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CORPORATE

CREDIT


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ACKNOWLEDGEMENT

This project report is guidance and knowledge imparted to me by mentors at Canara

Bank, SME Sulabh, Circle Office, Mumbai during my summer internship. It was very

valuable learning experience for me.

I would like to thank

Mr. Saurav Mitra Senior Manager (SME Sulabh, Circle Office, Mumbai)

Mrs. Sherly Madhubabu Credit Monitoring Officer (SME Sulabh, Circle Office,

Mumbai)

Mrs. Ranjana Brahme Officer (HRM Section)

I would like to give special thanks to our project guide Mrs. Sherly Madhubabu, because

of whom I was able to gain the insights of various departments in Canara Bank within a

short time period of two months. Last but not the least I would like to thank each and

every staff member & entire non staff members of Canara Bank family for their support

and help as and when required.

My special thanks and gratitude to Mrs. Ranjana Brahme, who were instrumental in

granting this project to me.

Ashish Chanchlani


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Declaration

To,

SME Sulabh,

Canara Bank,

Mumbai (Circle Office).

Sir,

I hereby declare that the project work entitled CORPORATE CREDIT has been

written and submitted, is my original work the empirical findings in the report are

based on information collected by me and not copied from elsewhere.

I understand that detection of any such coping is liable to be punished in any way

the school deems fit.

Ashish Chanchlani


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CHAPTER PLAN

TABLE OF CONTENT

CHAPTER 1 Executive Summary.

CHAPTER 2 Objectives.

CHAPTER 3 Research methodology.

CHAPTER 4 Industry profile.

CHAPTER 5 Company profile

5.1 History of Canara Bank

5.2 Vision.

5.3 Mission

CHAPTER6 Trade Finance

6.1 Concept Of Trade Finance.

6.2 Pre-Shipment Finance

6.3 Post-Shipment Finance..

6.4 Letter Of Credit..

CHAPTER 7 Assessment of Working Capital & Term Loans

7.1 Working Capital and Its Assessment

7.2 Assessment of Term Loans

CHAPTER 8 Credit Appraisal

8.1 INTRODUCTION..

8.2 PRE-SANCTION APPRAISAL AND POST

SANCTION SUPERVISION..CHAPTER 9 Case StudyABC Parts Pvt. Ltd

CHAPTER 10 Conclusion

Bibliography..


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Chapter 1 EXECUTIVE SUMMARY

This project was undertaken at the Canara Bank, SME Sulabh, Circle Office Mumbai.

Financial requirements for Project Finance and Working Capital purposes are taken care

of at the SME Sulabh. Companies that intend to seek credit facilities approach the bank.

Primarily, credit is required for following purposes:

a. Working capital financeb. Term loan for mega projectsc. Non Fund Based Limits like Letter of Guarantee, Letter of Credit etc.

Project Financing discipline includes understanding the rationale for project financing,

how to prepare the financial plan, assess the risks, design the financing mix, and raise the

funds. In addition, one must understand some project financing plans have succeeded

while others have failed. A knowledge-base is required regarding the design of

contractual arrangements to support project financing; issues for the host government

legislative provisions, public/private infrastructure partnerships, public/private financing

structures; credit requirements of lenders, and how to determine the project's borrowing

capacity; how to analyze cash flow projections and use them to measure expected rates of

return; tax and accounting considerations; and analytical techniques to validate the

project's feasibility

Project finance is different from traditional forms of finance because the credit riskassociated with the borrower is not as important as in an ordinary loan transaction; what

are most important are the identification, analysis, allocation and management of every

risk associated with the project.


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The purpose of this project is to explain, in a brief and general way, the manner in which

risks are approached by financiers in a project finance transaction. Such risk

minimization lies at the heart of project finance. Efficient management of credit portfolio

is of utmost importance as it has a tremendous impact on the Banks assets quality &

profitability. The ongoing financial reforms have no doubt provided unparallel

opportunities to banks for growth, but have simultaneously exposed them to various risks,

which need to be effectively managed.

The study has been conducted with the purpose of getting in-depth knowledge about the

credit appraisal and credit risk management procedure in the organization for the above

said first two purposes.


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Chapter2 OBJECTIVE

To study broad contours of management of credit, the loan policy, credit appraisal

for business units i.e. for working capital loan or Term Loan

To utilize the above learning and study the creditworthiness organizations those

approach CANARA BANK for credit. This would entail undertaking of the

following procedures:

i. Management Evaluationii. Business / Industry Evaluation

iii. Technical Evaluationiv. Legal Evaluationv. Financial Evaluation

vi. Credit Risk Rating


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Chapter3 RESEARCH METHODOLOGY

The methodology being used involves secondary source of information.

Secondary sources of Information

Loan Policy and Internal Circulars of the bank.

Research papers, power point presentations and PDF files prepared by the bank

and its related officials.

Referring to information provided by CIBIL, Income Tax files, Registrar of

Companies (Ministry of Corporate Affairs), and Auditor reports.


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Chapter4 INDUSTRY PROFILE

THE INDIAN BANKING INDUSTRY

The last decade has seen many positive developments in the Indian banking sector. The

growth in the Indian Banking Industry has been more qualitative than quantitative and it

is expected to remain the same in the coming years. Based on the projections made in the

"India Vision 2020" prepared by the Planning Commission, the report forecasts that the

pace of expansion in the balance-sheets of banks is likely to decelerate. The total assets of

all scheduled commercial banks by end-March 2010 is estimated at Rs 40,90,000 crores.

That will comprise about 65 per cent of GDP at current market prices as compared to 67

per cent in 2002-03. Bank assets are expected to grow at an annual composite rate of 13.4

per cent during the rest of the decade as against the growth rate of 16.7 per cent that

existed between 1994-95 and 2002-03. It is expected that there will be large additions to

the capital base and reserves on the liability side.

The Indian Banking Industry can be categorized into non-scheduled banks and scheduledbanks. Scheduled banks constitute of commercial banks and co-operative banks. There

are about 67,000 branches of Scheduled banks spread across India. As far as the present

scenario is concerned the Banking Industry in India is going through a transitional phase.

The Public Sector Banks (PSBs), which are the base of the Banking sector in India

account for more than 78 per cent of the total banking industry assets. Unfortunately they

are burdened with excessive Non Performing assets (NPAs), massive manpower and lack

of modern technology. On the other hand the Private Sector Banks are making

tremendous progress. They are leaders in Internet banking, mobile banking, phone

banking, ATMs. As far as foreign banks are concerned they are likely to succeed in the

Indian Banking Industry.


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Currently, banking in India is generally fairly mature in terms of supply, product range

and reach-even though reaching rural India still remains a challenge for the private sector

and foreign banks. In terms of quality of assets and capital adequacy, Indian banks are

considered to have clean, strong and transparent balance sheets relative to other banks in

comparable economies in its region. The Reserve Bank of India is an autonomous body,

with minimal pressure from the government. The stated policy of the Bank on the Indian

Rupee is to manage volatility but without any fixed exchange rate-and this has mostly

been true. With the growth in the Indian economy expected to be strong for quite some

time-especially in its services sector-the demand for banking services, especially retail

banking, mortgages and investment services are expected to be strong. One may also

expect M&As, takeovers, and asset sales.

In March 2006, the Reserve Bank of India allowed Warburg Pincus to increase its stake

in Kotak Mahindra Bank (a private sector bank) to 10%. This is the first time an investor

has been allowed to hold more than 5% in a private sector bank since the RBI announced

norms in 2005 that any stake exceeding 5% in the private sector banks would need to be

vetted by them.

Currently, India has 88 scheduled commercial banks (SCBs) - 28 public sector banks

(that is with the Government of India holding a stake), 29 private banks (these do not

have government stake; they may be publicly listed and traded on stock exchanges) and

31 foreign banks. They have a combined network of over 53,000 branches and 17,000

ATMs. According to a report by ICRA Limited, a rating agency, the public sector banks

hold over 75 percent of total assets of the banking industry, with the private and foreign

banks holding 18.2% and 6.5% respectively.

