“SMALL AND MEDIUM ENTERPRISE CASH CREDIT”

Under the guidance of

Mr. Niraj. Prakash.Nangrani. Chief .Credit .Manager

In partial fulfillment of the requirements

For the award of

POST GRADUATE DIPLOMA IN MANAGEMENT (PGDM)

(Approved by AICTE)

VIVEKANAND EDUCATION SOCIETY’S

INSTITUTE OF MANAGEMENT STUDIES AND RESEARCH

Chembur, Mumbai.

Submitted By:

PREETI SAWLANI

ROLL NO:41

PGDM

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2011--13

Acknowledgement

I am over whelmed in all humbleness and gratefulness to acknowledge my depth to all those who have helped me to put these ideas, well above the level of simplicity and into something concrete.

I would first thank my project guide Mr.M.V.Ramchandran (D.R.M, RO Thane), Mr Niraj. Prakash.Nangrani. (Chief .Credit .Manager RO Thane) Mr. Partho.Narayan.Dash (CO,SME Manager RO Thane)for their valuable inputs. They were always there to show the right track when I needed help. With the help of their valuable suggestions, cooperation, guidance and encouragement, I was able to perform this Project.

I would like to express my gratefulness to my faculty guide Prof .Nupur Gupta , Sanchita Chamdra. of Vivekananda education studies institute of management and research Studies. For guiding me throughout the project. Her valuable contributions in this project, worthy suggestions and overall guidance gave meaning to the project.

Last but not the least, I would also like to thank my parents who were the initial instigator and early on provided advice and encouragement, generously shared their views, ideas and data. And my friends who have been a great support to me.

I am unable to mention many others who have helped me greatly but it gives immense pleasure to appreciate and thank all those without whose encouragement and help this project would never have been completed.

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Certificate

This is to certify that MS PREETI SAWLANI has completed her Summer Internship at DENA BANK and has submitted his project report titled “CREDIT APPRAISAL OF SME

LOAN”

This Report is the result of his/her owns work and no part of it earlier comprised any other report, monograph, dissertation or book. This Project was carried out under my overall supervision.

Date: --------------

Place:-MUMBAI

-------------------------

Prof.

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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.

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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

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5.7%, 3.9% and 12.2% respectively in deposits and 8.41%, 3.14% and 12.85% respectively in credit

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 Regional Rural Land Development Cooperative

Banks Banks Banks Banks

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Public Sector Banks Private Sector Banks

SBI Groups Nationalized Banks Indian Banks Foreign Banks

SCENARIO OF BANKING SECTOR:-

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, India’s 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.

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INDUSTRY ANALYSIS:-

Competitive Forces Model

(Porter’s Five Force Model)

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

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

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

Organizing power of the supplier is high. With the new financial instruments they are

asking higher return on the investments

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.

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.

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.

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 secure*9ties, debentures, gold, real estate etc.

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.

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.

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.

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SWOT Analysis:-

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.

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 RBI’s 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.

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WEAKNESS:-

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 non-productive 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 standards of change in the total outstanding advances, which has to be reduced to meet the international standards.

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:-

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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:-

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.

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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INTRODUCTION TO DENA BANK.

Vision

DENA BANK will emerge as the most preferred bank of customer choice in its area of operations ,by its reputation and performance ,DENA BANK will provide its

  Customers - premier financial services of great value,    Staff - positive work environment and opportunity for   growth and achievement,  Shareholders - superior financial returns,  Community - economic growth

Dena Bank was founded on 26th May, 1938 by the family of Devkaran Nanjee under the name Devkaran Nanjee Banking Company Ltd

It became a Public Ltd. Company in December 1939 and later the name was changed to Dena Bank Ltd.

In July 1969 Dena Bank Ltd. along with 13 other major banks was nationalized and is now a Public Sector Bank constituted under the Banking Companies (Acquisition & Transfer of Undertakings) Act, 1970. Under the provisions of the Banking Regulations Act 1949, in addition to the business of banking, the Bank can undertake other business as specified in Section 6 of the Banking Regulations Act, 1949.

Milestones

One among six Public Sector Banks selected by the World Bank for sanctioning a loan of Rs.72.3 crores for augmentation of Tier-II Capital under Financial Sector Developmental project in the year 1995.

One among the few Banks to receive the World Bank loan for technological up gradation and training.

Launched a Bond Issue of Rs.92.13 crores in November 1996.13 | P a g e

Maiden Public Issue of Rs.180 Crores in November 1996.

Introduced Tele banking facility of selected metropolitan centers.

Dena Bank has been the first Bank to introduce:

Minor Savings Scheme. Credit card in rural India known as "DENA KRISHI SAKH PATRA" (DKSP).

Drive-in ATM counter of Juhu, Mumbai.

Smart card at selected branches in Mumbai.

Customer rating system for rating the Bank Services.

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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 up to Rs 10 million, can be considered as an SSI unit and any investment of up to 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.

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When it started gaining momentum, this sector was defined as an enterprise with investment 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 India’s development history spoke of liberalization. What this meant was that medium and large enterprises would no longer need licenses to run. Export-oriented 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.

1. MICRO ENTERPRISES

Micro (Manufacturing) Enterprise:

Enterprise engaged in the manufacturing / Production or preservation of goods and whose investment in plant machinery (original cost excluding land and building does not exceed Rs 25 lacs irrespective of the location of the unit.

Micro (Service) Enterprise:

Enterprise engaged in the providing/ rendering of service and whose investment in equipments(original cost excluding land building furniture fittings and other not directly related

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to the service rendered or as may be under the MSME development Act 2006 ) does not exceed Rs10 lacs.

2. SMALL ENTERPRISES

Small (Manufacturing) Enterprises:

Enterprise engaged in the manufacturing / Production or preservation of goods and whose investment in plant machinery (original cost excluding land and building and the items specified by the ministry of SSI vide its notification No. S.O.1722 (E) Dated October 5, 2006 as furnished in annexure 1) does not exceed Rs 5crore.

Small (Service) Enterprises:

Enterprise engaged in the providing/ rendering of service and whose investment in equipments(original cost excluding land building furniture fittings and other not directly related to the service rendered or as may be under the MSME development Act 2006 ) does not Exceed Rs 2crore.

The Small and Micro (Service) Enterprises shall include small road and water transport operators, small business professional and self employed persons and all other service enterprises.

3. MEDIUM ENTERPRISES

Medium (Manufacturing) Enterprises:

Enterprise engaged in the manufacturing/ Production or preservation of goods and whose investment in plant machinery (original cost excluding land and building and the items specified by the ministry of SSI vide its notification No. S.O.1722 (E) Dated October 5, 2006) is more than 5crore but does not exceed Rs 10crore.

Medium (service) Enterprises:

Enterprise engaged in the manufacturing/ Production or preservation of goods and whose investment in plant machinery (original cost excluding land and building and the items specified by the ministry of SSI vide its notification No. S.O.1722 (E) Dated October 5, 2006) is more than 2crore but does not exceed Rs 5crore.

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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 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 Appraisal:-

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.

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

Character Capacity Collateral

And also there are also some many 5 parameters which must kept in mind at a time of lending money .They are:-

About company

About promoters Existing experience Education Family background Occupation Years of business

About project Financial feasibility

a) Sales growth

b) Profit

c) PAT margin

d) Leverage ratio

e) Stock turnover ratio

f) Debtors days

g) Creditors days

h) Operating cycle days

i) Liquidity

j) DSCR

About industry analysis Market study

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industry performance growth margin production capacity market feedback

risk and mitigation

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.

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.

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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.

Brief overview of Loan:

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

Fund Base includes:

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Working capital finance

Fund based Non-fund based

others

a)Cash credit

b) Term loan

a)letter of credit

b) bank guarantee

a) Deposit product

b) Deposit product

c) Cash management products

d) Trade finance

e) Treasury product

f) Structured products

Cash credit Term Loan

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

Fund Base:-

A. 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.

B. 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:

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

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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. 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 Bank’s 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 program me 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.

Non-fund Base:-

A. 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,

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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

Authorizes another bank to effect such payment, or to accept & pay such bills of exchanges (drafts); or

Authorizes another bank to negotiate the Terms & conditions of the credit are complied with. against stipulated document(s), provided that

B. 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:

Applicant: The principal debtor – person at whose request the guarantee is executed Beneficiary: Person to whom the guarantee is given & who can enforce it in case of

default. 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.

