Project Report on

CREDIT APPRAISAL SYSTEM OF SME SECTOR OF AXIS BANK

Submitted to IN PARTIAL FULFILLMENT OF DEGREE OF MASTER OF BUSINESS MANAGEMENT FOR THE ACADEMIC YEAR Submitted By

Under The Guidance of

Acknowledgements

Training Programme is a golden opportunity for learning and self development. I consider myself very lucky and honored to have so many wonderful people lead me through completion of this project.

My grateful thanks to Mr. Mrugesh Suthar, Circle head, Axis bank who in spite of being extraordinarily busy with his duties, took time out to hear, guide and keep me on the correct path. I do not know where I would have been without him.

I would like to thanks _________________________________________, my project guide for his efforts and help provided to me to get such an excellent opportunity.

I would also like to thank my family and friends for their support as this project could not be completed without their support and encouragement. I am very much thankful to them.

Last but not the least there were so many who shared valuable information that helped in the successful completion of this project.

PREFACE

There are always two sides of knowledge, practical as well as theoretical. Practical is the path through which one can reach his destination. But it is essential to have clear ideas to reach that destination and that is what theoretical knowledge means. In short, theoretical is the instruments which push back the practical one.

Experience makes man perfect. By facing practical situation, one can get new ideas. Theoretical studies are something, which came by practically. Management student can make use of whatever he or she gets from his or her Academic background. Since, the commencement of business and services importance hiked up day by day.

This project helped me to understand concept of credit appraisal and how credit appraisal process is done in bank. I have tried to put my best effort to complete this task on the basis of skill that I have achieved during my study in the institute. I have tried to put my maximum effort to get the accurate statistical data. However I would appreciate if any mistakes are brought to me by the reader.

TABLE OF CONTENT

Chapter No.

Content Executive Summary

Page No.

1 2

Objective and Research Methodology Indian Banking Sector Introduction Banking Reforms Classification of banks Success path for banker Challenges facing by Banking Industry in India Banking Activities Porters Five Force Model SWOT Analysis

Introduction to Axis bank Business Division

Introduction to SME sector History Description of SME in the manufacturing sector

Overview of Credit Appraisal Brief overview of credit Brief overview of loan Credit appraisal Process Loan administration pre sanction process Loan administration post sanction credit process Types of lending arrangement

Credit appraisal model at Axis bank Scheme of Credit to SME sector Sanctioning powers for schematic Loans under MSME and Mid Corporate
4

Introduction to credit risk management Definition Determinants of Credit Risk Introduction to credit tools Rating Tool for Small and Medium Enterprises (SME) Definition of Parameters used in SME tool Subjective Assessment of Quality of Management Monitoring Tool Rating Scale

8 9 10 11

Case Study of Dynamic Products Ltd. Findings Conclusion Bibliography

EXECUTIVE SUMMARY The pace of development for the Indian banking industry has been tremendous over the past decade. As the world reels from the global financial meltdown, Indias banking sector has been one of the very few to actually maintain resilience while continuing to provide growth opportunities, a feat unlikely to be matched by other developed markets around the world. Growing percentage of Non Performing Assets is a big concern for modern as well as traditional financial institutions. If credit appraisal system is effective then certainly it will reflect positively on reducing percentage of NPAs. 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 credit 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.

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.

Project is about credit appraisal process of SME ( Small Medium Enterprise ) sector of Axis bank. First chapter deals with research methodology and objective, second chapter deals with introduction of banking sector and current scenario of banking sector. Third chapter is about introduction to SME and its history. Fourth chapter deals with overview of credit appraisal, credit appraisal process, pre and post sanction process. Next chapter depicts credit appraisal process and schemes at Axis bank. Sixth chapter is about credit risk management and rating tool. Case study of Dynamic Products Ltd. is done and how credit appraisal is done is stated in next chapter. Finding and conclusion is made on the basis of research.

CHAPTER -1 OBJECTIVE AND RESEARCH METHODOLOGY

PROBLEM STATEMENT:

To study the credit appraisal system in SME sector, at AXIS Bank Ahmadabad. OBJECTIVES:

To study the Credit Appraisal Methods. To understand the commercial, financial & technical viability of the project proposed & its funding pattern. To understand the pattern for primary & collateral security cover available for recovery of such funds. To study the credit appraisal process done by Axis Bank.

RESEARCH DESIGN:

A research design is the arrangement of the condition for collection and analysis of data. Actually it is the blueprint of the research project. Research design used will be Exploratory type.
DATA COLLECTION:

Primary data:

It will be collected through Informal interviews with Branch Manager and other staff members at Axis bank. Secondary data: It will be collected from Business Newspapers, magazines, internal reports of Axis bank, books, Journal and websites. Case Study: To understand how credit appraisal is done, I will be taking cases study of Dynamic Products. Ltd. which is in manufacturing of Food color product. LIMITATIONS OF STUDY As the credit rating is one of the crucial areas for any bank, some of the technicalities may not reveal which might cause destruction to the information and exploration of the problem. As some of the information is not revealed, whatever suggestions generated, will be based on certain assumptions. Finding of the study will be based on the assumptions that respondents have given correct information. Information provided by respondents may be biased. The study is academic in nature.

CHAPTER - 2 INDIAN BANKING SECTOR

Introduction
Without a sound and effective banking system in India it cannot have a healthy economy. The banking system of India should not only be hassle free but it should be able to meet new challenges posed by the technology and any other external and internal factors. For the past three decades India's banking system has several outstanding achievements to its credit. The most striking is its extensive reach. It is no longer confined to only metropolitans or cosmopolitans in India. In fact, Indian banking system has reached even to the remote corners of the country. This is one of the main reasons of India's growth process.

Currently, India has 96 scheduled commercial banks(SCBs) - 27 public sector banks (that is with the Government of India holding a stake), 31 private banks (these do not have government stake; they may be publicly listed and traded on stock exchanges) and 38 foreign banks. They have a combined network of over 53,000 branches and 49,000 ATMs. According to a report by ICRA (Investment Information and Credit Rating Agency of India Limited) a rating agency, the public sector banks hold over 75 percent of total assets of the banking industry, with the private and foreign banks holding 18.2% and 6.5% respectively.

Not long ago, an account holder had to wait for hours at the bank counters for getting a draft or for withdrawing his own money. Today, he has a choice. Gone are days when the most efficient bank transferred money from one branch to other in two days. Now it is simple as instant messaging or dial a pizza. Money have become the order of the day.

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The first bank in India, though conservative, was established in 1786. From 1786 till today, the journey of Indian Banking System can be segregated into three distinct phases. They are as mentioned below: Early phase from 1786 to 1969 of Indian Banks Nationalization of Indian Banks and up to 1991 prior to Indian banking sector Reforms. New phase of Indian Banking System with the advent of Indian Financial & Banking Sector Reforms after 1991. To make this write-up more explanatory, I prefix the scenario as Phase I, Phase II and Phase III.

BANKING REFORMS Phase I The General Bank of India was set up in the year 1786. Next came Bank of Hindustan and Bengal Bank. The East India Company established Bank of Bengal (1809), Bank of Bombay (1840) and Bank of Madras (1843) as independent units and called it Presidency Banks. These three banks were amalgamated in 1920 and Imperial Bank of India was established which started as private shareholders banks, mostly Europeans shareholders. In 1865 Allahabad Bank was established and first time exclusively by Indians, Punjab National Bank Ltd. was set up in 1894 with headquarters at Lahore. Between 1906 and 1913, Bank of India, Central Bank of India, Bank of Baroda, Canara Bank, Indian Bank, and Bank of Mysore were set up. Reserve Bank of India came in 1935. During the first phase the growth was very slow and banks also experienced periodic failures between 1913 and 1948. There were approximately 1100 banks, mostly small. To streamline the functioning and activities of commercial banks, the Government of India came up with The Banking Companies Act, 1949 which was later changed to Banking Regulation Act 1949

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as per amending Act of 1965 (Act No. 23 of 1965). Reserve Bank of India was vested with extensive powers for the supervision of banking in India as the Central Banking Authority. During those days public has lesser confidence in the banks. As an aftermath deposit mobilization was slow. Abreast of it the savings bank facility provided by the Postal department was comparatively safer. Moreover, funds were largely given to traders.

Phase II Government took major steps in this Indian Banking Sector Reform after independence. In 1955, it nationalized Imperial Bank of India with extensive banking facilities on a large scale especially in rural and semi-urban areas. It formed State Bank of India to act as the principal agent of RBI and to handle banking transactions of the Union and State Governments all over the country. Seven banks forming subsidiary of State Bank of India was nationalized in 1960 on 19th July, 1969, major process of nationalization was carried out. It was the effort of the then Prime Minister of India, Mrs. Indira Gandhi. 14 major commercial banks in the country was nationalized. Second phase of nationalization Indian Banking Sector Reform was carried out in 1980 with seven more banks. This step brought 80% of the banking segment in India under Government ownership.

The following are the steps taken by the Government of India to Regulate Banking Institutions in the Country: 1949: Enactment of Banking Regulation Act. 1955: Nationalization of State Bank of India. 1959: Nationalization of SBI subsidiaries. 1961: Insurance cover extended to deposits.
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1969: Nationalization of 14 major banks. 1971: Creation of credit guarantee corporation. 1975: Creation of regional rural banks. 1980: Nationalization of seven banks with deposits over 200 crore.

After the nationalization of banks, the branches of the public sector bank India rose to approximately 800% in deposits and advances took a huge jump by 11,000%. Banking in the sunshine of Government ownership gave the public implicit faith and immense confidence about the sustainability of these institutions.

Phase III This phase has introduced many more products and facilities in the banking sector in its reforms measure. In 1991, under the chairmanship of M Narasimham, a committee was set up by his name which worked for the liberalization of banking practices. The country is flooded with foreign banks and their ATM stations. Efforts are being put to give a satisfactory service to customers. Phone banking and net banking is introduced. The entire system became more convenient and swift. Time is given more importance than money. The financial system of India has shown a great deal of resilience. It is sheltered from any crisis triggered by any external macroeconomics shock as other East Asian Countries suffered. This is all due to a flexible exchange rate regime, the foreign reserves are high, the capital account is not yet fully convertible, and banks and their customers have limited foreign exchange exposure.

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
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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). 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 Commercial Banks Public Sector Banks SBI Groups Nationalized Banks Regional Rural Banks

IRBI

EXIM Bank

SIDBI Cooperative Banks

Land Development Banks

Private Sector Banks Indian Banks Foreign Banks

Nationalized /Public sector banks

Dominate the banking system in India. Nationalization of banks in India took place in 1969 by Mrs. Indira Gandhi.

Private Banks
Made banking more efficient and customer friendly.

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Jolted public sector banks out of complacency and forced them to become more competitive.

Foreign banks
Have brought latest technology and latest banking practices in India. Have helped made Indian banking system more competitive and efficient.

Major Banks in India

Axis Bank ABN-AMRO Bank Abu Dhabi Commercial Bank American Express Bank Andhra Bank Allahabad Bank Bank of Baroda Bank of India Bank of Maharastra Bank of Punjab Bank of Rajasthan Bank of Ceylon BNP Paribas Bank Canara Bank Catholic Syrian Bank Central Bank of India Centurion Bank China Trust Commercial Bank Citi Bank City Union Bank Corporation Bank Dena Bank Deutsche Bank Development Credit Bank Dhanalakshmi Bank

Indian Overseas Bank IndusInd Bank ING Vysya Bank Jammu & Kashmir Bank JPMorgan Chase Bank Karnataka Bank Karur Vysya Bank Laxmi Vilas Bank Oriental Bank of Commerce Punjab National Bank Punjab & Sind Bank Scotia Bank South Indian Bank Standard Chartered Bank State Bank of India (SBI) State Bank of Bikaner & Jaipur State Bank of Hyderabad State Bank of Indore State Bank of Mysore State Bank of Saurastra State Bank of Travancore Syndicate Bank Taib Bank UCO Bank Union Bank of India
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Federal Bank HDFC Bank HSBC ICICI Bank IDBI Bank Indian Bank

United Bank of India United Bank Of India United Western Bank

Success Path for Banker

One of the biggest problems facing senior managers of banks today is attracting customers and attaining growth, often in an environment where products and prices among competitors are close substitutes. Traditional bases for differentiation, such as product features or cost, are becoming less tangible. So the managements are forced to look for new ways to appear attractive to its target market and simultaneously retain the existing one. From the annual survey conduct by FICCI, we found that they rank their business strategies that have helped them in increased customer acquisition and retention (On a scale of 1 to 8 with 8 being the most important marketing strategy). The results of the Mode score being accorded by the Public, Private& Foreign banks are presented below:

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Technology has moved from being just a business enabler to being a business driver. Be it customer service, reducing operational costs, achieving profitability, developing risk management systems, we turn to technology for providing necessary solution. Technological up gradation was clearly identified as one of the most successful strategy in Customer Acquisition and Retention followed by Expansion of ATM Network, Advertisements and additional sales force. Customer Retention and Customer Satisfaction are inexorably interred - linked. While consumers may be happy to make payments and interact with their bank through convenient and cheaper banking channels, they still expect high standards of service. A consistent service reflects the banks brand and image across all channels. 93.75 per cent of respondent banks informed that superior service pre and post banking has been one of the essential factors rated high by their customers. 75 per cent of respondent banks felt that Personal touch in the dealings has helped them in winning customers.

