SYMBIOSIS SCHOOL OF BANKING & FINANCE

Constituent of Symbiosis International University

Accredited by NAAC with A Grade
Established under Section 3 of the UGC Act, 1956, vide notification No: F.9.12/2001-U3of the Government of India.

Credit Appraisal and Monitoring of SMEs

Internship Report submitted to SIU in partial completion of the requirement of

MBA Banking Management at Symbiosis School of Banking & Finance
Pune - 412115.

SIDDHANT

DIPAYAN

SHILPA

BHATNAGAR

ROY

RANE

19

APRIL 6th 2015 TO MAY 30th 2015

Credit Appraisal and Monitoring
of SMEs

ACKNOWLEDGEMENT

I feel a deep sense of gratitude in thanking all those who helped me to carry out this project to its
eventual accomplishment.

I sincerely thank Axis Bank group for giving me this opportunity. It has been a wonderful
experience to work in this esteemed organization and with the people of amazing caliber. I would
like to thank Mr. Rajesh Dewangan, Vice President, SME, Axis Bank for his guidance and
support throughout the duration of the project. I would also like to thank Mrs. Shipla Rane and
Mr. Madhav Moramkar without whose help and support it would not have been such a learning
experience.

Last but not the least, this acknowledgement would not be complete without Mr. Aman
Maheswari who has not only given valuable suggestions but also motivated me to take up the
project with a varied perspective.

I also extend my gratitude to my parents and all those who have helped me in some way or the
other in the completion of this project.

SIDDHANT BHATNAGAR
19
SYMBIOSIS SCHOOL OF
Credit Appraisal and Monitoring
of SMEs

BANKING AND FINANCE

SUMMARY

Axis Bank is one of the well-renowned financial institution of India in outcome of talented
minds of Shikha Sharma and Axis & Company. Today it offers wide range of services that
encompass every sphere of life. From life insurance, to commercial banking, to investment
banking, to mutual funds, the group caters to the diverse financial needs of individuals and
corporate.
In every business there is difference between the time period when the funds are raised and when
they can be utilized so every entity needs to make a match between these two times. This is
called working capital management. Working capital is defined as the funds required to carry out
the required levels of current assets to enable the unit to carry on its operations at the expected
levels uninterruptedly. So the main objective of this project is to do credit appraisal and
monitoring for the SMEs lending.

Firstly, an introduction about the Bank and what all areas is bank involved in and

initiatives taken. An introduction to the SME sector, structure of Axis bank in SMEs
Then the study of different products offered by SME.
Then the study of working capital finance is done. Both fund based and non-fund based

products are studied under it.

The methods followed by Axis Bank to grant loans.
Thus followed by Credit Appraisal process followed in Axis Bank. The process includes
discussion of various ratios. This is done before sanctioning any loan to check

commercial, financial and technical viability of the project.

Lastly monitoring process has been analyzed whereby bank ensures that the funds are
utilized for the sanctioned purposes and at the same time complying with all the sanction
terms and conditions.

Credit Appraisal and Monitoring

of SMEs

TABLE OF CONTENTS
LIST OF CHARTS.....6
LIST OF TABLES..7
ABBREVIATIONS....8
BRIEF PROFILE OF STUDENT9
NATURE OF THE PROJECT
10
OBJECTIVES

&

RESPONSIBILITIES...

.11
1. INTRODUCTION TO AXIS BANK......12
i.
Introduction..12
ii.
History..13
iii.
Area of business...14
iv. Initiatives..14
v. Awards and recognition15
vi.
Capital Structure15
vii.
Shareholders Pattern..16
2. INTRODUCTION TO SME
17
i.
Small Scale Industry17
ii.
From SSI to Small and Medium Enterprises (SME)...17
iii.
SME in Axis Bank...18
iv. Organization Structure.20
v. Customer Segmentation...20
vi.
Products23
vii.
Working Capital...25
viii.
Methods29
ix.
Exposures not handled by SME...31
3. CREDIT APPRAISAL32
i.
Introduction...32
ii.
Parameters.33
iii.
Ratios.33
iv. Process...40
Credit Appraisal and Monitoring
of SMEs

4. MONITORING41
i.
Credit Monitoring & Supervision.41
ii.
Rating Scales.41
iii.
Review in respect of SME exposure.41
iv. Sub-categories...42
v. Control Return...............42
vi.
Monitoring function...42
5.
6.
7.
8.