The policy makers, which comprise the Reserve Bank of India (RBI), Ministry of

Finance and related government and financial sector regulatory entities, have made

several notable efforts to improve regulation in the sector. The sector now compares

favorably with banking sectors in the region on metrics like growth, profitability and non-


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performing assets (NPAs). Indian banks have compared favorably on growth, asset

quality and profitability with other regional banks over the last few years. The banking

index has grown at a compounded annual rate of over 51 per cent since April 2001 as

compared to a 27 per cent growth in the market index for the same period.

The interplay between policy and regulatory interventions and management strategies

will determine the performance of Indian banking over the next few years. Management

success will be determined on three fronts:

i. Fundamentally upgrading organizational capability to stay in tune with thechanging market

ii. Adopting value-creating M&A as an avenue for growthiii. Continually innovating to develop new business models to access untapped

opportunities

Opportunities and Challenges for the Players

The bar for what it means to be a successful player in the sector has been raised. Four

challenges must be addressed before success can be achieved.

i. The market is seeing discontinuous growth driven by new products and servicesthat include opportunities in credit cards, consumer finance and wealth

management on the retail side, and in fee-based income and investment banking

on the wholesale banking side. These require new skills in sales & marketing,

credit and operations

ii. Banks will no longer enjoy windfall treasury gains that the decade-long seculardecline in interest rates provided

iii. With increased interest in India, competition from foreign banks will onlyintensify


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iv. Given the demographic shifts resulting from changes in age profile and householdincome, consumers will increasingly demand enhanced institutional capabilities

and service levels from banks


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Chapter5 COMPANY PROFILE

5.1.History of Canara Bank

Late Sri Ammembal Subba Rao Pai a philanthropist, founded Canara Bank as 'Canara

Bank Hindu Permanent Fund' in 1906, this small seed blossomed into a limited company

as 'Canara Bank Ltd.' in 1910 and became Canara Bank in 1969 after nationalization.

"A good bank is not only the financial heart of the community, but also one with an

obligationof helping in every possible manner to improve the economic conditions of the

commonpeople" - A. Subba Rao Pai.

Founding Principles

1. To remove Superstition and ignorance.

2. To spread education among all to sub-serve the first principle.

3. To inculcate the habit of thrift and savings.

4. To transform the financial institution not only as the financial heart of the community

but the social heart as well.

5. To assist the needy.

6. To work with sense of service and dedication.

7. To develop a concern for fellow human being and sensitivity to the surroundings with

a view to make changes/remove hardships and sufferings.


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Sound founding principles, enlightened leadership, unique work culture and remarkable

adaptability to changing banking environment have enabled Canara Bank to be a

frontlinebanking institution of global standards.

5.2.Mission

To provide quality banking services with enhanced customer orientation, higher value

creation for stakeholders and to continue as a responsive corporate social citizen byeffectively blending commercial pursuits with social banking.

5.3.VISION

To emerge as a Best Practices Bank by pursuing global benchmarks in profitability,

operational efficiency, asset quality, risk management and expanding the global reach.

BRANCHES & OFFICES

Our Bank has a network of more than 3002 branches, spread over 22 States/4 Union

Territories of the country and, which are administered through

Head Office at Bangalore:- Organizational Structure

34 Circle Offices


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BRANCHES AND OFFICES ABROAD

The Bank has overseas presence as below:

1. BRANCH at LONDON.

2. BRANCH at HONG KONG.

3. BRANCH at SHANGHAI, CHINA.

4. A joint venture Bank in Moscow - COMMERCIAL BANK OF INDIA LLC -

(CBIL) with State Bank of India on 60:40 bases.

Canara Bank have identified 21 overseas centers for opening branches/offices, out ofwhich, Canara Bank have approval from RBI for opening branches in South Africa,

Germany, Bahrain, Sultanate of Oman , Qatar, USA, Tanzania, Japan, Sharjah (UAE),

Brazil and a Second Branch in UK.

The Bank's International Operations is being supported by a network of 537

Correspondent Banks, spread over 94 Countries.

Further, Bank has rupee drawing arrangement with 20 Exchange Houses and 18 Banks in

the Middle East for channelizing the remittances of expatriates.


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Chapter 6 TRADE FINANCE

6.1Concept of Trade Finance

Credit and finance is the life blood of any business whether domestic or international. It

is more important in the case of export transactions due to the prevalence of novel non-

price competitive techniques encountered by exporters in various nations to enlarge their

share of world markets. The selling techniques are no longer confined to mere quality,

price or delivery schedules of the products but are extended to payment terms offered by

exporters. Liberal payment terms usually score over the competitors not only of capital

equipment but also of consumer goods. The payment terms however depend upon the

availability of finance to exporters in relation to its quantum, cost and the period at pre-

shipment and post-shipment stage. This project is an attempt to throw light on the various

sources of export finance available to exporters, the schemes implemented by ECGC and

EXIM for export promotion and the recent developments in the form of tie-EXIM tie-ups,

credit policy announced by RBI in Oct 2001 and TRIMS.

Export finance is a short term working capital finance allowed to an exporter. Finance

and credit are available to help not only export production but also to sell overseas

customers on credit.


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Need for Trade Finance

To cover commercial & Non-commercial or political risks attendant on granting

credit to a foreign buyer.

To cover natural risks like an earthquake, floods etc.

An exporter may avail financial assistance from any bank which considers the ensuing

factors:-

Availability of the funds at the required time to the exporter.

Affordability of the cost of funds.


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6.2Pre-Shipment finance

Pre-shipment finance which is generally called packing credit is essentially a working

capital advance made available for the specific purpose of procuring or processing or

manufacturing of goods meant for export.

Two essential features of packing credit advances are:-

a) There should be an export order or a letter of credit.

b) The advances to be liquidated from the relative export proceeds.

Importance of Finance At Pre-Shipment Stage:

To purchase raw material, and other inputs to manufacture goods. To assemble the goods in the case of merchant exporters. To store the goods in suitable warehouses till the goods are shipped. To pay for packing, marking and labeling of goods. To pay for pre-shipment inspection charges. To import or purchase from the domestic market heavy machinery and other

capital goods to produce export goods.

To pay for consultancy services. To pay for export documentation expenses.


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Different Forms of Pre-Shipment Finance:

Cash Packing Credit Loan. Advance against Hypothecation. Advance against Pledge. Advance against Exports through Export Houses. Advance against Duty Draw Back (DBK).

6.3 Post-Shipment Finance

It is essentially an advance against receivables which will be in the form of shipping

documents.

Definition:

Credit facility extended to an exporter from the date of shipment of goods till the

realization of the export proceeds is called Post-shipment Credit.

Importance of Finance At Post-Shipment Stage:

To pay to agents/distributors and others for their services. To pay for publicity and advertising in the overseas markets. To pay for port authorities, customs and shipping agents charges. To pay towards export duty or tax, if any. To pay towards ECGC premium. To pay for freight and other shipping expenses. To pay towards marine insurance premium, under CIF contracts. To meet expenses in respect of after sale service.


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To pay towards such expenses regarding participation in exhibitions and tradefairs in India and abroad.

To pay for representatives abroad in connection with their stay board.

Different Forms of Post-Shipment Advances

Export bills purchased / discounted Export bills negotiated Advances against bills sent on collection basis. Advances against exports on consignment basis. Advances against undrawn balances. Advances against duty drawback.


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6.4 Letter of Credit

Introduction:

This is one of the most popular and more secured of method of payment in recent times

as compared to other methods of payment. A L/C refers to the documents representing

the goods and not the goods themselves. Banks are not in the business of examining the

goods on behalf of the customers. Typical documents, which are required includes

commercial invoice, transport document such as Bill of lading or Airway bill, an

insurance documents etc. L/C deals in documents and not goods.

A letter of credit is a banking mechanism which allows importers to offer secure terms to

exporters.

A Letter of Credit can be defined as an undertaking by importers bank stating that

payment will be made to the exporter if the required documents are presented to the

bank within the validity of the L/C.

Parties Involved In Letter Of Credit:

Applicant: The buyer or importer of goods

Issuing bank: Importers bank, who issues the L/C

Beneficiary: The party to whom the L/C is addressed. The Seller or supplier of goods.

