are to be forwarded to the Advances Cells. The proposals sanctioned at Advances Cells / Zonal Offices during a particular month are to be submitted for review by the next higher authority through a monthly control return, latest by the 5th of the succeeding month, in the prescribed format and not on a case-by-case basis. Similarly, the proposals sanctioned by the Branch Heads /Advances Cells (headed by AVPs/Managers) during a particular month are to be submitted for review by the appropriate authority at Zonal Office or Advances Cells as the case may be through a monthly control return, latest by the 5th of the succeeding month, in the prescribed format and not on a caseby-case basis. The concessions in rates of interest / variations authorised by the VP (Advances) and SVP (Advances) during a particular month are to be submitted for review by the SVP(Advances)/ Zonal Head respectively through a monthly control return, in the prescribed format by the 5th of the succeeding month. If a combination of schematic Loan products is to be offered, the combined exposure shoul be the criterion while sanctioning the limits

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Introduction to Credit Risk Management

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

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

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

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

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

Introduction to Credit Tools

The Bank has developed tools for better credit risk management. These focus on the areas of rating of corporate (pre-sanctioning of Loans) and monitoring of Loans (post-sanctioning). The focus of this manual is to familiarise the user with the credit rating tool.  Credit Rating: Definition Credit rating is the process of assigning a letter rating to borrowers indicating the creditworthiness of the borrower. Rating is assigned based on the ability of the borrower (company) to repay the debt and his willingness to do so. The higher the rating of a company, the lower the probability of its default. The companies assigned with the same credit rating have similar probability of default.  Use in decision-making Credit rating helps the bank in making several key decisions regarding credit including: Whether to lend to a particular borrower or not; What price to charge What are the products to be offered to the borrower and for what tenor At what level should sanctioning be done What should be the frequency of renewal and monitoring

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

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 Main features of the rating tool: i) Comprehensive coverage of parameters. ii) Extensive data requirement. iii) Mix of subjective and objective parameters. iv) Includes trend analysis. v) 13 parameters are benchmarked against other players in the segment. The tool contains the latest available audited data/ratios of other players in the segment. The data is updated at intervals. vi) Captures industry outlook. vii) Eight grade ratings broadly mapped with external credit rating agencys ratings prevalent in India.  Special features of the web based credit rating tool i) Centralised data base. ii) Easy accessibility and faster computation of scores. iii) Selective access to users based on the area of operation. Branches have access to the data pertaining to their branch only, Zonal offices have access to the data pertaining to all the branches under their control and the Credit Department and Risk Department at Central Office have access to all accounts. iv) Adequate security system and provision of audit trails for confidentiality. v) Maintaining of past rating records in the system for collection of empirical data on rating migrations. This will enable the bank to arrive at PDs (Probability of Default) factor.

Rating Tool for Small and Medium Enterprises (SME)

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

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

y y y y y

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

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

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

Parameter Financial performance Operating performance of business Quality of management Industry outlook

Weightage (%) 40 22.5 22.5 15

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

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 Parameters used in the SME tool

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

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

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

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

 Three types under SME tool i) Manufacturing ii) Services and iii) Trading
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Various parameters under each of the above stated parameters for these three types of SME tool are as under:

Manufacturing

i) Financial performance

Sr. No. F1 F2 F3 F6 F7 F8 F9 F12*$ F13 F24 F27* F28*

Sub parameters Net Sales Growth Rate (%) PBDIT Growth Rate (%) PBDIT/Sales (%) TOL/TNW Current Ratio Operating Cash Flow DSCR Foreign exchange risk Expected values of D/E, if 50% of NFB credit devolves (corrected for margin) Realisability of Debtors State of export country economy Fund repatriation risk TOTAL

Weightage (%) 10 7 10 10 10 8 8 10 5 12 5 5 100

* Applicable for export units $Applicable for units having imports and or exports

ii) Operating performance of business

Sr. No. B7 B8 B9 B10

Sub parameters Credit period allowed Credit Period Availed Working Capital Cycle Tax incentives

Weightage (%) 10 10 20 10
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B13 B14 B15 B20 B21

Production Related Risk Product Related Risks Price Related Risk Client Risk Fixed Asset Turnover TOTAL

10 10 10 10 10 100

iii) Quality of management

Sr. No. M1 M2 M3 M4 M6 M9 M8

Sub parameters HR policy/track record of industrial unrest Track Record in Default of Statutory Dues Market Report of Management reputation History of FERA violation/ED enquiry Too Optimistic Projections of Sales and Other Financials Technical & Managerial Expertise Capability to raise money TOTAL

Weightage (%) 15 16 15 8 16 15 15 100

Services

i) Financial performance

Sr. No. F1 F2 F3 F6 F7

Sub parameters Net Sales Growth Rate (%) PBDIT Growth Rate (%) PBDIT/Sales (%) TOL/TNW Current Ratio

Weightage (%) 10 7 10 10 10

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F8 F9 F12*$ F13 F24 F27* F28*

Operating Cash Flow DSCR Foreign exchange risk Expected values of D/E, if 50% of NFB credit devolves (corrected for margin) Realisability of Debtors State of export country economy Fund repatriation risk TOTAL

8 8 10 5 12 5 5 100

* Applicable for export units $Applicable for units having imports and or exports

ii) Operating performance of business

Sr. No. M1 M3 M4 M6

Sub parameters HR Policy/Track Record in Industrial Unrest Market Report of Management Reputation History of FERA violation/ED enquiry Too Optimistic Projections of Sales and Other Financials

Weightage (%) 15 20 10 20

M8 M12

Capability to raise money Mix of Professional and Traditional Management TOTAL

15 20

100

iii) Quality of management

Sr. No. M1 M3

Sub parameters HR Policy/Track Record in Industrial Unrest Market Report of Management Reputation

Weightage (%) 15 20
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M4 M6

History of FERA violation/ED enquiry Too Optimistic Projections of Sales and Other Financials

10 20

M8 M12

Capability to raise money Mix of Professional and Traditional Management TOTAL

15 20

100

Trading

i) Financial performance

Sr. No. F1 F2 F3 F6 F7 F8 F9 F12*$ F13 F24 F27* F28*

Sub parameters Net Sales Growth Rate (%) PBDIT Growth Rate (%) PBDIT/Sales (%) TOL/TNW Current Ratio Operating Cash Flow DSCR Foreign exchange risk Expected values of D/E, if 50% of NFB credit devolves (corrected for margin) Realisability of Debtors State of export country economy Fund repatriation risk TOTAL

Weightage (%) 10 7 10 10 10 8 8 10 5 12 5 5 100

* Applicable for export units $Applicable for units having imports and or exports

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ii) Operating performance of business

Sr. No. B3 B7 B8 B9 B10 B14 B15 B24

Sub parameters Inventory Turnover Credit period allowed Credit Period Availed Working Capital Cycle Tax incentives Product Related Risks Price Related Risk Sustainability of Sales TOTAL

Weightage (%) 16 10 12 16 10 12 12 12 100

iii) Quality of management

Sr. No. M1 M2 M3 M4 M6 M8 M12

Sub parameters HR Policy/Track Record in Industrial Unrest Track Record in Default of Statutory Dues Market Report of Management Reputation History of FERA violation/ED enquiry Too Optimistic Projections of Sales and Other Financials Capability to raise money Mix of Professional and Traditional Management TOTAL

Weightage (%) 15 16 15 8 16 15 15 100

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Definition of Parameters used in SME tool

F1 - Net Sales Growth Rate Importance of this indicator This ratio refers to the compounded annual growth rate of net sales over a period of three years. The companys growth ratio vis--vis other companies in the industry will be a good tool to assess its performance. If the growth rate is low compared to others in the industry, then it will enable us to analyse the problems unique to this company.

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

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

F2 - PBDIT Growth Rate Importance of this indicator This ratio refers to the compounded annual growth rate of profits before depreciation (non cash), finance costs (interest) and tax over a period of three years. A consistent growth in this ratio indicates an improved performance of the company, reflected in increasing profitability (compared to its sales growth).

