suhail summer project report new

8/6/2019 Suhail Summer Project Report NEW

1/124


2/124

IES Management College and Research Centre

Bandra, Mumbai

MAY JUNE 2011

Students Declaration

I hereby declare that this report, submitted in partial fulfillment of the requirement for the award for

the Suhail Gaziani, to IES Management College and Research Centre is my original work and not used

anywhere for award of any degree or diploma or fellowship or for similar titles or prizes.

I further certify that without any objection or condition subject to the permission of the company

where I did my summer project, I grant the rights to IES Management College and Research Centre to

publish any part of the project if they deem fit in journals/Magazines and newspapers etc without my

permission.

Place : Mumbai

Date : 15th July, 2011

---------------------------------Signature

Name : (Suhail Gaziani)

Class : (PGDM B)

Roll No. : PG-10-75


3/124

Certificate

This is to certify that the dissertation submitted in partial fulfillment for the award of PGDM

of IES Management College and Research Centre is a result of the bonafide research work

carried out by Mr. Suhail Gaziani under my supervision and guidance. No part of this report

has been submitted for award of any other degree, diploma, fellowship or other similar titles

or prizes. The work has also not been published in any journals/Magazines.

Date: Industry guide

Signature of the Industry Guide: ______________

Name of Industry Guide: ____________________

Company : _______________________

Place: Designation : _______________________

Faculty guide

Signature of faculty Guide : _________________

Name of the faculty guide : __________________

Core Faculty

IES Management College

and Research Centre


4/124

ACKNOWLEDGEMENT

In my endeavor to learn the basics of Credit Rating, I would like to thank Dena Bank for

providing me an opportunity to work with their Bandra-Kurla Complex Branch, Mumbai. It

would have been a difficult task to give shape to this project without the guidance, and

encouragement of certain very important people. I hereby take this opportunity to thank my

project guide, Mr Raj Kapoor, Chief Manager, Dena Bank, Bandra-Kurla Complex Branch,

who has always been there to provide me with necessary inputs and keeping me motivated

during the project. This project was possible purely because of her kind co operation.

Further, I am extremely grateful to my Faculty Guide, Prof. Vijay Shahane who has taken

great pains to assist me in my project by guiding me throughout from the time of deciding the

project title till the very date of its submission. He has always been approachable and helpfuland has been kind enough to clarify all my doubts.

I would also like to thank the people at Dena Bank, Bandra-Kurla Complex Branch for their

co-operation and for giving me a platform to hone my skills.

Suhail Gaziani

PGDM (Finance) 20010-12

15th July 2011


5/124

TABLE OF CONTENTS

List of Tables, Charts, Graphs, etc.List of Abbreviations.


6/124

EXECUTIVE SUMMARY

With the growing trend of Indian exports and imports, India is slowly establishing itself as a

global powerhouse for trade. The Government of India is taking up initiatives to encourage

private and foreign investment in India in almost every sector today. Also a good number of

financial institutions have stepped forward to provide funding for projects in various sectors.

Banks see excellent opportunities in providing both project as well as trade finance in various

sectors across the country.

Financing is absolutely crucial to the growth of the economy of the nation. It is the basis on

which an entrepreneur can start up his new business, run is business or diversify his existingbusiness. It is through financing that an entrepreneur can realize his dreams, can get a

breakthrough with a new innovative Idea which can bring a revolution or become a mega

trend in the nation. All that is required mainly to push a person to achieve unimaginable

success can only be achieved if he has the blood (money) of the business which is exactly

what financing is all about.

This project has been carried out with an aim to understand how working capital financing

takes place and how banks do their credit risk management when it comes to financing Textile

enterprises.

Firstly, one needs to understand the banking structure of the country, its working, the products

and services provided today. Then one needs to focus on trade finance products, especially

those provided by nationalized banks. It is important to understand the client who would be

availing the loan. The type of the business plan he has, the kind of location where he would

have his plant, the amount of experience the promoters have, the kind of financial background

and would the business plan be successful not just in the existing conditions of the economy

but also if the economic conditions go worse. Finally the bank should match his requirements

with the clients requirement and avail the finance as requested by the client.


7/124

INDIAN BANKING INDUSTRY

The last decade has seen many positive developments in Indian Banking sector. The policy

makers, which comprise the Reserve bank of India(RBI), Ministry of Finance and related

Government and Financial sector, Regulatory entities have made several notable efforts to

improve regulation in the sector.

The sector now compares favourably with banking sectors in the region on metrices like

growth, profitability and non performing assets.

Economic Liberalization & Financial Sector reforms introduced in 1991 followed by Second

Phase of Financial Sector reforms in 1997 ushered in an era of fast track growth in size,

technology and deliverables of Banks in India.

The initial phase of financial sector reforms focused on modification in the policy frame

work, improvement in financial health through prudential norms. The second phase laid

emphasis on strengthening the foundations, streamlining procedures, upgrading technology,

human resource. The financial sector reforms gradually moved the Banking Industry from a

regulated environment to a deregulated market economy. In this process, banking operations

transformed itself from its traditional intermediary role to a business of risk return trade off.

Every micro and macro aspects of banking are put to Risk Return Matrix. The demand for

Risk Adjusted Returns on Capital (RAROC) based performance measures will be used to

drive pricing, performance measurement, portfolio management and capital management

Though the Sub-prime crisis that evolved in August 2008 and affected over 140 banks

worldwide did not have much impact on Indian financial sector. However, the year 2010-11

has witnessed a turnaround in the performance of the economy. Companies in most sectors

have posted good financial results. Alongside, the spectra of inflations has also become

evident.


8/124

Banking industry passed through a phase of liquidity deficit arising from sharp acceleration in

credit growth coupled with sluggish deposit growth. This prompted the Central bank to raise

policy rates several times during 2010-11. In its midterm policy review in March2011, the

RBI hiked Repo and Reverse Repo Rates by 25 basis points to 6.75% and 5.75% respectively.

As per CMIE Industrial production is estimated to grow by 9-10% in 11-12.Neither high

inflation nor an increase in interest rate is expected to hurt the Industrial growth. Income of

Indian consumers is expected to grow at much faster pace than inflation in 2011-12.

The corporate to grow by 16.3% in 2011-12 owing to healthy demand for goods and services.With these projections Banking Industry is expected to grow at 18.8% in 11-12 over an

estimated growth of 15.4% in 10-11. Core Interest Income is expected to rise by 20.4 % in the

year 11-12.


9/124

OVERVIEW OF DENA BANK

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 inSection 6 of the Banking Regulations Act, 1949.

Milestones

y One among six Public Sector Banks selected by the World Bank for sanctioning a loan

of 72.3 crores for augmentation of Tier-II Capital under Financial Sector

Developmental project in the year 1995.

y One among the few Banks to receive the World Bank loan for technological

upgradation and training.

y Launched a Bond Issue of ` 92.13 crores in November 1996.

y Maiden Public Issue of ` 180 Crores in November 1996.

Dena Bank has been the first Bank to introduce:

y Minor Savings Scheme

y Credit card in rural India known as "Dena Krishi Sakh Patra" (DKSP)

y Drive in ATM counter of Juhu, Mumbai

y Smart card at selected branches in Mumbai

y Customer rating system for rating the Bank Services


10/124

Financial Standings of Dena Bank

Financial results for year ended on 31st March 2011

(` in lacs)

31.03.2011 31.03.2010

1 Interest Earned 503353 401036

2 Other Income 53384 58863

3 Total Income 556737 459899

4 Interest expended 327016 291033

5 Operating expenses 30884 22084

6 Total expenditure 434358 375841

7 Operating Profit 122379 122379

8 Provisions (other than tax) & Contingencies 32520 15379

9 Exceptional Items 0 0

10 Profit(+)/Loss(-) from Ordinary Activities before tax 89859 68679

11 Tax Expense 28696 17554

12Net Profit(+)/Loss(-) from Ordinary activities after

tax61163 51125

13 Extraordinary Items (net of tax expense) 0 0

14 Net Profit(+)/Loss(-) for the period 61163 51125

There are three main sectors among which the lending services of a bank can be divided as

follows:

y Retail Lending

y MSME (Micro, Small and Medium and Enterprises)

y Project Financing (Industrial Financing)


11/124


12/124

Under Standardised approach, banks are not permitted to use their internal ratings and have to

be guided by External ratings, as per RBI guidelines. Under the Internal Rating based

approach, subject to regulatory permissions, banks may use their internal ratings.