Challenges facing by Banking industry in India

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The banking industry in India is undergoing a major transformation due to changes in economic conditions and continuous deregulation. These multiple changes happening one after other has a ripple effect on a bank Refer fig. trying to graduate from completely regulated sellers market to completed deregulated customers market.

Banking Activities
Over the last three decades, there has been a remarkable increase in the size, spread and scope of activities of banks in India. The business profile of banks has transformed dramatically to include non-traditional activities like merchant banking, mutual funds, new financial services and products and the human resource development. Now days, the bankers have to deal with a large number of matters. They serve as custodian of stocks and shares and other valuables, imports into and exports out of the country are
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financed by banks, and document relating to the goods so imported and exported, at one time or another, pass through the hand of bankers. Thus, they have not to deal with bills of exchange, but also with bills of lading, railway receipts, warehouse warratts and receipts, marine insurance policies and various other documents. As bankers they advance money on securities and issue letter of credit, travellers cheque, credit cards and circular notes to customers wishing to travel abroad as also to effect purchase and shipment of goods. They assists industrial undertaking by underwriting their debentures and shares, providing them with working capital finance and to a certain extent, with finance for fixed capital requirements also. In India, the banking industry is entering several new activities in the areas of merchant banking, leasing housing finance, venture capital and financial services in general. The range of services provided by our banks stretches from rural finance at one end to international banking at the other. According to survey done by FCCI, Following shows most profitable noninterest income of bank.

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Competitive Forces Model (Porters Five Force Model)

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

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

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

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

(3) The threat of substitute product is very high like credit unions and investment houses. There are other substitutes as well banks like mutual funds, stocks, government securities, debentures, gold, real estate etc.
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1. Rivalry among existing firms With the process of liberalization, competition among the existing banks has increased. Each bank is coming up with new products to attract the customers and tailor made Loans are provided. The quality of services provided by banks has improved drastically. 2. Potential Entrants Previously the Development Financial Institutions mainly provided project finance and development activities. But they now entered into retail banking which has resulted into stiff competition among the exiting players. 3. Threats from Substitutes Competition from the non-banking financial sector is increasing rapidly. The threat of substitute product is very high like credit unions and in investment houses. There are other substitutes as well banks like mutual funds, stocks, government securities, debentures, gold, real estate etc. 4. Bargaining Power of Buyers Corporate can raise their funds through primary market or by issue of GDRs, FCCBs. As a result they have a higher bargaining power. Even in the case of personal finance, the buyers have a high bargaining power. This is mainly because of competition. 5. Bargaining Power of Suppliers With the advent of new financial instruments providing a higher rate of returns to the investors, the investments in deposits is not growing in a phased manner. The suppliers demand a higher return for the investments. 6. Overall Analysis The key issue is how banks can leverage their strengths to have a better future. Since the availability of funds is more and deployment of funds is less, banks should evolve new products and services to the customers. There should be a rational thinking in sanctioning Loans, which will bring down the NPAs. As there is a expected revival in the Indian economy Banks have a major role to play.

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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.

a) STRENGTHS 1. Greater securities of Funds Compared to other investment options banks since its inception has been a better avenue in terms of securities. Due to satisfactory implementation of RBIs prudential norms banks have won public confidence over several years. 2. Banking network After nationalization, banks have expanded their branches in the country, which has helped banks build large networks in the rural and urban areas. Private banks allowed to operate but they mainly concentrate in metropolis. 3. Large Customer Base This is mainly attributed to the large network of the banking sector. Depositors in rural areas prefer banks because of the failure of the NBFCs. 4. Low Cost of Capital Corporate prefers borrowing money from banks because of low cost of capital. Middle income people who want money for personal financing can look to banks as they offer at very low rates of interests. Consumer credit forms the major source of financing by banks.

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

c) OPPORTUNITIES 1. Universal Banking Banks have moved along the value chain to provide their customers more products and services. like home finance, Capital Markets, Bonds etc. Every Indian bank has an opportunity to become universal bank, which provides every financial service under one roof. 2. Differential Interest Rates As RBI control over bank reduces, they will have greater flexibility to fix their own interest rates which depends on the profitability of the banks. 3. High Household Savings Household savings has been increasing drastically. Investment in financial assets has also increased. Banks should use this opportunity for raising funds.
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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.

d) THREATS 1. NBFCs, Capital Markets and Mutual funds There is a huge investment of household savings. The investments in NBFCs deposits, Capital Market Instruments and Mutual Funds are increasing. Normally these instruments offer better return to investors. 2. Changes in the Government Policy The change in the government policy has proved to be a threat to the banking sector. Due to some major changes in policies related to deposits mobilization credit deployment, interest rates- the whole scenario of banking industry may change.

3. Inflation The interest rates go down with a fall in inflation. Thus, the investors will shift his investments to the other profitable sectors. 4. Recession Due to the recession in the business cycle the economy functions poorly and this has proved to be a threat to the banking sector. The market oriented economy and globalization has resulted into competition for market share. The spread in the banking sector is very narrow. To meet the competition the banks has to grow at a faster rates and reduce the overheads. They can introduce the new products and develop the existing services.

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CHAPTER -3 INTRODUCTION TO AXIS BANK

Axis Bank was the first of the new private banks to have begun operations in 1994, after the Government of India allowed new private banks to be established. The Bank was promoted jointly by the Administrator of the specified undertaking of the Unit Trust of India (UTI - I), Life Insurance Corporation of India (LIC) and General Insurance Corporation of India (GIC) and other four PSU insurance companies, i.e. National Insurance Company Ltd., The New India Assurance Company Ltd., The Oriental Insurance Company Ltd. and United India Insurance Company Ltd.

The Bank's Registered Office is at Ahmedabad and its Central Office is located at Mumbai. The Bank has a very wide network of more than 1281 branches and Extension Counters (as on 31st March 2011). The Bank has a network of over 7591 ATMs (as on 30th September 2011) providing 24 hrs a day banking convenience to its customers. This is one of the largest ATM networks in the country. The Bank has strengths in both retail and corporate banking and is committed to adopting the best industry practices internationally in order to achieve excellence.

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

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

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

Corporate and institutional banking

Cash management Services Business current Accounts Correspondent Banking Government Business

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

International banking Major functions include

Handling regulatory issues which include compliance with regulations of various authorities such as RBI regulations, FEMA etc

Keeping a track of the business volumes being generated by the branches and controlling the margins Maintaining relationship with correspondent Banks outside India

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

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CHAPTER 4 INTRODUCTION TO SME

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

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

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

When it started gaining momentum, this sector was defined as an enterprise with investment 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
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(DICs) were set up and made the focal point of SSI development, bypassing large cities and state capitals. Also, the government started providing special services akin to product standardization, quality control and marketing surveys in order to assist the SSIs in enabling them to market their products in an underdeveloped market.

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

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

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

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Description of SME in the manufacturing sector

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

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CHAPTER - 5 OVERVIEW OF CREDIT APPRAISAL

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

Brief overview of Credit

Credit Appraisal is a process to ascertain the risks associated with the extension of the credit facility. It is generally carried by the financial institutions, which are involved in providing financial funding to its customers. Credit risk is a risk related to non-repayment of the credit obtained by the customer of a bank. Thus it is necessary to appraise the credibility of the customer in order to mitigate the credit risk. Proper evaluation of the customer is performed this measures the financial condition and the ability of the customer to repay back the Loan in future. Generally the credits facilities are extended against the security know as collateral. But even though the Loans are backed by the collateral, banks are normally interested in the actual Loan amount to be repaid along with the interest. Thus, the customer's cash flows are ascertained to ensure the timely payment of principal and the interest. It is the process of appraising the credit worthiness of a Loan applicant. Factors like age, income, number of dependents, nature of employment, continuity of employment, repayment capacity, previous Loans, credit cards, etc. are taken into account while appraising the credit worthiness of a person. Every bank or lending institution has its own panel of officials for this purpose. However the 3 C of credit are crucial & relevant to all borrowers/ lending, which must be kept in mind, at all times.
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 Character Capacity Collateral If any one of these are missing in the equation then the lending officer must question the viability of credit. There is no guarantee to ensure a Loan does not run into problems; however if proper credit evaluation techniques and monitoring are implemented then naturally the Loan loss probability / problems will be minimized, which should be the objective of every lending Officer. Credit is the provision of resources (such as granting a Loan) by one party to another party where that second party does not reimburse the first party immediately, thereby generating a debt, and instead arranges either to repay or return those resources (or material(s) of equal value) at a later date. The first party is called a creditor, also known as a lender, while the second party is called a debtor, also known as a borrower. Credit allows you to buy goods or commodities now, and pay for them later. We use credit to buy things with an agreement to repay the Loans over a period of time. The most common way to avail credit is by the use of credit cards. Other credit plans include personal Loans, home Loans, vehicle Loans, student Loans, small business Loans, trade. A credit is a legal contract where one party receives resource or wealth from another party and promises to repay him on a future date along with interest. In simple Terms, a credit is an agreement of postponed payments of goods bought or Loan. With the issuance of a credit, a debt is formed.

Brief overview of Loans

Loans can be of two types fund base & non-fund base: A. Fund Base includes: Working Capital Term Loan

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

A. Fund Base: Working capital

The objective of running any industry is earning profits. An industry will require funds to acquire fixed assets like land, building, plant, machinery, equipments, vehicles, tools etc., & also to run the business i.e. its day-to-day operations. Funds required for day to-day working will be to finance production & sales. For production, funds are needed for purchase of raw materials/ stores/ fuel, for employment of labor, for power charges etc. financing the sales by way of sundry debtors/ receivables. Capital or funds required for an industry can therefore be bifurcated as fixed capital & working capital. Working capital in this context is the excess of current assets over current liabilities. The excess of current assets over current liabilities is treated as net, for storing finishing goods till they are sold out & for working capital or liquid surplus & represents that portion of the working capital, which has been provided from the long-Term source.