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

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

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

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

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

Total Outside Liabilities Tangible Net Worth

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

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

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

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

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

Amount

Repayment due of long Term debt

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

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

Score O

F9 - DSCR (Debt Service Coverage Ratio) Importance of this ratio This ratio measures the capacity of the company to service its debt i.e. repayment of principal and interest. DSCR measures the number of times a companys earnings cover its total longTerm debt-servicing requirement, including interest and principal repayments in Term Loans, over a period of one year. This ratio will help us to evaluate if an adequate cash flow will be available to meet debt obligation and also for providing margin of safety to lenders. This ratio also helps to deTermine the time when repayment should commence and the pay-back period of the Loan. This ratio is a good indicator of the long-Term solvency of a company.

Formula The profit before depreciation and interest (PBDI) is divided by installments due during the year plus interest.

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P B D I__________ Instalments for the year + interest

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

F12 - Foreign exchange risk Importance of this indicator Adverse movements in the foreign exchange rate can have a tremendous impact on the companys financial strength. Foreign exchange risk may be either transaction based or portfolio based. Transaction based risk is due to time lags between purchases being made and payment being made, or sales being made and payment being received against these sales. Portfolio based risk is on account of foreign exchange Loans where the repayment is made on future dates in foreign currency. The rater needs to know how the likely fluctuation in exchange rate will affect the profits of the company. Depending on composition of international trade, the adverse exchange rate movement could affect the profitability/cash flow. Prudent borrowers hedge their exposure to foreign exchange. Only the un-hedged part of the foreign exchange exposure should be taken into account.

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

Description The risk involved is > 10% of TNW The risk involved is between 8% and 10% of TNW The risk involved is between 5% and 8% of TNW The risk involved is less than 5% of TNW The entire portfolio is hedged

Score 0 1

2 3 4

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

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

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

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

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

Do not calculate this ratio for banks, NBFCs and other financial institutions
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F24 - Realisability of Debtors Importance of this indicator This indicator should indicate the quality of the debtors of the company and if money can be recovered from them quickly and easily. A lot depends on how auditors have treated the receivables.

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

F27 State of the export country economy Importance of this indicator The economy of the country(ies) to which is being exported, will have a significant impact on the exporters business. A slowdown in the economic growth might even have a more than linear impact on the exporters turnover and profitability, since importers will typically may have the reaction to cut costs by cutting relationships with overseas suppliers.

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

F28 Fund repatriation risk Importance of this indicator Exporters are often paid in the currency of the country to which they export.Some of these currencies may be difficult to exchange or to wire back to India. In that case, significant costs and risks are involved in the repatriation of funds, which could affect the overall risk profile of the exporter
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How to rate The rater has to subjectively rate this indicator on a score of 0 to 4 based on his perception and knowledge of the foreign exchange risk. The minimum score of 0 could be assigned to an exporter who trades the bulk of his products/services with a country that has very stringent foreign exchange and currency repatriation policies. The maximum score of 4 could be granted to exporters who only trade with countries, which have no restrictions on the flow or repatriation of funds.

B3 - Inventory Turnover(Trading) Importance of this ratio This ratio indicates the velocity (number of times) with which the inventory circulates in the business, during the relevant period. A decrease in ratio could be a significant danger signal. Low ratio could indicate the presence of slow moving items in stock. A high ratio is good from the point of liquidity since inventory will be quickly converted into cash. This ratio also indicates the efficiency of the company in utilizing its inventory and maintaining it at an optimum level. Thus, the higher the ratio, the higher the sales per unit of investment in inventories. A lower ratio results in high carrying cost and blocking of funds, thus limiting the liquidity of the company.

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

B7 - Credit period allowed Importance of this indicator This indicates the period of realisation of sales proceeds. It is the average length of time that customers who buy on credit take to pay their dues. It indicates the efficiency of management in debt collection.

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

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

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

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

B8 - Credit period availed Importance of this indicator It measures the average time taken by the company to pay its suppliers for purchases made on credit. This ratio relates credit availed to its total purchases. This indicator is a measure of the bargaining power that the company enjoys with its suppliers. A stronger company will avail a longer credit period from its suppliers than a weak company. A longer credit period offered by suppliers also indicates that the suppliers are confident of the ability of the company to pay them. A word of caution, a very high ratio could indicate short-Term liquidity problems also.

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

Average creditors = (Sundry creditors in the beginning of the year + sundry creditors at
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the close of the year)/2 Do not calculate this ratio for banks, NBFCs and other financial institutions

B9 Working capital cycle (Manufacturing, Trading) Importance of this indicator Working capital represents an important part of the employed capital of many companies. Therefore, a good performing company should carefully manage this part of its assets, since it represents an important invest Also, the way a company go about their working capital, says a lot about the management of the company. In a sense one could argue that good working capital management is an indicator of good management Factors to be considered Inventory turnover and credit period allowed

How to calculate Net sales Working capital

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

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

B10 - Tax Incentives Importance of this indicator Tax incentives can be a major driver of profitability for many companies. A unit located in backward area or in some of the states (like Goa or union territory of Daman & Diu etc.) enjoy special tax incentives. (Both states grant income tax and sales tax holidays for 3-5 yrs.) Such tax holiday period is helpful for company to take advantage especially in a commodity market and thus improve profitability. How to rate The rater has to subjectively rate this indicator on a score of 0 to 4 based on his perception and knowledge of the government policies and industry. The rater should also be aware of the management strengths and their ability to make best use of the existing government

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

B13 - Production related risk (Manufacturing) Importance of this indicator This measures the risk of a company with respect to its production activities. It evaluates the ability of company to sustain the production activity at a diversified level. A company having little production related uncertainties in production would be better placed in the industry. Problems in production would lead to impact on overall performance of the company. Thus the efficiency, stability and consistency of quality of the production activities are a critical deTerminant of performance. The state of technology can be considered an overall driver of this risk

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

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

Do not calculate this ratio for banks, NBFCs, other financial institutions or service Companies B14 Product/service related risk Importance of this indicator This indicator measures the risk relating to the products manufactured / services provided by the company.
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The risks associated with the product can be those related to obsolescence, substitution, decrease in demand etc. A product should be of a consistent high quality; otherwise its market reputation will suffer. The companys ability to standardize product quality, getting ISI benchmarks or ISO certificates will add to its advantage. The expected product life cycle will also contribute to the overall product risk. The shorter the expected life of the product, the riskier the companys business performance . Factors to be considered Product range; Product/service quality; Brand value, Highly customized product/service; Obsolescence, Demand supply position/gap. How to rate The rater has to subjectively rate this indicator on a score of 0 to 4 based on his perception and knowledge of the product risk. A potential model to allocate score can be the following:

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

Score 0

B15 - Price Related Risk Importance of this indicator This indicator measures the ability of a company to dictate prices in the marketplace as well as to cut its prices in case of a price war. The price competitiveness of a company is an

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important indicator of the competitive position of a company. A company that is in a position to charge a premium over its competitors is better placed in the industry. Similarly, a company with lower costs is in a good position to withstand price competition in the market. If the companys products enjoy a high reputation, it can price the product to its advantage.

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

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

B20 Client risk(Services, Manufacturing) Importance of this indicator Smaller to midsized companies can face considerable risks at the client side. This risk is twofold: number of clients and quality of clients. Medium-sized companies sometimes depend on a very small portfolio of clients, or have 1 predominant clients who makes or breaks the company. Also, medium sized companies are sometimes closely connected to clients with a shady or poor reputation. This might not only adversely impact their own reputation, but also represent a barrier to recruiting and retaining of talent, innovation,

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

How to rate The rater has to subjectively rate this indicator on a score of 0 to 4 based on his/her perception and knowledge of the client risk. A score of 4 means that the company has a well diversified portfolio of high quality clients. A score of 0 indicates that the company depends on a small set of clients, which can be perceived as 2nd or 3rd rank in their respective industry.
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B21 Fixed asset turnover (Manufacturing) Importance of this indicator Fixed assets represent an important part of the capital employed at manufacturing companies. A well performing company should therefore make sure that it gets the maximum out of its machine park. How to rate Net sales Fixed tangible assets

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

B22 Quality of internal processes & systems (Services) Importance of this indicator The business performance of service companies is often determined by the quality of their internal processes and systems. It is therefore important to assess how these companies score on these dimensions, since they will be an important contributor to the potential success and / or risk of the company

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

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

B23 Competence to innovate(Services) Importance of this indicator The success of a company can often be related to the overall performance of its service offering. Therefore, a companys capability to develop services which respond to its users
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needs (through efficiency, customization, effectiveness ) will influence its competitive position and hence its success

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

B24 Sustainability of sales(Trading) Importance of this indicator An important driver of the success of a trading company, is the level of sales it is able to generate. Therefore, the risk associated with a trading company is very much linked to the sustainability of its sales. A company with sustainable sales will have a core portfolio of products, which will not switch quickly. Opportunistic trading companies do run the risk of making the wrong bet, resulting in impressive declines in sales.