Under Standardised approach, the use of external credit ratings is governed by certain rules to

ensure that banks do not indulge in cherry picking. The applicability of the rules framed by

Reserve Bank of India, in its final guidelines for implementation of the Basel II norms, makes

it necessary for banks to adopt a board approved policy for the purpose.

Internal Credit Rating System for credit exposures was introduced in October, 2000. With the

passage of time and need for necessary modifications, the Bank had adopted two credit ratingmodels for all credit exposures of Rs. 10 lakhs and above, with approval of the Board. These

models were, operationalised in January, 2004 and further improved in August 2005;

With the further passage of time and with a view to capture further possible risks under

various categories of risk and to introduce more models for different types of borrowers or

products, four different credit rating models were introduced with the approval of the Board

with effect from 1st April, 2010. Three models were based on the size of limits and fourth

model was for Infrastructure sector and large projects of size of over Rs. 100 crores.

Further, fifth model for projects (other than Infrastructure sector) of size up to Rs. 100 crores

and five models for Retail Banking Products have been introduced with approval of the Board

at its meeting held on 27.01.2011.

In the case of non-SLR investments, the time available for taking an investment decision is

rather limited and the only available data source is the Offer Document or Prospectus.

Therefore, it is necessary to use a very simplified credit rating model for such exposures.

Accordingly a simplified credit rating model is in place based on Investment Policy of the

Bank. However, external ratings wherever available, are also given due consideration in

arriving at a decision.


13/124

OBJECTIVE AND SCOPE OF THE STUDY

The project aims to study and analyze the Credit Rating Model adopted by Dena Bank for

Credit Rating and its application on Textile Industry.

The objective of the study is to understand the parameters that play a key role in enhancing

the ratings of borrowers obtained by this model. The project attempts to find the drivers of a

good rating and how this information can be used by borrowers in reducing their interest

burden.

The study focuses on the credit rating process undertaken by Dena Bank for the purpose ofgiving out loans and deciding upon the rate of interest to be charged.


14/124

RESEARCH METHODOLOGY

http://www.txcindia.com/html/monthlyreport.htm

For this study the following approach has been adopted:

Then, the rating officers and validators at Dena Bank in Mumbai were surveyed through face

to face interactions that can help in generating good ratings for borrowers.

LIMITATIONS

This project has been undertaken in Mumbai and is, therefore, specific to the accounts

handled by the rating officers of this region and their level of experience.


15/124

INDIAN TEXTILE INDUSTRY

The Indian textile industry is one the largest and oldest sectors in the country and among the

most important in the economy in terms of output, investment and employment. The sector

employs nearly 35 million people and after agriculture, is the second-highest employer in the

country. Its importance is underlined by the fact that it accounts for around 4% of Gross

Domestic Product, 14% of industrial production, 9% of excise collections, 18% of

employment in the industrial sector, and 16% of the countrys total exports earnings. With

direct linkages to the rural economy and the agriculture sector, it has been estimated that one

of every six households in the country depends on this sector, either directly or indirectly, for

its livelihood.

A strong raw material production base, a vast pool of skilled and unskilled personnel, cheap

labour, good export potential and low import content are some of the salient features of the

Indian textile industry. This is a traditional, robust, well-established industry, enjoying

considerable demand in the domestic as well as global markets.

The global textile and clothing industry is estimated to be worth about US$ 4,395 bn and

currently global trade in textiles and clothing stands at around US$ 360 bn. The US market is

the largest, estimated to be growing at 5% per year, and in combination with the EU nations,

accounts for 64% of clothing consumption.

The Indian textile industry is valued at US$ 36 bn. The export basket includes a wide range

of items including cotton yarn and fabrics, man-made yarn and fabrics, wool and silk fabrics,

made-ups and a variety of garments. Quota constraints and shortcomings in producing value-

added fabrics and garments and the absence of contemporary design facilities are some of

the challenges that have impacted textile exports from India.


16/124

Indias presence in the international market is significant in the areas of fabrics and yarn.

y India is the largest exporter of yarn in the international market and has a share of 25%

in world cotton yarn exports

y India accounts for 12% of the worlds production of textile fibres and yarn

y In terms of spindleage, the Indian textile industry is ranked second, after China, and

accounts for 23% of the worlds spindle capacity

y

Around 6% of global rotor capacity is in India

y The country has the highest loom capacity, including handlooms, with a share of 61%

in world loomage.


17/124


18/124

The fibre and yarn-specific configuration of the textile industry includes almost all types of

textile fibres, encompassing natural fibres such as cotton, jute, silk and wool; synthetic /

man-made fibres such as polyester, viscose, nylon, acrylic and polypropylene (PP) as well as

multiple blends of such fibres and filament yarns such as partially oriented yarn (POY). The

type of yarn used is dictated by the end product being manufactured.

The Man-made textile industry comprises fibre and filament yarn manufacturing units of

cellulosic and non-cellulosic origin. The cellulosic fibre/yarn industry is under the

administrative control of the Ministry of Textiles, while the non-cellulosic industry is underthe administrative control of the Ministry of Chemicals and Fertilisers.

It is well-established that India possesses a natural advantage in terms of raw material

availability. India is the largest producer of jute, the second-largest producer of silk, the

third-largest producer of cotton and cellulosic fibre/yarn and fifth-largest producer of

synthetic fibres/yarn.

The industry structure is fully vertically integrated across the value chain, extending from

fibre to fabric to garments. At the same time, it is a highly fragmented sector, and comprises

small-scale, non-integrated spinning, weaving, finishing, and apparel-making enterprises.

The unorganised sector forms the bulk of the industry, comprising handlooms, powerlooms,

hosiery and knitting, and also readymade garments, khadi and carpet manufacturing units.

The organised mill sector consists of spinning mills involved only in spinning activities and

composite mills where spinning, weaving and processing activities are carried out under a

single roof.


19/124

The competitiveness of composite mills has declined in comparison to the powerlooms in the

decentralised segment. Policy restrictions relating to labour laws and the fiscal advantages

enjoyed by the handloom and powerloom sectors have been identified as two of the major

constraints responsible for the declining scenario of the mill sector.

Nonetheless, overall cloth production in the country has been growing at 3.5% per annum

since 2000, with growth driven largely by the powerloom sector. Being the largest

manufacturer of fabric in the country, the powerloom sector produces a wide variety of cloth,

both grey as well as processed. According to the Ministry of Textiles, there are 1.923 mn

powerlooms in the country distributed over 430,000 units. The sector accounts for 63% of

the total cloth production in the country and provides employment to 4.815 mn people.

The handloom sector is the second-highest employer in the country after agriculture. The

sector accounts for 13% of the total cloth produced in the country, not including wool, silk

and handspun yarn. The production of handloom fabrics had gone up to 4629 mn sq mtrs in

2005, from 500 mn sq mtrs in the 1950s, representing an annual growth of around 4%. The

sector is weighed down by several problems such as obsolete technology, unorganised

production systems, low The Man-made textile industry comprises fibre and filament yarn

manufacturing units of cellulosic and non-cellulosic origin. The cellulosic fibre/yarn industry

is under the administrative control of the Ministry of Textiles, while the non-cellulosic

industry is under the administrative control of the Ministry of Chemicals and Fertilisers. XV

productivity, weak marketing links, overall stagnation in demand and competition from the

powerloom and mill sectors.


20/124

TEXTILE ORGANIZATIONS

The following are some governmental, semi-governmental, private bodies and associations,

which are working for the smooth running of the commerce of textile in India.