Term Loan

A Term Loan is granted for a fixed Term of not less than 3 years intended normally for financing fixed assets acquired with a repayment schedule. 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
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rationalization of plant, & repayable from out of the future earning of the enterprise, in installments, as per a prearranged schedule. From the above definition, the following differences between a Term Loan & the working capital credit afforded by the Bank are apparent: o The purpose of the Term Loan is for acquisition of capital assets. o The Term Loan is an advance not repayable on demand but only in installments ranging over a period of years. o The repayment of Term Loan is not out of sale proceeds of the goods & commodities per se, whether given as security or not. The repayment should come out of the future cash accruals from the activity of the unit. o The security is not the readily saleable goods & commodities but the fixed assets of the units. It may thus be observed that the scope & operation of the Term Loans are entirely different from those of the conventional working capital advances. The Banks commitment is for a long period & the risk involved is greater. An element of risk is inherent in any type of Loan because of the uncertainty of the repayment. Longer the duration of the credit, greater is the attendant uncertainty of repayment & consequently the risk involved also becomes greater. However, it may be observed that Term Loans are not so lacking in liquidity as they appear to be. These Loans are subject to a definite repayment programme unlike short Term Loans for working capital (especially the cash credits) which are being renewed year after year. Term Loans would be repaid in a regular way from the anticipated income of the industry/ trade. These distinctive characteristics of Term Loans distinguish them from the short Term credit granted by the banks & it becomes necessary therefore, to adopt a different approach in examining the applications of borrowers for such credit & for appraising such proposals. The repayment of a Term Loan depends on the future income of the borrowing unit. Hence, the primary task of the bank before granting Term Loans is to assure itself that the anticipated income from the unit would provide the necessary amount for the repayment of the Loan.
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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. B. Non-fund Base: Letter of credit The expectation of the seller of any goods or services is that he should get the payment immediately on delivery of the same. This may not materialize if the seller & the buyer are at different places (either within the same country or in different countries). The seller desires to have an assurance for payment by the purchaser. At the same time the purchaser desires that the amount should be paid only when the goods are actually received. Here arises the need of Letter of Credit (LCs). The objective of LC is to provide a means of payment to the seller & the delivery of goods & services to the buyer at the same time. Definition A Letter of Credit (LC) is an arrangement whereby a bank (the issuing bank) acting at the request & on the instructions of the customer (the applicant) or on its own behalf, o Is to make a payment to or to the order of a third party (the beneficiary), or is to accept & pay bills of exchange (drafts drawn by the beneficiary); or o Authorizes another bank to effect such payment, or to accept & pay such bills of exchanges (drafts); or o Authorizes another bank to negotiate the Terms & conditions of the credit are complied with. against stipulated document(s), provided that

Bank Guarantees:

A contract of guarantee is defined as a contract to perform the promise or discharge the liability of the third person in case of the default. The parties to the contract of guarantees are: a) Applicant: The principal debtor person at whose request the guarantee is executed b) Beneficiary: Person to whom the guarantee is given & who can enforce it in case of default.

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c) Guarantee: The person who undertakes to discharge the obligations of the applicant in case of his default. Thus, guarantee is a collateral contract, consequential to a main co applicant & the beneficiary. Purpose of Bank Guarantees Bank Guarantees are used to for both both preventive & remedial purposes. The guarantees executed by banks comprise both performance guarantees & financial guarantees. The guarantees are structured according to the Terms of agreement, viz., security, maturity & purpose. Branches may issue guarantees generally for the following purposes: a) In lieu of security deposit/earnest money deposit for participating in tenders; b) Mobilization advance or advance money before commencement of the project by the contractor & for money to be received in various stages like plant layout, design/drawings in project finance; c) In respect of raw materials supplies or for advances by the buyers; d) In respect of due performance of specific contracts by the borrowers & for obtaining full payment of the bills; e) Performance guarantee for warranty period on completion of contract which would enable the suppliers to period to be over; realize the proceeds without waiting for warranty) To allow units to draw funds from time to time from the concerned indenters against part execution of contracts, etc. f) Bid bonds on behalf of exporters g) Export performance guarantees on behalf of exporters favoring the Customs Department under EPCG scheme.

Bill discounting:

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

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certain sum of money only to, or to the order of, a certain person, or to the bearer of that instrument. Discounting of bill of exchange: A seller (Drawer) if need cash, may handover the B/E to the Bank, NBFC, a company or a high Net worth Individual and obtain ready cash this is known as discounting of bill. the practice in India is that, the financing organization holds the original B/E till the drawee pays on maturity. For discounting the bill, financiers charge an interest on the bill amount for the duration of the bill which is called discount charges.normal maturity periods are 30, 60, 90, 120 days. Types of Bills 1. Demand Bill 2. Usance Bill 3. Documentary Bills a. Documents against acceptance (D/A) bills b. Documents against payment (D/P) bills 4. Clean Bills Advantages o To Investors 1. Short Term source of finance 2. Outside the purview of Section 370 of Indian Companies Act 1956 3. No tax deducted at source 4. Flexibility o To Banks 1. Safety of funds 2. Certainty of payment 3. Profitability

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Credit Appraisal Process

Receipt of application from applicant

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

Pre-sanction visit by bank officers

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

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

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

Preparation of financial data

Proposal preparation

Assessment of proposal

Sanction/approval of proposal by appropriate sanctioning authority

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Documentations, agreements, mortgages

Disbursement of Loan

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

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Loan administration pre- sanction process

Appraisal, Assessment and Sanction functions 1. Appraisal A. Preliminary appraisal Sound credit appraisal involves analysis of the viability of operations of a business and the capacity of the promoters to run it profitably and repay the bank the dues as and when they fall Towards this end the preliminary appraisal will examine the following aspects of a proposal. Banks lending policy and other relevant guidelines/RBI guidelines, Prudential Exposure norms, Industry Exposure restrictions, Group Exposure restrictions, Industry related risk factors, Credit risk rating, Profile of the promoters/senior management personnel of the project, List of defaulters, Caution lists, Acceptability of the promoters, Compliance regarding transfer of borrower accounts from one bank to another, if applicable; Government regulations/legislation impacting on the industry; e.g., ban on financing of industries producing/ consuming Ozone depleting substances; Applicants status vis--vis other units in the industry, Financial status in broad Terms and whether it is acceptable The Companys Memorandum and Articles of Association should be scrutinized carefully to ensure (i) that there are no clauses prejudicial to the Banks interests, (ii) no limitations have
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been placed on the Companys borrowing powers and operations and (iii) the scope of activity of the company. Further, if the proposal is to finance a project, the following aspects have to be examined: Whether project cost is prima facie acceptable Debt/equity gearing proposed and whether acceptable Promoters ability to access capital market for debt/equity support Whether critical aspects of project - demand, cost of production, profitability, etc. are prima facie in order Required Documents for Process of Loan a) Application for requirement of loan b) Copy of Memorandum & Article of Association c) Copy of incorporation of business d) Copy of commencement of business e) Copy of resolution regarding the requirement of credit facilities f) Brief history of company, its customers & supplies, previous track records, orders In hand. Also provide some information about the directors of the company g) Financial statements of last 3 years including the provisional financial statement. h) Copy of PAN/TAN number of company i) Copy of last Electricity bill of company j) Copy of GST/CST number k) Copy of Excise number l) Photo I.D. of all the directors m) Address proof of all the directors n) Copies related to the property such as 7/12 & 8A utara, lease/ sales deed, 2R Permission, Allotment letter, Possession o) Bio-data form of all the directors duly filled & notarized p) Financial statements of associate concern for the last 3 years 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
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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 done by them. b) No Objection Certificate from Term lenders if already financed by them and c) Report from Merchant bankers in case the company plans to access capital market, wherever necessary. 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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a) Appraisal report from any other bank/financial institution in case appraisal has been

a) Audited profit loss account and balance sheet for the past three years (if the latest audited balance sheet is more than 6 months old, a pro-forma balance sheet as on a recent date should be obtained and analysed). For non-corporate borrowers, irrespective of market segment, enjoying credit limits of Rs.10 lacs and above from the banking system, audited balance sheet in the IBA approved formats should be submitted by the borrowers. b) Details of existing borrowing arrangements, if any, c) Credit information reports from the existing bankers on the applicant Company, and d) Financial statements and borrowing relationship of Associate firms/Group Companies. B. Detailed Appraisal The viability of a project is examined to ascertain that the company would have the ability to service its Loan and interest obligations out of cash accruals from the business. While appraising a project or a Loan proposal, all the data/information furnished by the borrower should be counter checked and, wherever possible, interfirm and inter-industry comparisons should be made to establish their veracity. The financial analysis carried out on the basis of the companys audited balance sheets and profit and loss accounts for the last three years should help to establish the current viability. In addition to the financials, the following aspects should also be examined: The method of depreciation followed by the company-whether the company is following straight line method or written down value method and whether the company has changed the method of depreciation in the past and, if so, the reason therefore; 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;
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The position regarding the companys tax assessment - whether the provisions made in the balance sheets are adequate to take care of the companys tax liabilities; The nature and purpose of the contingent liabilities, together with comments thereon; Pending suits by or against the company and their financial implications (e.g. cases relating to customs and excise, sales tax, etc.); Qualifications/adverse remarks, if any, made by the statutory auditors on the companys accounts; Dividend policy; Apart from financial ratios, other ratios relevant to the project; Trends in sales and profitability, past deviations in sales and profit projections, and estimates/projections of sales values; Production capacity & use: past and projected; o Estimated requirement of working capital finance with reference to acceptable build up of inventory/ receivables/ other current assets;

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.)
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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 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 Companys structure & systems Applicants strength on inter-firm comparisons

For the purpose of inter-firm comparison and other information, where necessary, source data from Stock Exchange Directory, financial journals/ publications, professional entities like CRIS-INFAC, CMIE, etc. with emphasis on following aspects: o Market share of the units under comparison o Unique features o Profitability factors
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o Financing pattern of the business o Inventory/Receivable levels o Capacity utilization o Production efficiency and costs o Bank borrowings patterns o Financial ratios & other relevant ratios o Capital Market Perceptions o Current price o 52week high and low of the share price o P/E ratio or P/E Multiple o Yield (%)- half yearly and yearly Also examine and comment on the status of approvals from other Term lenders, market view (if anything adverse), and project implementation schedule. A pre-sanction inspection of the project site or the factory should be carried out in the case of existing units. To ensure a higher degree of commitment from the promoters, the portion of the equity / Loans which is proposed to be brought in by the promoters, their family members, friends and relatives will have to be brought upfront. However, relaxation in this regard may be considered on a case to case basis for genuine and acceptable reasons. Under such circumstances, the promoter should furnish a definite plan indicating clearly the sources for meeting his contribution. The balance amount proposed to be raised from other sources, viz., debentures, public equity etc., should also be fully tied up. C. Present relationship with Bank: 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
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Repayment of Term commitments Compliance with requirements regarding submission of stock statements, Financial Follow-up Reports, renewal data, etc. Stock turnover, realization of book debts Value of account with break-up of income earned Pro-rata share of non-fund and foreign exchange business Concessions extended and value thereof Compliance with other Terms and conditions Action taken on Comments/observations contained in RBI Inspection Reports: CO Inspection & Audit Reports

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

H. Review of the proposal:

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Review of the proposal should be done covering (i) strengths and weaknesses of the exposure proposed (ii) risk factors and steps proposed to mitigate them (ii) Deviations, if any, proposed from usual norms of the Bank and the reasons therefore I. Proposal for sanction: Prepare a draft proposal in prescribed format with required backup details and with recommendations for sanction. J. Assistance to Assessment: Interact with the assessor, provide additional inputs arising from the assessment, incorporate these and required modifications in the draft proposal and generate an integrated final proposal for sanction.

2. Assessment: Indicative List of Activities Involved in Assessment Function is given below: Review the draft proposal together with the back-up details/notes, and the borrowers application, financial statements and other reports/documents examined by the appraiser. Interact with the borrower and the appraiser. Carry out pre-sanction visit to the applicant company and their project/factory site. Peruse the financial analysis (Balance Sheet/ Operating Statement/ Ratio Analysis/ Fund Flow Statement/ Working Capital assessment/Project cost & sources/ Break Even analysis/Debt Service/Security Cover, etc.) to see if this is prima facie in order. If any deficiencies are seen, arrange with the appraiser for the analysis on the correct lines. Examine critically the following aspects of the proposed exposure.

o Banks lending policy and other guidelines issued by the Bank from time to time o RBI guidelines o Background of promoters/ senior management o Inter-firm comparison
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o Technology in use in the company o Market conditions o Projected performance of the borrower vis--vis past estimates and performance o Viability of the project o Strengths and Weaknesses of the borrower entity. o Proposed structure of facilities. o Adequacy/ correctness of limits/ sub limits, margins, moratorium and repayment schedule o Adequacy of proposed security cover o Credit risk rating o Pricing and other charges and concessions, if any, proposed for the facilities o Risk factors of the proposal and steps proposed to mitigate the risk o Deviations proposed from the norms of the Bank and justifications therefor To the extent the inputs/comments are inadequate or require modification, arrange for additional inputs/ modifications to be incorporated in the proposal, with any required modification to the initial recommendation by the Appraiser Arrange with the Appraiser to draw up the proposal in the final form. Recommendation for sanction: Recapitulate briefly the conclusions of the appraisal and state whether the proposal is economically viable. Recount briefly the value of the companys (and the Groups) connections. State whether, all considered, the proposal is a fair banking risk. Finally, give recommendations for grant of the requisite fundbased and non-fund based credit facilities.