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: In lieu of security deposit/earnest money deposit for participating in tenders; 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;

In respect of raw materials supplies or for advances by the buyers; In respect of due performance of specific contracts by the borrowers & for obtaining full

payment of the bills; 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.Bid bonds on behalf of exporters

24 | P a g e

Export performance guarantees on behalf of exporters favoring the Customs Department under EPCG scheme.

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.

MSME Development Act (2006)

In line with the announcement in the policy package Government of India brought in a special act called “THE MICRO SMALL AND MEDIUM ENTERPRISES DEVELOPMENT ACT, 2006” which was passed on 16th June 2006 to provide for facilitating the promotion and development and enhancing the competitiveness of micro , small and medium enterprises and for matters connected therewith or incidental thereto. The act has come in force w.e.f 2nd October 2006.

With the passing of MSME development Act – 2006 there has been clarity as per the definition of micro, small and medium enterprises. Under provision of act steps are also being taken to support SME sector with the View to increasing their competitiveness and also to provide legal protection with this development in the year 2006 the growth in SME sector shall be accelerated visibly in the ensuing period.

Objective of the Policy:

The SME sector is growing and in the process there is opening up opportunities for Bank for lending. Therefore, Banks have been focusing to broaden their SME loan portfolio because lending to SME is profitable and divides risk of NPAs into number of small units. The policy aims to make Banks functionary at various level aware of this fact and also move aggressively to take a fair market share to build up and appropriate and sound SME portfolio. However to face competition and facilitate growth, the policy shall be constantly evolving measures to foster growth, remain competitive and also to mitigate risk involve and thus build up a quality portfolio. The policy also aims to strength arms of field functionary to acquire new account and thus increase borrower base. The policy also aims at helping operational unit/ field functionaries to build up quality credit portfolio.

Nayak Committee (1991-92)25 | P a g e

Nayak Committee was set up by RBI in December 1991 to look into the aspects of adequacy of

the credit that was being advanced to the SSI sector and also the time involved in processing loan

applications. Nayak Committee found that the SSI sector was receiving advances only to the

extent of 8.1% of their annual output, which was way below the normative requirement of 20%.

Based on the recommendations of the Nayak Committee RBI advised banks to grant working

capital to the extent of 20% of the projected annual turnover. RBI also issued a number of

circulars advising banks to process loan applications without delay and also set up specialized

bank branches to provide SSI loans in areas where there is a high concentration of SSI units.

Seven Point Action Plan

The Nayak Committee recommendations were incorporated in the Seven Point Action Plan that

was announced by the Finance Minister in the Budget speech of 1995-1996 to enhance the flow

of credit to the SSI sector. The recommendations incorporated included the following:

Setting up of specialized SSI bank branches

Adequate powers to be delegated to the branch and regional levels

Banks to conduct sample surveys of their performing SSI accounts to find out whether

they were getting adequate credit.

Steps to be taken for sanctioning of composite loans, covering both term loans and

working capital, to SSI entrepreneurs as far as possible.

Sensitization of bank managers towards the working of the SSI sector.

Simplification of procedural formalities by banks for SSI entrepreneurs.

Regular meetings to be held by the banks at both zonal and regional levels with the SSI

entrepreneurs.

General Lending Methods:

The following existing method of lending would be followed for working capital facilities:

1) Turnover Method2) Modified MPBF Method

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The entire fund based exposure to the SME sector upto Rs.5 crores are to be assessed in accordance with the turnover method (Nayak Committee Method) and above Rs. 5crore are to be assessed in accordance with the Modified MPBF (Maximum Permissible Bank Finance) method.

Cash credit and Term loan are included in fund based. In working capital limit by way of cash credit against stock (margin-25%) and receivable (margin-50%) to be approved. Letter of credit (LC) and Bank guarantee are included in Non fund based.

Format for calculating Turnover an

d Modified MPBF method:

A. Turnover method:a. Projected Accepted Turnover (gross sales) xxxb. Working Capital (25% of PTA) xxx c. Of this bank finance is to the extent of 20% of gross xxx d. Min net working capital /promoters margin @ 5% of gross sales xxxe. Actual / projected net working capital (ca- cl) xxxf. MPBF (b-d ) xxx

B. Modified MPBF method:

Total Current Asset xxx(less) Other Current Liabilities xxx -------------- (a)Working Capital Gap xxx

Margin – Higher of:i) 25% of working capital xxxii) Actual working capital xxx xxx -------------- (b) MPBF (a-b) xxx

Procedure for Lending

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First step of the lending procedure is either customer approaches the Bank or the Bank approaches the customer. The discussion over different products available with the Bank and the customer requirement is done and required conditions are discussed with the customer.

The Next step is the submission of required documents by the customer. The bank asks for the list of documents that has to be submitted.

Then depending upon the analysis of the financial data provided by the customer the Banks sets MPBF level for the customer.

If the MPBF limit or the total loan amount requirement of customer exceeds the permissible capacity of the Branch Manager such proposals are transferred to Regional Office for further analysis.

The RO does the site visit of the party for inspection of collateral security and for measuring other risk factors, for SME the representative of the Bank does the rating of the SME depending on which the interest rate of the advance is decided.

The RO studies the proposal and only on the recommendation of the Regional Manager the proposal is either financed or it is rejected.

Credit Appraisal Process:-

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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

AdvocatesProposal preparationValuation reports of the properties to be obtained from empanelled valuer/engineersPreparation of financial dataAssessment of proposal

Loan administration pre- sanction process:-

Appraisal, Assessment and Sanction functions

A. Appraisal

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.

Bank’s 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,

29 | P a g e

Documentations, agreements, mortgages

Sanction/approval of proposal by appropriate sanctioning authority

Disbursement of Loan

Post sanction activities such as receiving stock statements, review of accounts, renew of accounts, etc

(On regular basis)

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; Applicant’s status vis-à-vis other units in the industry,

Financial status in broad Terms and whether it is acceptable The Company’s Memorandum and Articles of Association should be scrutinized carefully to ensure

(i) that there are no clauses prejudicial to the Bank’s interests,

(ii) no limitations have been placed on the Company’s 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:- Application for requirement of loan Copy of Memorandum & Article of Association Copy of incorporation of business Copy of commencement of business Copy of resolution regarding the requirement of credit facilities Brief history of company, its customers & supplies, previous track records,

orders In hand. Also provide some information about the directors of the company

Financial statements of last 3 years including the provisional financial statement for the year 20010-11

Copy of PAN/TAN number of company Copy of last Electricity bill of company Copy of GST/CST number Copy of Excise number Photo I.D. of all the directors Address proof of all the directors

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Copies related to the property such as 7/12 & 8A utara, lease/ sales deed, 2R Permission, Allotment letter, Possession

Bio-data form of all the directors duly filled & notarized Financial statements of associate concern for the last 3 years

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.

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

Appraisal report from any other bank/financial institution in case appraisal has been done by them.

‘No Objection Certificate’ from Term lenders if already financed by them and Report from Merchant bankers in case the company plans to access capital market,

wherever necessary.

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:-

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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 analyzed). 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.

Details of existing borrowing arrangements, if any,

Credit information reports from the existing bankers on the applicant Company, and Financial statements and borrowing relationship of Associate firms/Group Companies.

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, inter-firm and inter-industry comparisons should be made to establish their veracity.

The financial analysis carried out on the basis of the company’s 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;

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;

Record of major defaults, if any, in repayment in the past and history of past sickness,

If any;

The position regarding the company’s tax assessment - whether the provisions made in the balance sheets are adequate to take care of the company’s tax liabilities;

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 company’s accounts; Dividend policy;

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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; Estimated requirement of working capital finance with reference to acceptable build up of

inventory/ receivables/ other current assets; 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:

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.)

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.

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 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 Industry profile & prospects

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

Technical feasibility with reference to report of technical consultants, if available Management quality, competence, track record Company’s structure & systems

Applicant’s 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:

Market share of the units under comparison Unique features Profitability factors Financing pattern of the business Inventory/Receivable levels Capacity utilization Production efficiency and costs Bank borrowings patterns Financial ratios & other relevant ratios Capital Market Perceptions Current price 52week high and low of the share price P/E ratio or P/E Multiple 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 up front. 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.