The Ministry of Textiles:

A Secretary who is assisted in the discharge of his duties by four Joint Secretaries and the

Development Commissioners for Handlooms and Handicrafts, Textile Commissioner and Jute

Commissioner heads this. The following are the principal functional areas of the Ministry:

y Textile Policy & Coordination

y Man-made Fiber/ Filament Yarn Industryy Cotton Textile Industry

y Jute Industry

y Silk and Silk Textile Industry

y Wool & Woollen Industry

y Decentralised Powerloom Sector

y Export Promotion

y

Planning & Economic Analysisy Integrated Finance Matters

y Information Technology

Advisory Bodies:

y All India Handlooms Board

y All India Handicrafts Board

y All India Power looms Board

y Advisory Committee under Handlooms Reservation of Articles for


21/124

Production

y Co-ordination Council of Textiles Research Association

y Cotton Advisory Board

y Jute Advisory Board

y Development Council for Textiles Industry

Export Promotion Councils:

y Apparel Export Promotion Council, New Delhi

y Carpet Export Promotion Council, New Delhi

y Cotton Textiles Export Promotion Council, Mumbai

y Export Promotion Council for Handicrafts, New Delhi

y Handloom Export Promotion Council, Chennai

y Indian Silk Export Promotion Council, Mumbai

y Power loom Development & Export Promotion Council, Mumbai

y Synthetic & Rayon Textiles Export Promotion Council, Mumbai

y Wool & Woolen Export Promotion Council, New Delhi

Autonomous Bodies:

y Central Wool Development Board, Jodhpur

y National Institute of Fashion Technology, New Delhi

y National Centre for Jute Diversification

Statutory Bodies:

y Central Silk Board, Bangalore

y

Jute Manufactures Development Council, Kolkatay Textiles Committee, Mumbai


22/124

Textiles Research Associations:

y Ahmedabad Textiles Industrys Research Association

y Bombay Textiles Research Association, Mumbai

y Indian Jute Industries Research association, Kolkata

y Man-made Textiles Research Association, Surat

y Synthetic and art silk Mills Research Association, Mumbai

y Wool Research Association, Thane

y Northern India Textiles Research Association, Ghaziabad

y South India Textiles Research Association, Coimbatore

Public Sector Undertakings:

y National Textile Corporation Ltd. (NTC)

y British India Corporation Ltd. (BIC)

y Cotton Corporation of India Ltd. (CCI)

y Jute Corporation of India Ltd. (JCI)

y National Jute Manufacturers Corporation (NJMC)

y Birds Jute Exports Ltd. (BJEL)

y Handicrafts and Handlooms Export Corporation (HHEC)

y Central Cottage Industries Corporation (CCIC)

y National Handloom Development Corporation (NHDC)


23/124

TRENDS IN PRODUCTION


24/124

TRADE SCENARIO

According to the provisional DGCI&S data, textile exports during fiscal 2005- 06 stood ataround US$17 billion, recording a 22% growth year-on-year. Except for man-made textiles,

all segments in the textile industry, including handicraft carpets, wool and silk, have

recorded a growth in exports during 2005-06 -- the first year since the phasing out of the

quota system in the global market.

Readymade garments (RMG) is the largest export segment, accounting for a considerable

45% of total textile exports. This segment has benefited significantly with the termination of

the Multi-Fibre Arrangement (MFA) in Jan 05. In 2005-06, total RMG exports grew by 29%,

touching US$ 7.75 bn. In 2003-04 and 2004-05, the growth in RMG exports was 8.5% and

4.1% respectively. The jump in 2005-06 exports has been largely due to the elimination of

quotas.

Exports of cotton textiles -- which include yarn, fabric and made-ups -- constitute over 2/3rd

of total textiles exports (excluding readymade garments). Overall, this segment accounts for

26% of total textile exports. According to the Ministry of Textiles, in 2005-06, total cotton

textile exports Source: Ministry of Textiles, GoI Source: Ministry of Textiles, GoI XVI were

worth US$ 4.5 bn, implying a growth of 27% over the exports in 2004-05, which were worth

US$ 3.5 bn.

Man-made textiles exports have witnessed a decline of 2.5% in 2005-06. Between 1999-

2000 and 2002-03, man-made textiles exports were growing at around 30% per annum. The

slowdown began since 2003-04 and have been on the decline since.


25/124

Major export destinations for Indias textile and apparel products are the US and EU, which

together accounted for over 75% of demand. Exports to the US have further increased since

2005, post the termination of the MFA. Analysis of trade figures by the US Census Bureau

shows that post-MFA, imports from India into the US have been nearly 27% higher than in

the corresponding period in 2004-05.

Segment-wiseExports, 2002-

2006 (US$ bn)

Category 2002-03 2003-04 2004-05 2005-06

Cotton Textiles 3.62 3.68 3.54 4.49

Manmade Textiles 1.53 1.86 2.05 2.00

Silk 0.49 0.56 0.59 0.69

Wool 0.29 0.35 0.42 0.47

Ready Made Garments 5.75 5.92 6.02 7.75

Handicrafts 1.42 1.11 1.01 1.24

Jute 0.20 0.25 0.28 0.29

Coir & Coir Manufactures 0.08 0.08 0.11 0.13

Total 13.37 13.80 14.03 17.08


26/124

MAJOR TEXTILE PLAYERS

Following are some major players in the field of Indian Textile Industry.

y Arvind Mills: Arvind Mills is one of the major and fully vertically integrated composite

mills player in India. It has large production in denim, shirting and knitted garments. It is

now adding value by manufacturing denim apparel. Its sales are around US$ 300 million.

y Raymonds: Raymonds has the large, diversified integrated business model, which is

spread across the value chain from yarn to retail. It is specialized in Diversified woolen

textiles. It already supplies to some US retailers.

y Reliance Textiles: Reliance Textiles is one of the major Textile Companies that is in the

business of fully integrated manmade fiber. It has capacity of more than 6 million tones

per year. It has joint venture partners like, DuPont, Stone & Webster, Sinco (Italy) etc.

y Vardhaman Spinning: Vardhman deals in spinning, weaving and processing segment of

the industry. It is an approved supplier to global retailers like GaP, Target and Tommy

Hilfiger. Its sales are little over US$ 120 million.

The following are some of the other major textile companies:

y Bombay Dyeing Ltd. (Composite and fully integrated)

y Welspun India (Manufactures terry towels)

y Oswal Knit India (Woolen Wear)

y Sharda Textile Mills (Man-made Fiber)

y Mafatlal Textiles (Fully integrated Composite Mill)

y LNJ Bhilwara Group (Diversified and vertically integrated denim producer

with spinning and weaving capacity)

y Alok Textiles (Cotton and Man-made Fiber Textiles)

y Indian Rayon (Man-Made Fiber)

y BSL Ltd. (Textiles)


27/124

y Century Textiles (Composite mill, cotton & Man-made)

y Morarjee Mills (Fully integrated Composite Mill)

y Hanil Era Textiles (Yarn, Cotton & Man-made Fiber)

y Filaments India Ltd. (Manmade Textiles)


28/124


29/124

GOVERNMENT INITIATIVES

The Governments role in the textile industry has become more reformist in nature. Initially,

policies were drawn to provide employment with a clear focus on promoting the small-scale

industry. The scenario changed after 1995, with policies being designed to encourage

investments in installing modern weaving machinery as well as gradually eliminating the

pro-decentralised sector policy focus. The removal of the SSI reservation for woven apparel

in 2000 and knitted apparel in 2005 were significant decisions in promoting setting up of

large-scale firms. Government schemes such as Apparel Parks for Exports (APE) and the

Textile Centres Infrastructure Development Scheme (TCIDS) now provide incentives for

establishing manufacturing units in apparel export zones.

The new Textile Policy of 2000 set the ball rolling for policy reforms in the textile sector,

dealing with removal of raw material price distortions, cluster approach for powerlooms,

pragmatic exit of idle mills, modernisation of outdated technology etc. The year 2000 was

also marked by initiatives of setting up apparel parks; 2002 and 2003 saw a gradual

reduction in excise duties for most types of fabrics while 2004 offered the CENVAT system

on an optional basis.