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

Subjective Assessment of Quality of Management

How to rate: The rater should rate the ratios and indicators on the score of 0 to 4 depending on his understanding and comfort levels.

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A score of 4 means that the rater feels that promoters and their management will perform very well on the ratio/indicator. Adversely, the rater should assign a score of 0 if he/she thinks that management will perform poorly on the ratio/indicator.

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

M1 - HR policy / Track record of industrial unrest Importance of this indicator This factor relates to labour unrest, lock out, and work slow down, strike and strained management employee relation. Industrial harmony is a key factor for success of an industry/business. In short, this indicator reflects the quality of the companys HR policy.

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

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

M3 - Market report of management reputation Importance of this indicator This market report assesses the reputation or general perception about integrity and fair dealing of the promoters. The reputation of promoters regarding their integrity, adhering to commitments, fair dealings has important bearing on quality of management. This incidentally becomes one of the most important ratios and indicators, as past behaviour is often a good proxy for their future behaviour. Adverse performance of associate concerns controlled by the corporate should also be considered.

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

M6 Too optimistic projections of sales and other financials Importance of this indicator There is sometimes a conscious attempt to over-estimate financial projections to secure excess borrowings. Recurrent non-achievement of targets could be indicative of such practice. Careful scrutiny of past track records help develop an idea of reliability of projections.

M8 Capability to raise resources Importance of this indicator Managements capability of raising additional resources is an important factor in assessing the creditworthiness of the company. If management is likely to find additional outside funding (from capital market, partners, family, group company,) whenever this is necessary, this should contribute to a reduced risk for the bank.

M9 - Technical & Managerial expertise(Manufacturing) Importance of this indicator This indicator relates to the technical knowledge and experience of the promoters in the relevant area of operation. Technical skills will contribute to a greater efficiency of operations and quality of products. Managerial know-how will enable management to avoid typical pitfalls and to put together a consistent and feasible strategy.

M12 Mix of professional and traditional management (Services,Tarding) Importance of this indicator This indicator tries to evaluate the professionalism of the companys management. It is important that the management consists of people who know the business, the industry and who have the necessary experience to make things work. However, a lot of companies are
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still family-owned, which is often reflected in the composition of the management team. Therefore, it is important to assess if the company maintains a good balance between traditional management (who often own the client relations) and professional management.

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

The model has been provided with the following two options: 1) Scenario I 2) Scenario II At the time of sanctioning of a fresh advance, the concerned client should be rated in the credit rating model under the Scenario I option. This would activate the Credit rating tool provided in the rating model and based on the data entered, the tool would compute a credit rating for the client. After the sanction and disbursement of the advance, rating of the borrower should be reviewed at a frequency indicated by the rating wise schedule (as indicated in the Credit Policy of the Bank). This rating exercise should be done in the model under the Scenario II option. This would activate both the Credit rating tool and the Monitoring tool in the model. The model would re-compute the overall rating after reckoning the data both from rating tool and the monitoring tool. Once an account has been re-rated using the Scenario-II option, further modifications / re-ratings pertaining to that account will compulsorily have to be done using Scenario-II option only. In other words, the access to Scenario-I option will be blocked in such cases

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The

following Scenario 1

LCMC Scenario II Scenario 1

SME Scenario II

weightages have been allocated under the

above stated respective scenarios: Parameters Financial Business Management Industry Monitoring (Conduct) Tool 40.00 22.50 22.50 15.00 Not Applicable 35.00 17.50 20.00 12.50 15.00 55.00 15.00 15.00 15.00 Not Applicable 47.50 15.00 15.00 12.50 10.00

(The above stated weightages are subject to change)

Bases on an exercise conducted to examine the robustness of the monitoring tool; the erstwhile conduct rating parameters have been condensed and divided into two groups: 1) Hurdles: These are parameters which lack the discriminating power between a good and a bad account but they are nevertheless important as far as behavior of an obligor is concerned. 2) Discriminants: These are parameters which have higher discriminating power between a good and a bad account and maybe used for predicting defaults.

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

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Parameter Hurdles A1 A2 Creation of Charge on Primary Security Creation of charge on collateral and / or execution of personal / corporate guarantee A3 A4 A5 A6 A7 A8 A9 A10 B1 B2 Other Terms & conditions not complied with Receipt of periodical data / Stock & Book Debt statements Receipt of Balance Sheet / Renewal data Compliance of financial covenants Unit inspection reports observations Routing of proportionate turnover / business Utilisation of facilities (not applicable for Term Loan) Adequacy of insurance for the primary / collateral security Negative Deviation in Net Sales (actual vs. estimates) Financial Discipline Overdue discounted bills during the period under review Devolved bill under L/C outstanding during the period under review

Invoked BGs issued outstanding during the period under review Frequency of RETURN of cheques per quarter deposited by borrower Frequency of issuing of cheques without sufficient balance per quarter

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Payment of INTEREST or INSTALMENT B3 B4 B5 Frequency of requests for Ad Hoc increase in limits Frequency of overdrawing in CC account Any other adverse features financial / non-financial, including corporate governance issues such as adverse publicity, strictures from regulators, political risk and adverse trade environment not covered elsewhere .

Hurdles
A1: Creation of Charge on Primary Security Primary security refers to the asset/s taken as the main tangible security for the funding of which the bank grants finance, such as inventory, receivables, other current assets, fixed assets, etc. When these assets are taken as security, they should be properly charged to the bank by way of hypothecation, mortgage, pledge and assignment which should be legally enforceable. In case the primary security is not properly created or charged as required under the relevant law, the banks advance may become unsecured thus increasing the risk in the exposure. Check whether the charge on primary security stipulated in the sanction has been created and registered with the RoC (where ever required) or any other authority. If any of the requirements of proper creation of charge on the primary security is not fulfilled, charge on the stipulated security is considered as not created for this exercise. Even if the delay in creation of security is allowed by the sanctioning authority, security is considered as not created.

A2: Creation of charge on collateral and / or execution of personal / corporate guarantee Collateral security is taken as an additional security over and above the primary security. The collateral security offers additional comfort to the bank partly mitigating the risk involved in the exposure. The requirements stated in respect of the primary security (under A1) are applicable for the collateral security also.

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

A3: Other Terms & conditions not complied with Apart from the security, various other Terms and conditions are stipulated for enabling the bank to mitigate risk from the exposure. Some of the stipulations assume greater importance to the safety of advance such as obtention of NOC from the existing lenders for creation of first / second / paripassu charge in favour of the bank, bringing in another bank for sharing / tying up the gap, end use certification, etc.

A4: Receipt of periodical data / Stock & Book Debt statements Timely receipt of various data from the borrower is of utmost importance in monitoring the health of an account. Apart from deTermining the drawing power (where ever applicable), the data is considered as an indicator of conduct of the borrowers business operation which have implication on the conduct / performance of the account. Non receipt of such data (for any reason whatsoever) itself is considered as a risk factor. Even in case of frequent delays in submission of stock statements, FFR, etc the parameter should be rated as Not Complied.

A5: Receipt of Balance Sheet / Renewal data The balance sheet is one of the sources of tangible information on the companys operation which can be objectively analysed to assess the effectiveness of the business model. Scrutiny of the balance sheet can help notice salient and abnormal features in the areas of cash flow, fund flow, capital base, production, inventories, receivables, sales, borrowings, diversion of funds, and profitability. A timely submitted balance sheet enables the Bank to assess potential adverse features and take appropriate action well in time. Non finalisation of audited balance sheet, non submission / delayed submission of audited balance sheet / renewal data reflects poorly on the corporate governance of the borrower and considered as one of the risk factors.