Advising bank: Issuing banks branch or correspondent bank in the exporters country to

whom the L/C is send for Onward transmission to the beneficiary.


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Confirming bank: The bank in beneficiarys country, which Guarantees the credit on the

request of the issuing Bank.

Negotiating bank: The bank to whom the beneficiary presents his Documents for

payment under L/C

All letters of credit contain these elements:

A payment undertaking given by the bank (issuing bank).

On behalf of the buyer (applicant).

To pay a seller (beneficiary).

A given amount of money.

On presentation of specified documents representing the supply of goods within

specific time limits.

These documents conforming to terms and conditions set out in the letter of credit.

Documents to be presented at a specified place.

Put simply, the issuing bank's role is twofold:

To guarantee to the seller that if compliant documents are presented, the bank will

pay the seller the amount due. This offers security to the seller - the bank says in

effect "We will pay you if you present documents (XYZ)"

To examine the documents, and only pay if these comply with the terms and

conditions set out in the letter of credit. This protects the buyer's interests the

bank says "We will only pay your supplier on your behalf if they present

documents (XYZ) that you have asked for"


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Chapter 7ASSESSMENT OF WORKING CAPITAL AND

TERM LOANS

7.1WORKING CAPITAL AND ITS ASSESSMENT

The objective of running any industry is earning profits. An industry will require funds to

acquire fixed assets like land and building, plant and machinery, equipments, vehicles

etc and also to run the business i.e. its day to day operations.

Working capital is defined, as the funds required for carrying the required levels of

current assets to enable the unit to carry on its operations at the expected levels

uninterruptedly. Thus working capital required (WCR) is dependent on

i. The volume of activity (viz. level of operations i.e. Production and Sales)ii. The activity carried on viz. manufacturing process, product, production

programme, and the materials and marketing mix.

The purpose of assessing the WC requirement of the industry is to determine how the

total requirements of funds will be met. The two sources for meeting these requirementsare the units long-term sources (like capital and long term borrowings) and the short-

term borrowings from banks. The long-term resources available to the unit are called the

liquid surplus or Net Working Capital (NWC).

It can be explained by visualizing the process of setting up of industry. The units starts

with a certain amount of capital, which will not normally be sufficient, even to meet the

cost of fixed assets. The unit, therefore, arranges for a long-term loan from a financial

institution or a bank towards a part of the cost of fixed assets. From these two sources

after meeting the cost of fixed assets some funds remain to be used for working capital.

This amount is the Net Working Capital or Liquid Surplus and will be one of the sources

of meeting the working capital requirements.


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The remaining funds for working capital have to be raised from banks; banks normally

provide working capital finance by way of advantage against stocks and sundry debtors.

Banks, however, do not finance the full amount of funds required for carrying inventories

and receivables: and normally insist on the stake of the enterprise at every stage, by way

of margins. Bank finance is normally restricted to the amount of funds locked up less a

certain percentage of margins. Margins are imposed with a view to have adequate stake

of the promoter in the business both to ensure his adequate interest in the business and to

act as a protection against any shocks that the business may sustain. The margins

stipulated will depend on various factors like salability, quality, durability, price

fluctuations in the market for the commodity etc. taking into account the total working

capital requirements as assessed earlier, the permissible limit, up to which the bank

finance cab be granted is arrived.

While granting working capital advances to a unit, it will be necessary to ensure that a

reasonable proportion of the working capital is met from the long-term sources viz. liquid

surplus. Normally, liquid surplus or net working capital be at least 25% of the working

capital requirement (corresponding to the benchmark current ratio of 1.33), though this

may vary depending on the nature of industry/ trade and business conditions.

Various methods for assessment of Working Capital are:

1. Operating cycle method2. Traditional method of assessment of working capital requirement

a. Raw materialb. Stock in processc. Finished goodsd. Sundry debtors (receivables)e. Expenses

3. Projected Annual Turnover Method for SME units (Nayak Committee)


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4. MPBF Method (Tandon and Chore Committee Recommendations)5. Projected Balance Sheet Method (PBS)

7.2Assessment of Term Loans

Term Loans are generally granted to finance capital expenditure, i.e. for acquisition of

land, building and plant and machinery, required for setting up a new industrial

undertaking or expansion/diversification of an existing one and also for acquisition of

movable fixed assets. Term Loans are also given for modernization, renovation, etc. to

improve the product quality or increase the productivity and profitability.

The basic difference between short-term facilities and term loans is that short-term

facilities are granted to meet the gap in the working capital and are intended to be

liquidated by realization of assets, whereas term loans are given for acquisition of fixed

assets and have to be liquidated from the surplus cash generated out of earnings. They

are not intended to be paid out of the sale of the fixed assets given as security for the

loan. This makes it necessary to adopt a different approach in examining the application

of the borrowers for term credits.

For the assessment to Term Loan Techno Economic Feasibility Study is done. The

success of a feasibility study is based on the careful identification and assessment of all

of the important issues for business success. A detailed Project Report is submitted by an

entrepreneur, prepared by a approved agency or a consultancy organization. Such report

provides in-depth details of the project requesting finance. It includes the technical

aspects, Managerial Aspect, the Market Condition and Projected performance of the

company. It is necessary for the appraising officer to cross check the information

provided in the report for determining the worthiness of the project.

The feasibility study is a part of Credit Appraisal process and the same is discussed in the

following chapter.


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Chapter 8 CREDIT APPRAISAL

8.1INTRODUCTION

Credit appraisal is a holistic exercise which starts from the time a prospective

borrower walks into the branch and culminates in credit delivery and monitoring

with the objective of ensuring and maintaining the quality of lending and managing

credit risk within acceptable limits.

There are two types of proposals that are received by the Bank for funds. The first types

of proposals are for starting a new project or for setting up a new company, also known

as project financing and the other proposals are for additional funds requirements

(working capital). Financial requirements for Project Finance and Working Capital

purposes are taken care of at the Credit Department. Companies that intend to seek credit

facilities approach the bank. Primarily, credit is required for following purposes:-

1. Working capital finance

2. Term loan for mega projects

3. Non fund based Limits like Letter of Guarantee, Letter of Credit

Prior to nationalization the Bank had a security centric approach for sanctioning

the proposals i.e. the Bank sanctioned the proposal for credit facility to the company

when it had security against the amount given. There are two types of securities,

primary and collateral. The primary security is the asset created out of the Banks

finance. Collateral security refers to other assets owned by the company or its directors.


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Previously there were no regulatory issues or capital adequacy issues. But it was

observed that during boom period many people who did not even had the knowledge

about a particular industry jumped in and were interested for finance. Eventually such

companies resulted to be failures. RBI norms for Non- Performing Assets (NPA) are

very strict. Thus to avoid many of the accounts becoming NPAs the Bank changed its

security centric approach.

The process of credit appraisal would begin with the selection of the proponent. It

would involve appraising the background of the proponent/ management, commercial,

technical and financial appraisal.

Appraisal of credit facilities would comprise two distinct segments:

a) Appraising the acceptability of the customer

b) Assessment of the customers credit needs.

The appraisal would be different in respect of:

a) Personal loans for consumer durables, houses etc;

b) Loans to tiny business enterprises;

c) Loans to agriculturalists; and,

d) Credit facilities to firms, corpora te and others for business/trade/industry.


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8.1.1 Background of the proponent/management

The identification of the borrower is done properly through scrutiny of his

antecedents, experience, competence, integrity, initiative etc. This may be done by

obtaining status reports from previous bankers or meaningful assessment of his

dealings with the bank, if banking with it. In case of corporate, the management

structure, the background of top management, needs to be scrutinized. The names

of prospective borrowers/promoters should not appear in the list of defaulters

published by RBI/ECGC etc or in any other list of undesirable customers. If so, ca re

should be taken. To strengthen the credit appraisal further details of the status report

received from another bank may be ascertained by the appraising officer by personallyvisiting his counterpart in the other bank remitting the report for a personal discussion.