The Union Budget of 2005-2006 announced competitive progressive policies, whose salient

features included:

y A major boost to the 1999-established Technology Upgradation Fund Scheme for its

longevity through a Rs 4.35 bn allocation with 10% capital subsidies for the textile

processing sector

y Initiation of cluster development for handloom sector

y Availability of health insurance package to 0.2 mn weavers from 0.02 mn initially


30/124


31/124

SWOT ANALYSIS

Strengths of the Textile Industry:The following are few strengths of the Indian Textile Industry:

y An Independent and self-reliant industry;

y Large and potential domestic and international market;

y Abundant Raw Material availability that helps industry to control costs and reduces the

lead-time across the operation;

y Availability of low cost and skilled manpower provides competitive advantage to

industry;

y Availability of large varieties of cotton fiber and has a fast growing synthetic fiber

industry;

y Promising export potential.

Weaknesses of the Textile Industry:

The following are the few drawbacks of the textile industry, which it has to overcome:

y The Industry is a highly fragmented Industry.

y It is highly dependent on Cotton.

y There is lower productivity in various segments.

y There is a declining in Mill Segment.

y Lack of Technological Development that affect the productivity and other activities in

whole value chain.

y Infrastructural Bottlenecks and Efficiency such as, Transaction Time at

y Ports and transportation Time.

y Unfavorable labor Laws.

y Lack of Trade Membership, which restrict to tap other potential market.


32/124

DENA BANK LENDING SCHEMES

The Dena Banks total exposure to textile sector as on 31.03.2006 was 4.62% as against the

stipulated ceiling of 2.50% in Credit Policy. It is proposed to raise the ceiling to 5.50% in the

Credit Policy.

There is a high level of NPA in the sector (16.44%). Therefore care should be taken while

taking any new exposure in the sector. New exposure should be taken only in case of

borrowers with high credit rating. It is proposed that the new exposure should be taken based

on credit rating of borrowers as per Loan Policy guidelines.

Project viability study is to be taken up for any fresh unit or expansion plans in line with Loan

Policy guidelines.

The incidence of NPA for Jute Sector is very high (88.56%). Although, our exposure in the

sector is quite low, any new exposure in the sector should be undertaken on selective basis

with the approval of General Manager and above.

In recent times, the Denim sector has experienced a downtrend. In view of the same, caution

should be taken while taking any exposure in the Denim sector. Any fresh exposure to Denim

Sector will require an approval at least at the level of Executive Director/ Chairman &

Managing Director.

India has a great potential in Cotton Textile & Garment export segment. Bank should strive to

take exposure in quality accounts in the sector.

The borrowers who require credit facilities for modernization/ upgradation of their units/

plants should be encouraged to take the benefits of TUF Schemes. In case of borrowers who

want to take the benefit of TUF scheme, it should be ensured that all the provisions of the

TUF scheme have been complied with.


33/124

Thrust should be on the advances to commercially viable SME units. It will help the bank in

spreading the risk over a number of borrowers. SME units are also important in terms of the

return, as the interest rate in case of SME units is generally high.

These provisions/ recommendation, if approved and adopted by the Board, will constitute the

lending policy of the Bank in the Textile Sector. The provision specifically mentioned here

will prevail over the Credit Policy of the Bank in case of any conflict. However, in case of

other matters, the provisions of the Credit Policy of the Bank will be applicable.


34/124

BASIC PRINCIPLES OF LENDING

When a bank lends money, it attempts to lend money to those applicants

that are deemed as the best from the applicant pool. The process by which a

lender appraises the creditworthiness of the prospective borrower is called

credit appraisal. This normally involves appraising the borrowers payment

history and establishing the quality and sustainability of his income.

A bank assesses the credit risk of any borrower based on the following 5 C's

of Credit:

Capacity to repay is the most significant of the five factors. The lender willhave to determine the sources of income that the applicant possesses to

repay the loan. The main consideration will be cash flow generated from the

business.

Capital is the money that has been invested by the business owner into

his/her business. The amount of invested capital by the owner is indicative

of the owner's stake and confidence in the viability of his/her business.

Collateral is pledged assets to guarantee the security of a loan. Collateral is

deemed as a second source to fall back in the event of borrowers defaults.

Assets that are typically accepted as collateral are fixed assets of a business

i.e. equipment, plant etc. and also third party securities. Banks also

consider working capital like receivable and inventory to be feasible sources

of collateral for the Prime security.

Conditions focus on the intended purpose of the loan. Also banks consider

the local market and economic conditions both within your industry and

other industries that affect your business e.g. your suppliers and customers.


35/124

Character is the personal impression that a prospective borrower makes to

a potential lender or investor. A person's educational background, industrial experience and

credit history with other creditors will be considered.

NEED FOR CREDIT ANALYSIS

Credit risk is defined as the possibility of losses associated with diminution in the credit

quality of borrowers or counterparties. Credit analysis is done in order to lessen the credit risk

faced by a bank. In a bank's portfolio, losses stem from outright default due to inability or

unwillingness of a customer or counterparty to meet commitments in relation to lending,

trading, settlement and other financial transactions. Alternatively, losses result from reduction

in portfolio value arising from actual or perceived deterioration in credit quality. Credit risk

emanates from a bank's dealings with an individual, corporate, bank, financial institution or a

sovereign.

Credit risk may take the following forms:

y In the case of direct lending, principal and/or interest amount may not be repaid.

y In the case of guarantees or letters of credit, funds may not be forthcoming from the

constituents upon crystallization of the liability.

y In the case of treasury operations, the payment or series of payments due from the

counter parties under the respective contracts may not be forthcoming or ceases.


36/124


37/124


38/124

Appraisal of financial health of a borrower (for sanction of new limits/ enhancements of

existing limits and for renewal/review) has been based on receipt of unaudited financial

statements immediately.

In considering the project feasibility and viability, i.e. while doing the credit appraisal, the

following points have to be taken into account:

y Managerial Appraisals

y Technical Feasibility

y Financial Feasibility

y Market Appraisal

y Economic Appraisal

y Organizational Feasibility

1. Management Appraisal

It is nothing but evaluation of entrepreneur and management. Management appraisal is related

to following:

y Promoters qualification, experience etc.

y Family reputation in the market.

y Credit report on the promoters and the company

y Scrutiny of IT and WT returns

y The technical and managerial competence, integrity, knowledge of the project.

The promoters should have the knowledge and ability to plan, implement and operate the

entire project effectively. The past record of the promoters is to be appraised to clarify their

ability in handling the projects.


39/124

2. Technical Feasibility

The technical feasibility of a project is normally examined by the Engineers in the bank. The

Detailed Project Report (DPR) furnished by the borrower is critically examined.

Technical Appraisal of a project is essential to ensure that necessary physical facilities

required for production will be available and the best possible alternative is selected to

procure them.

Technical feasibility analysis is the systematic gathering and analysis of the data pertaining to

the technical inputs required and formation of conclusion there from. The availability of the

raw materials, power, sanitary and sewerage services, transportation facility, skilled manpower, engineering facilities, maintenance, local people etc. are coming under technical

analysis. This feasibility analysis is very important since its significance lies in planning the

exercises, documentation process, and risk minimization process and to get approval.

3. Financial feasibility

One of the very important factors that a project team should meticulously prepare is the

financial viability of the entire project. Under this the viability of the project is evaluated from

the financial angle. This involves the preparation of cost estimates, means of financing,

financial institutions, financial projections, break-even point, ratio analysis etc.

The cost of project includes the land and sight development, building, plant and machinery,

technical know-how fees, pre-operative expenses, contingency expenses etc.

4. Market Appraisal

The weakest link in any project under appraisal is the ability to sell the product/service being

planned under the project. Therefore, Market analysis of the product/services is a very

important part of the project.


40/124

In the commercial appraisal many factors are coming. The scope of the project in market or

the beneficiaries, customer friendly process and preferences, future demand of the supply,

effectiveness of the selling arrangement, latest information availability an all areas,

government control measures, etc. The appraisal involves the assessment of the current

market scenario, which enables the project to get adequate demand. Estimation, distribution

and advertisement scenario also to be here considered into.