A6: Compliance of financial covenants Financial covenants are stipulated for mitigating risk in an exposure. Some of these stipulations relate to creation of Debt Service Reserve, maintenance of minimum asset cover, current ratio level, TOL/TNW ratio, infusion of funds by promoters, raising of long Term
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funds, liquidation of investments, restrictions of investments/dividend etc. These risk mitigation measures provide extra comfort to the bank while sanctioning the advance. In case the stipulated financial covenants are not complied with, partly or fully, the exposure would carry a higher risk which needs to be captured in the monitoring tool.

A7: Unit inspection reports observations Physical inspection of borrowers unit enables the bank to verify the information supplied by the borrower. Inspection should cover the following indicative areas: Idle plant and machinery. Attendance of labour / staff and their working conditions. Adequate availability of utilities / infrastructure such as water, power, etc. Quality & value of inventory & finished product. Legal / statutory / lenders notices pasted in the factory or on the Plant and Machineries.

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

A8: Routing of proportionate turnover / business The user is required to select whether the borrower enjoys: Sole Banking Multiple / Consortium Banking And rate the borrower as per the options provided there under. Apart from supplementing other income from the borrower the routing of entire / proportionate turnover / business enables the bank to capture the borrowers cash flow which an important indicator of the borrowers operations. In case of sole banking arrangement, the borrower is expected to route its entire turnover / business through the bank. In other cases, at least proportionate business should be routed. Points to note: In case of Term Loan facility without working capital facility, the routing of turnover/business through the bank is considered as an added advantage to the bank, although it may not be one of the stipulations.
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A9: Utilisation of facilities (not applicable for Term Loan) Full utilisation of cash credit facilities without variations for a long period requires closer scrutiny to ensure that the liquidity of the borrower is not strained. The parameter intends to capture such risk. Optimum utilisation of account apart from indicating soundness of borrowers cash flow also ensures adequate earnings for the bank.

A10: Adequacy of insurance for the primary / collateral security Inadequacy of insurance indicates low value of assets or the possibility that the borrower has inadequate interest in the assets. Underinsurance would result in application of average clause leading lower settlement of claim. These implications are undesirable from a lenders point of view.

Discriminants

B1: Negative Deviation in Net Sales (actual vs. estimates) The amount of estimated/projected net sales is one of the major parameters of credit assessment. Non-achievement of estimated/projected net sales by the company indicates setback in the borrowers business performance. Non-achievement of sales could be one of the early indicators of the weakening of an account and we need to look for the reason/s for the set back. The user needs to input the sales turnover as per the latest Audited Annual report as well as the sales turnover estimated / projected in the credit appraisal for the corresponding period.

B2: Financial Discipline Overdue discounted bills during the period under review Non realisation of bills discounted by the bank reflects adversely on the borrowers customer profile and hence considered as risk.

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

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Adequate cash flows are one of the important indicators of satisfactory health of a borrower. Devolvement of bills under LC indicates inadequate cash flows of the borrower. Historically, in most of the cases, such features are the starting point of financial deficiency ultimately leading to default. A borrower having adequate cash flows and efficient cash flow management system would not allow devolvement of contingent liability such as bills under LC. Invoked BGs issued outstanding during the period under review Invocation of a guarantee indicates the borrowers failure to perform the contract or meet the requirement for which the guarantee was issued and considered as a risk factor. Further, nonpayment of the invoked Bank Guarantee obligation within a reasonable period is considered risky.

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

Frequency of issuing of cheques without sufficient balance per quarter deposited by borrower Issuance of cheques by the borrower without maintaining sufficient balance in the account impacts his credit worthiness. This would have negative impact on the health of the borrower. Payment of interest or instalment Failure to meet interest / instalment payment obligation indicates crystallization of credit risk. Default / delay in payment of interest or instalment represent a strong warning signal about the health of the account.

B3: Frequency of requests for Ad Hoc increase in limits Frequent requests for ad hoc increase in limits indicate lack of proper management of funds or inability of the borrower to raise funds from other sources or lack of cash flows to manage the working capital cycle. The signal adds to risk profile of the borrower. B4: Frequency of overdrawing in CC account
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The requirement of working capital finance is assessed on the basis of borrowers estimated / projected level of operations. Hence, the borrower should be able to manage his funds requirement within the sanctioned facilities. Frequent overdraft of the CC account due to any reason (such as Term instalment, interest, temporary liquidity mismatch etc.) indicates poor management of working capital finance and may be a potential risk of default.

B5: Any other adverse features financial / non-financial, including corporate governance issues such as adverse publicity, strictures from regulators, political risk and adverse trade environment not covered elsewhere No exposure is risk free nor can all risk factors in an exposure be objectively listed or foreseen at a given point of time. As this parameter is subjective the rater should select a suitable option based on his/her understanding of the borrower and the exposure. Factors including market forces like capital market perception (continuous fall in the stock price which are signals of deteriorating financial conditions, as well as other issues) may be considered while selecting the option.

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

Borrower Rating SME 1 SME 2 SME 3 SME 4 SME 5 SME 6 SME 7 SME 8

Range of Scores Above 85 76-85 66-75 56-65 46-55 36-45 26-35 Below 26

Risk Level Lowest risk Lower risk Low risk Moderate risk High risk High risk Higher risk Highest risk

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CHAPTER-8 CASE STUDY- 1

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

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

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

Qualitative Factors:


The Company has a pro-active Management and Promoters who have hands on experience in manufacturing of Dyes InTermediaries and Food Colours. Profit making Company since last 13 years. The company has to its credit an award for Indirect Export of Self Manufactured Dyes for the year 2001-02 & 2002- 03 received by Gujarat Dyestuffs Manufacturers Association.

 

The company has obtained certificate of approval From Bureau Verities Quality International (BVQI) for achievement of ISO 9001: 2000 quality standards, the Company has also received certificate of approval from Bureau Verities Quality International (BVQI) for achievement of 14001:1996 and 14001:2004 quality standards for both its units satiated at Ankleshwar.
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The company has also obtained HAACP Code: 2003 certificate of registration from TQCS International (Group) Pty Ltd under food safety programme for both its units situated at Ankleshwar

The company was awarded with trophy for export performance of more than Rs. 6.00 & 8.00 Crore for Self

Manufactured Indirect Export of Dyes & inTermediates in the year 2002-03 by Gujarat Dyestuffs ManufacturersAssociation.

Both the Units of the company are exporting Oriented Units and have obtained the status of One Star Export House.

Marketing Strategy/Marketing arrangement Strong and experience people are leading companys marketing department. Companys total turnover is divided into:
 

Exports Sales Local Sales

 y

Exports Sales: Companys 70% turnover is generated by way of exports sales. Company has its own presence in all most all countries. The company is exporting Food colors in Latin America, African countries, Middle East, Far East, US and Europe. Almost all export customers are dealing with company for many years.

Out of total exports turnover 60 to 70% percentage orders are repeated orders and rest of the orders are new orders.

The Company has region wise Export Managers who can cater the need of customers individually. Due to the quality and timely delivery of the material the company have less competition from these countries. Globally many countries have discontinued production of Dyes, Food colors and Intermediates, new market has opened for Indian manufacturer of Dyes and Intermediates. As Dynemic Products Ltd is already a well recognized name in the field globally, it has more opportunities to grab from growing International market.

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 Local Sales:
y

In Local Market Company is doing marketing its Dyes & Intermediates to the end customers.

The company is the largest manufacturer of S.P.C.P in India which generating repeated order from the local customers.

Now, company is planning to market the food colors in small packing through its dealers and distributors which cater the local needs.

Company is also planning to arrange marketing arrangement with soft drink manufactures and pharmaceutical manufactures for food colors.