The gist of such a discussion may be recorded in a file and brought out in the

proposal. KYC guidelines as framed by RBI and adopted by Bank are to be followed by

the branches. In case of borrowers/promoters who have been identified as willful

defaulters by banks and advised by RBI, there are certain penal provisions

applicable. These are required to be complied without fail by branches.

8.1.2 Commercial appraisal

The nature of the product, demand for the same, the existing and perceived

competition in the segment, ability of the proponents to withstand the same,

government policies governing the industry, etc. need to be taken into consideration. The

trade practices in respect of the product should be thoroughly understood


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8.1.3 Technical appraisal

Technical appraisal of the project needs to be carried out for industrial activity proposals

beyond the cut- off limits prescribed from time to time. Such appraisal may be carried

out in-house by technical officers working in Technical Appraisal

Department/Technical Appraisal cells or officers having technical expertise for the

same or by an outside agency as determined by the appropriate authority. Where

technical appraisal is carried out by All India Financial Institutions. PSU

Banks/other leading banks having expertise I the area and the same ma y be accepted for

an appraisal purpose

In case of service industry or preservation industry TEV study is not applicable

unless the goods to be preserved require some change in their state through some

industrial process.

Exemptions from fresh techno- economic appraisal shall be available in the following

categories:

a) Where appraisal has been carried out by all India financial institutions/ Banks and

such FIs/Banks themselves would be taking up exposure.

b) Where appraisal has been carried out by leader of WC consortium and the

branch/sanctioning authority observing no serious differences with such appraisal.

c) In case of AAA (LC1 to LC2 or equivalent) /AA (LC3 to 4 or equivalent)

rated accounts with other banks, where our bank proposes to join the consortium and/or

sanction limits under multiple banking arrangement for the existing activity of the

company/fir m, and the sanctioning authority decides not to insist for fresh TEV study.

d) In case of well conducted existing accounts with credit rating of AAA (LC1 to

LC2) and AA (LC3 to LC4) where only additional working capital limits are


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Where higher limits are considered, detailed analysis of the financial health would

be made and the following ratios computed:-

Current ratio

Total outside liabilities/equity ratio

Profit before interest and taxes/interest ratio

Profit before tax/ net sales ratio

Inventory + receivables/Sales ratio

DSCR if the borrower enjoys any term loan with any bank/ FI even if no TL is

being considered by the bank


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8.2PRE-SANCTION APPRAISAL AND POST SANCTION SUPERVISION

Effectiveness of pre-sanction appraisal and post-sanction follow-up system in a bank can

be gauged from the level of NPAs in its credit portfolio. Both the systems are of great

significance particularly in the present scenario when the economy is globalizing and

financial reforms are taking place, thereby exposing the bank to greater credit related

risks. Such risks may include business industry outlook, financials, interest, quality of

management, etc. a sound system helps banks to identify and sanction loan proposals that

are technically, financially, commercially and economically sound.

8.2.1 Pre-sanction appraisal of projects

A project report is a document which provides information about the proposed activity-

product/service to be undertaken both in terms of quantity and value, process of

manufacture, technology to be used, type of raw materials and machinery required

and their supply position. The project report also provides information about the

demand and supply position of the product, profitability projections, funds flow

statements, schedule of repayment of the bank loan and important ratios. In

addition to this it provides position of availability of licenses, permissions if any

required from the government agencies, local/international market conditions and

environmental factors having influence on the project for successful implementation

of any project the background, experience, qualification of entrepreneurs/promoters

also matter.

The various aspects which should be examined while appraising any project are discussed

as under:


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Provision for contingencies to meet any unforeseen expenses

(ii) Means of finance

The cost of project can be financed through the following means/sources:

Capital brought in by the promoters and shareholders in the form of

equity/debentures

Unsecured long-term loans and deposits raised from friends and relatives to

remain in business till repayment of banks loans

Term loans from institutions/banks which a re repayable over a period of time

Deferred term credits by suppliers of plant/machinery, payable in installments

over a period of time

Raising funds through Euro-issues, foreign currency loans, premium on capital

issues, etc. which are sometimes comparatively cheaper means of finance

Subsidies and development loans provided by the central/state government in

notified backward districts to attract entrepreneurs

(iii) Profitability projections

The profitability projections should be prepared based on assumptions which are realistic

neither optimistic nor pessimistic. Projections are worked out for a period covering the

repayment of loans. The appraisal of the projections should cover scrutiny of variousitems of revenue and cost to ensure that these are achievable. While preparing

profitability projections, the past trends of performance in industry and other

environmental factors influencing the cost and revenue items should also be considered

objectively.


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(iv) Break-Even Analysis

Analysis of break-even point of a business enterprise would help in knowing the level of

output or sales at which would break-even, i.e. there is neither profit nor loss. The break-

even analysis can help in making vital decisions relating to fixation of selling price, make

or buy decision, maximizing production of the item giving higher contribution etc.

further, the break-even analysis can also help in understanding impact of important cost

elements, such as, power, raw materials, labor etc. and optimizing product-mix to

improve project profitability.

(v) Fund-Flow Statement

A fund-flow statement is often described as a working capital flow statement. It is

derived by comparing the balance sheets on two specified dates and finding out the net

changes in the various items appearing in the balance sheets.

A critical analysis of the statement shows the various changes in sources and applications

of funds and to ultimately provide the position of net funds available with the business

for repayment of the loans.

(vi) Balance sheet projections

Study of projected balance sheet statements provides the position of assets and liabilities

of a unit at a particular time. An appraisal of the projected balance sheet data would

reveal whether the concern is healthy, growing, and has a promising future or is

stagnating.


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(vii) Financial ratios

While analyzing the financial aspects of project, it would be advisable to analyze the

important financial ratios over a period of time as it would tell us a lot about a units

liquidity position, managements stake in the business capacity to service the debts, etc.

the financial ratios which are considered important may include debt-service coverage

ratio, debt-equity ratio, current ratio, net profit to sales ratio, etc.

But financial analysis has certain limitations and it does not disclose some of the

following critical factors:

Managerial competence

Technological competence

Turnover of people

Obsolescence of technology

Competition

Marketing

Thus the above aspects are also considered while appraising a project to make the

appraisal activity more meaningful.


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2. Appraisal of market demand and potential

The market demand and potential need to be examined for each product item after taking

into account the demand/supply position, availability of substitutes, selling price,

discount structure, arrangement for after sales services, etc. the main aspects to be

critically analyzed under this head may include the following:

Size of market for the product(s) both local and export based on present/expected

demand and supply position

Position of competitors indicating the levels at which they a re operating and as to

how they are performing in terms of sales and profit.

Buy-back arrangement under the foreign collaborations, if any, and for what

quantity, price and period

Selling price with complete break-up i.e. whole-sale, retail, discount structure,

credit proposed to be offered etc.

Analysis of import and export and the government policies having influence on the

project.

Future demand for the product(s) based on reports published in important journals,

newspapers and views expressed by the government and trade association, etc.

3. Appraisal of Technical aspects

The appraisal of technical aspects of a project should cover the technology to be used and

how far it is successful. The important aspects requiring examination should cover thefollowing:

Product(s) proposed to be manufactured or services rendered in terms of quantity,

value and their application


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Location of unit indicating advantages and disadvantages, availability of

infrastructural facilities, concessions available from the government in the area,

etc.

Size of the land and building and whether open and covered area is enough for

present activity and for future expansion.

Availability of technology and process of manufacture and whether the same has

been subjected to frequent changes in the past

Capacity of the plant/machinery, price, market report on the suppliers credentials

and the on the performance of the machines.

Specifications for raw material needed, sources of supply, availability position,

transportation costs, etc.

Arrangement made for inspection at intermediate and final stages of production,

equipment needed for ensuring quality.

Availability of licenses and clearances, if any, required from the central/state

governments and other agencies for setting up of such a unit.

It is generally seen that the new promoter(s) make heavy and disproportionate

investments in fixed assets like land/building, plant/machinery, etc. which results in

uneconomic working due to heavy interest burden on such investments if these remain

under-utilized. At times adequate provision for funds is not made to take care of normal

cost overruns which can even result in failure of the project. A proper technical appraisal

can help in successful implementation of the project.