5. Economic Appraisal

Economic appraisal is done to ascertain how far the project contributes to the development of

the sector, industrial development, social development, maximizing the growth of

employment, development of new technology, ancillary development, pollution andecological consideration, earner of foreign exchange and also to know the gestation period

required in relation to size of investments and benefits etc. are kept in view while evaluating

the economic feasibility of the project.

6. Organizational feasibility

It is done to ascertain the following:

y Adequate arrangement for procurement of materials and services.

y Reasonableness of the terms of purchase.

y Whether arrangements have been made to obtain license from the municipalities. The

State and central government for location facilities, supply of water and power,

foreign exchange, capital issues, import of equipment and stores.

y Whether there are any performance agreements with consultancy firms, contractors,

suppliers etc.


41/124

SECURITY REQUIRED FOR GRANTING THE LOANS

y Normally Term loans are granted against the first Charge (No other prior charge on

the security) or Pari Passu charge in case of joint finance (i.e. When there are

multiple banks financing a particular project) on the existing and future fixed assets

(Land, Building, machinery), other tangible assets of the concern.

y However on the availability of working capital finance also from banks, the second

charge in favor of bank on the fixed assets mortgaged is also taken into consideration.

y Securities for term loans also depend on the risk perception of the individual account.

y In case of infrastructure projects such as Power Projects, Road Projects, etc. Term

loans are also secured against first charge on the future cash flows of the project along

with a first charge on the entire fixed assets of the project.

Nature of Mortgage

y Banks ideally insist on registered mortgage of land and buildings.

y However, these days to minimize the expenditure and delay in releasing of the term

loan banks do not insist, except in rare cases and allow the term loan on equitable

mortgage of land and buildings and hypothecation of plant and machinery wherever

original documents are available.

y Therefore, banks except that only unencumbered assets having clear and marketable

title deeds are offered as security.


42/124

OTHER MEASURES OF PRECAUTION

1. Personal Guarantee

2. Collateral security

3. Third party Guarantee

4. Credit Guarantee trust

Personal Guarantee

y In addition to the charge on the existing as well as proposed assets, the banks also

secures the loan by taking personal guarantee of the promoter, partners and directors.y In case where the project is considered risky or where net worth of the promoters is

not adequate, 3rd party guarantee is also taken of persons of repute.

Collateral security

y The collateral security may be full value of loan, or reduced amount depending upon

the risk perception. The property furnished for collateral should be easily

marketable/mortgage-able having clear title and should not be an agricultural land.

Third party Guarantee/Collateral security

This may be waived for deserving cases and those limits which are covered under

credit risk guarantee trust for micro and small enterprise (CGTMSE).


43/124

CREDIT PROPOSAL

The financial consultants of the bank prepare credit proposal. The company approaches the

bank and briefs them about their requirement (term loan, cash credit etc.) based on which thecredit proposal is prepared.

Before the work starts on the proposal the company requires a set of documents. These

documents are as follows:

1. Audited balance sheet for the last three years

2. Brief background of the company

3. Profile of the directors

4. Share holding pattern of the company

5. Group details of the company with regards to sales, profitability, net worth etc.

6. Borrowing arrangements

a. Working capital

b. Term Loans

7. Details of security provided and Net worth of the guarantors

8. Next 2 years financial projections

9. Project report in case of term loan

a. The purpose of the present requirement

After receiving the above documents the work on the credit proposal starts. The main sections

of a credit proposal are as following:

1. Nature of request

This section lists out the request of the company. This section lists out the fund based and

non-fund based requirements of the company. In the fund based requirements there is cash

credit limits or working capital demand loan, export credit limits, bill-discounting limits etc.

In the non-fund based limits there is bank guarantee limits, letter of credit limits etc.


44/124

2. Basic details of the borrower

y Name of the company and the group it belongs. If the borrower is a group concern

then the bank can get corporate guarantee from the main company.

y Constitution of the company to know if the company is public or private limited and

its date of incorporation.

y The corporate office address and the location of its manufacturing units if the

borrower is a manufacturing concern.

y The line of activity of the company detailing the products it manufactures or trades

and the industry it belongs.

y If the company has been dealing with the bank then the date from which the company

is availing the facilities from the bank.

These basic details provide some necessary information to start the credit appraisal process.

3. Management of the company

This section tells about the top administration that manages the company. As they are the

major decision makers for the firm a proper investigation about the management of the firm

becomes necessary. This section details the board of directors/partners and the various

positions they hold in the company. A brief note is also written on the background of these

directors/ partners, which is in general their qualification and experience in business.

The management of the company is of great importance to the credit appraisal team and

especially forSMEs.

The main points looked into are:

y Is the management competent enough on running the firm

y Is there any type of differences between the partners/directors of the firm

y Is there any major director/partner planning to leave the firm as there may be a

chance that many customers may move with the director/partner to other firms.

y Is any director/partner in the defaulter list of RBI or CIBIL.


45/124

4. Ownership Pattern

This section tells about the percentage shares held by the promoters, the financial institutions,

foreign institutional investors, public and others.

5. Stock market perception

If the borrowing company is a public limited company then its important for the credit

analyst to know what the stock market feels about the company.

6. Background of the company

This section tells about the promoters of the company and the main purpose to start the firm.

This section tells about the profile of the products it manufactures or trades as well as themarket standing of these products. The various overseas ventures or any other business

collaboration that may have effects on the performance of the company are mentioned in this

section.

7. Group details and profile

This section details about the group concerns and a brief note about their financial

performance. For example, certain important information about the sales, net profit, net worth

of the company, the gearing ratio and the current ratio.

8. Borrowing arrangements

This section gives a detail of the current borrowing arrangements of the firm. It specifies the

working capital arrangement as well as the term borrowing arrangements.

y Working capital arrangements

In the working capital arrangements, the current WC limits of each bank are given detailing

the fund based and non- fund based limits the existing and proposed. A note on the primary

security offered as well as the collateral security offered is also mentioned.

For a loan for working capital or cash credit limit the above section is important. The credit

analyst looks at the various banking arrangements the company has. He also looks into the


46/124

actual need or the maximum permissible bank finance as per the estimates to determine if the

banks are over funding the firm. If there is excess funding then the company might use the

funds for some other purpose other than the business.

y Term Loan arrangements

The credit analyst looks the term loan arrangement of the borrower with other banks. Here the

limit extended by different banks and the outstanding amount along with the repayment

schedule is given in this section. The analyst looks into the conduct of the account to see if

there is any default by the borrower at any stage of the loan period. The analyst takes default

in payment very seriously and the reasons are probed deeply.

9. Industry analysis

Apart from a micro analysis of the company, the overall assessment of the industry in which

the company works is important. This assessment gives the credit analyst an insight into the

macro environment and the potential risk for the company. As the economic and business

environment in which a company is working is constantly changing it becomes all the more

important for the bank to assess the industry.

The industry is assessed in four parameters:

y Demand Supply gap

y Government policies

y Input related risks

y Extent of competition

After assessing the industry, the analyst sees how the company is geared to tackle the future

risks of the business. The analyst also sees how proactive the company is, to take advantage

of the opportunities on offer.


47/124

10. Business analysis

Product profile

In this section the product profile of the company is looked into. The main products of the

company are noted and sales in value and volume terms for each product are noted. The data

collected should be at least for the last two years. The analyst looks into the composition of

the products and the percentage share of each product. This will help in knowing which

product is doing well in the market and which one is not.

The analyst can also look into the production capacity of the company to see if the company is

fully utilizing its existing capacity.

Sales growth

Here the sales growth and the PBDIT growth of the company are analyzed. The data

presented should be for at least three years. The recent growth rates are calculated and the

reasons for the variations are looked into. The recent growth rates and the industry outlook

form the basis of the future sales projections of the company. The analyst sees that the sales

projection given by the company is realistic or not.

11. Financial analysis

The financial analysis forms the main part of the assessment of any company. A detailed

analysis of the financial statements as well as ratio analysis is done to ascertain the financial

standing of the company. These financial statements are not studied in isolation nor are they

studied for one year. A trend analysis is done to analyze the deviation or movement of the

company.