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

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

Value of the existing connection with the borrower

Loan administration - Post sanction Credit process

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

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

Types of Lending Arrangements

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

Sometimes, units would prefer to have banking arrangements with more than one bank on account of the large financial requirement or the resource constraint of his own banker or due to varying terms & conditions offered by different banks or for sheer administrative convenience. The advantages to the bank in a multiple banking arrangement/ consortium arrangement are that the exposure to an individual customer is limited & risk is proportionate. The bank is also able to spread its portfolio. In the case of borrowing business entity, it is able to meet its funds requirement without being constrained by the limited resource of its own banker. Besides this, consortium arrangement enables participating banks to save manpower & resources through common appraisal & inspection & sharing credit information. The various arrangements under borrowings from more than one bank will differ on account of terms & conditions, method of appraisal, coordination, documentation & supervision & control. Consortium Lending When one borrower avails loans from several banks under an arrangement among all the lending bankers, this leads to a consortium lending arrangements. In consortium lending, several banks pool banking recourses & expertise in credit management together & finance a single borrower with a common appraisal, common documentation & joint supervision & follow up. The borrower enjoys the advantage similar to single window availing of credit facilities from several banks. The arrangement continues until any one of the bank moves out of the consortium. The bank taking the highest share of the credit will usually be the leader of consortium. There is no ceiling on the number of banks in a consortium. Multiple Banking Arrangement Multiple Banking Arrangement is one where the rules of consortium do not apply & no inter se agreement among banks exists. The borrower avails credit facility from various banks
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providing separate securities on different terms & conditions. There is no such arrangement called Multiple Banking Arrangement & the term is used only to denote the existence of banking arrangement with more than one bank. Banking Arrangement has come to stay as it has some advantages for the borrower & the banks have the freedom to price their credit products & non-fund based facility according to their commercial judgment. Consortium arrangement occasioned delays in credit decisions & the borrower has found his way around this difficulty by the multiple banking arrangement. Additionally, when units were not doing well, consensus was rarely prevalent among the consortium members. If one bank wanted to call up the advance & protect the security, another bank was interested in continuing the facility on account of group considerations. Points to be noted in case of multiple banking arrangements Though no formal arrangement exists among the financing banks, it is preferable to have informal exchange of information to ensure financial discipline Charges on the security given to the bank should be created with utmost care to guard against dilution in our security offered & to avoid double financing Certificates on the outstanding with the other banks should be obtained on the periodical basis & also verified from the Balance sheet of the unit to avoid excess financing Credit Syndication A syndicated credit is an agreement between two or more lending institutions to provide a borrower a credit facility using common loan documentation. It is a convenient mode of raising long-term funds. The borrower mandates a lead manager of his choice to arrange a loan for him. The mandate spells out the terms of the loan & the mandated banks rights & responsibilities. The mandated banker the lead manger prepares an information memorandum & Circulates among prospective lender banks soliciting their participation in the loan. On the basis of the memorandum & on their own independent economic & financial evolution the leading banks take a view on the proposal. The mandated bank convenes the meeting to discuss the syndication strategy relating to coordination, communication & control within the syndication process & finalizes deal timing, management fees, cost of credit etc. The loan
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agreement is signed by all the participating banks. The borrower is required to give prior notice to the lead manger about loan drawal to enable him to tie up disbursements with the other lending banks. Features of syndicated loans Arranger brings together group of banks Borrower is not required to have interface with participating banks, thus easy & hassle fee Large loans can be raised through syndication by accessing global markets For the borrower, the competition among the lenders leads to finer terms Risk is shared Small banks can also have access to large ticket loans & top class credit appraisal & management

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

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CHAPTER - 6 CREDIT APPRAISAL MODEL AT AXIS BANK Scheme of Credit to SME Sector
AXIS bank provides credit to SME sector under following Schemes A. SME Schematic (Fast Track) It includes structured products basically to provide fast services to clients. It includes various products like: Mpower OD and Mpower Term Loan Business Loan for Property Power Rent Power Trade Zero Collateral Loans (ZCL) to MSE under CGS Card Power Enterprise Power Business Power Mpower OD and Mpower Term Loan:

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

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The product is aimed at providing finance to business enterprises for acquition of an immovable property. The facility is in the form of a Term Loan repayable by EMIs. The maximum Loan amount under the product is Rs. 5 crores. Power Rent:

The product generally known in market parlance as Lease Rental Discounting is aimed at providing a Term Loan to owners of properties against their lease rental receivables. The Loan amount is assessed on the basis of the net present value of the rental receivables over the lease period (after deducting margin and taxes). The lease rentals are hypothecated in banks favor and the Loan is further collateralized by charge over the property. The product specifies a minimumsecurity coverage of 1.5 times. Maximum Loan amount under the product is Rs. 20 crores. Power Trade:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Letter of Credit: Apart from fund based working capital facilities Bank provides a range of Non59

Fund Based facilities such as Letter of credit, Bank Guarantees, Solvency certificates, etc. Letter of Credit is provided to meet trade purchases. These are generally provided for 3-6 months depending upon Trade cycle. Apart from this it provides Import Letter of Credit for importing machinery or capital goods. Such LCs are for tenure ranging from 1-3 years depending upon the need of the borrower. Bank Guarantee: Bank provides Bank Guarantee on behalf of its client to various other entities such as Government, quasi govt bodies, corporate and so on. it provides a range of guarantee such as Performance guarantee, financial guarantee, EPCG etc. The tenure of Bank Guarantee range from 1 year to 10 years depending upon the purpose of the guarantee. Solvency Certificates: Bank also provides solvency certificate depending upon the need of the borrower.

Sanctioning powers for schematic Loans under MSME and Mid Corporate
In order to have better control over the portfolio, it is felt that the budget for schematic advances should be allotted only to select branches, where the potential and manpower support exist for such business. Accordingly, the budget has been restricted to select branches, to be decided by Advances Cells. The Branch Heads of branches located at centers where Advances Cells have been set up will not have any sanctioning powers. Branch Heads of stand-alone branches where budgets have been allocated will have sanctioning powers as per delegation of powers given below. The Branch Heads of other stand-alone branches where budgets have not been allocated will not have any sanctioning powers. These branches would, however, continue to source business and such proposals would be processed / sanctioned at the respective
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Advances Cells. Review / renewal of existing Loans at such branches would also be done at the Advances Cells. Branches would continue to be responsible for all post sanction formalities, maintaining quality of assets held in their books, periodic updating of drawing power, obtention of stock statements and periodical inspection of borrowal units. The sanctioning powers, to be exercised by various officials would be as under.

Sanctioning Authority Senior Manager AVP DVP / VP SVP (Advances) at ZO

Exposure Limits (in Rs. Lacs) 50 250 1000 2000

Interest rates Concessions NIL NIL Upto 100 bps Upto 100 bps

Reviewing Authority AVP / VP-Advances at the Advances Cell DVP/VP-Advances SVP Advances Zonal Head

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

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CHAPTER - 7 Introduction to Credit Risk Management

Definition Of all different types of risks that a bank is subject to, credit risk can be defined as the risk of failure on the part of the borrower to meet obligations towards the bank in accordance with the Terms and conditions that have been agreed upon. Inability and/or unwillingness of the borrower to repay debts may be the cause of such default. The bank aims at minimizing this risk that could arise from individual borrowers or the entire portfolio. The former can be addressed by having well-developed systems to appraise the borrowers; the latter, on the other hand, can be minimized by avoiding concentration of credit exposure with a few borrowers who have similar risk profiles. Credit risk management becomes even more relevant in the light of the changes that have been brought about in the economic environment, including increasing competition and thinning spreads on both the sides of Balance sheet

Determinants of Credit Risk Factors determining credit risk of a banks portfolio can be divided into external and internal factors. The banks do not have control on external factors. These include factors across a wide spectrum ranging from the state of the economy to the correlation among different segments of industry. The risk arising out of external factors can be mitigated via diversification of the credit portfolio across industries especially in light of any expectations of adverse developments in the existing portfolio. Given that the banks have very little control over such external factors, the bank can minimize the credit risk that it faces mainly by managing the internal factors. These include the internal policies and processes of the bank like Loan policies, appraisal processes, monitoring systems etc. These internal factors can be taken care of, partly, via effective rating and monitoring systems, entry level criteria etc. These processes would enable improvement in the quality of credit decisions.
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This would effectively improve the quality (and hence profitability) of the portfolio. While monitoring systems are useful tool at post-sanction stage, rating systems act as important aid at the pre-sanction stage.

Introduction to Credit Tools

The Bank has developed tools for better credit risk management. These focus on the areas of rating of corporate (pre-sanctioning of Loans) and monitoring of Loans (post-sanctioning). The focus of this manual is to familiarize the user with the credit rating tool. Credit Rating: Definition Credit rating is the process of assigning a letter rating to borrowers indicating the creditworthiness of the borrower. Rating is assigned based on the ability of the borrower (company) to repay the debt and his willingness to do so. The higher the rating of a company, the lower the probability of its default. The companies assigned with the same credit rating have similar probability of default. Use in decision-making Credit rating helps the bank in making several key decisions regarding credit including: Whether to lend to a particular borrower or not; What price to charge What are the products to be offered to the borrower and for what tenor At what level should sanctioning be done What should be the frequency of renewal and monitoring It should, however, be noted that credit rating is one of the inputs used in taking credit decisions. There are various other factors that need to be considered in taking the decision (e.g., adequacy of borrowers cash flow, collateral provided, relationship with the borrower). The rating allows the bank to ascertain a probability of the borrowers default based on past data.

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

Rating Tool for Small and Medium Enterprises (SME)

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

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The following broad areas have been considered for determining the rating of Borrowers in the SME category: Financial performance Business performance Industry outlook Quality of management Conduct of account (after roll out of the Monitoring tool)

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

Parameters used in credit rating of SME: The rating tool for SME borrowers assigns the following weightings to each one of the four main categories i) Scenario (I) without monitoring Parameter Financial performance Operating performance of business Quality of management Industry outlook Weight age (%) 40 22.5 22.5 15

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

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

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

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

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

Three types under SME tool i) Manufacturing ii) Services and iii) Trading Various parameters under each of the above stated parameters for these three types of SME tool are as under:
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1 i) Financial performance Sr. No. F1 F2 F3 F6 F7 F8 F9 F12*$ F13

Manufacturing

Sub parameters Net Sales Growth Rate (%) PBDIT Growth Rate (%) PBDIT/Sales (%) TOL/TNW Current Ratio Operating Cash Flow DSCR Foreign exchange risk Expected values of D/E, if 50% of NFB credit devolves (corrected for margin) F24 Realisability of Debtors F27* State of export country economy F28* Fund repatriation risk TOTAL * Applicable for export units $Applicable for units having imports and or exports

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

ii) Operating performance of business Sr. No. B7 B8 B9 B10 B13 B14 B15 B20 B21 Sub parameters Credit period allowed Credit Period Availed Working Capital Cycle Tax incentives Production Related Risk Product Related Risks Price Related Risk Client Risk Fixed Asset Turnover TOTAL Weightage (%) 10 10 20 10 10 10 10 10 10 100

iii) Quality of management Sr. No. Sub parameters Weightage (%)

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M1 M2 M3 M4 M6 M9 M8

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

15 16 15 8 16 15 15 100

2
i) Financial performance

Services

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

Sub parameters Net Sales Growth Rate (%) PBDIT Growth Rate (%) PBDIT/Sales (%) TOL/TNW Current Ratio Operating Cash Flow DSCR Foreign exchange risk Expected values of D/E, if 50% of NFB credit devolves (corrected for margin) F24 Realisability of Debtors F27* State of export country economy F28* Fund repatriation risk TOTAL * Applicable for export units $Applicable for units having imports and or exports