Proposal for

Proposal for fresh sanction of credit facilities by way of take over (with enhancement) from HDFC Bank
a)

Sanction of Cash Credit Limit of Rs. 500.00 lacs for working capital requirement ( take over of Rs. 500.00 lacs from HDFC Bank).

b)

Sanction of Letter of Credit (Inland/Foreign) of Rs. 300.00 lacs for working capital requirement as a sub-limit of cash credit limit (take over of Rs. 300.00 lacs from HDFC Bank).

c)

Sanction of EPC/FBD/FBP/PCFC/PSCFC of Rs. 500.00 lacs for working capital requirement as a sub -limit of cash credit limit (take over of Rs. 500.00 lacs from HDFC Bank).

d)

Sanction of Corporate Loan of Rs. 200.00 lacs (take over of Working Capital Term Loan of Rs. 200.00 lacs from HDFC Bank).

e)

Sanction of LER limit of Rs. 25.00 lacs (equivalent to forward cover of Rs.500.00 lacs).

f)

Waiver of credit opinion report from existing bankers of M/s. DPL (HDFC Bank) and group concerns of M/s. DPL i.e. M/s. Dynemic Overseas (India) Limited based on justifications given in the proposal.

g) h)

Concession in processing fees at Rs. 1.00 lacs against norm of 1.00%. Permitting time of 30 days for completion of take over formalities with HDFC and creation of mortgage by CMC.

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Existing & Proposed Facilities Existing Limits (HDFC) 500.00 200.00 (500.00) (300.00) (15.00) 700.00 Total WC/LC/LER : To meet working capital requirements. Purpose Tenor Corporate Loan : For NWC built up. WC/LC/LER : 12 months. Corporate Loan : 24 months from the date of first disbursement. Repayment WC/LC/LER : On Demand. Corporate Loan : 23 monthly instalments of Rs. 834000 each and last instalment of Rs. 818000. Repayment to commence from December 2009. Interest to be serviced as and when debited. Security Primary Hypothecation of entire current assets (Pari passu) of the company (Both present & future). (Value as on 31.03.2009 is of Rs. 1326.42 lacs). Hypothecation over Plant and Machinery (Pari Passu) (Both present & future). (Value is of Rs. 1529.55 lacs as per empanelled valuer of Citi Bank). Collateral Pari Passu charge being shared by Citi Bank Limited on following properties :
i.

Type of Facility Cash Credit Limit Stock cum Book Debt Corporate Loan EPC/FBD/FBP/PCFC/PSCFC As a sub limit of Cash Credit Limit LC(Inland /Foreign) - As a sub limit of Cash Credit Limit LER Limit (as a sub-limit of CC limit)

Proposed + Inc / Dec ----+25.00 +25.00

(Rs. in lacs) Proposed Limits (Axis Bank) 500.00 200.00 (500.00) (300.00) +25.00 725.00

Factory Land and Building, Plant and Machinery at Plot No. 6401,6415,6416, G.I.D.C., Ankleshwar, Dist.Bharuch

admeasuring 5664 sq.mts. standing in name of M/s. Dynemic Products Limited.

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ii.

Office situated at B- 301,308,309,310 Satyamev Complex-1, Opp. New Gujarat High Court, S.G.Highway, Sola,

Ahmedabad-380 060, Gujarat admeasuring 4272 square feets standing in the name of M/s. Dynemic Products Limited.
iii.

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

Guarantee

Personal Guarantee of : Mr. B.K.Patel having net worth of Rs. 264.88 lacs (approx.) as on 31.03.2009. Mr. Ramesh B.Patel having net worth of Rs. 152.57 lacs (approx.) as on 31.03.2009. Mr. Dashrath P.Patel having net worth of Rs. 257.89 lacs (approx.) as on 31.03.2009. Mr. Shashikant P.Patel having net worth of Rs. 148.22 lacs (approx.) as on 31.03.2009. Mr. Dixit B.Patel having net worth of Rs. 36.33 lacs (approx.) as on 31.03.2009.

Credit enhancement Interest Rate LC Charges Processing fees Banking Arrangement

Nil.

BPLR - 3.50% i.e. 11.25% p.a. with monthly rests (presently BPLR @ 14.75%). Banks standard schedule of charges. Rs. 1 lacs for the sanctioned facilities plus applicable taxes. Multiple with Citi Bank (Proposed).

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

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Operational & Financial Analysis

(Rs. in lacs) Particulars 31.03.07 (Actuals) Gross Sales Net Sales Net Sales Growth Rate % Operating Profit Other Income PBDIT Depreciation Interest PBT PAT Cash Profit Operating Profit Margin % PBDIT Margin % PAT Margin % Paid up Capital - Equity Unadjusted TNW Unadjusted TOL Unadjusted TOL/ TNW Adjusted TNW Adjusted TOL Adjusted TOL/ TNW Interest Coverage Current Ratio DSCR NOCF Net Profit / NOCF NOCF / Interest NOCF / Financing Payments 3231.12 3231.12 12.79% 227.49 141.52 322.88 47.94 47.45 369.01 266.95 182.35 7.04% 9.99% 8.26% 1132.84 2649.73 1109.42 0.42 2710.84 1048.31 0.39 9.82 1.76 7.67 105.69 2.53 2.23 0.08 31.03.08 (Actuals) 3657.70 3657.70 13.20% 313.80 (5.36) 412.89 50.62 48.47 308.44 184.99 103.07 8.58% 11.29% 5.06% 1132.84 2707.33 1589.26 0.59 2725.68 1570.91 0.58 8.44 1.34 1.83 230.12 0.80 4.75 0.13 31.03.09 (Actuals) 4911.20 4911.20 34.27% 261.62 56.07 503.87 96.12 146.12 317.69 190.03 153.62 5.33% 10.26% 3.87% 1132.84 2764.96 2331.73 0.84 2828.34 2268.35 0.80 3.84 0.94 1.21 654.38 0.29 4.48 0.29 31.03.10 (Proj.) 6500.00 6500.00 32.35% 621.29 55.00 881.74 110.94 149.50 676.29 446.42 424.83 9.56% 13.57% 6.87% 1132.84 3078.84 2890.12 0.94 3237.48 2731.48 0.84 6.27 1.13 2.35 (269.99) (1.65) (1.81) (0.08) 31.03.11 (Proj.) 7500.00 7500.00 15.38% 729.97 65.00 1018.09 107.00 181.12 794.97 524.76 499.22 9.73% 13.57% 7.00% 1132.84 3471.06 3094.44 0.89 3629.70 2935.80 0.81 5.98 1.24 2.20 149.24 3.52 0.82 0.04

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Total Debt / NOCF (No. of years)

1.17

0.78

0.60

(0.45)

(0.00)

Rating The rating of the company as per SME Rating Tool comes to SME - 3 (ABS 31.03.2009). The segment wise scoring is as under: Particulars Overall Scoring Financial scoring Business scoring Management scoring Industry scoring Rating SME-3 SME-4 SME-3 SME-3 SME-3

CIBIL/RBI/ECGC Defaulters List/CA Verification/ Auditor Verification Particulars RBI Defaulters list ECGC Specific Approval List CIBIL Defaulters List CA Verification (Auditor) Auditors Firm Verification 13.11.2009 13.11.2009 As of Date 31.12.2008 31.07.2008 Position No match found. No match found. Satisfactory. Verified. Verified.

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

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

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b) The proposed expansion of the company is having huge market potentials. c) The Company is the leader in Manufacturing and export of food colours.

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

e) The business is 19 years old.