48/124

The financial statements scrutinized are:

y Balance sheet

y Income statement/P & L statement

The tools for financial analysis are

y Ratio analysis

y Cash flow analysis


49/124

BALANCE SHEET ANALYSIS

Balance sheet is a statement showing the assets and the liabilities of the firm at a particular

point of time. In simple terms, balance sheet means a list of everything a firm owns and owes

at a particular point of time. Normally the values shown are at historic cost but where the

current market price is less than cost the valuation is made on the net realizable value.

Liability side

Net worth: It is made up of share capital and reserves.

Share capital: The bank is interested in the paid up capital as this constitutes the amountactually collected by the company from its shareholders.

Reserves and surplus: Reserves arise out of undistributed past profits. For the banker,

reserves are at par with owned funds. The banks look whether the reserves are retained in the

business or the funds are deployed outside. Revaluation reserve is not included by the banks

as it doesnt result in any inflow of funds.

Secured loans: Here the banks look at the security offered by the company and the repayment

schedule. All short term loans are also treated as current liability. Loans by directors to the

company are treated as quasi equity and added to net worth of the company.

Unsecured loans: The bank would be interested in the maturity profile of these loans to

ascertain the liquidity position of the company.

Current liabilities and provisions: It forms an important part of the working capital and a

very important constituent while calculating the working capital limits by the bank. Working

capital loan is treated as a current liability and is deducted from the secured loans.


50/124

Contingent liability: These are possible liabilities on the occurrence of a certain event. These

include claims against the company not acknowledged as debt, bills discounted but not

matured, guarantee issued etc. They are given as a footnote in the balance sheet. Some

contingent liabilities occur in the natural course of business but some contingent liabilities

like huge disputed taxes should be looked into.

Asset side

Fixed assets: Assets are normally shown at their original cost less depreciation. The bank

makes sure that the assets are depreciated regularly and funds are set aside so that they are

available at the time of replacement of assets.

Investments: Huge funds blocked in investments are not taken lightly by the bank as those

funds are used by others.

Current assets and loans and advances: Sunk inventory is excluded from the closing

inventory as also the debtors due for more than six months. They are treated as non-current

assets.

Miscellaneous expenditure: The amount appearing under this head is deducted from the

owners fund to determine the owners stake in the business.


51/124

INCOME STATEMENT ANALYSIS

It is a statement showing the income and expenses of the firm at a particular period of time. It

shows the amount of profit or loss the firm has earned at the end of the year but a deeper

analysis is necessary as there could be a loss but it could be for valid reasons. Likewise there

can be substantial profits but it could be from income arising from other than core business of

the firm. Therefore a complete reliance on the income statement may give misleading

conclusions. So apart from the P/L figures, the bank scrutinizes the efficiency of the unit in

the capacity utilization, streamlining of expenses, increase in sales volume, cash generation

capacity etc.

Analysis of the income statement should involve the financial statements of at least threeyears so that it gives a clearer picture of the current position. The trends could be reasonably

established and future projections estimated.

Sales: Sales should show an upward trend but the reasons should be ascertained.

Cost of sales and gross profit: Gross profit of the last three years may be compared and it

may also be compared with the industry level. Among the various heads of expenses,

consumption of raw materials is analyzed. Levels of closing stock should be watched and

normal holding levels ensured.

Operating profit: It is an indicator of profits generated through main business of the firm.

Therefore it is the operating profit figure which is important to bankers for their credit

decision.

Net profit/loss: Banks check the income and expenses to make sure that they are incurred in

the normal course of the business. Any intention to divert from the main activity should be

looked into. The study of the appropriation account is equally important. Whether the

management is strengthening their reserve position or declaring higher dividends despite

forbidding financial position shows their attitude towards the business.


52/124

COMPLIANCE TO FINANCIAL PARAMETERS

Ratio Analysis

Interpreting and analyzing financial statements enables to discover what a companysfinancial position is. Ratio analysis is a device which is used to

y Compare the performance of a company this year with last year

y Compare the performance of a company with its competitors.

y Detect specific weaknesses

y Determine a companys liquidity (ability to meet debts)

y Determine a companys profitability

y Provide an indicator of trends.

Financial ratios can be divided into five categories

1. Liquidity ratios

2. Turnover ratios

3. Leverage ratios

4. Profitability ratios

5. Valuation ratios

Liquidity Ratios:

Liquidity refers to the ability of a firm to meet its obligations in the short-run, usually one

year. Liquidity ratios are generally based on the relationship between current assets (the

sources for meeting short-term obligations) and current liabilities.

The Current Ratio: A simple measure that estimates whether the business can pay debts due

within one year from assets that it expects to turn into cash within that year. A ratio of lessthan one is often a cause for concern, particularly if it persists for any length of time.

Current Ratio = Current Assets

Current Liabilities


53/124

Assessment Method Ratio (Indicative)

Turnover method 1.10:1

Modified MPBF method:

WC limit up to 10 crore

WC limit above 10 crore

1.17:1

1.25:1

Quick Ratio: Not all assets can be turned into cash quickly or easily. Some notably raw

materials and other stocks must first be turned into final product, which is then sold and the

cash collected from debtors.

Quick Ratio = Current Assets StockCurrent Liabilities

Turnover Ratios:

Turnover ratios, also referred to as activity ratios or asset management ratios, measure how

efficiently the assets are employed by a firm. These ratios are based on the relationship

between the level of activity, represented by sales or cost of goods sold, and levels of various

assets. The important turnover ratios are: inventory turnover, average collection period,

receivable turnover, fixed assets turnover, and total assets turnover.

Stock Turnover Ratio: Stock turnover measures how fast the inventory is moving through

the firm and generating sales. Inventory turnover reflects the efficiency of inventory

management.

Stock Turnover = Cost of Goods Sold

Average Inventory

Debtors Turnover Ratio: This ratio shows how many times sundry debtors (accounts

receivable) turnover during the year.

Debtors Turnover = Net Credit Sales

Average Sundry Debtors


54/124

Average Collection Period: The average collection period represents the number of days

worth of credit sales that is locked in sundry debtors.

Average Collection Period = Average Sundry Debtors

Average Daily Credit Sales

The average collection period and debtors are related as follows:

Average Collection Period = 365

Debtors Turnover

Fixed Assets Turnover: This ratio measures sales per rupee of investment in fixed assets.Fixed Assets Turnover = Net Sales

Average Net Fixed Assets

Total Assets Turnover: Akin to the output-capital ratio in economic analysis, the total assets

turnover is defined as:

Total Assets Turnover = Net Sales

Average Total Assets

Current Assets Turnover ratio: This ratio will indicate the turnover of the current assets in a

year. Generally this will be above 1.75.

Leverage Ratios:

Leverage ratios help in assessing the risk arising from the use of debt capital. Two types of

ratios are commonly used to analyze financial leverage i.e. structural ratios and coverage

ratios. Structural ratios are based on the proportions of debt and equity in the financial

structure of the firm. The important structural ratios are debt-equity ratio and debt-assets ratio.


55/124


56/124

Profitability Ratios:

Profitability reflects the final result of business operations. There are two types of profitability

ratios i.e. profit margins ratios and rate of return ratios. Profit margin ratios show the

relationship between profit and sales. The most popular profit margin ratios are: gross profit

margin ratio and net profit margin ratio. Rate of return ratios reflect the relationship between

profit and investment. The important rate of return measures are return on assets, earning

power return on capital employed and return on equity.

Gross Profit Margin Ratio: This ratio tells us something about the business's ability

consistently to control its production costs or to manage the margins its makes on products its

buys and sells.Gross Profit Margin Ratio = Gross Profit

Net Sales

Net Profit Margin Ratio: This ratio shows the earnings left for shareholders as a percentage

of net sales. It measures the overall efficiency of production, administration, selling, financing

and pricing.

Net Profit Margin Ratio = Net Profit

Net Sales

PBIT to Total Assets: To have a better insight about the utilization of assets, this ratio needs

to be examined to find out the comparative performance of the unit over a period of time.