METHODOLOGY..47
OBSERVATIONS48
CONCLUSIONS..49
BIBLIOGRAPHY50

Credit Appraisal and Monitoring

of SMEs

LIST OF CHARTS

Figure Number
1
2
3
4
5
6
7
8
9
10
11
12
13

Description
Shareholders Pattern
SME Business
PAN India SME network
Organization Structure
SME Structure
Products
Classification of loans
Letter of Credit
Process
Flowchart for Churning report
Flowchart to keep check on Interest
Flowchart to keep up on stock statement
Flowchart of stock auditing

Credit Appraisal and Monitoring

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Page Number
16
18
19
20
22
23
26
29
40
43
44
45
46

LIST OF TABLES

Table Number
1
2
3
4
5
6
7
8
9

Description
SME Definition
Industry wise Distribution
Customer Segmentation
Parameters
Format of operating cash flow
Rating of Foreign Exchange Risk
Monitoring and Supervision
Rating score
Sub-categories

Credit Appraisal and Monitoring

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Page Number
17
19
20
33
35
36
41
41
42

ABBREVIATIONS

CMA
SME
CIBIL
DIFC
EBT
eKYC
SSI
LC
SEG
MEG
SCF
MSME
MSE
OD
LCBN
ZCL
CGTMSE
EPCG
AACB
LTV
MDAB
NPA
RM
DP
RBI
EPC
CC
MPBF
BG
WC

Credit Monitoring Assessment

Small and Medium Enterprises
Credit Information Bureau India Limited
Dubai International Financial Centre
Electronic Benefit Transfer
electronic Know your customer
Small Scale Industry
Letter of Credit
Small Enterprises Group
Medium Enterprise Group
Supply Chain Financing
Micro Small and Medium Enterprises
Micro and Small Enterprises
Overdraft
Letter of Credit Backed by Negotiation
Zero Collateral Loans
Credit Guarantee Fund Trust for Micro and Small Enterprises
Export Promotion Capital Goods
Advance Against Collection Bills
Loan-To-Value
Minimum Daily Average Balance
Non-Performing Assets
Relationship Manager
Drawing power
Reserve Bank of India
Export Packing Credit
Cash credit
Maximum Permissible Bank Finance
Bank Guarantee
Working Capital

Credit Appraisal and Monitoring

of SMEs

BRIEF PROFILE OF STUDENT

My name is Siddhant Bhatnagar. I live in . I have done my 10 th from Swami Vivekanand High
School (Maharashtra Board) scoring 73.84%. I have done my commerce from Swami
Vivekanand Junioir College (Maharashtra Board) scoring 67.33%. Following the commerce
background I pursued my Bcom in Banking and Insurance from K.J. Somaiya (Mumbai
University) scoring 6.36 CGPA. Currently pursuing MBA from Symbiosis School of Banking
& Finance.
I like to invest in equity market. I have being investing in shares from past one and half years and
keen to pursue my carrier in equity market. I have been pursuing certifications too related to
equity markets.
I am a member of Cultural Committee. Enjoy organizing events. I am also proficient in roller
skating.
My greatest achievement is to be appointed as a Class Representative for 2 years in my
graduation. I got experience of how to manage things with different types of people.
My hobbies are listing music, watching movies, keeping myself updated on mobile technology
playing badminton, cricket and table tennis.