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

ii) Operating performance of business

Sr. No. M1 M3 M4 M6

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

Weightage (%) 15 20 10 20

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M8 M12

Capability to raise money Mix of Professional and Traditional Management TOTAL

15 20 100

iii) Quality of management Sr. No. M1 M3 M4 M6 M8 M12 Sub parameters HR Policy/Track Record in Industrial Unrest Market Report of Management Reputation History of FERA violation/ED enquiry Too Optimistic Projections of Sales and Other Financials Capability to raise money Mix of Professional and Traditional Management TOTAL Weightage (%) 15 20 10 20 15 20 100

3
i) Financial performance

Trading

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

Sub parameters Net Sales Growth Rate (%) PBDIT Growth Rate (%) PBDIT/Sales (%) TOL/TNW Current Ratio Operating Cash Flow DSCR Foreign exchange risk Expected values of D/E, if 50% of NFB credit devolves (corrected for margin) F24 Realisability of Debtors F27* State of export country economy F28* Fund repatriation risk TOTAL * Applicable for export units

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

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$Applicable for units having imports and or exports

ii) Operating performance of business

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

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

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

iii) Quality of management

Sr. No. M1 M2 M3 M4 M6 M8 M12

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

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

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Definition of Parameters used in SME tool

F1 - Net Sales Growth Rate Importance of this indicator This ratio refers to the compounded annual growth rate of net sales over a period of three years. The companys growth ratio vis--vis other companies in the industry will be a good tool to assess its performance. If the growth rate is low compared to others in the industry, then it will enable us to analyse the problems unique to this company. Formula The compounded annual growth rate over the past 3 years is calculated in percentage Terms. CAGR (Compounded annual growth rate) for three years = [{(Value of sales in current year)/(Value of sales in year 3)}(1/3) 1}]*100 Thus it is the third root of sales in current year divided by sales three years ago, minus 1, expressed as percent. Notes Net sales = Gross sales Indirect taxes For banks, NBFCs, and other financial institutions: o Net sales = net interest income + other income F2 - PBDIT Growth Rate Importance of this indicator This ratio refers to the compounded annual growth rate of profits before depreciation (non cash), finance costs (interest) and tax over a period of three years. A consistent growth in this ratio indicates an improved performance of the company, reflected in increasing profitability (compared to its sales growth). Formula The compounded annual growth rate over the past 3 years is calculated in percentage Terms. CAGR (Compounded average growth rate) for three years =
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[{(Value of PBDIT in current year)/(Value of PBDIT 3 years back)}(1/3) 1}]*100 Thus it is the third root of PBDIT in current year divided by PBDIT three years ago, minus 1, expressed as percent. Notes PBDIT denotes profit before depreciation, interest and tax. For banks, NBFCs, and other financial institutions, use PBT instead of PBDIT F3 - PBDIT/Sales Importance of this ratio This ratio indicates the profit before depreciation, interest and tax as a percentage of net sales. The profit before interest, depreciation and tax is an indicator of the operational efficiency. If this ratio as a percentage of sales is high, then it is a positive indication of the operating efficiency in Terms of raw material consumption, employee productivity and power consumption among other things. A high value indicates greater profitability and hence betters capability to repay the debt. The ratio is a measure of the margin available to a company from its operations. Formula This ratio (in %) is computed by dividing the PBDIT with Net Sales. (PBDIT/Net Sales) x 100 PBDIT = Operating profit before depreciation, interest and tax For banks, NBFCs, and other financial institutions: o Net sales = net interest income + other income o Use PBT instead of PBDIT F6 - TOL/TNW Importance of this ratio This ratio gives a holistic representation of total outside liabilities in relation to tangible net worth of company. It reflects the capacity of the business unit to assure the creditors of the security they have for payment of both interest and instalment. It indicates the extent to which the creditors are covered by asset. This ratio shows how much outside borrowings are resorted to in comparison with owners funds
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Formula The total outside liabilities are divided with the tangible net worth of the company. Total Outside Liabilities Tangible Net Worth TOL = Total liabilities - TNW TNW as defined in Debt Equity ratio Also calculate this ratio for banks, NBFCs and other financial institutions, as it will give an indication of the capital adequacy of the company F7 - Current Ratio Importance of this ratio Current assets of company are the assets that can be easily liquidated and converted into cash. The current ratio measures short-Term liquidity of the company and ability to meet its shortTerm financial obligations. A high ratio is good from the point of view of the bank but a very high ratio may affect profitability through a high inventory carrying cost. Formula The ratio is worked out by dividing the Current Assets with Current Liabilities Current Assets Current liabilities (including instalments due during the year) To get a meaningful current ratio, we should account for the vulnerability of a company to short Term insolvency. The current ratio could be high because of excess inventory or slow realisation of debtors. Therefore, current assets must not include inventory which is older than the normal working cycle of company (say 6-8 month), receivables over 6 months, dies, spares required for more than 9 months of production and disputed receivables. If such excess assets exist then please make necessary notes in the remarks column. In such cases please indicate your assessment of the value of current ratio. Also calculate this ratio for banks, NBFCs and other financial institutions, as it will give an indication of the duration mismatch of the companys balance sheet

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F8 - Operating Cash Flow Importance of this indicator This measure indicates the companys cash inflows and outflows arising from its operations. It is different from funds flow of business. It helps us to evaluate the companys ability to generate cash inflows from operations to pay debt, interest and dividends, and to explain the difference between net income and net cash flow for operating activities. The operating cash flow can indicate the companys need for external financing. While funds flow is good to match long Term and short Term use and source of funds, this indicator tries to capture the capability of the firm to be able to meet its business obligations . Calculation Operating cash flow ( for the last financial year) is computed in the following manner Head Net Sales Other income Total receipts Less: COGS Gross Profit Less: SGA/Operating expenses PBDIT - Increase / + decrease in non cash current assets + Increase / - decrease in current liabilities Operating cash Less: Income tax paid Post tax operating cash Less: Interest paid on LT & ST Less: Dividend paid Cash from operations Repayment due of long Term debt Amount

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How to rate Compare cash flow from operations to repayment due of long Term debt. The rating is done as explained in the table below. Description The company is likely to default on repayment of its Loans and Interest The company is not in a position to meet its repayment obligations from its own resources and it faces difficulties to arrange outside funds The company is in a position to meet its repayment obligation from its own resources and Term funds that are already applied for (and expected to be sanctioned shortly) The company is in a position to meet its repayment obligation from its own resources and Term funds The company is in a comfortable position to meet its repayment obligation from its own resources (no need for outside funds) 3 4 2 Score O 1

F9 - DSCR (Debt Service Coverage Ratio) Importance of this ratio This ratio measures the capacity of the company to service its debt i.e. repayment of principal and interest. DSCR measures the number of times a companys earnings cover its total longTerm debt-servicing requirement, including interest and principal repayments in Term Loans, over a period of one year. This ratio will help us to evaluate if an adequate cash flow will be available to meet debt obligation and also for providing margin of safety to lenders. This ratio also helps to deTermine the time when repayment should commence and the pay-back period of the Loan. This ratio is a good indicator of the long-Term solvency of a company. Formula The profit before depreciation and interest (PBDI) is divided by installments due during the year plus interest. P B D I__________ Instalments for the year + interest
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 Do not fill in this ratio for banks, NBFCs and other financial institutions F12 - Foreign exchange risk Importance of this indicator Adverse movements in the foreign exchange rate can have a tremendous impact on the companys financial strength. Foreign exchange risk may be either transaction based or portfolio based. Transaction based risk is due to time lags between purchases being made and payment being made, or sales being made and payment being received against these sales. Portfolio based risk is on account of foreign exchange Loans where the repayment is made on future dates in foreign currency. The rater needs to know how the likely fluctuation in exchange rate will affect the profits of the company. Depending on composition of international trade, the adverse exchange rate movement could affect the profitability/cash flow. Prudent borrowers hedge their exposure to foreign exchange. Only the un-hedged part of the foreign exchange exposure should be taken into account. How to rate The rater has to subjectively rate this indicator on a score of 0 to 4 based on his perception and knowledge of the foreign exchange risk. A potential model to allocate score can be the following: Description The risk involved is > 10% of TNW The risk involved is between 8% and 10% of TNW The risk involved is between 5% and 8% of TNW The risk involved is less than 5% of TNW The entire portfolio is hedged Score 0 1 2 3 4

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Important notes The foreign exchange risk can be quantified by using the forward exchange rates prevailing in the currency market. The risk involved can be estimated by evaluating two measures: 1. exports as % of TNW 2. Natural hedge involved, with a proxy measure being (1- imports divided by exports) (always divide the smaller number by the larger one). When this ratio is 1, foreign exchange risk from exports and imports cancels each other out (provided it is to/from similar currency zones) Example: total sales = 100, exports = 20, imports = 10, TNW = 200 Risk involved = exports x (1- imports/exports) = 20 x (1- 10/20) = 10 = 5% of TNW Also calculate this ratio for banks, NBFCs and other financial institutions F13 - Expected values of Debt Equity ratio if 50% NFB credit devolves Importance of this indicator This indicator gives us an idea about the future expected debt equity structure in an extreme situation. It recalculates the Debt/Equity ratio when 50% of non-fund based limits devolve. In doing so, it gives a sense of the long-Term financial stability in an extreme situation. This is quite a good comforting factor for the bank. Most companies have to put up a margin for their nonfund based credits. The new D/E ratio will have to be corrected for this when the limits devolve, since part of it will be covered by the margin Calculation The calculation is the same as for F5 Debt/Equity ratio, with Debt = Long Term debt + 50% of the companys non-fund based limits margin that the company put up for its non-fund based limits.

Do not calculate this ratio for banks, NBFCs and other financial institutions
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F24 - Realisability of Debtors Importance of this indicator This indicator should indicate the quality of the debtors of the company and if money can be recovered from them quickly and easily. A lot depends on how auditors have treated the receivables. There are many ways in which the auditors can play around with the receivables viz. the receivables may be disputed. Receivables may be unrelated to business activity of the company or there could be high amount of bad debts in the receivable portfolio of the company. Any delay in receipt of payment from debtors/non-receipt of amount can hamper the production cycle of a company as well as increase collection costs and the probability of default on the part of the debtor of the company. Hence the realisability of the debtors of a company is a critical input for assessing the financial risk of a borrower. F27 State of the export country economy Importance of this indicator The economy of the country(ies) to which is being exported, will have a significant impact on the exporters business. A slowdown in the economic growth might even have a more than linear impact on the exporters turnover and profitability, since importers will typically may have the reaction to cut costs by cutting relationships with overseas suppliers. How to rate The rater has to subjectively rate this indicator on a score of 0 to 4 based on his perception and knowledge of the foreign exchange risk. The minimum score of 0 could be assigned to exporters who trade the bulk of their products/services with 1 single country, that is currently in a recession. The maximum score of 4 can be granted to parties who have a wide portfolio of export countries, with most (or all) of these countries showing strong economic growth. F28 Fund repatriation risk Importance of this indicator Exporters are often paid in the currency of the country to which they export.Some of these currencies may be difficult to exchange or to wire back to India. In that case, significant costs and risks are involved in the repatriation of funds, which could affect the overall risk profile of the exporter
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How to rate The rater has to subjectively rate this indicator on a score of 0 to 4 based on his perception and knowledge of the foreign exchange risk. The minimum score of 0 could be assigned to an exporter who trades the bulk of his products/services with a country that has very stringent foreign exchange and currency repatriation policies. The maximum score of 4 could be granted to exporters who only trade with countries, which have no restrictions on the flow or repatriation of funds. B3 - Inventory Turnover(Trading) Importance of this ratio This ratio indicates the velocity (number of times) with which the inventory circulates in the business, during the relevant period. A decrease in ratio could be a significant danger signal. Low ratio could indicate the presence of slow moving items in stock. A high ratio is good from the point of liquidity since inventory will be quickly converted into cash. This ratio also indicates the efficiency of the company in utilizing its inventory and maintaining it at an optimum level. Thus, the higher the ratio, the higher the sales per unit of investment in inventories. A lower ratio results in high carrying cost and blocking of funds, thus limiting the liquidity of the company. Formula The ratio is worked out by dividing the net sales with average inventory maintained. Net sales Average inventories Average inventory = (opening stock of inventory + closing stock of inventory)/2 Inventory = raw materials + WIP + finished goods Do not calculate this ratio for banks, NBFCs and other financial institutions B7 - Credit period allowed Importance of this indicator This indicates the period of realisation of sales proceeds. It is the average length of time that customers who buy on credit take to pay their dues. It indicates the efficiency of management in debt collection.