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

g) Since the company is into Manufacturing of Food Colours, the net margin normally remains between 5.00% - 9.00%. The net profit of the company was decreased from Rs. 266.95 lacs in FY06-07 (Aud) showing margin of 8.26% to Rs. 184.99 lacs in FY07-08 (Aud) showing margin of 5.06%. However, the same was maintained at Rs. 190.03 lacs in FY08-09 (Aud) showing margin of 3.87% due to decrease in margins in the chemical industry on account of raw material price fluctuations worldwide. The same was an aberration. But, now the industry is on revival and boom path. Considering the same, the company has estimated the profit of Rs. 446.42 lacs for FY09-10 @ margin of 6.87%, which may be accepted. h) The TOL/TNW of the company increased from 0.42 in FY06-07 (Aud) to 0.59 in FY07-08 (Aud) and to 0.84 in FY08-09 (Aud). The company has estimated TOL/TNW at 0.94 and 0.89 for FY09-10 and FY10-11 respectively on account of increased bank borrowings, which may be considered comfortable. i) The current ratio of the company was 1.76 in FY06-07 (Aud) which decreased to 1.34 in FY07-08 (Aud) and which further plummeted to 0.94 in FY08-09 (Aud), on account of capex expansion which will be completed in the current fiscal. The company has estimated its current ratio at 1.13 and 1.24 for FY09-10 and FY10-11, which is reasonably acceptable as regards to the liquidity position of the company.
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j) The NOCF is positive during FY 2008-09 (Aud) by Rs. 654.38 lacs. NOCF is estimated negative in FY 2009 10 at Rs. 269.99 lacs, as per projected financials submitted by the company on account of increase in stock and receivables which is keeping in line with the increase in turnover and the holding levels are as per the industry practice.

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

l) The main director is dynamic and has rich experience of more than 20 years in his line of activity. m) The company is a registered SSI unit.

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

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

Brief Background The SANKALP group is a chain of specialty theme based retail restaurant outlets. SRPL has been incorporated on 05.02.2002. However, the group is having its presence into the Hospitality business for more than two decades and has their esteemed reputation in the market. The company has been floated by the promoters Mr. Ramavatar Ranglal Goenka & his two sons Mr. Kailash Goenka and Mr. Robin Goenka. The Founder of this chain Mr. Ramavtar Goenka, ventured in to the business in 1981 with the opening of its flagship restaurant at Ashram Road, Ahmedabad, India and there has been no looking back since then. Knowing the South Indian cuisine very well, he set up the theme-based restaurant in Ahmedabad and got an overwhelming response.
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It has been the culmination of inherent desire to give customer an innovative specialty brand that gave birth to Sankalp Restaurant. With over forty highly profitable outlets and a large loyal customer base to boast off, the group is all set to launch into international market with its brands and food product exports merchandising too.

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

Repayment to start from April 2011

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Repayment

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

Interest to be serviced separately as and when debited.

Security & Guarantee Primary y EM of Land & Building at the Project Site located at FP # 4, TPS # 45, Survey # 948, Near AUDA Garden, Off. 100 ft. Road, Prahaladnagar, Near S. G. Highway, Ahmedabad 51 (Projected Cost Rs. 15.07 crores) y Hypothecation of entire movable fixed assets at the Project Site (Projected Cost Rs. 7.06 crores) Collateral Guarantee Nil. Personal guarantee of the directors of the company. The net worth details are as under: (Rs. in crores) Name of the Director Mr. Kailash R. Goenka Mr. Robin R. Goenka Mr. Ramavatar R. Goenka Total Net Worth 4.61 3.03 2.18 9.82

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

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Proposed Project SRPL has been incorporated as a Private Limited Company with main object of business of running hotel in all its aspects, lodging and boarding and to run, manage, acquire, control, own, purchase, hire the same including restaurant, caf, tavern, refreshment-room, lodginghouse keepers etc. The company has proposed to set up a three star hotel with 96 rooms at S.G. highway. The project is located at one of the best locations and in the newly developed area of Ahmedabad City. This is situated at Sankalp Hotel Near AUDA Garden, Off 100 ft. Road, Prahaladnagar, S.G.Highway, Ahmedabad - 380051. This area is the fastest developing area in the city and is surrounded by various business office premises, residential plots, various restaurants and other commercial complexes. Ahmedabad Railway Station is just 20 mins from the Hotel and International Airport is almost 30 mins from the location. Companys main purpose of the hotel is to encourage the corporate people who come for the business purposes. Hence the location of the project is ideal & the company wants to be a part of the growing popularity of this area.

COST OF PROJECT A Land & Building B Civil Construction and Civil Finishing C Furniture & Fixtures D Plant and Machinery E Preliminary and Pre-operative Cost F Contingencies TOTAL

Rs. in Crores 9.01 6.06 5.49 1.57 2.11 0.76 25.00

MEANS OF FINANCE A Equity Share Capital / Premium B Unsecured Loans C Term Loan TOTAL 3.00 7.00 15.00 25.00

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Against the total cost of project of Rs. 25.00 crores, the company has requested for Term Loan assistance of Rs. 15.00 crores. Hence, the margin to be brought in by way of promoters contribution would be 40% of the total CAPEX for the proposed hotel project of the company by way of share capital/premium and unsecured Loans.

Operational & Financial Analysis Particulars 31.03.08 31.03.09 31.03.10 31.03.11 31.03.12 (Aud) Net Sales / Receipts Operating Profit Other Income PBDIT Depreciation & Amortisation Interest & Financial Charges Profit Before Tax (PBT) Profit After Tax (PAT) Cash Accruals Share Capital Reserves & Surplus Misc. Exp. Not W/off Tangible Net Worth (TNW) USL as Quasi Equity Adjusted TNW Total Term Liabilities (TTL) Total Outside Liabilities (TOL) Net Sales Growth % PBDIT Margin % PAT Margin % ROCE TOL / TNW Adj. TOL / TNW TTL / TNW 483.62 63.32 12.80 76.12 7.56 4.98 63.58 46.63 54.19 1.00 74.64 0.00 75.64 0.00 75.64 30.20 156.95 0.31% 15.74% 9.64% 64.78% 2.07 2.07 0.40 (Aud) 489.64 85.68 0.51 86.19 7.49 7.59 71.11 48.96 56.45 1.00 123.59 0.00 124.59 0.00 124.59 11.00 169.30 1.38% 17.60% 10.00% 58.04% 1.36 1.36 0.09 (Est) 609.00 143.84 0.00 143.84 12.00 39.00 92.84 64.84 76.84 201.00 188.43 0.00 389.43 139.20 528.63 1646.80 1848.80 22.44% 23.62% 10.65% 6.06% 5.10 3.50 4.59 (Proj) 1333.00 476.00 0.00 476.00 121.00 146.00 209.00 136.00 257.00 301.00 324.43 0.00 625.43 139.20 764.63 2192.80 2579.80 118.88% 35.71% 10.20% 12.00% 4.35 3.37 3.73 (Proj) 2386.00 916.00 0.00 916.00 216.00 247.00 453.00 295.00 511.00 301.00 619.43 0.00 920.43 139.20 1059.63 1846.80 2497.80 78.99% 38.39% 12.36% 24.08% 2.86 2.36 2.16
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Adj. TTL / TNW Current Ratio Current Ratio w/o TL inst. Interest Coverage Ratio Net Operating Cash Flow (NOCF) Net Profit / NOCF NOCF / Interest NOCF / Financing Payments Total Debt / NOCF (No. of years)

0.40 1.60 1.60 15.29 (49.39) (0.94) (9.92) (0.28) (0.61)

0.09 1.42 1.52 11.36 51.87 0.94 6.83 0.23 0.21

3.12 1.51 2.41 3.69 77.57 0.84 1.99 0.26 4.11

2.87 1.44 2.80 3.26 300.00 0.45 2.05 0.50 7.31

1.74 1.52 3.24 3.71 650.00 0.45 2.63 0.59 2.84

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

Particulars Overall Scoring Financial scoring Business scoring Management scoring Industry scoring

Rating SME-2 SME-3 SME-2 SME-2 SME-4

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

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

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

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

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

e) The net profit of the existing business of the company was increased from Rs. 46.63 lacs (NP margin of 9.64%) in FY07-08 to Rs. 48.96 lacs (NP margin of 10.00%) in FY08-09. The PBDIT of the existing activity of the company was increased from Rs. 76.12 lacs (PBDIT margin of 15.74%) in FY07-08 to Rs. 86.19 lacs (PBDIT margin of 17.60%) in FY08-09 f) The TOL/TNW of the company remained at 2.07 in FY07-08 and 1.36 in FY08-09. The TOL/TNW of the company has been estimated at 5.10 for FY09-10 considering the Loan Against Property of Rs. 420.00 lacs taken for existing business and the proposed Term Loan disbursement of Rs. 1000.00 lacs during the current FY09-10.

g) The current ratio of the company remained above the benchmark level at 1.60 in FY07-08 and 1.42 in FY08-09. The same has been estimated at 1.51 for FY09-10 considering the existing business activity of the company during 2009-10. While
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considering the existing as well as proposed business activity of the company, the current ratio has been projected at 1.44 for FY10-11 and 1.52 for FY11-12.