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4. Appraisal of Management and Organization of Project

The identification of the borrower needs to be done properly through scrutiny of his

antecedents, experience, competence, integrity, initiative etc. this may be done by

obtaining status reports from previous bankers or meaningful assessment of his dealings

with the bank, if banking with it. In case of corporate, the management structure, the

background of top management, needs to be scrutinized. The names of prospective

borrowers/promoters should not appear in the list of defaulters published by

RBI/ECGC etc or in any other list of undesirable customers. If so, care should be

taken. To strengthen the credit appraisal further details of the status report receive

d from another bank may be ascertained by the appraising officer by personallyvisiting his counterpart in the other bank remitting the report for a persona l

discussion. The gist of such a discussion may be recorded in a file and brought out

in the proposal. KYC guidelines as framed by RBI and adopted by Bank are to be

followed by the branches.

Willful defaulters

In case of borrowers/promoters who have been identified as willful defaulters by banks

and advised by RBI, there are certain penal provisions applicable. These are required to

be complied without fail by branches.


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8.2.2 Post-Sanction Supervision and Follow-Up

Post sanction supervision and follow-up of loan accounts in banks has assumed a lot of

significance as it helps in keeping a close watch on their performance and for initiating

timely corrective action. Main objective of the post-sanction supervision is to ensure that

the project financed is successfully implemented. Some of the important goals of

monitoring are as under:

1. Periodical monitoring of the actual performance of assisted constituents vis--vis

projections accepted a t the time of appraisal of credit facilities viz. Sales,

operating Profits, Inventory and Debtor levels, Cash Flow etc.

2. Identifying and evaluating temporary / critical aberrations coming in the way of

smooth functioning of the assisted company /s for timely restructuring.

3. Interacting regularly with the borrowers (and guarantors) through timely

inspection in order to ascertain.

Borrowers (management) stake and interest in the day to day business operations

The production level, inventory level, trend of manufacturing/ sales, labor

problems, maintenance of production units and market reports and other related issues.

As to whether funds invested in business are adequately protected and

whether day to day problems, if any, facing the business are resolved

satisfactorily.

And understand the financial problems of the assisted companies without delay

and to assist on regular or ad-hoc basis after evaluating the same on merits.

Whether there are any impediments in timely service of interest, repayment

of installments due to Bank


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As to whether the Banks funds are put to productive use

As to whether there is any threat to the recovery of Banks funds invested in the

business and to initiate timely, appropriate recovery measures in potentially non-

performing assets.

The system adopted by the bank for follow-up of the loan accounts having working

capital limits of Rs.50 lakhs and above is as advised by the Reserve Bank of India. The

system is popularly known as Quarterly Information System (QIS) under which the

following three formats have been prescribed for collecting information.


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Chapter9 CASE STUDYABC PARTS PVT. LTD

9.1BORROWERS PROFILE

Group Name ABC Parts Private Limited

Address of Regd./Corporate Office 41, DLF, Industrial Area, New Delhi-110015

Constitution Private Limited

Date of incorporation 18/08/1960

Dealing with CANARA BANK

since

Maintaining current account with Canara Bank, New

Delhi for the last 8 years.

Industry/Sector Manufacturing of Auto & Tractor Parts (Large Scale)

Business Activity (Product)Engaged in Designing, Engineering and

Manufacturing of Auto and Tractor components.

BACKGROUND

The Company ABC Parts Pvt. Ltd. was incorporated in 1960. The borrower has setup

manufacturing units at 4 locations for manufacturing of Automotive Parts. This company is an

ISO-9001 2000 Certified Company and working speedily on achieving the TQ 14000. The

Management of the company is experienced and working in the line since long and the party is

having the regular orders for marketing of products and as well as contracts with corporatemanufacturing units of Vehicles/Auto Mobiles. Because of their standing the company is getting

repeated orders. The Company is supplying its product to manufacture of Automobile/Vehicles

Manufacturer unit as Original Equipment Manufacturers. The company has set up in- house

R&D facility in their unit, sophisticated instrumentation laboratory, testing laboratory etc., which

reflects the broad vision of the company to withstand the changing environment.


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SHAREHOLDING

Major Share holders No. of shares Amt. in Rs. Lacs % Holding

Promoters Holding 100000 100.00 100%

FIs/ Mutual Funds/UTI/Banks/FIIs NIL NIL NIL

NRIs/OCBs NIL NIL NIL

Public NIL NIL NIL

Total 100000 100.00 100%

FACILITIES REQUIRED

Nature ProposedSecured/Unsecured (As per

RBIs guidelines)

Fund Based

CC(H) 900.00 Secured

Fund Based Ceiling 900.00

Non Fund Based

Non Fund Based Ceiling NIL

Term Loan 1600.00 Secured

TOTAL COMMITMENT 2500.00 Secured

Rs. In Lacs


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9.2CREDIT APPRAISAL FOR ABC PARTS PVT. LTD

I. MANAGERIAL EVALUATION1. Market reputation on the promoter / management of the company: Satisfactory

2. Brief Profile of DirectorsShri Mahender Kumar Bhunsali, aged 80 years, promoted the business of auto

ancillaries after completing his education. He has been founder of the company

and is presently the chairman of the company. Looking at his rich experiencealong with his forward looking capabilities, excellent work and ability to progress

as per the changing industry scenario, he was honored by Udyog Patra Award

Shri Munish Kumar Bhunsali, aged 46 years, son of Shri Mahendra Kumar

Bhunsali joined his fathers business after completing his Graduation. He has now

been associated with this business for twenty-four years and is presently

Managing Director of the company

Smt. Meenal Bhunsali W/o of Shri Munish Kumar Bhunsali aged 44 years, is

also a graduate. She has also been associated with the business for last eight years

and presently Director in the company

3. Quality of Management (Including Corporate Governance): Management of thecompany is well experienced and have more than 40 year experience in the auto parts

line.

4. Succession Planning: Is been taken care of


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5. Confidential Reports: Satisfactory6. Marketing: The endless pursuit for quality excellence for over four decades has earned

ABC the unswerving confidence of leading automotive and tractor manufactures, that's

why its components are used as Original Equipment in vehicles manufactured. The

company supplies its products to various ORIGINAL VEHICLE MANUFACTURERS

like:

Escorts Tractors Limited, Tractors and Farm Equipment Limited (Massey Ferguson U.K) Carraro India Ltd., (Carraro Spa, Italy) Samey Deutz Fahr India Ltd.,(Samey, Italy) Eicher Tractors (Valtra, Brazil) Ford New Holland (CNH, Italy) "Sonalika" International Tractors Ltd (Renault, France) International Auto Ltd. etc.

On the other hand company have well experienced management, good marketing team

and vide market network of customers of its products.

7. Borrowers' diversification, expansion, modernization program: The company issetting up a new manufacturing facility, as a part of companys overall

expansion/integration plant for its production activities. For the above purpose, a plot of

land measuring about 11,190 sq. meters has been allotted to the company by New Okhala

Industrial Development Association, near New-Delhi. The Company Intend to set up new

machinery there for setting up a new plant to cater growing demands of its customers,

who have already placed orders to increase supply.


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II. BUSINESS EVALUATION

Comments on industry scenario and industry outlook:

The past few years have witnessed a continuous influx of global auto majors in India.

Many auto majors have established facilities, which have also been aided by the liberal

government policy. India crossed million-mark last fiscal, which has set the domestic

auto ancillary industry on a roll. Auto MNCs are also launching their latest models in

India. The domestic auto industry has also come up with new and quality models.

Consequently, the importance for precision auto components has been growing. The

increase in demand for auto components in India has also resulted in an increase in

revenues and exports. Exports of auto components from India have witnessed a CAGR of

over 19% over the last six years.

The auto component sector is on a growth trajectory as is evident by the fact that an auto

component has been designated as a Thrust Sector by the Government of India under

the EXIM Policy.

Also, the problems of high rejection rates which plagued the domestic auto ancillary

industry has been overcome which is exhibited in number of overseas deals concluded by

the domestic industry amidst stiff competition from other Asian countries. The

Government has extended various fiscal incentives and policy measures which have

helped the industry.