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A lower value of this ratio indicates a speedy realisation of sale proceeds. The industrys practice should be given due consideration. A high ratio could be indicative of disputed receivables or a high amount of bad debts. The appraisal officer should be careful when assessing this ratio, since it also reflects the bargaining power enjoyed by the company in the market with respect to the buyers. Formula The period of collection (in days) is calculated by dividing the average debtors outstanding with average daily sales. Average debtors Average daily sales Average debtors = (Sundry debtors in the beginning of the year + sundry debtors at the close of the year)/2 Do not calculate this ratio for banks, NBFCs and other financial institutions B8 - Credit period availed Importance of this indicator It measures the average time taken by the company to pay its suppliers for purchases made on credit. This ratio relates credit availed to its total purchases. This indicator is a measure of the bargaining power that the company enjoys with its suppliers. A stronger company will avail a longer credit period from its suppliers than a weak company. A longer credit period offered by suppliers also indicates that the suppliers are confident of the ability of the company to pay them. A word of caution, a very high ratio could indicate short-Term liquidity problems also. Formula The credit period availed (in days) is computed by dividing the average (non financial) creditors outstanding during the year with average daily cost of sales. Average creditors Average daily cost of sales Average creditors = (Sundry creditors in the beginning of the year + sundry creditors at
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the close of the year)/2 Do not calculate this ratio for banks, NBFCs and other financial institutions B9 Working capital cycle (Manufacturing, Trading) Importance of this indicator Working capital represents an important part of the employed capital of many companies. Therefore, a good performing company should carefully manage this part of its assets, since it represents an important invest Also, the way a company go about their working capital, says a lot about the management of the company. In a sense one could argue that good working capital management is an indicator of good management Factors to be considered Inventory turnover and credit period allowed How to calculate Net sales Working capital Working capital = Raw materials and spares+ Finished and semi finished goods+ Debtors Do not calculate this ratio for banks, NBFCs and other financial institutions B10 - Tax Incentives Importance of this indicator Tax incentives can be a major driver of profitability for many companies. A unit located in backward area or in some of the states (like Goa or union territory of Daman & Diu etc.) enjoy special tax incentives. (Both states grant income tax and sales tax holidays for 3-5 yrs.) Such tax holiday period is helpful for company to take advantage especially in a commodity market and thus improve profitability. How to rate The rater has to subjectively rate this indicator on a score of 0 to 4 based on his perception and knowledge of the government policies and industry. The rater should also be aware of the management strengths and their ability to make best use of the existing government

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incentives. Score of 4 indicates a high probability of successfully getting tax incentives. Score of 0 means no or negative effect of taxes. B13 - Production related risk (Manufacturing) Importance of this indicator This measures the risk of a company with respect to its production activities. It evaluates the ability of company to sustain the production activity at a diversified level. A company having little production related uncertainties in production would be better placed in the industry. Problems in production would lead to impact on overall performance of the company. Thus the efficiency, stability and consistency of quality of the production activities are a critical deTerminant of performance. The state of technology can be considered an overall driver of this risk Factors to be considered Capacity Utilisation; Availability of raw material, State of technology used; Flexibility in product manufacturing; Patents and proprietary technology; R&D Number of manufacturing plants. How to rate The rater has to subjectively rate this indicator on a score of 0 to 4 based on his perception and knowledge of the production risk. A potential model to allocate score can be the following: Score =2, if company is upgrading but has old technology Score = 0,1 if company is not upgrading and has old technology Score = 4, if company is upgrading and technology is new Score = 3, if company is not upgrading but has new technology

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

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

Score 0 1 2 3 4

B15 - Price Related Risk Importance of this indicator This indicator measures the ability of a company to dictate prices in the marketplace as well as to cut its prices in case of a price war. The price competitiveness of a company is an important indicator of the competitive position of a company. A company that is in a position to charge a premium over its competitors is better placed in the industry. Similarly, a
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company with lower costs is in a good position to withstand price competition in the market. If the companys products enjoy a high reputation, it can price the product to its advantage. Factors to be considered Economies of scale/cost effective technology; Brand Equity; Pricing Flexibility; Financing edge over competitors; Bargaining power of buyers How to rate The rater has to subjectively rate this indicator on a score of 0 to 4 based on his/her perception and knowledge of the price risk. A score of 4 means that the company is not at all subject to price risk, i.e. can charge a sustainable price premium. A score of 0 indicates that the company has no control at all over its price, thus being subject to high price risks. B20 Client risk(Services, Manufacturing) Importance of this indicator Smaller to midsized companies can face considerable risks at the client side. This risk is twofold: number of clients and quality of clients. Medium-sized companies sometimes depend on a very small portfolio of clients, or have 1 predominant clients who makes or breaks the company. Also, medium sized companies are sometimes closely connected to clients with a shady or poor reputation. This might not only adversely impact their own reputation, but also represent a barrier to recruiting and retaining of talent, innovation, Factors to be considered Number of clients, quality/reputation of clients How to rate The rater has to subjectively rate this indicator on a score of 0 to 4 based on his/her perception and knowledge of the client risk. A score of 4 means that the company has a well diversified portfolio of high quality clients. A score of 0 indicates that the company depends on a small set of clients, which can be perceived as 2nd or 3rd rank in their respective industry. B21 Fixed asset turnover (Manufacturing) Importance of this indicator
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Fixed assets represent an important part of the capital employed at manufacturing companies. A well performing company should therefore make sure that it gets the maximum out of its machine park. How to rate Net sales Fixed tangible assets With fixed tangible assets = replacement or acquisition value of fixed tangible assets (land, machines, buildings,..) B22 Quality of internal processes & systems (Services) Importance of this indicator The business performance of service companies is often determined by the quality of their internal processes and systems. It is therefore important to assess how these companies score on these dimensions, since they will be an important contributor to the potential success and / or risk of the company Factors to consider Consistency of delivered service, timeliness or response time, internal sharing of know-how, quality of internal training programs, How to rate The rater has to subjectively rate this indicator on a score of 0 to 4 based on his/her perception and knowledge of the quality of internal processes and systems. A score of 4 means that the companys processes and systems are considered top class in the industry. A score of 0 indicates that the company has a very poor service offering and resulting reputation. B23 Competence to innovate(Services) Importance of this indicator The success of a company can often be related to the overall performance of its service offering. Therefore, a companys capability to develop services which respond to its users needs (through efficiency, customization, effectiveness ) will influence its competitive position and hence its success
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How to rate The rater has to subjectively rate this indicator, based on his understanding of the companys innovation capabilities. A rating scale from 0 to 4 will be used. A score of 2 means that the company can be seen as having average innovation skills. A score of 3 or 4 indicates a stronger or outstanding (respectively) innovational strength compared to its competitors. A score of 1 or 0 indicates a weaker or poor (respectively) innovation skill compared to competitors. B24 Sustainability of sales(Trading) Importance of this indicator An important driver of the success of a trading company, is the level of sales it is able to generate. Therefore, the risk associated with a trading company is very much linked to the sustainability of its sales. A company with sustainable sales will have a core portfolio of products, which will not switch quickly. Opportunistic trading companies do run the risk of making the wrong bet, resulting in impressive declines in sales. How to rate The rater has to subjectively rate this indicator, based on his understanding of the companys sales sustainability. A rating scale from 0 to 4 will be used. The maximum score of 4 can be assigned to trading companies with a strong portfolio of core products, showing continuous growth as a result of a well laid out strategy. The minimum score of 0 could be given to opportunistic trading companies, showing a very random path in performance, and without a clear-cut strategy.

Subjective Assessment of Quality of Management

How to rate: The rater should rate the ratios and indicators on the score of 0 to 4 depending on his understanding and comfort levels. A score of 4 means that the rater feels that promoters and their management will perform very well on the ratio/indicator. Adversely, the rater should assign a score of 0 if he/she thinks that management will perform poorly on the ratio/indicator.
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The importance of each of the above ratios and indicators are now listed. M1 - HR policy / Track record of industrial unrest Importance of this indicator This factor relates to labour unrest, lock out, and work slow down, strike and strained management employee relation. Industrial harmony is a key factor for success of an industry/business. In short, this indicator reflects the quality of the companys HR policy. Factors to assess include: is the HR system fair and equitable, are promotions based on merits, does the company provide a supportive environment, and do employees feel appreciated? M2 - Track record in default of statutory dues (e.g. Electricity bills, PF dues, etc.) (Manufacturing ,Trading) Importance of this indicator This factor takes into account the seriousness of the company and its management towards contractual obligation. If management is not serious about the legal and statutory dues then there is a high probability of it not being committed to fulfil the Loans taken from the bank. M3 - Market report of management reputation Importance of this indicator This market report assesses the reputation or general perception about integrity and fair dealing of the promoters. The reputation of promoters regarding their integrity, adhering to commitments, fair dealings has important bearing on quality of management. This incidentally becomes one of the most important ratios and indicators, as past behaviour is often a good proxy for their future behaviour. Adverse performance of associate concerns controlled by the corporate should also be considered.

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M4 - History of FEMA violation /ED enquiry Importance of this indicator A company may have a track record of FEMA violation or might have faced raids by the Enforcement Directorate. Companies also indulge in unhealthy practice of electricity thefts or evasion of ST, IT or Excise or indulge in Hawala transactions, under-invoicing or overinvoicing. Such instances speak about poor integrity of company and indicate about company working against national interest. M6 Too optimistic projections of sales and other financials Importance of this indicator There is sometimes a conscious attempt to over-estimate financial projections to secure excess borrowings. Recurrent non-achievement of targets could be indicative of such practice. Careful scrutiny of past track records help develop an idea of reliability of projections. M8 Capability to raise resources Importance of this indicator Managements capability of raising additional resources is an important factor in assessing the creditworthiness of the company. If management is likely to find additional outside funding (from capital market, partners, family, group company,) whenever this is necessary, this should contribute to a reduced risk for the bank. M9 - Technical & Managerial expertise(Manufacturing) Importance of this indicator This indicator relates to the technical knowledge and experience of the promoters in the relevant area of operation. Technical skills will contribute to a greater efficiency of operations and quality of products. Managerial know-how will enable management to avoid typical pitfalls and to put together a consistent and feasible strategy. M12 Mix of professional and traditional management (Services,Tarding) Importance of this indicator This indicator tries to evaluate the professionalism of the companys management. It is important that the management consists of people who know the business, the industry and who have the necessary experience to make things work. However, a lot of companies are
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still family-owned, which is often reflected in the composition of the management team. Therefore, it is important to assess if the company maintains a good balance between traditional management (who often own the client relations) and professional management.