34 | P a g e

C. Present relationship with Bank:-

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 Frequency of irregularity i.e., number of times and total number of days the account was

irregular during the last twelve months 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

Working Capital and 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: 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

35 | P a g e

Repayment Terms, where applicable ECGC cover where applicable Other standard covenants

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

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 borrower’s application, financial statements and other reports/documents examined by the appraiser.

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.

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Bank’s lending policy and other guidelines issued by the Bank from time to time

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

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 company’s (and the Group’s) connections. State whether, all considered, the proposal is a fair banking risk. Finally, give recommendations for grant of the requisite fund-based 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.

Examine critically the following aspects of the proposed exposure in the light of corresponding instructions in force:

Bank’s lending policy and other relevant guidelines RBI guidelines Borrower’s status in the industry Industry prospects

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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 Stipulated vis-à-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 essential. A banker cannot take solace in sufficiency of security for his loans. He has to -

Make a proper selection of borrower Ensure compliance with terms and conditions Monitor performance to check continued viability of operations Ensure end use of funds. 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.

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Now lets see the loan propasal that was sanctioned by the bank.Which is shown below.

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LOAN

PROPOSAL

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Summary of the Loan:

S.P.Chemi equip is a limited company established on 5th February 2007. The registered office of the company is located at plot no A-20, MIDC, Anand nagar, Ambernath (east). The company is manufacturer of chemical equipments, vessels & heat exchangers in ferrous and non ferrous material.

The firm has expertise in designing / fabrication and erecting of various equipments i.e. tanks, vessels, heat, exchangers and structures in various material such as stainless steel, carbon steels nickel , inconnel etc. apart from repairing of old tanks ,vessels and heat exchangers . They had a wide variety of manufacturing products ranging from

1. Reactors – ss : 316/ss : 304/nickel/carbon steel

2. Vessel - ss:316/ss : : 304/nickel/carbon steel

3. Tanks - - ss:316/ss : : 304/nickel/carbon steel

4. Heat exchangers - ss:316/ss : : 304/nickel/carbon steel

5. Chimney – carbon steel

6. Structures – carbon steel

The borrower has been banking with us since 2007 and has been regular in transactions with us without any defaults.

We received proposal on 21st April 2012 from AIROLI Branch. The customer demanded for fresh cash credit facility limit of rs 42.00 lacs cum fresh bank guarantee limit of rs 20.00 lacs. But after the analysis of audited balance sheet we found that customer was eligible for Rs 36.92lacs only, on the basis of turnover method. The proposed limit of Rs.lacs is secured by collateral security worth of Rs320 lacs which covers the sanctioned limit by more than 200% and also on the basis of financial analysis it is considered as satisfactory.

The credit rating was carried out by visiting the unit and the unit has scored 44.16 marks with rating at “BB” grade and applicable rate of interest at BR+2.40(SME) =13.10% (BR @ 10.70%) as applicable for SME units

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DENA BANK, THANE REGIONAL OFFICE, THANEPROPOSAL NO.: TRO/ADV/ XXXX /2012 Date:xx.xx.2012Proposal received at Branch

Proposal received at RO

Proposal received at HO

Date of Credit Committee Clearance

Date: Date: Date Date:

SANCTIONING AUTHORITY Dy. GENERAL MANAGER (TRO)

GIST OF THE PROPOSAL :

Request for the following facilities ;

Fresh cash credit facility limit of rs 42.00 lacs

Fresh bank guarantee limit of rs 20.00 lacs

With approval of following relaxation

The current ratio as of 31.03.2011 is 1.05 as against indicative level of 1.10 and Hurdle ratio of 1:1

Particulars Bench marks Hurdle Actual

Adj,current ratio (turnover method)

1.10 1.00 1.05

The current ratio of the party past two years is below 1:1 but improved to 1.05 as of 31.03.2011. This is due to increase trade creditors. However the company has projected current ratio for 2011-2012 and 2012-13 at 1.33 and 1.14 respectively .We propose of release of 50% of the proposed limit and remaining 50% will be released after submission of abs and looking at the financials of the firm.

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2. PROFILE

Name of borrower M/S S.P.CHEMI EQUIPMENTS (proprietary ship)

Branch: AIROLI Region: THANE

Registered Office address with e-mail & Phone no.

PLOT NO A-20 ,MIDC,ANAND NAGAR, AMBERNATH (EAST)

PH -0251-2621579, FAX- 0251-2621581

Residential address with e-mail & phone no. Row house no A- 16 ,sec -4 Airoli , near fire brigade , Navi Mumbai

Address of Unit/ Factory/ works

Established on 05.02.2007 Whether appearing in

Dealing with us since Fresh connections Standard B List NO Date of last sanction & AuthorityGroup: NIL Willful Defaulter List No

Line of Activity

Manufacturer of chemical equipments ,vessels & heat exchangers in ferrous and non ferrous material

Defaulter / CIBIL List No

Key Person/Promoter Key Person Promoter

Multiple / Consortium Sole banking EXISTING PROPOSED

Leader Bank NA Asset Classification Standard Standard

Our share: Asset Category as per CMC Standard Standard

FB - % 100% D2K Codes & Description

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NFB- % 100 % Activity 7533 MANUFACT

STL- NA Sector 15 Hardware products

TL- NA Special Category

70 SSI/ SME

Priority Yes Date of last sanction Fresh connection

WOMEN ENTREPRENEURS ENTERPRISE

BSR Code: 321 Basel II Code:Risk Weightage 100% Provisioning: 0.25%

Credit Risk Rating BB Risk Grade as per ABS Date 31.03.2011External NAName of the Agency Rating Internal Rating as per ABS 31.03.2010

3. NAMES OF PATNERS /GUARANTORS & NET WORTH (Rs. in lacs)

Sr. Name Net Worth As on Basis

1MRS.JADAWATI.S. SHUKLA

19.10 31.03.2011 PERSONAL.BALANCE SHEET

Whether Proprietor / Partner/ Director / Guarantor has any relationship with any Director or Senior Official (Scale IV & above) of the Bank. If so give details (Refer to Guidelines)

No

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4. Major ShareholdersSr. Name Status No. of shares held Percentage

holdingNA THIS IS A

PROPRIETORSHIP CONCER

[Rs in Lacs]

Borrower EXPOSURE Existing Proposed Variation(+/-)Fund Based 0.00 42.00 +42.00Non Fund Based 0.00 20.00 +20.00Forward Cover 0.00 0.00 0.00Total Credit Exposure 0.00 62.00 +62.00Investments 0.00 0.00 0.00Other Commitments 0.00 0.00 0.00Total Exposure 0.00 62.00 +62.00GROUP EXPOSUREFund Based 20.00 30.00 +10.00Non Fund Based NIL NIL NILForward Cover NIL NIL NILTotal Credit Exposure 20.00 30.00 +10.00Investments NIL NIL NILOther Commitments NIL NIL NILTotal Exposure 20.00 30.00 +10.00

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5. COMPLIANCE TO PRUDENTIAL / INTERNAL EXPOSURE LIMITS

(Rs in crores)

As per RBI guidelines

As per Internal Guidelines

Individual 742.14 60.00

Group 1938.34 120.00

Whether the limits proposed exceed the prudential exposure norms (Individual / Group)

No No

In case of exceeding, details of permission from the competent authority

N.A

6. PRESENT PROPOSAL:To permit the following: I. Status of existing and proposed limits (Rs in Lacs)

Facility Existing O/S as on31.05.2011

DP Irregular/ Overdue amount

Proposed Variation

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Limit Margin (%)

Limit Margin (%)

a) Fund Based1 Cash credit

HYPO0.00 NA Nil 42.00 25/50 +42.00

Total 0.00 42.00 +42.00b) NF Based

BG(P/F) 0.00 NA NIL 20.00 15/25 +20.00TOTAL 0.00 20.00 +20.00

c) Forward cover

0.00 NIL 0.00 0.00 0.00

d) Grand Total (a+b+c)