Credit Appraisal and Monitoring

of SMEs

NATURE OF THE PROJECT

Credit analysts, also known as financial analysts in the business world, play a very important role
in the health of the economy. Credit analysts makes the entire modern economy function from
day to day. Without the recommendations of credit analysts, banks are not able to extend lines of
credit to businesses seeking loans. Credit analysts follows a method by which one calculates the
creditworthiness of a business. In other words, it is evaluation of the ability of a company to
honor its financial obligations. The objective of this method is to look at both the borrower and
the lending facility being proposed and to assign a risk rating. The risk rating is derived by
estimating the probability of default by the borrower at a given confidence level over the life of
the facility, and by estimating the amount of loss that the lender would suffer in the event of
default.
Credit analysis involves a wide variety of financial analysis techniques

Analysis of the Business and the Industry Category

Financial Statement Analysis for Strengths and Weaknesses
Cash Flow Analysis and Projections for Loan Repayment
Collateral Analysis
Calculating Ratios
Ram / Systematic rating
Analysis of Credit Risk
Adequate Loan Structure and Pricing
Analysis of Loan Documentation for Completeness

Before approving a commercial loan, bank looks at all of the above factors.

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10

OBJECTIVES & RESPONSIBILITIES

Objectives

To study the credit appraisal process.

To understand technical, commercial and financial of the proposed project and also the

funding pattern.
To understand the process of rating a company.
To understand the pattern for primary & collateral security cover available for recovery of

such funds.
To study various reports and understanding the process.

Responsibilities

Studying the credit policy of SME department in Axis Bank.

Studying about the credit and rating tools used by SME department in Axis Bank.
Preparation of Credit Monitoring Analysis (CMA) for various companies.
Rating companies.
Preparation of sanction letter.
Studying the appraisal notes.
Preparation of control return letter (monetary mechanism).
CIBIL report of consumer and commercial.
Preparation of proposal.

CH 1: INTRODUCTION TO AXIS BANK

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Introduction
Axis Bank is the third largest private sector bank in India. Axis Bank offers the entire spectrum
of financial services to customer segments covering Large and Mid-Corporates, MSME,
Agriculture and Retail Businesses.
The Bank has a large footprint of 2589 domestic branches (including extension counters) and
12,355 ATMs spread across the country as on 31st March 2015. The overseas operations of the
Bank are spread over its seven international offices with branches at Singapore, Hong Kong,
DIFC (Dubai International Financial Centre), Colombo and Shanghai and representative offices
at Dubai and Abu Dhabi. During the year, the Bank has upgraded its representative office in
Shanghai, China to a branch to become the first Indian private sector bank to set up a branch in
China. During the year, the Banks overseas subsidiary namely Axis Bank UK Ltd. commenced
banking operations.
Axis Bank is one of the first new generation private sector banks to have begun operations in
1994. The Bank was promoted in 1993, jointly by Specified Undertaking of Unit Trust of India
(SUUTI) (then known as Unit Trust of India),Life Insurance Corporation of India (LIC), General
Insurance Corporation of India (GIC), National Insurance Company Ltd., The New India
Assurance Company Ltd., The Oriental Insurance Company Ltd. and United India Insurance
Company Ltd. The shareholding of Unit Trust of India was subsequently transferred to SUUTI,
an entity established in 2003.
With a balance sheet size of Rs. 4,61,932 crores as on 31st March 2015, Axis Bank has achieved
consistent growth and stable asset quality with a 5 year CAGR (2010-14) of 21% in Total Assets,
19% in Total Deposits, 23% in Total Advances