Critically, outsourcing of automobile components that have relatively high engineering

and design content from suppliers in low cost countries like India, is gaining momentum

fast. It is estimated that in the next 10 years the auto components industry will reach USD

33-40 billion.

Going by the current trends in the domestic automotive industry and as stated above, it is

expected that the indigenous demand for auto components will also reach USD 13-15


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III.TECHNICAL EVALUATION

1.

Land & Building - The Party has proposed to setup the designing , engineering andmanufacturing unit at NoidaII having the area of 11,190 sq Mts The Party has already

constructed approx 45000 sq feet Industrial Shed. The building area is sufficient for the

installation of the plant and machinery and for smooth working of the unit.

2. Plant and Machinery: It is reported by the party that they are one of the largestintegrated plant of its kind for manufacturing Auto and Tractor Component in North

India spread over sprawling area of 57,340 sq feet at different locations in Delhi,

Faridabad and Noida. There are different types of shops i.e grinding shop, Turning

centers, Machine Shops, ensuring high productivity and better quality to keep pace with

the ever rising quality standards. The party is also having HEAT TREATMENT SHOP

with hardening, annealing, carbonizing, tampering furnaces which make the component

to withstand strength in operating conditions of the parts.. The party has submitted the

quotations from the suppliers/manufacturers with the term and conditions for supply. The

credential of the suppliers is verified for the supply of the machinery as per bank

guidelines.

3. Raw Materials: The basic raw material required for the unit is forging of auto parts ,stainless steel, welding rods and store items etc. The material is available through local

suppliers/ units and most of the raw material is purchased from Delhi & NCR.

4. Manufacturing Process: The auto parts being manufactured under strict quality controlby using latest CNC Machines of improved technology, modern process control devices

monitored by microprocessors and backed by a competent team of technical personnel to


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ensure strict quality norms as laid down by the OEM units/ Manufacturer of Tractors and

other Vehicles.

5. Production Capacity: The stated projections are accepted by the bank as they bothmatch and are in sync the installed capacity and the market demand. The new plant will

become operational in the mid of the financial year 2010-11 and production capacity of

the company will increased.

6. Quality Control: The party has proposed to set up in- house R&D facility comprising ofpilot plant facility, sophisticated instrumentation laboratory, testing laboratory etc. for

Raw Material and finished goods etc. Quality control test are being undertaken for raw

material and other products at stages of production. The product shall meet all the

specification requirement of their client.

7. Staff and Labor: As the machines are semi automatic and the unit is located at theNodia, which is the approved industrial area. So, there is no problem of skilled andunskilled labor and it will be easily available as per the requirement of the party as and

when required for the proposed unit at Noida.

8. Power: The party has taken the temporary power load connection of 20KW forcompletion of construction at Noida unit.

9. Other Infrastructure: The unit of the party is situated at Noida, it is a developedindustrial area and is connected to other parts of the country by roads and rails routes. All

types of facilities like postal, telecommunication, transportation etc. are easily/already

available.


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IV. LEGAL EVALUATION

Status of various statutory approvals and clearances:

For the Noida Unit Company has already obtained the Various approvals such as sanction of

building plan, Electricity/Power Load Connection, Water Connection, Pollution Control

Clearance. The other units of the Company are already working at different locations in

Faridabad and Delhi. The Director of the company has reported that they have obtained the

all approvals required for the units for manufacturing of auto parts i.e, registration of the

units with the concerned departments i.e. SSI registration, Income tax, Sales Tax,

authorization from Pollution control board.


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V. FINANCIAL EVALUATIONFinancial Statements of the company are as follows

PROFIT AND LOSS ACCOUNT: ABC PARTS PVT. LTD

(In Rs. Lacs)

31.03.2007 31.03.2008 31.03.2009 31.03.2010 31.03.2011

Audited Audited Audited Provisional Projection

Sales Turnover 1995.39 2047.12 2584.65 2379.88 4840.00

% rise or fall in sales 2.59 26.26 -7.92 103.37

Cost of sales 1868.41 1954.42 2502.28 2270.66 4405.56

Operating Profit 126.98 92.70 82.37 109.22 434.44

Other Income 17.40 7.44 17.84 12.39 20.00

Profit Before Tax 144.38 100.14 100.21 121.61 454.44

Provision for taxes 40.00 40.00 69.74 3.67 113.59

Profit After Tax 104.38 60.14 30.47 117.94 340.85

Depreciation 41.97 52.91 74.08 84.98 344.00

Cash Profit 146.35 113.05 104.55 202.92 684.85

BALANCE SHEET: ABC PARTS PVT. LTD

(In Rs. Lacs)

31.03.2007 31.03.2008 31.03.2009 31.03.2010 31.03.2011


Share capital 100.00 100.00 100.00 100.00 175.00

Reserves and Surplus 482.55 542.69 573.16 691.10 1064.68Share App. Money 0.00 0.00 0.00 75.00 0.00

Quasi Capital 17.45 32.79 45.84 60.88 75.00

Def. Tax liability/ Loss 0.00 0.00 32.81 32.81 0.00

Revaluation Reserves 0.00 0.00 0.00 0.00 0.00

Net Worth 600.00 675.48 751.81 959.79 1314.68


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Secured Loans 496.55 685.86 981.12 1119.01 1819.54

Unsecured Loans 0.00 0.00 0.00 0.00 0.00

Term Liabilities 496.55 685.86 981.12 1119.01 1819.54

Working Capital Advances 0.00 461.01 482.21 442.79 900.00

Sundry Creditors 496.60 400.67 694.94 633.65 100.00

Statutory Liabilities 0.00 0.00 0.00 0.00 0.00

Adv from Customers 0.00 0.00 0.00 0.00 0.00

Other current Liabilities 707.92 187.91 105.32 85.00 138.59

Current Liabilities 1204.52 1049.59 1282.47 1161.44 1138.59

Total Outside Liabilities 1701.07 1735.45 2263.59 2280.45 2958.13

Total Liabilities 2301.07 2410.93 3015.40 3240.24 4272.81

Fixed Assets 1640.29 1830.50 2372.27 2590.20 3998.99

Depreciation 792.19 845.10 919.18 1004.16 1398.16

Lease Asset 0.00 0.00 0.00 0.00 0.00

Net Block 848.10 985.40 1453.09 1586.04 2600.83

Inventories 426.89 602.67 796.42 932.02 979.28

Sundry Debtors 735.23 353.35 473.80 326.43 403.33

Cash & bank balance 13.38 68.33 3.72 37.19 19.30

Advances to suppliers 0.00 64.57 38.14 44.23 0.00Loans & advances 0.00 0.00 0.00 0.00 0.00

Advance Tax 0.00 0.00 0.00 0.00 113.59

Other Current Assets 277.47 330.22 243.75 307.85 150.00

Current Assets 1452.97 1419.14 1555.83 1647.72 1665.50

Investments 0.00 6.39 6.48 6.48 6.48

Security Deposits 0.00 0.00 0.00 0.00 0.00

Margin Money 0.00 0.00 0.00 0.00 0.00

Exp. Not WO 0.00 0.00 0.00 0.00 0.00

Non-current Assets 0.00 6.39 6.48 6.48 6.48

Total Assets 2301.07 2410.93 3015.40 3240.24 4272.81


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BUILD UP OF NWC: ABC PARTS PVT. LTD

(In Rs. Lacs)

31.03.2007 31.03.2008 31.03.2009 31.03.2010 31.03.2011


Long Term Approach

Net Worth 600.00 675.48 751.81 959.79 1314.68

Term Loans 496.55 685.86 981.12 1119.01 1819.54

Total Long Term Sources 1096.55 1361.34 1732.93 2078.80 3134.22

Net Fixed Assets 848.10 985.40 1453.09 1586.04 2600.83

Other Non Current Asset 0.00 6.39 6.48 6.48 6.48

Total Long Term Uses 848.10 991.79 1459.57 1592.52 2607.31

Surplus / Deficit 248.45 369.55 273.36 486.28 526.91

Short Term Approach

Current Liabilities (Sources) 1204.52 1049.59 1282.47 1161.44 1138.59

Current Assets (Uses) 1452.97 1419.14 1555.83 1647.72 1665.50

Surplus / Deficit -248.45 -369.55 -273.36 -486.28 -526.91

FINANCIAL INDICATORS: ABC PARTS PVT. LTD

(In Rs. Lacs)