0.00 0.00 62.00 +62.00

e) Investment Exposure

0.00 0.00 0.00 0.00

TOTAL EXPOSURE

0.00 62.00 +62.00

II. SECURITY / DOCUMENATION

a) Prime security (Rs. in lacs)Nature Value BasisExisting STOCK BOOK DEBTS

28.8130.38

As per Latest stock statement dated 31.03.2012

Proposed STOCK BOOK DEBTS

35.4326.21

PROJECTED stock & book debt as on31.03.2013

b) Collateral Security (Rs. in lach)Nature of Security Type of

ChargeValue Basis /

SourceWhether eligible under CRM (Basel II Norms)

Existing

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Plot No: A-20 ,MIDC,ANAND NAGAR,ADDL. AMBERNATHINDUSTRIAL AREA , AMBERNATH (EAST) ADMEASURING 800 SQ MT

Equitable Mortgage

215.00 DECLARED BY BORROWER VIDE LETTER DTD 22.04.12

Proposed AdditionalPLANT &MACHINERY HYPO 105.00Total 320.00

THE FRESH TITLE SEARCH & valuation of the properties mentioned to be obtained from our empanelled advocate and valuer before disbursement of limit. The property should be NA mortgage able and freely marketable . The legal marketability of the said collateral properties shall be confirmed by regional office before disbursement. In case there is any problem in title or shortfall in valuation , the company will provide proportionate additional collateral security . the collateral coverage shall be at least 100%. The branch manager has to submit the visit report of immovable properties as well as stock before disbursement

PROPOSED COVERAGE: 100%Details of properties/assets etc. under collateral security viz. valuer, valuation date, encumbrance & marketability status etc. are as per Annexure – 7

i) Percentage coverage of collateral security: 1 Total value of Collateral security Rs 320.00 lacs 2 Of which our share 100% 3 Total limits proposed from our Bank Rs.62.00 lacs4 Collateral coverage MORE THAN 100%

ii) Reasons in case of dilution of security coverage: N.Ac) Date of creation of Charge: N.A

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d) Date of subsequent modification of charge: N.A

e) Date of vetting of documents by legal officer /Panel Advocate: TO BE OBTAINED BEFORE RELEASE OF LIMIT

f) Name of Guarantors & their net worth (Rs in Lakh) Sr. Name Relation Net Worth As on Basis

1Sunilkumar laltaprasad pandey

Friend 10.30 31.03.2011

Personal balance sheet as on 31.03.2011

2Shailendra kumar shukla

Husband 18.21 Do Do

Note: Net worth of the guarantors include their investment in the subject Company and group companies.(Declaration from borrower to be obtained and kept on record, that no commission or remuneration is paid to them for providing guarantee.)

Shaliender kumar shukla is prop of M/S :- S.P. engineers and banking with us since 2004

III. CREDIT RATING & Pricing: Pricing Proposed

Credit Rating Score Based on ABS 31.03.2010

BB(31.03.2011)-78.86

Applicable interest rate as per Credit Rating BR+2.40-13.10% (BR@10.70)

Interest rate presently Charged and Proposed NA

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Concession if any NIL

Interest Rate charged by Lead Bank NA

Commission on NFB Limits As per HO Guidelines

- Credit Rating Work Sheet furnished as Annexure 1

a) Factors contributing to the up gradation / slippage in credit rating: N. A

b) Justification for proposing lower rate of interest/concession in charges/process fees N.A.

IV. Permissions for Deviations, Issue of NOCs etc & Concessions in service charges

No Existing Proposed

NIL THE current ratio is below bench mark of 1.10:1 but within hurdle ratio of 1:1

7. Ratifications required for actions, exceeding permitted etc. beyond discretionary powers: NA

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8. COMPANY PROFILE (in brief) (DETAILS OF MANAGEMENT, PRODUCTS MANUFACTURED, USER INDUSTRIES & COMPANY’S MAJOR CUSTOMERS)

M/s S.P chemi equipments is a proprietorship concern established on 05-02-2007 and promoted by Mrs jadwadevi shukla who is young and energetic women entrepreneur . The firm is operating from own factory at A-20, MIDC , Anand nagar ,Ambernath east .She is supported by her husband Mr. s.k. shukla who is a qualified engineer having experience of more than 18 years in the line of activity.

The firm has expertise in designing / fabrication and erecting of various equipments i.e. tanks ,vessels, heat, exchangers and structures in various material such as stainless steel , carbon steels nickel , inconnel etc. apart from repairing of old tanks ,vessels and heat exchangers . They had a wide variety of manufacturing products ranging from

1. Reactors – ss : 316/ss : 304/nickel/carbon steel

2. Vessel - ss:316/ss : : 304/nickel/carbon steel

3. Tanks - - ss:316/ss : : 304/nickel/carbon steel

4. Heat exchangers - ss:316/ss : : 304/nickel/carbon steel

5. Chimney – carbon steel

6. Structures – carbon steel

The manufacturing process is under

a. Raw material

The various raw materials required for the above activities are as under

1. Mild steel, carbon steel, stainless steel, copper, nickel plates and pipes.

2. Flanges , bendess , elbows ,pipes and tubes

3. Welding electrodes, oxygen, and argon gas as consumable.

b. Process

I. Drawing of equipments

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II. Procuring raw material as per requirements

III. Cutting plates, pipes by gas cutter

IV. Welding parts by welding electrode

V. Dispatching

The main raw material suppliers are

1. Rajat steel and engineering co

2. Bombay steel

3. Swastika steel

4. Om profile company

5. Namrata metal and alloys

6. Dinesh steels (India)

7. Kamal agencies

8. Raj tools centre

9. Lalit steels

10. Akash steel craft pvt ltd

11. Heera gas

12. Tejas abrasive

13. Kalyan commercials

14. Padmavati pipes and fitting

15. Piece chem. . Ind Engg

16. Sheetal Engg company

The major customer are

1. IVP ltd, Boisar

2. Hikal Ltd

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3. Coating & Coating Pvt Ltd

4. Omkar specialty chemicals ltd

5. Sangdeep acid hem pvt.ltd

6. Anuj organic pvt ltd

7. Unifab Engg projects Pvt Ltd

8. Wipro Water Ltd

9. Lioyd Insulation (India)Ltd

9. INDUSTRY SCENARIO

a. Industry Categorisation Manufacturer of Hardware productsb. Demand and supply situation of the product – present and projected (source of information)

NAAs the firm engaged in the activity of engineering sector in a unorganised sector and having adequate orders on hand from various companies .there is no source for ascertaining the demand/ supply gap . The promoters are engaged in this activity since long and due to their past record;they have been getting continuous orders

c. Major players & their market share There are many other small/medium ssi units in this sector and all are getting business and hence competitors and their market share cannot be ascertained

d. Bank’s exposure in this industry Not availablee. Cyclical trends No cyclic trends.since the activity falls ubder

Engineering sector the orders are on continuous basis and increasing over the period

f. Govt. Policies Encouraging and conducive at presentg. Whether the product is an import substitute, if so, what is the landed cost of import and what is the production cost of the indigenous manufacture

Na since the execution is done based on the specifications of their customers

h. Availability of raw materials, labour, infrastructural advantages

Raw material & labour is locally available

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i. What are internal & external advantages of the borrower/technology used

The promoter are qualified personal with vast experience in this line of activity. They have the required machinery for execution of the orders in time . The firm also has all the infrastructure (equipment , plant & machinery , vehicle) required for executing the contracts.

j. What are the weaknesses The only risk involved in this kind of industry is delayed payment from the companies . It may lead to cost of idling of men and machinery and interest loss to the borrower . Non availability of working capital funds to execute orders having substantial value is a major constraint

k. What are the relative opportunities In view of their long experience and past records , they have been receiving huge orders from multinational companies which is indicated from sharp jump in their turnover during FY 2011 and orders on hand / under negotiations. With the availability of working capital the unit is expected to report improved performance over the years

l. What are the threats Delayed payment and lack of working capital from banks

m. Any other information Nil

10. PRODUCTION CAPACITY

Production Capacity Existing ProposedInstalled 30 Machines 30 MachinesUtilised N.A N.A% Utilisation N.A N.A

11. MARKET CAP a) Face value of shares NA

This is a proprietorship concernb) Market value as onc ) High & low ( 12 months )

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12. FINANCIAL INDICATORS [Rs in lakhs]

Audited Estimated Actuals(provisional)

Estimated Projected

31.03.2009 31.03.2010 31.03.2011 31.03.2012 31.03.2013

A.CURRENT LIABILITIES

i. Bank Borrowings 0.00 0.00 0.00 0.00 45.00

ii.TL installments due within 1 yr

0.00 0.00 0.00 0.00 0.00

iii. Deposits/Unsecured loans

0.00 0.00 0.00 0.00 0.00

iv. Sundry Creditors for goods

30.16 46.22 61.24 27.19 8.75

v. Sundry Creditors for expense

0.00 0.00 0.00 0.00 0.00

vi. Provision 0.00 0.68 1.48 1.35 3.50

vii. Other current liabilities

2.61 15.58 8.14 8.50 9.50

viii. ADVANCE PAYMENT TO SUPPLIER

0.00 0.00 0.00 0.00 0.00

ix.VAT Payable 0.00 0.00 0.00 0.00 0.00

Total (A) 32.77 62.48 70.86 37.04 66.75

Prefrenceshares (redeemable after1yr.)