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

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The allocated

following Scenario 1 under the

LCMC Scenario II Scenario 1

SME Scenario II

weightages have been above stated respective scenarios: Parameters Financial Business Management Industry Monitoring Tool (Conduct)

40.00 22.50 22.50 15.00 Not Applicable

35.00 17.50 20.00 12.50 15.00

55.00 15.00 15.00 15.00 Not Applicable

47.50 15.00 15.00 12.50 10.00

(The above stated weightages are subject to change) Bases on an exercise conducted to examine the robustness of the monitoring tool; the erstwhile conduct rating parameters have been condensed and divided into two groups: 1) Hurdles: These are parameters which lack the discriminating power between a good and a bad account but they are nevertheless important as far as behavior of an obligor is concerned. 2) Discriminants: These are parameters which have higher discriminating power between a good and a bad account and maybe used for predicting defaults. Since inputs for the monitoring tool will be available with the branches, data input in the monitoring tool will be done by the branches only. In case of any clarifications the user may get in touch with the Risk Department at Central Office

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Parameter Hurdles A1 A2 Creation of Charge on Primary Security Creation of charge on collateral and / or execution of personal / corporate guarantee A3 A4 A5 A6 A7 A8 A9 A10 B1 B2 Other Terms & conditions not complied with Receipt of periodical data / Stock & Book Debt statements Receipt of Balance Sheet / Renewal data Compliance of financial covenants Unit inspection reports observations Routing of proportionate turnover / business Utilisation of facilities (not applicable for Term Loan) Adequacy of insurance for the primary / collateral security Negative Deviation in Net Sales (actual vs. estimates) Financial Discipline Overdue discounted bills during the period under review Devolved bill under L/C outstanding during the period under review Invoked BGs issued outstanding during the period under review Frequency of RETURN of cheques per quarter deposited by borrower Frequency of issuing of cheques without sufficient balance per quarter Payment of INTEREST or INSTALMENT B3 B4 B5 Frequency of requests for Ad Hoc increase in limits Frequency of overdrawing in CC account Any other adverse features financial / non-financial, including corporate governance issues such as adverse publicity, strictures from regulators, political risk and adverse trade environment not covered elsewhere
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Hurdles
A1: Creation of Charge on Primary Security Primary security refers to the asset/s taken as the main tangible security for the funding of which the bank grants finance, such as inventory, receivables, other current assets, fixed assets, etc. When these assets are taken as security, they should be properly charged to the bank by way of hypothecation, mortgage, pledge and assignment which should be legally enforceable. In case the primary security is not properly created or charged as required under the relevant law, the banks advance may become unsecured thus increasing the risk in the exposure. Check whether the charge on primary security stipulated in the sanction has been created and registered with the RoC (where ever required) or any other authority. If any of the requirements of proper creation of charge on the primary security is not fulfilled, charge on the stipulated security is considered as not created for this exercise. Even if the delay in creation of security is allowed by the sanctioning authority, security is considered as not created. A2: Creation of charge on collateral and / or execution of personal / corporate guarantee Collateral security is taken as an additional security over and above the primary security. The collateral security offers additional comfort to the bank partly mitigating the risk involved in the exposure. The requirements stated in respect of the primary security (under A1) are applicable for the collateral security also.

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A personal / corporate guarantee further enhances the degree of mitigation of risk. It is important to ensure that these have been executed / obtained strictly as per the sanction Terms and legal requirements. A3: Other Terms & conditions not complied with Apart from the security, various other Terms and conditions are stipulated for enabling the bank to mitigate risk from the exposure. Some of the stipulations assume greater importance to the safety of advance such as obtention of NOC from the existing lenders for creation of first / second / paripassu charge in favour of the bank, bringing in another bank for sharing / tying up the gap, end use certification, etc. A4: Receipt of periodical data / Stock & Book Debt statements Timely receipt of various data from the borrower is of utmost importance in monitoring the health of an account. Apart from deTermining the drawing power (where ever applicable), the data is considered as an indicator of conduct of the borrowers business operation which have implication on the conduct / performance of the account. Non receipt of such data (for any reason whatsoever) itself is considered as a risk factor. Even in case of frequent delays in submission of stock statements, FFR, etc the parameter should be rated as Not Complied. A5: Receipt of Balance Sheet / Renewal data The balance sheet is one of the sources of tangible information on the companys operation which can be objectively analysed to assess the effectiveness of the business model. Scrutiny of the balance sheet can help notice salient and abnormal features in the areas of cash flow, fund flow, capital base, production, inventories, receivables, sales, borrowings, diversion of funds, and profitability. A timely submitted balance sheet enables the Bank to assess potential adverse features and take appropriate action well in time. Non finalisation of audited balance sheet, non submission / delayed submission of audited balance sheet / renewal data reflects poorly on the corporate governance of the borrower and considered as one of the risk factors. A6: Compliance of financial covenants Financial covenants are stipulated for mitigating risk in an exposure. Some of these stipulations relate to creation of Debt Service Reserve, maintenance of minimum asset cover, current ratio level, TOL/TNW ratio, infusion of funds by promoters, raising of long Term
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funds, liquidation of investments, restrictions of investments/dividend etc. These risk mitigation measures provide extra comfort to the bank while sanctioning the advance. In case the stipulated financial covenants are not complied with, partly or fully, the exposure would carry a higher risk which needs to be captured in the monitoring tool.

A7: Unit inspection reports observations Physical inspection of borrowers unit enables the bank to verify the information supplied by the borrower. Inspection should cover the following indicative areas: Idle plant and machinery. Attendance of labour / staff and their working conditions. Adequate availability of utilities / infrastructure such as water, power, etc. Quality & value of inventory & finished product. Legal / statutory / lenders notices pasted in the factory or on the Plant and Machineries. In case of borrowers engaged in activities other than manufacturing, the borrowers godown / office / branches / outlets should be visited for ascertaining the overall conduct of business. A8: Routing of proportionate turnover / business The user is required to select whether the borrower enjoys: Sole Banking Multiple / Consortium Banking And rate the borrower as per the options provided there under. Apart from supplementing other income from the borrower the routing of entire / proportionate turnover / business enables the bank to capture the borrowers cash flow which an important indicator of the borrowers operations. In case of sole banking arrangement, the borrower is expected to route its entire turnover / business through the bank. In other cases, at least proportionate business should be routed. Points to note: In case of Term Loan facility without working capital facility, the routing of turnover/business through the bank is considered as an added advantage to the bank, although it may not be one of the stipulations.
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A9: Utilisation of facilities (not applicable for Term Loan) Full utilisation of cash credit facilities without variations for a long period requires closer scrutiny to ensure that the liquidity of the borrower is not strained. The parameter intends to capture such risk. Optimum utilisation of account apart from indicating soundness of borrowers cash flow also ensures adequate earnings for the bank. A10: Adequacy of insurance for the primary / collateral security Inadequacy of insurance indicates low value of assets or the possibility that the borrower has inadequate interest in the assets. Underinsurance would result in application of average clause leading lower settlement of claim. These implications are undesirable from a lenders point of view.

Discriminants
B1: Negative Deviation in Net Sales (actual vs. estimates) The amount of estimated/projected net sales is one of the major parameters of credit assessment. Non-achievement of estimated/projected net sales by the company indicates setback in the borrowers business performance. Non-achievement of sales could be one of the early indicators of the weakening of an account and we need to look for the reason/s for the set back. The user needs to input the sales turnover as per the latest Audited Annual report as well as the sales turnover estimated / projected in the credit appraisal for the corresponding period. B2: Financial Discipline Overdue discounted bills during the period under review Non realisation of bills discounted by the bank reflects adversely on the borrowers customer profile and hence considered as risk. Devolved bill under L/C outstanding during the period under review

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Adequate cash flows are one of the important indicators of satisfactory health of a borrower. Devolvement of bills under LC indicates inadequate cash flows of the borrower. Historically, in most of the cases, such features are the starting point of financial deficiency ultimately leading to default. A borrower having adequate cash flows and efficient cash flow management system would not allow devolvement of contingent liability such as bills under LC. Invoked BGs issued outstanding during the period under review Invocation of a guarantee indicates the borrowers failure to perform the contract or meet the requirement for which the guarantee was issued and considered as a risk factor. Further, nonpayment of the invoked Bank Guarantee obligation within a reasonable period is considered risky. Frequency of return of cheques per quarter deposited by borrower Return of cheques deposited by the borrower indicates low credit worthiness of the borrowers clients or the goods supplied by the borrowers do not conform to the Terms of sale qualitatively. This may ultimately affect the business of the borrower and hence considered as a risk factor. Frequency of issuing of cheques without sufficient balance per quarter deposited by borrower Issuance of cheques by the borrower without maintaining sufficient balance in the account impacts his credit worthiness. This would have negative impact on the health of the borrower. Payment of interest or instalment Failure to meet interest / instalment payment obligation indicates crystallization of credit risk. Default / delay in payment of interest or instalment represent a strong warning signal about the health of the account. B3: Frequency of requests for Ad Hoc increase in limits Frequent requests for ad hoc increase in limits indicate lack of proper management of funds or inability of the borrower to raise funds from other sources or lack of cash flows to manage the working capital cycle. The signal adds to risk profile of the borrower. B4: Frequency of overdrawing in CC account
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The requirement of working capital finance is assessed on the basis of borrowers estimated / projected level of operations. Hence, the borrower should be able to manage his funds requirement within the sanctioned facilities. Frequent overdraft of the CC account due to any reason (such as Term instalment, interest, temporary liquidity mismatch etc.) indicates poor management of working capital finance and may be a potential risk of default. B5: Any other adverse features financial / non-financial, including corporate governance issues such as adverse publicity, strictures from regulators, political risk and adverse trade environment not covered elsewhere No exposure is risk free nor can all risk factors in an exposure be objectively listed or foreseen at a given point of time. As this parameter is subjective the rater should select a suitable option based on his/her understanding of the borrower and the exposure. Factors including market forces like capital market perception (continuous fall in the stock price which are signals of deteriorating financial conditions, as well as other issues) may be considered while selecting the option.

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

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

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

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

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CHAPTER- 8 CASE STUDY

Details of case study
Name Constitution Office Address Line of activity Sector Dealing with us Incorporation Name of Directors M/s Dynemic Products Limited (DPL) Public Limited Company B- 301, Satyamev Complex-1, Opp. New Gujarat High Court, S.G.Highway, Sola, Ahmedabad-380 060, Gujarat, India. Manufacturing of Food Colour Products Chemical and Chemical Products New Connection 14th June 1990 Mr. Dashrathbhai Prahladbhai Patel (DIN : 00008160) Mr. Rameshbhai Bhagwanbhai Patel (DIN : 00037568) Mr. Hitendra Hargovinddas Sheth (DIN : 00037705) Mr. Jagdishbhai Sevantilal Shah (DIN : 00037826) Mr. Harishbhai Keshavlal Shah (DIN : 00037932) Mr. Bhagwandas Kalidas Patel (DIN : 00045845) Mr. Dixit Bhagwandas Patel (DIN : 00045883) Mr. Shashikant Purshottambhai Patel (DIN : 00045957) Mr. Vishnubhai Gangarambhai Patel (DIN : 00270413) Group Rating Associate Concern Share holding pattern Share Price movement Mr. Shankarlal Baluram Mundra (DIN : 00388204) Not a recognized group External: Not done. Internal: SME 3 (ABS 31.03.2009) Dynemic Overseas (India) Private Limited Dynemic USA Inc. As mentioned below Listed on the BSE Current Market Price Rs.22.35/- (27.11.2009) 52 week high/low Rs. 15.15 ( 22 Apr' 09) / Rs. 27.35 ( 16 Jan' 09) Brief Background: The Company was incorporated on 14th June, 1990 as Private Limited Company. The Name was subsequently changed to Dynemic Products Limited on 31/12/1992. The Company was

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promoted with the objective of carrying on the business of manufacturing S.P.C.P, the raw material for Food Color, reactive & Raazole Dyes. In the Year 2000 the company acquired the running business of M/s Safforn Dye Stuff Industries and started manufacturing wide range of food colors at the premises 3709/6, GIDC Estate, Ankleshwar having plot area of admeasuring 3700 Sq.Mtr. As the company aims to provide entire range qualitative and quantitative service to food industry, as its Unit I. The company commenced manufacturing of food colors namely Tratrazine in the year 2000-01. Both the units at Ankleshwar are Ultra modern and have eco friendly plants with in house testing facilities to control quality at every level of manufacturing. The Company gained goodwill in the short span of time due to its quality product. The company has well equipped state of art in house laboratory which conduct test of every parameter of food color & Dye intermediates laid down under national and international authorities. The Company exports its product to around 41 countries worldwide. All these have led the company to acquire and retain a status of largest manufacturer and supplier of food colors and dye intermediates in India.