Return on Assets: ROA is an odd measure because its numerator measures the return to

shareholders whereas its denominator represents the contribution of all investors.

Return on Assets = Profit after Tax



57/124

Earning Power: It is a measure of business performance which is not affected by the interest

charges and tax burden. It abstracts away the effect of capital structure and tax factor and

focuses on operating performance.

Earning Power = Profit before Interest and Taxes


Return on Capital Employed: ROCE is the post-tax version of earning power. It considers

the effect of taxation, but not the capital structure. It is internally consistent.

Return on Capital Employed = Profit before Interest and Tax (1 Tax rate)


Return on Equity: It measures the profitability of equity funds invested in the firm. It is a

very important measure because it reflects the productivity of ownership (or risk) capital

employed in the firm.

Return on Equity = PAT Preference Dividend

Equity Share Cap. + Reserves & Surplus

Valuation Ratios:

Valuation ratios indicate how the equity stock of the company is assessed in the capital

market. Since the market value of equity reflects the combined influence of risk and return,

valuation ratios are the most comprehensive measures of a firms performance. The important

valuation ratios are price earnings ratio, yield and market value to book value ratio.

Price Earnings Ratio: The price earnings ratio or the price earnings multiple is a summary

measure which primarily reflects growth prospects, risk characteristics shareholder

orientation, corporate image and degree of liquidity.

Price Earnings Ratio = Market Price per share

Earnings per share


58/124


59/124

For peer group analysis, it is often difficult to find similar companies with which to make a

comparison. Smaller companies may have adopted different accounting policies or have

different product ranges. Typically a bank compares the financial ratios calculated on the

spreadsheet with published data, such as lists of industry standard ratios. Another approach is

that banks use the data published by credit rating agencies or financial databases available in

the market which enables the analysis of the company vis--vis its competitors.

CASH FLOW ANALYSIS

A firm basically generates cash and spends cash. It generates cash when it issues securities,

raises a bank loan, sells a product, disposes an asset, etc. It spends cash when it redeemssecurities, pays interest and dividends, purchases materials, acquires an asset etc. The

activities that generate cash are called sources of cash and activities that absorb cash are

called uses of cash.

Companies can be profitable with negative cash flows and loss making with positive cash

flows. A company can report a large profit for a year in which the cash balance may have

fallen, perhaps as a result of heavy expenditure on fixed assets. Likewise, a company can be

losing money and generating cash via asset disposals. It is important to understand that cash

and profit are different.

The purpose of cash flow statement is therefore to report the net change in the cash balance

and to help explain how the surplus or deficit in cash arose.

Summary of cash flow statement

y Reports the financial effect of all transactions during the accounting period.

y Mixes capital and revenue transactions and is entirely backward looking.

Cash flow statements are used to

y Assess the long term risks in a lending situation


60/124

y Test the assumptions of a given project

Standard terms and conditions (general) for credit arrangements

(Fund based and non-fund based)

Limit:

While showing the total limit, mention sub-limits, if any, within total

sanctioned limits.

Sub-limits are to be separately shown in case of different types of

securities such as raw materials, finished goods, stores & spares, packing

materials, book-debts in case of single C.C. limit and in case of BP/BD(DP/DA) limits for BD-DA limits, in case of L/C (DP/ DA) limit, for

DA-LC limit.

Margin:

To be quoted as % of invoice / market value whichever is lower.

Mentioned be made separately for margin in respect of different types of

securities such as raw materials, goods under process, finished goods,

imported materials, book-debts etc. in case of cash credit arrangements

/limits.

In case of BP/BD limits, as % of value of the bill, shown simply as "%".

In case of Guarantee Limits:

For Performance Guarantees: % by way of cash / FDR/SDR duly discharged

with letter of set-off.

For Financial Guarantees : Normally, all financial guarantees are covered by

100% margin in various forms of securities such as cash/FDR/SDR duly

discharged with letter of set off, and/or extension of charge on current and/or

fixed assets of the borrower, or as may be decided on case to case basis.

Interest:

% per annum with monthly rest along with Interest Tax as applicable at the rate


61/124

of % per annum ( In case of Fixed Interest Rate) / % per annum over and

above /below the published Dena Bank Prime Lending Rate (DBPLR), the

present rate being % per annum (floating rate) with monthly rests along

with interest tax as applicable.

Penal Interest :

For non/late submission of Stock Statements and Financial Follow up

Report I (FFR-I) and Financial Follow up Report II (FFR II), MMS Statement.

i. Submission of Stock statement

Where the borrower defaults in submission of stock statement, then the

Penal Interest @2% p.a. over applicable rate to be charged on outstanding

in working capital limits till the date of submission of the statement.However, following relaxations are permitted:-

a. If there is delay once in a year, then no penalty to be charged.

b. If there is second time delay in submission of statement in a year,

then caution notice to be given to the borrower.

c. If there is next delay in submission of stock statement, then penalty @

2% p.a. over applicable rate be charged from the due date of

submission of stock statement.

Relaxations are subject to the following conditions :-

a. Where assets classification of the borrower is standard and operations

in the account are satisfactory.

b. the proposal is not overdue and not pending for renewal.

Relaxation / waiver in respect of penal interest for adhoc limits, excess over

limits, overdue term loan installments, overdue bills / cheques purchased /

discounted can be granted at the level of Regional Manager in respect of the

proposals sanctioned at Branch level. In case of proposals sanctioned at the

level of Regional Office and above the same can be permitted by the

respective sanctioning authority.

ii. Submission of Financial Follow-up Reports


62/124

Where the borrower defaults in submission of FFR-1 and / or FFR-II, then the

interest @2% p.a. over the applicable rate be charged on availed Fund Based

Working Capital Limit till the date if submission of these statements.

Penal Interest for Non / Late submission of Renewal Papers.

Where the borrower defaults in submission of full set of renewal papers

including financial statements, then penal interest @ 2% p.a. over the

applicable rate should be charged from the due date of submission. Till the

actual date of submission of full set of renewal papers. However, the

sanctioning authority on the specific recommendations of Branch Manager and

on merits can waive/relax penal interest in following cases:-

a. Assets classification of the borrower is standard and operations in theaccounts are satisfactory.

b. The default is not more than two months from the due date of

submission of renewal papers.

Penal Interest for exceeding Cash Credit Hypothecation

Where there is exceeding in Cash Credit Account and /or drawing power is not

available, penal interest @ 2% p.a. should be charged as under:-

a. In case of exceedings in Cash Credit Account, penal interest @2% p.a.

will be charged on the amount exceeded over and above the

sanctioned limit from the date of exceeding till the date of

regularization.

b. Where drawing power is not sufficient to cover the outstanding

amount penal interest @ 2% is to be charged on the uncovered

amount till the date of availability of adequate drawing power in the

account.

Penal Interest for Non / Late Repayment of Monthly/Quarterly Interest /

Installments of Term Loan/Demand Loans.

Where Monthly/Quarterly Interest / Installments of Term Loan/Demand Loans

are overdue, penal interest @2% is to be charged on the overdue


63/124

interest/installments and not on the full outstanding of Term Loan/Demand

Loan. The penal interest is to be charged till actual date of payment of Monthly/

Quarterly interest /installments.

Penal Interest for overdue bills

In case of overdue bills, penal interest 2% p.a. to be charged as under:-

In case of DA and Supply Bills, penal interest is to be charged on the entire

amount of overdue bills for the overdue period i.e. from the due date till date of

realization of bills.

Penal Interest on Devolvement of LC (IBRs)

In addition to the normal rate of interest as applicable to the Working capital

facilities or commercial rate where the client does not enjoy Working Capitalfacility, penal interest on devolvement of LCs (IBRs) is to be charged as under:-

Penal Interest of 2% above normal rate /commercial rate as the case may be,

where the devolved LC liability (IBRs) is outstanding for a period of one month.

Penal interest of 3% above normal rate /commercial rate as the case may be,

where the devolved L/C liability (IBRs) is outstanding for a period of more than

one month.

Maximum Penal Interest chargeable for more than one default

For each default a penal interest @2% p.a. to be charged. However, if there are

more than one default as mentioned above, then maximum penal interest @2%

p.a. to be charged to the borrower on aggregate amount of irregularities.