0.00 0.00 0.00 0.00 0.00

Deferred Payment Credit excluding

0.00 0.00 0.00 0.00 0.00

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instt.due within 1 yr.)

Unsecured Loans (repayable after 1 yr.) /OTLs

2.15 1.58 5.01 5.00 5.00

Deffered Tax 0.00 0.00 0.00 0.00 0.00

B. TERM LIABILITIES

2.15 1.58 5.01 5.00 5.00

C. NET WORTH

i. Capital 5.31 11.27 19.10 25.98 30.52

Quasi Capital 0.00 0.00 0.00 0.00 0.00

Revaluation Reserves 0.00 0.00 0.00 0.00 0.00

General Reserve 0.00 0.00 0.00 0.00 0.00

Share Premium 0.00 0.00 0.00 0.00 0.00

DeferredTax Liability 0.00 0.00 0.00 0.00 0.00

General Reserve/Capital Reserve

0.00 0.00 0.00 0.00 0.00

Profit & Loss A/c 0.00 0.00 0.00 0.00 0.00

ii. Reserves & Surplus

0.00 0.00 0.00 0.00 0.00

Total (i + ii) 5.31 11.27 19.10 25.98 30.52

Total (C) 5.31 11.27 19.10 25.98 30.52

D. TOTAL LIABILITIES (A+B+C)

40.23 75.33 94.97 68.02 102.27

E. CURRENT ASSETS

i. Cash & Bank Balance 1.60 1.05 5.57 6.10 4.35

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ii. Receivables - Domestic

4.07 26.38 37.76 30.46 26.21

iii. Inventory 20.40 24.76 9.48 7.03 35.43

iv. Loans & Advances 0.00 0.00 0.00 0.00 0.00

v.VAT credit available 0.00 0.00 0.00 0.00 0.00

vi. Other current assets 0.28 2.07 21.67 5.85 9.99

Total(E) 26.35 54.26 74.48 49.44 75.98

Investment(F) 0.00 0.00 0.00 0.00 0.00

G.NET FIXED ASSETS (Excluding Revaluation Reserve)

13.88 20.87 20.09 17.78 25.29

H. Other non Current Assets

0.00 0.20 0.40 0.80 1.00

I. TOTAL ASSETS (E+F+G+H)

40.23 75.33 94.97 68.02 102.27

J.FINANCIAL PERFORMANCE

i.GrossSales Domestic

21.70 68.37 140.76 144.58 209.64

Less :excise duty 0.61 0.02 7.98 9.09 13.18

Net sales 21.09 68.35 132.78 135.49 196.46

ii. Gross Profit 1.64 8.56 12.06 10.36 7.55

iii. Depreciation 0.00 2.52 3.08 2.30 1.73

iv. Taxation 0.00 0.76 0.92 0.89 0.30

v. Net Profit 1.64 5.28 8.06 7.17 5.52

vi. dividend

Amount 0.00 0.09 1.17 1.17 1.21

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Vii profit retained in business

1.64 5.28 8.06 7.17 5.52

Ix intrest 0.04 0.01 0.01 0.01 0.01

x PBDIT 1.68 8.57 12.07 10.37 13.85

Xi PBDT 1.64 8.56 12.06 10.36 7.55

K. RATIO ANALYSIS

i. Current Ratio 0.80 0.87 1.05 1.33 1.14

ii. Total Debt/Equity 6.58 5.68 3.97 1.62 2.35

iii. Gross Profit/Sales

7.78% 12.52% 9.08% 7.65% 3.84%

iv. Net Profit/Sales 7.78% 7.72% 6.07% 5.29% 2.81%

v. Debtors/Sales 2.32 4.63 3.22 2.70 1.60

vi. Creditors/Purchase

19.03 9.82 8.83 3.30 0.60

vii. Interest Coverage Ratio

42.00 781.00 1115.00 948.00 2.15

viii. Current Asset Turnover

0.86 1.34 2.98 3.61 3.19

Net Working Capital (6.42) (8.22) 3.62 12.40 9.23

13. Comments on financial indicators, in brief:1. Sales Turnover:

The turnover has picked up from rs 21.70 lacs as of 31.03.2009 to rs 68.37lacs as of 31.03.2010 and for the year ending on 31.03.2011, the sales turnover further increased sharply to rs 140.76 lacs . The party has estimated a turnover of rs 144.58 lacs and rs 209.64 lacs for the 58 | P a g e

next year ended on 31.03.2012 respec. The firm has informed that they have made sales of rs 88.64 lacs and received labour charges of rs 28.82 lacs during the period from april 2011 to February ,2012 As per the sales tax returns the sales of the company is as under :Particulars Amount (in rs)For the quarter ended on june 2011 4507364.00For the quarter ended on September 2011 3881693.00For the quarter ended on December 2012 277296.00Total 8666353.00 The requirement of enhanced limits is justified based on the huge orders on hand as stated below.

Sl .No Particulars Order Value Under execution/Pending

1 Coating &Coating (India)Pvt Ltd 387.25 358.712 HikalLtd (Three Orders) 13.22 13.223 Sarbi Petroleum 68.11 68.114 Unfab Engg.Projects Pvt Ltd 4.26 2.10

Total 472.84 442.14

The party has informed that order at Srl no 1 and 4 is partly completed . The proprietor is confident to execute the above orders, but due to shortage pf working cpital they are unable to bid for more orders. They have all the required infrastructure / machinery etc to execute and complete the project in time.

The above orders will be executed during the up coming years and the promoter has required infrastructure for carrying out the said order and accordingly projected for the year ending 31.03.2013 is considered as achievable and accepted for assessment

In view of the aforesaid and our past experience of the promoter in their associate concern the estimated/ projected sales turnover for the year ending 2012 and 2013 is considered as reasonable and accepted.

Profits :The net profit has increased from rs1.64 lacs for the year ended 31.03.2009 to 5.28 lacs as of 31.03.2010 an increase of almost 300% which is on account of corresponding increase in operating efficiency. similarly there is further increase in profit to rs 8.06 lacs during the year 2010-11 .However the firm is projecting the net profit at rs 7.17 lacs for the year 2012.

The company has projected the profits in line with the above points for the coming yeasr , and seems to be achievable

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Capital/Net Worth /Total Debt Equity Ratio: The capital of the company is in increasing trend due to retention of retained earning. TDER of 2009 was 6.58 which improved to 3.97 due to retention of profit in 2010-11

Adjusted Current Ratio: The current ratio of year ending on 31.03.2009 and 31.03.2010 was 0.80 and 0.87 respectively which improved to 1.05 as of 31.03.2011. this is due to high trade creditors .but the same is estimated to improve to a satisfactory level of 1.33 as of 31.03.2012.By retaining the in the business the current ratio will improve to accepted level. Similarly for the year ending 31.03.2013 the current ratio is projected at 1.14 on account retention of profits in business. The estimated / projected level of current ratio for 31.3.2012 & 31.03.2013 can be considered as satisfactory except for the year ending 31.03.2009 and 31.032010 which is on account of high trade creditors and fixed assets.

Interest Coverage Ratio : The ratio for the past two years and estimated / projected for the current year ending 31.03.2012 &31.03.2013 is above the minimum requirement of 1.50 as per credit policy guidelines and hence considered as satisfactory and acceptable.