Qualitative Factors:

The Company has a pro-active Management and Promoters who have hands on experience in manufacturing of Dyes InTermediaries and Food Colours. Profit making Company since last 13 years. The company has to its credit an award for Indirect Export of Self Manufactured Dyes for the year 2001-02 & 2002- 03 received by Gujarat Dyestuffs Manufacturers Association. The company has obtained certificate of approval From Bureau Verities Quality International (BVQI) for achievement of ISO 9001: 2000 quality standards, the Company has also received certificate of approval from Bureau Verities Quality International (BVQI) for achievement of 14001:1996 and 14001:2004 quality standards for both its units satiated at Ankleshwar. The company has also obtained HAACP Code: 2003 certificate of registration from TQCS International (Group) Pty Ltd under food safety programme for both its units situated at Ankleshwar
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The company was awarded with trophy for export performance of more than Rs. 6.00 & 8.00 Crore for Self Manufactured Indirect Export of Dyes & inTermediates in the year 2002-03 by Gujarat Dyestuffs ManufacturersAssociation. Both the Units of the company are exporting Oriented Units and have obtained the status of One Star Export House.

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

Exports Sales Local Sales Exports Sales: Companys 70% turnover is generated by way of exports sales. Company has its own presence in all most all countries. The company is exporting Food colors in Latin America, African countries, Middle East, Far East, US and Europe. Almost all export customers are dealing with company for many years. Out of total exports turnover 60 to 70% percentage orders are repeated orders and rest of the orders are new orders. The Company has region wise Export Managers who can cater the need of customers individually. Due to the quality and timely delivery of the material the company have less competition from these countries. Globally many countries have discontinued production of Dyes, Food colors and Intermediates, new market has opened for Indian manufacturer of Dyes and Intermediates. As Dynemic Products Ltd is already a well recognized name in the field globally, it has more opportunities to grab from growing International market.

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 Local Sales:

In Local Market Company is doing marketing its Dyes & Intermediates to the end customers. The company is the largest manufacturer of S.P.C.P in India which generating repeated order from the local customers. Now, company is planning to market the food colors in small packing through its dealers and distributors which cater the local needs. Company is also planning to arrange marketing arrangement with soft drink manufactures and pharmaceutical manufactures for food colors.

Proposal for

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

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

b)

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

c)

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

d)

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

e)

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

f)

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

g) h)

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

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Existing & Proposed Facilities Type of Facility Cash Credit Limit Stock cum Book Debt Corporate Loan EPC/FBD/FBP/PCFC/PSCFC As a sub limit of Cash Credit Limit LC(Inland /Foreign) - As a sub limit of Cash Credit Limit LER Limit (as a sub-limit of CC limit) Existing Limits (HDFC) 500.00 200.00 (500.00) (300.00) (15.00) Proposed + Inc / Dec ----+25.00 +25.00

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

Purpose Tenor Repayment

700.00 Total WC/LC/LER : To meet working capital requirements. Corporate Loan : For NWC built up. WC/LC/LER : 12 months.

Corporate Loan : 24 months from the date of first disbursement. WC/LC/LER : On Demand. Corporate Loan : 23 monthly instalments of Rs. 834000 each and last instalment of Rs. 818000. Repayment to commence from December 2011. Interest to be serviced as and when debited. Primary Hypothecation of entire current assets (Pari passu) of the company (Both present & future). (Value as on 31.03.2011 is of Rs. 1326.42 lacs).

Security

Hypothecation over Plant and Machinery (Pari Passu) (Both present & future). (Value is of Rs. 1529.55 lacs as

Collateral

per empanelled valuer of Citi Bank). Pari Passu charge being shared by Citi Bank Limited on following properties :
i.

Factory Land and Building, Plant and Machinery at Plot No. 6401,6415,6416, Products Limited. G.I.D.C., Ankleshwar, Dist.Bharuch admeasuring 5664 sq.mts. standing in name of M/s. Dynemic

ii.

Office situated at B- 301,308,309,310 Satyamev Complex-1, Opp. New Gujarat High Court, S.G.Highway, Sola, Ahmedabad-380 060, Gujarat admeasuring 4272 square feets
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standing in the name of M/s. Dynemic Products Limited.

iii.

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

Guarantee

Dynemic Products Limited. Personal Guarantee of :

Mr. B.K.Patel having net worth of Rs. 264.88 lacs (approx.) as on 31.03.2011. Mr. Ramesh B.Patel having net worth of Rs. 152.57 lacs (approx.) as on 31.03.2011. Mr. Dashrath P.Patel having net worth of Rs. 257.89 lacs (approx.) as on 31.03.2011. Mr. Shashikant P.Patel having net worth of Rs. 148.22 lacs (approx.) as on 31.03.2011. Mr. Dixit B.Patel having net worth of Rs. 36.33 lacs (approx.) as on 31.03.2011.

Credit enhancement Interest Rate LC Charges Processing fees Banking Arrangement

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

Unit visit
The unit was visited Mr. Asim Bhaduri (VP SME and Center Head), Mr. P.C.Dash (AVP and SCO SME) and Mr. Kuntal Bhatt (Manager and RM - SME) on 13th November 2011 and the overall operations of the unit were found to be satisfactory.

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Operational & Financial Analysis

(Rs. in lacs) Particulars Gross Sales Net Sales Net Sales Growth Rate % Operating Profit Other Income PBDIT Depreciation Interest PBT PAT Cash Profit Operating Profit Margin % PBDIT Margin % PAT Margin % Paid up Capital - Equity Unadjusted TNW Unadjusted TOL Unadjusted TOL/ TNW Adjusted TNW Adjusted TOL Adjusted TOL/ TNW Interest Coverage Current Ratio DSCR NOCF Net Profit / NOCF NOCF / Interest NOCF / Financing Payments Total Debt / NOCF (No. of years) 31.03.09 (Actuals) 3231.12 3231.12 12.79% 227.49 141.52 322.88 47.94 47.45 369.01 266.95 182.35 7.04% 9.99% 8.26% 1132.84 2649.73 1109.42 0.42 2710.84 1048.31 0.39 9.82 1.76 7.67 105.69 2.53 2.23 0.08 1.17 31.03.10 (Actuals) 3657.70 3657.70 13.20% 313.80 (5.36) 412.89 50.62 48.47 308.44 184.99 103.07 8.58% 11.29% 5.06% 1132.84 2707.33 1589.26 0.59 2725.68 1570.91 0.58 8.44 1.34 1.83 230.12 0.80 4.75 0.13 0.78 31.03.11 31.03.12 31.03.13 (Actuals) (Projected) (Projected) 4911.20 6500.00 7500.00 4911.20 6500.00 7500.00 34.27% 32.35% 15.38% 261.62 621.29 729.97 56.07 55.00 65.00 503.87 881.74 1018.09 96.12 110.94 107.00 146.12 149.50 181.12 317.69 676.29 794.97 190.03 446.42 524.76 153.62 424.83 499.22 5.33% 9.56% 9.73% 10.26% 13.57% 13.57% 3.87% 6.87% 7.00% 1132.84 1132.84 1132.84 2764.96 3078.84 3471.06 2331.73 2890.12 3094.44 0.84 0.94 0.89 2828.34 3237.48 3629.70 2268.35 2731.48 2935.80 0.80 0.84 0.81 3.84 6.27 5.98 0.94 1.13 1.24 1.21 2.35 2.20 654.38 (269.99) 149.24 0.29 (1.65) 3.52 4.48 (1.81) 0.82 0.29 (0.08) 0.04 0.60 (0.45) (0.00)

Rating The rating of the company as per SME Rating Tool comes to SME - 3 (ABS 31.03.2011). The segment wise scoring is as under: Particulars Overall Scoring Financial scoring Business scoring Rating SME-3 SME-4 SME-3
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Management scoring Industry scoring

SME-3 SME-3

CIBIL/RBI/ECGC Defaulters List/CA Verification/ Auditor Verification Particulars RBI Defaulters list ECGC Specific Approval List CIBIL Defaulters List CA Verification (Auditor) Auditors Firm Verification As of Date 31.12.2011 31.07.2011 13.11.2011 13.11.2011 Position No match found. No match found. Satisfactory. Verified. Verified.

Reference Check Reference check was made through some of Banks clients in the same line of activity financed by Axis bank and the same was reported to be satisfactory. Analysis a) The promoters of the company are having rich experience of more than 19 years in various Industries. b) The proposed expansion of the company is having huge market potentials. c) The Company is the leader in Manufacturing and export of food colours.

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

e) The business is 19 years old. f) The sale of the company has been showing an increasing trend throughout the years under consideration. The sale of the company was increased from Rs. 3231.12 lacs in FY08-09 (Aud) to Rs. 3657.70 lacs (Aud) in FY09-10 and further to Rs. 4911.20 lacs in FY10-11 (Aud).

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g) Since the company is into Manufacturing of Food Colours, the net margin normally remains between 5.00% - 9.00%. The net profit of the company was decreased from Rs. 266.95 lacs in FY08-09 (Aud) showing margin of 8.26% to Rs. 184.99 lacs in FY09-10 (Aud) showing margin of 5.06%. However, the same was maintained at Rs. 190.03 lacs in FY10-11 (Aud) showing margin of 3.87% due to decrease in margins in the chemical industry on account of raw material price fluctuations worldwide. The same was an aberration. But, now the industry is on revival and boom path. Considering the same, the company has estimated the profit of Rs. 446.42 lacs for FY11-12 @ margin of 6.87%, which may be accepted. h) The TOL/TNW of the company increased from 0.42 in FY08-09 (Aud) to 0.59 in FY09-10 (Aud) and to 0.84 in FY10-11 (Aud). The company has estimated TOL/TNW at 0.94 and 0.89 for FY11-12 and FY12-13 respectively on account of increased bank borrowings, which may be considered comfortable. i) The current ratio of the company was 1.76 in FY08-09 (Aud) which decreased to 1.34 in FY09-10 (Aud) and which further plummeted to 0.94 in FY10-11 (Aud), on account of capex expansion which will be completed in the current fiscal. The company has estimated its current ratio at 1.13 and 1.24 for FY11-12 and FY12-13, which is reasonably acceptable as regards to the liquidity position of the company. j) The NOCF is positive during FY 2010-11 (Aud) by Rs. 654.38 lacs. NOCF is estimated negative in FY 2011 12 at Rs. 269.99 lacs, as per projected financials submitted by the company on account of increase in stock and receivables which is keeping in line with the increase in turnover and the holding levels are as per the industry practice. k) The overall conduct of the account, repayment status etc. at Citi Bank and HDFC is satisfactory. l) The main director is dynamic and has rich experience of more than 20 years in his line of activity. m) The company is a registered SSI unit.
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n) Market reference of the company is satisfactory . o) The overall projected performance and financial of the unit are satisfactory.

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Analysis
a)

The market reputation of promoter is satisfactory.

b)

Firm has achieved sales of Rs. 204.49 lacs in FY. 2009- 10 and Rs. 431.02 lacs in FY. 2010-11, this is more than double of the last year. Firm has submitted estimated sales of Rs. 568.57 lacs for FY 2011-12, against which firm has achieved sales turnover of Rs. 235.70 lacs till 31st October 2011, which is 41.45 % of estimated sales.

c)

Profitability of the firm is also showing increasing trend y-o-y bases. Firm has achieved PBT of Rs. 3.71 lacs in FY 2009-10 & Rs. 8.55 lacs in FY 2010-11. Profitability has also rose in line with increase in sales of previous financial year. PBDIT of the firm is also on increasing trend, which can be considered as satisfactory.

d)

Net worth of the firm is increasing y-o-y bases, with plough back of the profit in the business. Unadjusted gearing of the firm is on higher side for FY 2010-11 mainly due to higher side of creditors at particular point in March 2010. In March 2011, proprietor submitted that purchase of raw material was at better price & the suppliers also allowed credit period. Hence, the creditor base was on higher side.

e)

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

f)

The Current Ratio of the firm has been on higher side, above the benchmark level of 1.33 for all the past 3 years. Current ratio for FY 2009-10 was 1.44 & for FY 2010-11 was at 1.77. Estimated ratio is 1.66 for FY 2011-12. Although, it has been maintained above the benchmark level, which can be considered as acceptable.

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

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

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

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

requirements of almost all the types of SME units.

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

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

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CHAPTER - 11 BIBLIOGRAPHY
Web Sites www.rbi.org.in www.Axis Bank.com www.indianbankassociation.com www.bankersindia.com www.wikipedia.com Books:
Credit and banking By: K. C. Nanda

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