Exemptions

Exemption may be extended to units which are closed and not able to submit

statements in time on account of sickness (including industrial relation

problems) and those units affected by

a. political disturbances

b. riots

c. natural calamities

However, waiver of penalty in such cases should be considered by


64/124

Regional Manager on case to case basis.

Delegation of Waiver of Penal Interest

Except as mentioned above, Executive Director and Chairman & Managing

Director will have powers to waive/relax penal interest on the specific

recommendations of Operational General and on merits of the case.

Adhoc Facilities

Charge additional interest @ 2% p.a. above the regular rate of interest will

continue. However, if adhoc facility is not liquidated on due date, then penal

interest @2% will be charged with additional interest @2% p.a. within the

maximum rate of interest prescribed by the Bank from time to time.Clearance Certificate from Pollution Control Board

In case of industrial borrower, certified true copy of clearance certificate

from Pollution Control Board and other statutory environmental

requirements of the Government of India wherever applicable and the

concerned Department of the State Government should be obtained before

releasing of credit limits.

Commission:

a. In case of inland BP/BD limits

b. In case of foreign BP/BD limits

c. In case of Inland / Foreign (DP/DA) letters of credit limits

d. In case of performance / financial guarantee limits

i. Performance Guarantees: 0.75% per quarter or part thereof with

a minimum of ` 250/- for the guarantee period and claim

period.

ii. Other than Performance Guarantees: 1 % per quarter or part

thereof with a minimum of ` 250 for the guarantee period and

claim period.


65/124

THE FUND BASED FACILITIES

y Cash credit

Cash/credit facility is granted to the customers to bridge working capital gap i.e. funding for

the stocks of inventories, work-in-progress, finished goods and receivables.

The key risk points assessed are as following:

a. The cash flows should be positive.

b. If it is a running account, the conduct should be good.

c. Utilizing the current limits sanctioned.

d. Cash cycle of the company.e. Quality of inventory i.e. the percentage of sunk inventory to total inventory etc.

f. Projected sales vis--vis existing capacity.

y Bills discounting

When the parties to the trade transaction i.e. seller/buyer are not willing to part possession of

cash/goods, as the case maybe, before receipt of the equivalent consideration, drawing of bills

is restored. For the sale proceeds of the goods to be recovered from the buyer, the seller draws

a bill known as Bill of Exchange (BOE) directing the buyer to pay to a named person the

amount thereof.

y Short Term Finance:

The banks offer short-term loans for a period ranging from 3 months to 12 months to sound

corporate for meeting their specific short-term working capital requirements.

The Bank provides short-term facility for purpose of bridging temporary cash flow

mismatches arising due to various reasons like non-realization of receivable in time, routine,

capex etc.

The facility is extended to that Corporate who have sound financials and have adequate

internal accruals to pay off the facility out of the earnings, which can be substantiated with


66/124

cash flow statements. The key risk points assessed is the cash flows of the company, the cash

profits generated of the company, the conduct of the account etc.

y Export financing - Pre shipment

Pre-shipment advance in the form of packing credit is made available to eligible exporters for

the purchasing, manufacturing, packing and shipping of goods meant for exports against

lodging an irrevocable LC established in giver of the exporter through a reputed bank,

confirmed order/contract placed by the buyer for exports from India.

Packing credits can be availed on a running account basis. The advance is generally given for

a period up to 180 days and may be extend up to 360 days with the approval of RBI.

y Export financing Post shipment

Post shipment advance is extended in the form of negotiation/purchase/ discount of export

bills drawn under letters of credit, confirmed orders/ export contracts. The bills are

negotiated/purchased/discounted at the Banks bill buying rate prevailing on the date of

negotiation, which is extremely competitive/attractive to the exporter. The maximum usage

permission for the export bills is 180 days.

NON FUND BASED FACILITIES

The non-fund based business is very profitable proposition for the banks as it gives substantial

revenue without deployment of the funds.

The major objectives of the non-fund based facilities are:-

1. To overcome shortage of funds.

2. To increase the profitability

3. To increase the liquidity


67/124

4. To have easy monitoring

5. To facilitate international trade

6. For optimum utilization of funds

The non-fund based facilities are 100% substitute for fund based facilities. The contingent

liability can become a current liability if it is not crystallized/ paid on the due date. They are

all 100% risk weighted assets for which the bank has to keep the required quantum of Capital

Adequacy ratio. This fact necessitates the importance for proper appraisal of proposal of the

borrower.

Although non-fund based facilities are lucrative businesses, to the bank considering the riskinvolved, it is necessary to take utmost precautions and special care while sanctioning these

facilities to the customers. Generally these facilities are to be sanctioned to the parties who are

enjoying fund based facilities with the banks.


68/124


69/124

5. Settlement risk: It is the risk where the bank delivers its part of the contract but the

other bank does not fulfill its obligation. This risk arises out of time lags in settlement

of another currency in another time zone.

The bank needs to identify all sources of credit risk and monitor aggregated exposures to a

borrower or counter-party on a bank-wide basis.


70/124

SOME OF THE RISK MITIGATION TECHNIQUES

DUE DILIGENCE

Due diligence is done for the property that is being kept as collateral security with the bank

against which the loan is to be given. It is to be done for all the security. This is being done to

make sure about the viability of the security.

Hence number of parameter is being looked in to like we check the value of the security for

which the customer is required to get the valuation report of the collateral from an authorized

valuer who checks and gives the value of the property based on the market rate (this valuation

of the property is to be done every three years), condition of the property etc.

We also look about how the surrounding area of the security is whether it is progressive or

not, we check about what is the type of the property like whether it residential, industrial or

commercial.

We check the size that is area of the property, whether the property is under the BMC, we also

check the landmark around the security, whether the marketability of the property is fair or

not.

Due diligence of is also done for the individuals where in bank inquires about the individual

behavior from other people.


71/124

REPORTS FROM CIBIL

The credit history of borrowers of MSME sectors will be available from CIBIL (Credit

Information Bureau of India Limited). Availability of information of clients loan repayment

histories shall help Bank to reduce time, cost and default rate.

CIBIL collects the information, then collates and disseminates both positive & negative Credit

Information pertaining to individual borrowers in the form of Credit Information Report

(CIR). It contains credit history of commercial (Public ltd, Private Ltd companies,

Partnership, proprietary firms) and consumer borrowers (Individual borrowers).

Beneficial to Bankers: Reports from CIBIL facilitates bankers in improving speed, confidence

and reducing cost at the time of processing the proposal. It also helps the banks to make

informed, objective, transparent and faster credit decisions.

Beneficial to Borrower: Reports from CIBIL facilitates the customers to get faster and more

competitive services at better terms.


72/124

CREDIT RATING FRAMEWORK (CRF)

Credit analysis includes financial and non-financial factors and these factors are all

interrelated. These factors include:

y The environment

y The industry

y Competitive position of the firm

y Financial risks the company has

y Management/business risks

y Loan structure and documentation issues.

Every credit proposal, whether for an existing borrower or a new borrower, for additional/new

on or off balance sheet exposure has inherent credit risk. A systematic assessment of such

inherent credit risk is essential before a credit decision is taken. The method of such

assessment is termed as Credit Rating Framework (CRF). Such an assessment is required for a

variety of reasons as under:

y To set up benchmarks for levels of risk to enable a bank to decide upon Entry level

risks and/or assuming additional risks involved.

y To set up benchmarks for levels of risk to enable a bank to decide upon Exit levels

from current exposures.

y To suitably price an exposure commensurate with the risk involved.

y To facilitate portfolio level analysis.

y To facilitate surveillance, monitoring and to generate internal MIS.

All advanced techniques for credit risk management like analysis of credit rating migration,

estimation of expected and unexpected losses from credit portfolio etc. are based on CRF.

CRFs are primarily driven by a need to standardize and uniformly communicate the

judgment in credit selection procedures and are not intended to be a substitute to vast

lending experience of the banks professional staff.

suhail summer project report new

Documents