31.03.2007 31.03.2008 31.03.2009 31.03.2010 31.03.2011


Intangible Assets 0.00 0.00 0.00 0.00 0.00

TNW 600.00 675.48 751.81 959.79 1314.68

Investments in allied co. 0.00 0.00 0.00 0.00 0.00

Adjusted TNW 600.00 675.48 751.81 959.79 1314.68

Current Ratio 1.21 1.35 1.21 1.42 1.46

Debt/Equity 0.83 1.02 1.31 1.17 1.38

NWC 248.45 369.55 273.36 486.28 526.91

TOL/TNW 2.84 2.57 3.01 2.38 2.25

TOL/ Adjusted TNW 2.84 2.57 3.01 2.38 2.25

Operating Profit / Sales (%) 6.36 4.53 3.19 4.59 8.98

PAT / Sales (%) 5.23 2.94 1.18 4.96 7.04

FACR 1.71 1.44 1.48 1.42 1.43


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Brief discussion on Financial Indicators

1. Paid up capital / TNW

a.

Authorized capital of the company is Rs.100 Lacs comprising of 1 Lac-equityshares of Rs. 100/- each. Paid up capital are Rs. 100 Lacs comprising of 1 Lac-

equity shares of Rs 100/- each. It has been projected at the level of Rs 175.00

Lacs during current year. The company already inducted Rs. 75.00 Lacs as Share

application money, which will be converted in to Paid up share Capital before

disbursement of limits by the bank. The Company will increase the Authorized

Capital Limit after the Sanction of the Proposal but before the disbursement of the

loan.

b. TNW of the company is steadily increasing with full retention of profits. It wasRs. 582.55 Lacs as on 31.03.2007 and increased to Rs. 675.48 Lacs as on

31.03.2008 and further increased to Rs. 751.81 Lacs as on 31.03.2009. It has been

estimated / projected at Rs. 959.79 Lacs and Rs.1314.68 Lacs respectively as at

31.03.2010 and 31.03.2011 due to retention of estimated/projected internal

accruals and proposed induction of capital in the business. Keeping in view of the

past trend of profitability, estimates/projections of TNW can be accepted.

2. Sales: Gross Sales of the company is showing increasing trend. Sales have increasedfrom Rs. 20.47 crores in 2007-08 to Rs. 25.85 crores in 2008-2009. Thus the company

has registered a growth of more than 26% over the last year. But sale during the financial

year 2009-10 did not register any growth, due to fluctuation in the foreign market export

sale of the company decreased from the last financial year. The company has achieved

net sales of Rs 22.30 crore during the financial year 2009-10. The company is estimating

the sale on the basis of order in hand. In view of the recovery of economy since Oct.

2009, Company is expecting the good growth rate in sale in coming financial years,

Another reason of the healthy estimates are good government policies for export out of

India and recovery of overall global market from the financial crunch. The new plant of


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in the production capacity of the company will reduce the operation cost of the company

and the profitability of the company will increase. Keeping in view the industry scenario

and past trends of the company projections/estimates of the profitability of the company

can be accepted.

5. Investments: The Company has made investments in Fixed Deposits. The value of FixedDeposits at the end of the financial year 2008-09 is Rs. 6.48 Lacs.

6. Current ratio: Current ratio of the company for the financial year ending 31.03.2007 &31.03.2008 was 1.21:1 & 1.35:1 .But current ratio for the financial year 2008-09 was

1.22:1 which is little lower than the bench mark of the bank i.e, 1.33:1 which was due to

expansion plan of the company and formation of long term assets of the company during

the financial year 2008-09 to increase the overall profitability of the company. The

company used its internal accrual for purchase of capital assets of the company. In spite

of using its short term funds for the purchase of the capital assets the NWC of the

company is positive. The expansion in the capital assets has increased the size of the

plant and profitability of the company which also improve the short term liquidity of the

company. As per the provisional balance sheet for the financial year 2009-10 the current

ratio of the company is 1.42, which is above the bench mark of the bank. Keeping in view

the past records/trends of the company estimated level current ratio can be accepted.

7. Debt Equity Ratio: Debt Equity Ratio of the company for the financial year 2007-08was 1.02:1 and for the financial year 2008-09 was 1.31:1. As per provisional Balance

sheet of the company the debt equity ratio for the financial year 2009-10 is 1.17. The

Company has estimated it debt equity ratio for current financial year at 1.38:1. The debt

equity ratio of the company is below the acceptable bench mark of the bank i.e. 3:1 and

proves the long term solvency of the company. Hence keeping in view the past trends of

the company estimates/ projections of Debt Equity ratio of the company can be accepted.


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9.3PRESENT PROPOSAL

The Borrower, ABC PARTS Pvt. Ltd. approached to the Bank for the Sanction of following

facilities:-

For Sanction of Working Capital Limit of Rs. 900.00 Lacs

And, for Sanction of Term Loan of Rs.1600.00 Lacs (by way of takeover of Term Loan

of Rs. 612.00 Lacs from SBBJ, Barakhamba Road, New Delhi and sanction of Fresh

Term Loan of Rs. 988.00 Lacs for New Plant & Machinery at Noida Unit)

1. JUSTIFICATION FOR WORKING CAPITAL SANCTIONMAXIMUM PERMISSIBLE BANK FINANCE: ABC PARTS PVT. LTD

(In Rs. Lacs)

31.03.2007 31.03.2008 31.03.2009 31.03.2010 31.03.2011


Inventories 426.89 602.67 796.42 932.02 979.28

Sundry Debtors 735.23 353.35 473.80 326.43 403.33

Chargeable Current Assets 1162.12 956.02 1270.22 1258.45 1382.61

Other Current Assets 290.85 463.12 285.61 389.27 282.89

Total Current Assets 1452.97 1419.14 1555.83 1647.72 1665.50

Other Current Liabilities 1204.52 588.58 800.26 718.65 238.59

Working Capital Gap (A) 248.45 830.56 755.57 929.07 1426.91

Minimum Stipulated

Working Capital -25% of

TCA (B)

363.24 354.79 388.96 411.93 416.38

Actual / Projected NWC

(C) 248.45 369.55 273.36 486.28 526.91

PBF 1 ( A - B ) -114.79 475.78 366.61 517.14 1010.54

PBF 2 ( A - C ) 0.00 461.01 482.21 442.79 900.00

MPBF -114.79 461.01 366.61 442.79 900.00


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2. JUSTIFICATION FOR TERM LOAN

a. Purpose: Sanction of Fresh Term Loan of Rs. 988.00 Lacs for purchase of NewPlant & Machinery at new unit at New Okhla Industrial Area, Noida.

b. Summary of Cost of Project and Means of Finance

Cost of Project AmountCost of Machinery 1313.79

Electricity and Water Connection 20.00

Total 1333.79

Means of Finance Amount

Term Loan 988.00

Unsecured Loans 75.00

Share Capital & internal accruals 270.79Total 1333.79

(In Rs. Lacs)

c. Sources of Promoters Contribution and the time schedule as to when thefunds will be brought.

Promoters of the company have already contributed Rs. 75.00 Lacs by way of

share application money and Rs. 60.88 Lacs as unsecured loan up to 31.03.2010

as unsecured loans. Promoters will introduce remaining amount of unsecured

loans Rs.14.12 Lacs during the current financial year. The balance amount of

promoters contribution & internal accrual will be arranged by 100% retention of

profits for the financial year 2009-10 and 2010-11.


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d. Projections for the profitability of the project

PROJECTIONS - ABC PARTS PVT. LTD.