Current Asset Turnover Ratio : This ratio for the year ending 31.03.2012 & estimated for 31.03.2013 as well as last two years is above the bench mark level of 1.75 and is expected to improve further in view of the increase in volume of operations which can be considered satisfactory

The overall performance of the firm is expected to improve during the current year ending 31.03.2013 & they have ordes on hand / expected orders which are to be executed during 2012-13. This will improve the profitability and other financial parameters to fall in line with the policy guidelines.

Additional comments, if any along with investments details in associate /sister concerns, comments on balance sheet, auditors remarks etc. are as per Annexure. However, if such comments will have material effect on financials of the company, that should be part of the main proposal note.

I. Auditor’s remarks and Management replies. No major observations

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II. Contingent Liabilities NIL

III. INTER-FIRM COMPARISON (PEER GROUP) ( Rs in lacs)(In case aggregate limit exceeds Rs.5000 lakhs)Particulars Our borrower Company A Company B Company CSales NILNet WorthNet ProfitBorrowing D/E RatioCurrent Ratio

14. ASSESSMENT OF WORKING CAPITAL REQUIREMENTS (Turn over Method) ( Rs in lacs)

Actual Estimated ProjectedYear ending 31.03.2011 31.03.2012 31.03.2013Gross Sales/Projected Accepted Turnover 140.76 144.58 209.64

Total Working Capital Requirement25% of Gross Sales/Projected Sales

35.19 36.15 52.41

Of this Bank Finance is to the extent of 20% of Gross Sales/PAT

28.15 28.92 41.93

Minimum Net Working Capital/Promoters Margin5% of Gross Sales

7.04 7.23 10.48

Actual Net Working Capital 3.62 12.40 9.23

Max. Permissible Bank Finance 14.48 30.92 36.92

Total Existing Working Capital limits Nil Nil 42.00Excess borrowing, if any, to be converted into Working Capital Term Loan

B INVENTORY AND RECEIVABLE LEVELS: (Rs in lacs)

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Inventory Last accepted

Actual 31.3.010 Actual 31.3.11

Estimate 31.3.12

Projection 31.3.13

Level Mths Value Mths Value Mths Value Mths Value

Work in progress

4.88 24.76 0.94 9.48 0.64 7.03 2.25 35.43

Receivables 4.63 26.38 3.41 37.76 2.51 30.46 1.45 26.21

Creditors 9.82 46.22 8.83 61.24 3.00 27.19 0.54 8.75

Note: In case of assessment being done under Turnover Method or Cash Budget Method, use format for MPBF computation as per annexure.

Comment on holding level : Receivables are estimated at 1.45 months for the year ending 31.03.2012 which is below the actual level of 2.51 in 2012 & 3.41 in 2011. The firm has clarified that actual of past years cannot be compared as they were not having any working capital limits and they were depending on market credit . further , with competition in their type of business, the party has to extend some credit to their buyers and the estimate level is the conservative level estimated by the party. The same can be considered as reasonable when compared to their past trend and hence accepted for assessment purpose.

Inventories /Work in progress are estimated / projected at 2.25 months 2013 as against the actual level of 0.64 months in 2012, 0.94 months in 2011. The estimated and projected level is on higher side as the party has represented that they have huge orders in hand and they have to maintain adequate inventory to complete in time . Apart from this, the party has clarified that there is always some time gap in execution and billing process due to which the inventories at the end of financial years also differ. But ,looking to the nature of work / nature of job involved the estimated level is considered as acceptable.

Sundry Creditors: are estimated at 0.54 months in FY 2013 as against 3.00 months in 2012 8.83 months in 2011. Party has clarified that they have not been enjoying any fund based limits and hence have to depend on the credits extended by the seller which was very costly. with the availability of working capital limits, the party will be depending less on market credit. In view of the above, the estimated / projected level of creditors is considered as reasonable and acceptable.Based on the above accepted level of inventory and other components of current assets, MPBF as per Turnover Method is computed at Rs. 45.00 lacs for the year ending 31.3.2013 on the

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accepted level of turnover of gross receipts of Rs. 229.64 lacs which is recommended for consideration.

C Comments on assessment of working capital with justification

The firm is one of the leading manufacturers of equipment & other accessories. They have huge orders on hand/ under execution worth Rs. 442.14 lacs. The party has estimated sales turnover of Rs. 229.64 lacs for the year ending 31..3.2013 which they are confident to achieve as they have following g orders

Sl No Particulars Order Value Under execution/Pending1 Coating& Coating (India) Pvt Ltd 387.32 358.712 Hikal Ltd.( Three Orders) 13.22 13.223 Sarbi Petrolium 68.11 68.114 Unfab Engg. Projects Pvt. Ltd 4.26 2.10

Total 472.84 442.14

Based on the above orders and their performance for FY 2012, the estimated level of sales turnover of Rs. 209.64 lacs for the year ending 31.3.2013 made by the party appears to be achievable and hence accepted for assessment purpose.

The firm has requested for WC Limit of Rs. 45 lacs. For the projected turnover of Rs. 209.64 lacs for the year 2013 the WC Limit works out to Rs. 41.92 lacs ( Say Rs. 42 lacs) provide the firm has matching contribution of Rs. 10.48 lacs i.e. 5% of the projected turnover against which

the firm has NWC of Rs. 3.62 lacs as of 31.3.11. The firm has estimated NWC at Rs. 12.40 lacs as of 31.3.12. However, the firm has projected NWC at RS. 9.23 lacs as of 31.3.13. We stipulate that firm to bring additional Rs. 3 lacs during the year 2012-13 to have matching contribution in business.

Since the WC Limit requirement works out to Rs.42 lacs, however considering the position of NWC as of 31.03.11, we propose that initially.50% of the proposed limit i.e. 21 lacs to be released and balance 50 % to be released only after submission of Audited Balance Sheet as of 31.3.2012.

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15. Assessment of Term Loan : NA

16. Assessment of Non fund based limits

A Letter Of Credit : NAB Bank Guarantee :

The firm is engaged in the business Manufacturing of Chemical Equipments, Vessels & Heat exchangers in Ferrous and Non Ferrous Material etc. The firm has undertaken several projects in the past. The firm is having several orders in hand from Hikal Ltd, Sarbi Petrolium and Unifab Engg. Projects Pvt Ltd etc.

At present the firm has secured work orders on hand/ under execution aggregating to Rs. 360.81 lacs and orders under pipeline aggregating to Rs. 81.33 lacs The firm is required to give bank guarantee towards the performance of the work orders which is estimated to be around 5-10% of the contract value. In view of the same they have approached our branch with the request for considering fresh bank guarantee limit of Rs. 20.00 lacs with 25% margin in the form of Term Deposit. Unsecured portion of the guarantee will be secured by collateral security in the form of immovable property as detailed elsewhere in this proposal and also charge over current assets in the form of stock & receivables. The guarantee limit is therefore fully secured.

A. BANK GUARANTEE

a Purpose of the limit For performance / financialb Nature & amount of limit sanctioned Nilc Outstanding as on 31.05.2011 Nild Whether the existing limit is proposed to be continued, if so, justification

Fresh

e Name of the beneficiary/ i.e. in whose favour guarantees to be issued

Various Limited companies/ MNC etc as per the list attached

f Nature of the guarantee limit required i.e. performance/ financial/ Bid Bond etc.

Rs. 20.00 Lacs

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g Assessment and justification for the limit proposed *

Given above

h Margin proposed 15 % for performance & 25 % for financial guarantee

i Security Uncovered portion to be secured by our charge on the collateral security, current assets and unencumbered fixed assets

J ECGC cover for export performance NAk asset coverage for non-fund based limits NA

17. Views/ comments on the conduct of the account : FreshA Comments on utilization of both fund and non fund based limits

Whether stock statements are submitted every month. If not submitted regularly mention the date of last stock statement

NA

Whether operations are within sanctioned limits Na

Whether limits are utilised optimally /satisfactorily NA

Frequency of inspection of stocks. Date of the last inspection and irregularity/adverse features, if any observed and steps taken to set right the same.

Pre sanction visit is carried out by the branch on and the operations are found to be satisfactory

Insurance cover - Whether securities adequately insured and in force

Insurance cover : Amount and In force upto : (date)

NA

Whether terms and conditions of previous sanction have been complied with, if not, specify time frame to complete (with explanation) & permission obtained from competent authority

NA

Whether certificate from Pollution control Board has been obtained. Yes

Whether the borrower is facing any litigation from banks /FIs/creditors/ Govt. Dep’t. / Statutory bodies etc., if so, state in brief.

