taking credit decisions

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About Bank Credit


Taking Credit Decisions

Taking Credit Decisions

To start off any business, certain requirements are to be fulfilled which can be broadly classified into two as:

1) Mandatory Requirements

2) Statutory Requirements

The Mandatory Requirements and the Documentary evidences needed for each are: -

Mandatory Requirements Documentary Evidences

1) A suitable premise in a suitable place to Copy of rent agreement in case of

operate from

leased properties and copy of title deed

in case of owned premises along with

land tax and building tax paid receipts.

2) Power Allocation Power Allocation letter from the

Electricity board/ Electricity Bill.

3) Water Connection Water connection letter from the water

authority/ Water Bill.

4) Amenities for the StaffUnit Visits

5) Nature of Association: -

a) ProprietorshipDeclaration

b) PartnershipCopy of Partnership Deed

c) Joint Venture

Joint Venture Agreement

d) Private Ltd CompanyMemorandum and Articles of

e) Public Ltd Company association

Certificate of Commencement of

Business (Not applicable to Pvt Ltd Co)

The Statutory requirements and the documentary evidences needed for each are: -

Statutory Requirements Documentary Evidences

1) State Government Licenses Copy of Sales tax registration certificate

Ex. Sales Tax registration certificate.

2) Central Government license

Copies of Central Sales Tax/VAT

Ex. Central Sales Tax registration/ VATregistration certificate

3) Local Body License

Copies of Shop Establishment/Factory

Ex. Shop Establishment Act, Factory registration certificate

License etc.

4) Department specific licenses such as

Licenses from : -

a) Drug Controller in the case of

Copy of license

Pharmaceutical connected activities

Including the medical shops

b) Forest department in the case of

Copy of license

Timber-based industries including


c) Pollution control board in case of

Copy of license

Manufacturing industries

d) Excise Department in case of

Copy of license

distilleries, manufacturing processes

where alcohol contents are involved

e) Explosives department in case of

Copy of license

Quarries and firework related business

f) Geological survey in case of serviceCopy of license

Industries, job works and excisable items

g) Central excise in case of service

Copy of license

Industries, job works and excisable items

h) Approved plan and construction

Approved Plan, Permission letter

Permission from the competent authorityEstimates.

In case of Building/ housing finance

Along with the estimates

i) Land Tax, Building tax, approved planTax paid receipts

And completion certificate in case of

Existing constructions

j) Prospectus, Application/ Approval

Prospectus used by the institution, course

Of the course from Ministry of HRD in

approval from ministry of HRDs website

Case of Educational loan for Indian

www.education.nic.inCourses and Prospectus with


Educational Institutions:


Loans to


1) Higher Secondary School

- Affiliation from State Government/ CBSE/ ICSE.

2) Professional Colleges other than

- Approval from All India Council for


- Technical Education(AICTE)/ Affiliation to the University of the State.

- Government Approval

3) Medical and Pharmacy

- Affiliation to the university of the state

Approval from Indian Medical Council (IMC)

Ayurveda_Central council of Indian Medicines (CCIM)

4) Nursing

- Approval from government and

affiliation to the university

Approval from the Indian Nursing council (INC)

Educational Loan prospectus

What to read from the documents?

1) Evidence of association and activity

2) Legality of association and activity

3) Names and addresses of institutions

4) Names and addresses of persons behind the show.Taking Credit Decisions - Pre-Balance sheet Appraisal Exercises

1. Applicant should have a place to operate from. It can be either own premises or rented one. As a documentary proof towards having a place to operate from, photocopy of title deed/building tax paid receipt in case of own building or copy of the lease deed in case of rented building is to be obtained and verified with the building number and location.

Needless to mention that there should be power and water connection which are basics to run the show.

Benefits of the exercise - By looking at the deed, we can find out whether it is an own premises or a rented one, in case of rented one, how long the applicant can function from the premises. An access letter/approval from the owner would be additional safeguard.

2. Legality of the Activity

In order to ensure that the activity proposed is an approved one by the law of the land, license from Local body of Administration like Panchayat/Municipality/Corporation is a must.

Benefits of the Exercises - Apart from the confirmation that the activity is an approved one by the Local authority, we can check the name of the applicant, the constitution, Address, activity permitted and the period, from the license.

3. Statutory Requirements

a) Every activity/ resulting in sale has to be registered with the Sales tax and Central Sales tax authorities, such copy of the ST/CST registration has to be obtained as applicable.

b) In case of Timber/ Wooden Furniture Industries/Business, a permission/NOC is necessary from the Forest Dept. in addition to the ST/CST and the local body license.

c) In case of manufacturing of medicines, Licenses from Drug Controller and Excise Dept. are required. Drug license is also required for sales.

d) In case of food, License from food Inspector of the local body is a must.

e) In case of Manufacturing industries, the pollution control Board is the only authority to decide which is the polluting and which is the non-polluting activity. As such, all manufacturing industry should have the NOC /License from the pollution control Board.

There are Export processing zones, District Industrial Areas, autonomous bodies like Noida and Okhala where there is a separate pollution control licensing authority, NOC is to be taken from the pollution Board of the industrial areas/autonomous bodies too.

f) In case of the number of employees are more than ., Provident fund contribution and Employees State Insurance (ESI) are compulsory.

Benefit of the exercises - It can be found out that how long the unit is functioning, the name, address, constitution and the activity.

General :

In addition, copies of partnership, memorandum and articles of Association, Certificate of incorporation, certificate of commencement of business, SSI registration etc. are to be obtained wherever applicable.

If it is a running concern, financials for the last 3 years, audited one in case of turnover is above 40 lakhs, along with the sales tax assessment order, if not available, copies of annual S.T. return filed to be obtained. If the profit shown in the P&L a/c is more than taxable level, copies of IT returns filed also to be obtained.

While the ST assessment/copies of returns would confirm the sales turnover, the IT return will confirm the profit. Only after obtaining these documents and making a market study of the proposed activity and its feasibility one should venture into the analysis of balance sheet leading to credit decision.

Simple Analysis of Balance sheet - A statement showing sources

and uses of fund on a given date

Source/Liabilities :

1) Current Liability/Working capital Apart from the equity and long term source of fund, there is another component in source of fund which is demand in nature, to be repaid as and when demanded, like loans from friends, loans from Banks, cost of goods purchased on credit, the salary to be paid, the audit fee payable and tax collected but not remitted at the Treasury etc. These are the sources out of which current assets are created, so as a whole can call these as working capital, not the Bank finance alone.

2) Deffered Liability - Loans from close relatives, and financial Institutions which are repayable not in the near future, say not earlier than one year can be classified under this. This is also known as debt.

The owners fund together


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