2010-

11

2011-

12

2012-

13

2013-

14

2014-

15

2015-

16

2016-

17

2017-

18

2018-

19

Net sales 4251.33 4677.46 5145.21 5648.73 6202.6 6811.86 7482.05 7850.65 8237.69

Profit after

Tax256.83 316.38 350.91 385.66 414.55 489.72 551.54 570.83 606.02

Depriciation 224.81 266.09 226.17 207.25 176.16 164.74 140.03 149.02 126.67

Cash Profit 481.64 582.47 577.08 592.91 590.71 654.46 691.57 719.85 732.69

(In Rs. Lacs)

Imp: Detailed projected financial statements are not shown in the report due to confidentiality of the data

e. Present physical & financial status of project, if anyBasement of the factory building is already constructed. Present Financial Status

of the project is

PARTICULARS Cost Incurred Cost to be Incurred Total Cost

Cost of Construction NIL 1313.79 1313.79

Cost of Electricity and Water

Connection1.65 18.35 20.00

Total 1.65 1332.14 1333.79

(In Rs lacs)


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f. Implementation ScheduleActivity Start Date Completion Date

Land Acquisition Already Done

Building and Civil Construction AlreadyJune 2010 ( Shed Measuring 45000 Sq Ft isalready Constructed)

Delivery of Equipment at site March ,2010 June,10

Installation of Equipments June, 2010 July,10

Commissioning of plant August,2010 Sept,10

g. Proposed Repayment ScheduleScheduled date of Completion of Project Sept 2010

Commercial Operations Date (COD Oct 2010

Implementation period (in months) 6 Months

Moratorium (in months) 12 Months

Repayment period in months/quarters/ Half year 84 Months

No. of installment 84

Starting Date Oct 2011

End Date (Last installment) Sept 2018

Door to door tenor 102 months


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9.4SECURITY

1. Primaryi) For working capital limits: Hypothecation of Companys present and future raw

material, Stock in process, finished goods, stores and spares and other current

assets and Book Debts

ii) For Term Loan:First charges on plant and machinery purchased from fresh term loan of Rs.

988.00 Lacs. Security Cover Available

Description of Security Book Value Market Value

Land Situated at, Nodia, U.P. 365.68 1100.00

Building and Sheds 519.55 519.55

Plant & Machinery* 1671.87 1671.87

Other Fixed Assets** 56.21 56.21

Total 2613.31 3347.63(In Rs lacs)

iii) Personal /Corporate Guarantee:Name of Guarantor Position

Net Worth As on

31.03.10

Immovable property

As on 31.03.10

Mr. M K Bhunsali Chairman 394.95 261.00

Mr. Munish Kumar Bhunsali MD 389.45 261.00

Mrs. Kumad Bhunsali Director 124.56 40.50

(In Rs lacs)


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9.5 CREDIT RISK RATING ABC PARTS PVT LTD.

The account was rated under the Large Corporate Model. The following rating have been

obtained by both: branch office and zone office

1. FINANCIAL EVALUATIONi. Past Financials

Category ParameterCO

Value

Benchmark Values Rate

0 1 2 3 4

Past

Financials

Absolute

Comparison

TOL/TNW 2.38 >5.00 5.00-4.00 4.00-2.50 2.50-1.00 6.00 6.00-5.00 5.00-4.00 4.00-3.00


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Reliability of Debtors There is no disclosure of debtors 2.00

2. BUSINESS EVALUATIONA. Market position evaluation

Parameter Comments Rate

Competitive position 3.00

Expected sales growth The firm has achieved a sales growth of around

48% during the years 2007 08. It is expectedthat company will be in a position to achieve a

sales growth of around 10 25% in the current

year

3.00

Input related risk 3.00

Availability of raw material

and other critical inputs

Raw material is easily available from nearby

states

3.00

Proximity to skilled Labor The firm is located in industrial in NOIDA inputs

are available easily

3.00

Production related risk 4.00

State of technology used The firm has adopted proven technology better

than its peers

4.00

Product related risk 3.00

Product range Firm is mainly engaged in the processing of

OEM

3.00

Product quality Quality of product is reported to be better than

the peers

3.00

Marketing 3.00


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Distribution network Firm has a well developed distribution network 3.00

Geographical diversity of the

market

Firm is selling its product directly to the vehicle

manufacturers

3.00

B. Industry risk evaluationIndustry risk evaluation for auto ancillary industry 75%

3. MANAGEMENT EVALUATIONA. Objective

ParameterCo

Value0 1 2 3 4 Rate

Actual grosssales

2379.88

95% 4.00Targeted sales 2208.91

Actual PBT 144.38

95% 4.00Targeted PBT 137.57

(in Rs lacs)

B. SubjectiveS. No. Parameter Comments Rate

1 Management set up The firm is in operation since 1960 3.00

2 Commitment and sincerity The management is reported to be reliable 3.00


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and sincere

3 Track record in debt payment The account is running satisfactorily with us 2.00

4 Financial strength/ flexibility

Management is capable of arranging funds

but with a time lag 2.00

4. CONDUCT OF ACCOUNT EVALUATIONParameter Comments Rate

Status of account No irregularity is observed with our bank in last 2 yrs 3.00

Operations in account Operations in account are healthy 3.00

Submission of financial data Timely submission of data 3.00

TOTAL SCORE

Factor % score obtained Weight Weighted Score

Financial Evaluation 75.00 40.00% 30.00

Business & Industry

Evaluation

60.00 25.00% 15.00

Management Evaluation 75.00 20.00% 15.00

Conduct of Account 75.00 15.00% 11.25

AGGREGATE SCORE 71.25

(The Aggregate Score of 71.25 refers to CANARA BANK- AA-)

THIS MEANS THE RATING OF THE BORROWER IS CANARA BANK AA-


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DETERMINATION OF ROI

From the internal circular of the bank on ROI the corresponding ROI for auto ancillary firm

having a credit risk rating of AA- are:

BPLR + 1.50% for Working Capital limit, and BPLR + 1.50% + 0.50% for Term loan

Imp: The rating as shown in the above section is not a replication of the original model in any form,

And the values and calculation of scores is for the purpose of understanding the process


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Chapter 10 CONCLUSION

The study at Canara Bank gave a vast learning experience to me and has helped to enhance my

knowledge. During the study I learnt how the theoretical financial analysis aspects are used in

practice during the working capital finance assessment. I have realized during my project that a

credit analyst must own multi-disciplinary talents like financial, technical as well as legal know-

how.

The credit appraisal for working capital finance system has been devised in a systematic way.

There are clear guidelines on how the credit analyst or lending officer has to analyze a loan

proposal. It includes phase-wise analysis which consists of 5 phases:

1. Financial statement analysis2. Working capital and its assessment techniques3. Credit risk assessment4. Documentation5. Loan administration


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BIBLOGRAPHY

1. Books:i) PAUL R. KRUGMAN and MAURICE OBSTFELD, 2003. International

Economics Theory and Policy, SIXTH EDITION. New York. Pearson

Education International.

ii) GHASSEM A. HOMAIFAR, 2004. Managing Global Financial and ForeignExchange Rate Risk. New Jersey. Wiley Publication.

iii)Manuals and journals of Canara Bank

2. From Websites:

i) Reserve Bank of India,Link:http://www.rbi.org.in

ii) Ministry of Finance, Government of India,Link:http://www.finmin.nic.in

iii)Director General of Foreign Trade, Government of India,Link:http://dgft.gov.in

iv)Pages from Yahoo,Link:http://yahoo.finance.com

v) Indian Chamber of Commerce,Link:www.iccwbo.org

vi) Canara Bank
http://www.rbi.org.in/http://www.rbi.org.in/http://www.rbi.org.in/http://www.finmin.nic.in/http://www.finmin.nic.in/http://www.finmin.nic.in/http://dgft.gov.in/http://dgft.gov.in/http://dgft.gov.in/http://yahoo.finance.com/http://yahoo.finance.com/http://yahoo.finance.com/http://www.iccwbo.org/http://www.iccwbo.org/http://www.iccwbo.org/http://www.iccwbo.org/http://yahoo.finance.com/http://dgft.gov.in/http://www.finmin.nic.in/http://www.rbi.org.in/