NO

In case of consortium advance, whether our bank is getting proportionate share of business

NO

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Additional / temporary limits sanctioned subsequent to the last regular sanction and whether same is liquidated on due date or not

Nil

Outstanding amount of unhedged Foreign Currency Exposures NIL

Rs in LacsParticulars Last year Current year(2011-12)

Sales – ActualPurchasesCredit SummationDebit Summation ( NOT APPLICBLE)Minimum BalanceMaximum BalanceLC Devolved - Number AmountGuarantee Invoked: Number AmountWhether sales and purchase figures match with the turnover in the account

B Income value of account

(Rs. in Lakh)Last year

2009-10

Current year

2010-2011

Value of account (Deposits) (FRESH LIMIT PROPOSED)

Process Fee recovered

Interest earned

Exchange income

Commission earned

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Income from Third party products / insurance

Others (Lead Bank Fee, Commitment fee, Penal Interest, Syndication fee)

TotalTurnover in Foreign Exchange Business

Deposits placed (Owner Directors/ partners or Family Members, Relatives & Friends)

- Current

- Savings

- Term Deposits

a. Adverse features affecting credit decision and action proposed b (including non compliance to terms and conditions of sanction and present position)Sr No Pending Matters Present position Steps taken / Remarks

NA

C.MAJOR INSPECTION / AUDIT IRREGULARITIES POINTED OUT IN THE LAST INSPECTION REPORT

Brief details of irregularities reported

Compliance Status

1 Internal Inspectors Not Applicable2 RBI-AFI Inspectors3 Statutory Auditors4 Stock Auditors5 Credit Auditor

d. Directors’ name figuring in RBI/ Wilful Defaulters’ / CIBIL / SAL – ECGC list and comments thereon. Impact on taking exposure where names are appearing in the defaulters list : The CIBIL Report of one of the Guarantor Mr. S. K shukla shows two settled credit card without any overdue

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e .Position of statutory dues and incentives receivables

Provident Fund, ESI and Superannuation contribution paid upto CA Certificate from M?S Mahadevan & Co Chartered Accountants ( M-45184) dated 01.03.2012 obtained and verified kept on record

Wages and salaries paid upto

Sales Tax paid upto

Service Tax paid upto

Income Tax Assessment completed upto and for the year ending #

Advance Tax paid for the year ending

Excise duty paid upto

Municipal Tax, Octroi etc.

Incentives from the Government and other agencies

Disputes not acknowledged as debts

Contingent Liabilities (Likely to turn into Liabilities)

Reconciliation of Debtors/ creditors

CA certificate to be obtained and kept on record

# Wherever borrowers encounter tax disputes, searches, raids by tax authorities, details along with proceedings and present status should be reported.

F.Group dealings/experience & desirability of further exposure:

RISK ASSESSMENT

Industry/ Activity risks:

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As the Company is in the Business of manufacturer of equipment, demand depends more on various companies. any recession may affect the business of the company.

Risk mitigation factors

The firm has received huge orders from various companies for supply of equipments and their performance for 2011 also indicates increased demand for their product, The party does not envisage any problem in getting orders.

Borrowers/ Business risk

As business of units requires working capital in the form of fund based limit and guarantee limits failing which the execution of orders may get affected.

Risk mitigation factors

The party has requested fresh fund based limits are also proposed which will take care of working capital limits and smooth execution of the orders apart from bank guarantee.

Security Risk

The firm takes orders from private companies, payments from whom may get delayed depending on the cash flow of that company.

Risk mitigation factorsContracts are carried out on behalf of reputed multinational companies and other limited companies and there is no default in the past. Further, limits are secured by Collateral Securities to the extent of 100 % which is above the minimum required level of 10 to 20 %

Other Risk - NIL

18. COMPLIANCE OF RBI / BANK LOAN POLICY GUIDELINES : NIL

COMPLIANCE FOR TAKEOVER NORMS : NA

19 MODIFICATION IN EXISTING TERMS OF SANCTION IF ANY : NA

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20 VIEWS/ RECOMMENDATIONS OF THE CREDUT COMMITTEE :

Thane RO credit committee has cleared the proposal in its meeting held on 20.04.2012

21 DISCRETIONARY POWER FOR SANCTION AND FOR APPROVAL OF DEVIATION, IF ANY : Dy. General manager ( TRO) for Noting

22 BRANCH RECOMMENDATON

1. M/S S.P Chemi equipment is a Proprietorship concern established in 200 by Mrs. Jadawati S. Shukla who is young and energetic woman entrepreneurs. The firm is operating from its own premises at A-20, IDC, Ambernath and is engaged in the business of manufacture of Chemical equipments, vessels & Heat exchangers in Ferrous and non ferrous material.

2. The firm has orders on hand/ under execution pipeline aggregating to Rs. 442.14 lacs and party needs working capital limits to complete said orders. To execute the same they are in need of working capital limits in the form of CC Hypo limits and Guarantee limits for issue of Guarantee at various stages of execution which is assessed herein above and recommended for consideration.

3. The net worth has also improved due to retention of profits in business the financial parameters also have improved during 31.03.2011

4. The collateral security coverage is 100%5. Based on the audited balance sheet as of 31.03.2011 the rating is done and the account is

rated at BB. We have accepted the rating based on the audited financials of 31.03.2011 and applicable rate of interest is recommended accordingly which is applicable to SME accounts.

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In view of the foregoing, and looking in to the ongoing business scenario, we recommended for considering their request for fresh cash credit limit and bank guarantee as under on the terms and condition of sanction as per annexure attached herewith.

Facility Existing limit Proposed limit Margin Interest/commissionFund based:CCHYPO(ST/BD) NIL 42.00 25%ST

BD 50%BR+2.40= 13.10 % AS APPLICABLE TO SME (BR@10.70%)

NON FUND BASEDGUARANTEE (P/F)

NIL 20.00 25% / 15% CASH / TERMDEPOSITS

AS PER HO GUIDELINES ISSUED FROM TIME TO TIME

TOTAL NIL 62.00

THANE RO OBSERVATIONS / RECOMMENDATIONS:WE endorse recommendation of branch. The limit shall be released subject to compliance of following.

STIUPLATIONS:

The sanctioned limits to be released subject to compliance of the following:a) Creation of our charge on the collateral securities existing as well as proposed after

ensuring that search Report, Title Clearance report and non encumbrance certificate is obtained and verified for clear and marketable title

b) An Undertaking to be obtained from the borrower that they to comply stipulations made in Pollution Controlling Authority.

c) 50%of the Proposed Working Capital Limit i.e. 21.00lacs to be released and the balance 50% to be released only after submission of Audited Balance Sheet as of 31.03.2012.

d) The firm to raise an amount of Rs 3lacs during the year 2012-13 to have matching contribution in the business for the limits of Rs 42lacs.An undertaking to be obtained in this regard before release of limit

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LIST OF ANNEXURES TO THE PROPOSAL

1. Credit rating worksheet – Attached Separately

2. Detailed Terms & conditions. – Annexture - 2

3. Financial Indicators in detail with comments on performance – Already attached in process

note under financial parameters

4. Details of consortium / multiple banking arrangements- Annexture 4

5. Details of Limits enjoyed by Associate / Group concerns – Annexture 5

6. Profile of the group concerns with brief financial indicators – Annexture 6

7. Details of properties/assets etc. Under collateral security viz. Valuer, valuation date,

encumbrance & marketability status etc.

8. Additional comments, if any along with investments details in associate /sister concerns,

comments on balance sheet, auditors remarks etc.

TERMS AND CONDITION FOR THE LIMITS

NAME OF THE BORROWER : M/S .S. P CHEMI EQUIPMENTS

ACCOUNT WITH : AIROLI BRANCH

NATURE OF FACILITY: CASH CREDIT HYPO

(STOCK CUM BOOK DEBT)

EXSITING LIMITS : NIL

PROPOSED LIMIT : RS 42.00 LACS (FRESH)

MARGIN : STOCK 25%

BOOK DEBT 50%

RATE OF INTREST : BR + 2.40 = 13.10 % p.a (BASE RATE @ 10.70%) at present subject to change from time to time as per HO/RBI guidelines.