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

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

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CASE STUDY 3
Details of case study

Applicant Details 1 Name of the Applicant 2 Registered Office M/S. Vishesh Distributors Pvt. Ltd. (New Relationship) 401, Kalasagar, Behind Ratnamani Complex, Jodhpur Cross Road, Satellite, Ahmedabad - 380015 F/101, Swagat Plaza I, Bopal Amli Road, Bopal, Ahmedabad. M: 9898052002 19, Rudra Square, Judges bunglow cross road, Bodakdev, Ahmedabad. M: 9898052616 Sola Timber Market, After Sola Over Bridge, Behind Mahindra Showroom, Sola, Ahmedabad. M: 9898052041 Tel. No. 079-26747999 Mobile: 9898052001 (Ketan Shah) E-Mail: [email protected] Private Limited Company Directors: 1. Mr. Ketan P. Shah (ACPPS7169H) 2. Mr. Pankaj C. Shah (ACYPS5908B) 3. Mrs. Dhara K. Shah (AMFPS2018F) 4. Mrs. Pina P. Shah (APAPS7788E) Company PAN No. AABCV2348Q y Certificate of incorporation No. U51229GJ2001PTC39423, Dated 17.04.2001 y Gujarat Sales Tax Registration No. 24074300543, dated 01.07.2002 y Import Export Code No. 0807004081, dated 24.05.2007 Distributorship of Pepsi products, Airtel, Levis Struss Signature

Showroom (Fragrances) Showroom (Airtel)

Godown (Beverage)

Contact Details 3 Constitution

Date of Establishment

Nature of Business

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Brief Background M/S. Vishesh Distributors Pvt. Ltd. Is a private limited company, held by close family members. The company was established in year 2001. The group has been engaged in distribution of branded company products like Pepsico beverage products, Airtel, Levis Struss Signature, Amul, TATA, fragment shop, etc. The group was earlier distributor for companies like Himalaya, Wipro, Godrej, Parker, Parle, Adani & Lays. Now, due to strong marketing channel, the company is also entered in agreement with Levis signature for distribution of garments to their outlets & franchises in all over the Gujarat. Further the company is also having 14 commercial vehicles for distribution activities. . Present Proposal To meet the increasing business demand for the various distribution schemes, the company has requested for the OD limit of Rs. 180.00 lacs. by takeover of existing LAP from HDFC Bank & also requested to allow the Cash credit limit of Rs. 55.00 lacs from Vijaya Bank. The company wants to expand their existing business activity by enhancing working capital limit for smooth business operation.

Purpose of loan Limits Proposed Rate of Interest Validity of Limits Security Details

For General Business Purpose OVERDRAFT - Rs. 180.00 lacs BPLR 2.50% i.e. 12.25% p.a. with monthly rests. (Presently BPLR is at 14.75% p.a.) 12 months only subject to review every year. Primary Security: NIL Collateral Security: Equitable Mortgage of following properties: 1. Residential flat situated at 401, Kalasagar Appartment, Opp. Star India Bazaar, Jodhpur, Satellite, Ahmedabad, belonging to Mr. Ketan P. Shah (Director). Estimated market value Rs. 80.00 lacs. 2. Shop at 101, 1st floor, Swagat Plaza I, Near Bopal Amli road, Bopal, Ahmedabad, belongs to Mrs. Dhara K. Shah (Director). Estimated market value Rs.41.00 lacs. 3. Shop at 19, 1st floor, Rudra Square, Near Bodakdev police chowki,
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Bodakdev, Ahmedabad, belongs to Mr. Ketan P. Shah (Director). Estimated market value Rs. 80.00 lacs. 4. Shop at 9-10, Ground floor, Sukriti Annexie, Near Prernatirth Bunglows-2, Satellite, Ahmedabad, belongs to Mr. Ketan P. Shah (Director). Estimated market value Rs. 100.00 lacs. Total market value of above properties is Rs. 301.00 lacs (Approx). Guarantee: Personal guarantee of: 1. Mr. Ketan P. Shah (Director & property holder). 2. Mrs. Dhara K. Shah (Director & property holder) 3. Mr. Pankaj C. Shah (Director) 4. Mrs. Pina P. Shah (Director) PDCs: Two PDCs for the entire overdraft limit each dated 3 months and 9 months from the date of first disbursement. 0.75% of the limit sanctioned plus applicable taxes (Non-refundable) Processing Fees As per banks extent guidelines. Documentation The company is facing competition from the other distributors in the market. Risk Associated Risk mitigates The above risk factor is mitigated as below: 1. Directors of the company, are having 10 years of rich experience in the field of distributorship 2. The company is frequently offering promotional schemes to its retail distributors 3. The company is having diverse clientele base in the market. The company has been visited by Mr. N. Ramachandran (AVP-SME), Ms. Disha Badani (Executive-SME), Mr. Nirav Ayer (Executive-SME), on 04.02.2010: Overall visit was found satisfactory. Rs. 5000/- plus applicable taxes (Non refundable) Login Fees

Unit Visit

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

CIBIL: Credit card repayment record of Director Mr. Ketan P. Shah: In CIBIL of Mr. Ketan, it is observed that one credit card account from Standard Chartered Bank, with overdue amount Rs. 0.43 lacs, was observed written-off. However, Mr. Ketan has submitted that it was a due of Rs. 1100/-. Due to non receipt of bill on time, there was interest charge levied on the actual amount. He, subsequently paid the actual amount, but not the interest amount, which as on date has become overdue of Rs. 43,723/- with interest charge. The director has also filed a case against SCB regarding the same, to the Consumer Education & Research Society and it is in process till date. The director has submitted the copy of the relevant documents to our bank.

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

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

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Performance details Particulars 31.03.2007 31.03.2008 31.03.2009 31.03.2010 31.03.2011 31.03.2012 Audited Sales Other Income Total Income PBDIT Depreciation Interest Interest & remuneration to Directors PBT PAT PBT Margin % Cash Accruals TNW(Unadjusted) Unsecured Loans from friends & relatives TNW (Adjusted) TOL(Adjusted) TOL(Unadjusted) TOL/TNW(Unadjusted) TOL/TNW(Adjusted) Debtors - Less than 6 months - More than 6 months Debtors holding (in days) Current Ratio Current Asset Current Liabilities 38.94 52.38 183.99 222.93 16.59 3.51 64.97 64.97 0.00 18.62 1.61 187.52 116.30 56.25 70.26 148.91 205.16 14.64 2.12 45.88 45.88 0.00 16.22 1.70 160.33 94.37 95.46 111.41 127.13 222.59 13.96 1.14 71.60 71.60 0.00 29.55 2.26 185.98 82.16 78.46 116.42 250.71 329.17 8.67 2.15 117.19 117.19 0.00 38.02 1.33 328.10 246.72 78.46 123.42 259.41 337.87 7.51 2.10 153.65 153.65 0.00 38.02 1.37 350.71 255.42 78.46 131.42 260.79 339.25 6.41 1.98 158.85 158.85 0.00 38.02 1.43 367.00 256.80 1273.31 23.49 1296.80 23.44 3.78 12.92 4.80 1.94 1.68 0.15 5.46 13.44 Audited 1032.33 32.39 1064.72 28.59 6.38 17.55 2.40 2.26 2.03 0.21 8.41 14.01 Audited Estimated Projected Projected 884.53 30.33 914.86 31.58 6.58 18.94 2.50 3.56 2.40 0.39 8.98 15.95 1125.00 30.00 1155.00 45.27 6.91 28.61 2.75 7.00 5.00 0.61 11.91 37.96 1475.00 30.00 1505.00 50.54 6.91 30.63 3.00 10.00 7.00 0.66 13.91 44.96 1525.00 30.00 1555.00 52.29 6.91 30.63 3.25 11.50 8.00 0.74 14.91 52.96

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

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

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

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

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

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

g) Despite of decrease in turnover of the company, profitability is on increasing trend. Also, PBDIT of the company is at quite higher level of Rs. 31.58 lacs for the FY 2008-09 & Rs. 28.59 lacs for the FY 2007-08, which can be considered as satisfactory.
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h) The company has been marginally increasing its TNW (unadjusted) Y-o-Y basis i.e. from Rs. 13.44 lacs in FY. 2006-07 to Rs. 15.95 lacs in FY. 2007-09. The TNW for the FY 2009-10 is estimated at higher side of Rs. 37.96 lacs, mainly due to ploughing back of entire profit and infusion of fresh capital by directors with decrease in unsecured Loans from directors. .