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TERMS AND CONDITIONS for STOCK :

1. Hypothecation of entire stock of raw materials, work in process, finished goods, stores and spares lying at the factory and various project site .

2. The goods to by fully insured against fire , theft, burglary, pilferage, SRCC, flood, earthquake with bank clause .The place of storage should be mentioned in the insurance policy. Transit risk policy to be obtained if goods are stored at place other than office / godown premises. In case stocks are situated at different places, a separate policy should be taken with banks clauses with location wise details in the stock statement.

3. The firm must submit the stock statement by 15thof every following month. The branch to carry out periodical inspection and fix drawing power based on the valuation of stock statement.

4. Our advance is restricted to manufacturing activities only against fully paid stock. While computing the drawing power, goods sent on consignment, sundry creditors for goods supplied and goods received under DA L/C to be deducted from the value of stock. Sundry creditors ‘statement to be submitted every month along with the stock statement .

5. Dena bank’s nameplate stating ‘goods hypothecated to dena bank’ should be prominently displayed where goods are stored.

6. Old and obsolete stocks should be shown separately in stock statement so as to exclude them while computing drawing power.

7. Stock should be stored at a place which is easily accessible to bank’s official and borrower to extent all co-operations in conducting periodicals inspection.

TERMS &CONDITION FOR BOOK DEBTS

1. Hypothecation of all book debts arising out of the genuine sale transaction2. No advance will be allowed against the book debts of associates / sister concerns.3. Statements of book debts showing age wise break up to be submitted to the branch every

month on or before 15th. While arriving at the dp , bills already purchased and discounted should be excluded.

4. A general power of attorney should be given by the company to collect proceeds of book debts directly

5. An undertaking should be submitted by the company that realization from book debts would be deposited in the account from time to time.

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6. A statement of book debts duly certified by chartered accountant regarding the age of the book debts, quality etc.should be submitted every quarter by the firm.

7. While computing drawing power , book debts exceeding 90 days will be excluded 8. Branch to obtain letter / undertaking from the party that all proceed in respect of work

carried out by the firm at various sites would be deposited in our bank only.

NATURE OF FACILITY : GUARANTEE (F/P)

SANCTIONED : 20.00 LACS

MARGIN : 15 %(P)/25%(F)

COMMISSION : AS PER HO GUIDELINES

TERMS & CONDITIONS FOR GAURANTEE LIMITS:-

1. 100% Counter guarantee to be executed by borrower.

2. The Guarantee will be delivered directly to the beneficiary and will not be handed over to the party

3. The period of Guarantee should not exceed 12 months

4. The uncovered portion of the Guarantee amount to be covered by or charge on the collateral securities and also by way of extension of our charge on current assets and unencumbered portion of fixed asset

OTHER TERMS & CONDITIONS

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1. Our usual set of documents to be executed by the borrower.

2. Our advance to be guaranteed by Mr. SunilKumar Lalit Prasad Pandey & Mr Shaliendra Kuamar Shukla.

3. All the assets charged to the Bank(prime as well as collateral securities) to be fully insured against fire,theft,earthquake,SRCC breakdown of machinery with bank clause.

4. Process fee/Supervision charges/ godown charges/ commitment charges wherever applicable to be paid by the firm as per H.O guidelines.

5. The firm should ensure that there are no inter firm/ unit transfer of funds except for genuine sales transactions.

6. Bank will have a right to examine all the times firm’s Books of accounts, assets etc and have the firms workings and operations examined from time to time by the officers of the Bank/ or technical experts and/ or management consultancy and fees to be borne by the company.

7. Guidelines issued by HO/Ro from time to time are to be strictly adhered to.

8. Date of reconsideration- one year after sanction, subject to the advance being repayable on demand.

9. The firm should not enter into borrowing arrangement of any sort with any other Bank, financial institution, company otherwise, save not expect to the extent of working capital arrangements agreed.

10. The firm should keep the bank informed about the happening of any event such as labour problems, power cuts, litigations, Govt, action etc or such events that are likely to adversely affect the financial health of the company to its subsidiaries.

11. All te remarks/deficiencies pointed out by the Statutory Auditors/Stock Auditors/RBI Inspectors/Concurrent Auditors from time to time to be rectified as and when informed by the branch.

12. In case the firm commits default in repayment of the loan/credit facilities,interest,additional interest or any other dues that may arise out of the loan amount/financial assistance, the Bank reserves the right to disclose or publish the names of the partners of the fir in such a manner and through such media as the Bank/Reserve Bank Of India in their absolute discretion may think fit.

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13. All the terms and conditions pertaining to advances sanctioned to be conveyed to the borrower in writing and acknowledgement to be obtained in this respect from the borrower and kept on branch record.

14. The branch to submit certificate confirming compliance of all the terms and conditions stipulated here in above within one month without fail.

15. The Bank reserves the right to vary any terms and conditions of sanction.

16. Unencumbered Plant & Machinery, equipments, Furniture/fixtures etc existing as well future to be taken as additional security to cover its arrangements.

17. The firm to authorize the Bank to debit the account towards insurance premium in case insurance/non-renewal of insurance

18. The advance is secured by following collateral securities.

(Rs. in lacs)Nature of Security Type of

ChargeValue Basis / Source Whether

eligible under CRM

PlotNoA-20,MIDC,Anand Nagar, Addl. Amernath Industrial Area, Ambernath(EAST) admeasuring 800sqmt

EM 215.00 Declared by borrower vide letter dtd 22.04.12

NO

Plant & Machinery Hypo 105.00

19. The legal documents executed by the firm including creation/extension of equitable mortgage are duly got verified by the Legal Officer Ro/advocate from Bank’s approved panel and certificate to the effect that the same are in order to be obtained and kept on branch record.

23. STIUPLATIONS:

The sanctioned limits to be released subject to compliance of the following:a) Creation of our charge on the collateral securities existing as well as proposed after

ensuring that search Report, Title Clearance report and non endurances certificate is obtained and verified for clear and marketable title

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b) An Undertaking to be obtained from the borrower that they to comply stipulations made in Pollution Controlling Authority.

c) 50%of the Proposed Working Capital Limit i.e. 21.00lacs to be released and the balance 50% to be released only after submission of Audited Balance Sheet as of 31.03.2012.

d) The firm to raise an amount of Rs 3lacs during the year 2012-13 to have matching contribution in the business for the limits of Rs 42lacs.An undertaking to be obtained in this regard before release of limit.

FINANCIAL INDICATORS

Already Given

Annexure 4

DETAILS OF CONSORTIUM / MULTIPLE BANKING ARRANGEMENTS (Rs. in lakh)Particulars % Share EXISTING PROPOSED

FB NFB FB NFBOur Bank

NILOther Member BanksTotal(Details as per Annexure)

Annexure 5

Limits enjoyed by Associate / Group concerns: (Rs. In lakh)A. With our bank

Name BranchDetails of limits Last sanction Asset

ClassificationFBWC TL NFB Date Authority

NA. No associate concern (Rs. In lakh)

B. With other bank/FIs/others

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NameBank/FIs /Others

Details of limits Outstanding Asset ClassificationFBWC TL NFB FBWC TL NFB

Not applicable

Annexure 6

Profile of the group concerns with brief financial indicators:- NA

Annexure 7Details of properties/assets etc. Under collateral security viz. Valuer, valuation date, encumbrance & marketability status etc.

Collateral Security (Rs. in lacs)Nature of Security Type of

ChargeValue Basis / Source Whether

eligible under CRM

PlotNoA-20,MIDC,Anand Nagar, Addl. Ambernath Industrial Area, Ambernath(EAST) admeasuring 800sqmt

EM 215.00 Declared by borrower vide letter dtd 22.04.12

NO

Plant & Machinery Hypo 105.00

The Fresh Title and Valuation of the properties mentioned to be obtained from our empanelled Advocate and Valuer before disbursement of limit, The Property should be N.A. Mort gable and free marketable, The Legal Marketability of the said collateral properties shall be confirmed by the Regional Office before disbursement. In case there is any problem in title or shortfall in valuation, he company will provide proportionate additional collateral security. The Collateral shall be at least 100%.The Branch Manager has to submit the Visit Report of Immovable Properties as well as Stock before disbursement.

Name of officials who have visited the properties should be mentioned: Branch manager Mr S.J.Kamble on 14.01.2012

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