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

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CASE STUDY 4
Details of case study

Name of the Applicant Work Office Address

Suchi Wires (New Relationship)

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

Residence Address Contact Details

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

0265-2645431, 3098431 0265-2831649 (O) M: 9824034470 (Rajendrabhai) Proprietorship Firm

Constitution

Nature of Business

31.01.1992 (GST Registration No. Proprietor: Mr. Rajendra 24691601368) Vallavhbhai. Patel (SSI Registration No. 240191100480, dated PAN: ACSPP2512N 07.06.2007) Manufacturer of HB (Half hard bend) & MS (Mild stone) wires Date of Establishment

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

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

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

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

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

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

To prepare the wires according to customers requirement, work processes like wire drawing, cutting, bending etc. are performed. Iron wires are used in making grill of fridge back, table fan cover, stapler pins, u-pins, etc.  Major Suppliers of the applicant are: National Small Industries Corporation Ltd. (Ahmedabad) Shanti Fintrade Ltd. (Raipur) Roundwell Steel Corporation (Ahmedabad) Shree Vinayak Steels (Billimora)  Major Buyers of the applicant are: Gandhi Special Tubes Ltd. (Halol) Vijay jyot Seats Pvt. Ltd. (Halol) Lalit Engineers (Vadodara) Almonard Pvt. Ltd. (Vadodara)

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Present Proposal Purpose of Loan Limits Proposed Working capital limit CC limit of Rs. 50.00 lacs.

Rate of Interest & BPLR-2.25% i.e. 12.50% (BPLR at present is 14.75%) Validity of Limits Security Details 12 months only subject to review every year. Primary: Hypothecation of current assets of the firm. Collateral: A) Equitable mortgage of following properties: 1. Factory premise of Suchi Wires situated at Plot No. 428, GIDC, Ramangamdi, Por, Vadodara. Property belongs to Mr. Rajendra V. Patel (proprietor) & approximate market value of the property is Rs. 45.00 lacs. 2. Residential property situated at Deep Jyot-2, Block No. 404 & 405, Opp. Gujarat tractor, Vshwamitri, Vadodara. The property belongs to Mr. Rajendra V. Patel (proprietor) & approximate market value of the property is Rs. 15.00 lacs. B) Hypothecation of fixed assets of the firm. Guarantee: Personal guarantee of: 1. Mr. Rajendra Vallabhbhai Patel (Proprietor) 2. Mr. Kalpesh Patel (Brother-in-law of the proprietor) Visit to the location of Firm The unit of the firm was jointly visited by Mr. N Ramachandran (AVPSME), Mr. Sachin gupta (Deputy Manager-SME) & Mr. Sameep Buch (Manager-Axis Sales) on 12.10.2009. Overall conduct of the business was found regular. The visit was satisfactory. Processing Fees Login Fees 1.00% of sanctioned CC limit, plus applicable taxes (non-refundable). Rs. 5000/- plus applicable taxes, to be taken upfront (Non - refundable)

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Defaulter List

Whether the names of the borrower or any of the promoters/directors appear(s) in: RBI defaulters List: No (The firm name and proprietors name are not featuring in RBI defaulters list latest available of 31.12.2008) ECGC defaulter List: No CIBIL: Satisfactory

Credit Scoring Credit Score (Enclose Credit Scoring Sheet) Parameters Financial Business & Management Industry Overall Rating SME 2

Score (ABS 31/03/2009) 28.00 42.78 11.14 81.92

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Performance details

Particulars

31.03.2007 Audited

31.03.2008 31.03.2009 31.03.2010 Audited 204.49 1.69 206.18 5.16 1.23 0.22 3.71 3.71 1.80 4.94 26.27 Audited 431.02 3.39 434.41 11.13 1.31 1.27 8.55 8.55 1.97 9.86 34.08

31.03.2011

Estimated Projected 568.57 4.08 572.65 21.04 1.18 5.47 14.39 14.39 2.51 15.57 46.96 625.43 4.9 630.33 22.80 1.06 5.48 16.26 16.26 2.58 17.32 61.72

Sales Other Income Total Income PBDIT Depreciation Interest PBT PAT PBT Margin % Cash Accruals TNW(Unadjusted) Unsecured Loans from friends & relatives TNW (Adjusted) TOL(Adjusted) TOL(Unadjusted) TOL/TNW(Unadjusted) TOL/TNW(Adjusted) Debtors - Less than 6 months - More than 6 months Debtors holding (in days) Current Ratio Current Asset Current Liabilities

119.73 1.06 120.79 3.91 0.52 0.11 3.28 3.28 2.72 3.8 20.63

16.50 37.13 26.89 43.39 2.10 0.72 22.08 22.08 0.00 67.31 1.40 37.76 26.89

19.90 46.17 27.98 47.88 1.82 0.61 33.74 33.74 0.00 60.22 1.44 43.57 30.36

76.03 110.11 64.05 140.08 4.11 0.58 74.13 74.13 0.00 62.78 1.77 113.59 64.05

68.53 115.49 80.95 149.48 3.18 0.70 94.76 94.76 0.00 60.83 1.66 134.55 80.95

66.53 128.25 83.95 150.48 2.44 0.65 104.24 104.24 0.00 60.83 1.76 147.88 83.95

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Analysis a) The market reputation of promoter is satisfactory.

b)

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

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

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

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

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

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CHAPTER 9 FINDINGS
 Credit appraisal is done to check the commercial, financial & technical viability of the project proposed its funding pattern & further checks the primary or collateral security cover available for the recovery of such funds  Credit is the core activity of the banks & important source of their earnings which go to pay interest to depositors, salaries to employees & dividend to shareholders  Credit & risk go hand in hand  In the business world risk arises out of:y y y y Deficiencies / lapses on the part of the management Uncertainties in the business environment Uncertainties in the industrial environment Weakness in the financial position

 Banks main function is to lend funds/ provide finance but it appears that norms are taken as guidelines not as a decision making  A bankers task is to indentify/assess the risk factors/parameters & manage/mitigate them on continuous basis  The Credit Appraisal process adopted by the bank take into account all possible factors which go into appraising the risk associated with a loan

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

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 The assessment of financial risk involves appraisal of the financial strength of the borrower based on performance & financial indicators  The norms of the bank for providing loans are not stringent, i.e. even if a particular client is not having the favorable estimated and financial performance, based on its past record and future growth perspective, the loan is provided.  By providing various schemes of loans, Axis bank tries to cater to the financial requirements of almost all the types of SME units.

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CHAPTER 10 CONCLUSION
 Finance management is the backbone of any organizations and hence yields a number of job options ranging from strategic financial planning to sales.  From the study of Credit appraisal of SME, it can be concluded that credit appraisal should therefore be based on the following factors, the same are applied at Axis Bank: y y y y y Financial performance Business performance Industry outlook Quality of management Conduct of account

 Axis Bank loan policy contains various norms for sanction of different types of loans. These all norms do not apply to each & every case. Axis Bank norms for providing loans are flexible & it may differ from case to case.  Usually, it is seen that credit appraisal is basically done on the basis of fundamental soundness. But, after different types of case studies, our conclusion was such that credit appraisal system is not only looking for financial wealth. Other strong parameters also play an important role in analyzing credit worthiness of the firm/company.  In all, the viability of the project from every aspect is analyzed, as well as type of business, industry, promoters, past records, experience, projected data and estimates, goals, long term plans also plays crucial role in increasing chances of getting project approved for loan.

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

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