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History
Axis Bank began its operations in 1994, after the Government of India allowed new private
banks to be established. The Bank was promoted in 1993 jointly by the Administrator of the Unit
Trust of India (UTI-I), Life Insurance Corporation of India (LIC), General Insurance Corporation
Ltd., National Insurance Company Ltd., The New India Assurance Company, The Oriental
Insurance Corporation and United India Insurance Company. The Unit Trust of India holds a
special position in the Indian capital markets and has promoted many leading financial
institutions in the country.
Axis Bank (erstwhile UTI Bank) opened its registered office in Ahmedabad and corporate office
in Mumbai in December 1993. The first branch was inaugurated on 2 April 1994 in Ahmedabad
by Dr. Manmohan Singh, then Finance Minister of India.
In 2001 UTI Bank agreed to merge with and amalgamate Global Trust Bank, but the Reserve
Bank of India (RBI) withheld approval and nothing came of this. In 2004 the RBI put Global
Trust into moratorium and supervised its merger into Oriental Bank of Commerce.
UTI Bank opened its first overseas branch in 2006 Singapore. That same year it opened a
representative office in Shanghai, China.
UTI Bank opened a branch in the Dubai International Financial Centre in 2007. That same year it
began branch operations in Hong Kong. The next year it opened a representative office in Dubai.
Axis Bank opened a branch in Colombo in October 2011, as a Licensed Commercial Bank
supervised by the Central Bank of Sri Lanka. Also in 2011, Axis Bank opened a representative
offices in Abu Dhabi.
In 2013, Axis Bank's subsidiary, Axis Bank UK commenced banking operations. Axis Bank UK
has a branch in London.
In 2014, Axis Bank upgraded its representative office in Shanghai to a branch.

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Area of Business
Axis Bank has following subsidiaries:

Axis Capital Ltd.

Axis Private Equity Ltd.
Axis Trustee Services Ltd.
Axis Asset Management Company Ltd.
Axis Mutual Fund Trustee Ltd.
Axis Bank UK Ltd.
Axis Securities Ltd.
Axis Finance Ltd.

Initiatives

The Business Gaurav SME Awards:

In 201112, Axis Bank set up 6 SME centres and SME cells each across the country,
taking the total number to 32 SME centres. The Bank also organised the 'Business Gaurav
SME Awards' in association with Dun & Bradstreet to recognise and award achievements

in the SME space.

Financial inclusion:
Till March 2012, the Bank had opened over 4.4 million No Frills accounts in over 7607
villages through a network of 15 Business Correspondents and nearly 6000 customer
service points. Axis Bank has a strong presence in Electronic Benefit Transfer (EBT) and
has covered 6800 villages across 19 districts and 9 states till date with over 3.7 million

beneficiaries.
Industry First Initiatives:
Axis Bank launched Mobile Banking App 2.0 for its retail resident Indian
customers the first of its kind in India, which offers a high level of personalization.
The App has been launched in partnership with Tagit, a leading Singapore mobile
solutions company. The new application uses Tagit's mobility solution platform
that enables Banking on-the-go.
'Axis Bank - ISIC Forex Card' for students, is the first photo Travel Currency Card
available in USD, Euro, GBP and AUD currencies. It can be used across 34
million merchant locations and at over 2 million MasterCard ATMs globally.

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 Axis Bank has partnered with Visa to launch 'eKYC' (electronic Know your
customer) facility, first organization in India to introduce Biometrics based KYC,
offering convenience, speed and ease to Aadhaar-registered individuals to open
bank accounts.

Awards and Recognition

Axis bank has been awarded the title of Superbrand 2014-2015, by Superbrands
No. 1 Promising Banking Brand of 2015, ET Best Brands 2015
Best Corporate Payment Project- The Asian Banker Technology Implementation Award

2015
Best HR System Project -The Asian Banker Technology Implementation Award 2015
The Compliance Risk Technology Implementation of the Year -The Asian Banker Risk

Management Awards 2015

Axis Bank felicitated at CNBC Awaaz Act for Good Governance Summit 2015
Winner in the 'Best Payment Initiatives' category amongst Private Sector Banks, IBA

Banking Technology Awards 2015

Runners up in the 'Technology Bank of the Year' category amongst the Private sector
Banks, IBA Banking Technology Awards 2015

Capital Structure
The Bank has authorized share capital of Rs. 850 crores comprising 850,000,000 equity shares of
Rs.10/- each. As on 31st March 2014, the Bank has issued, subscribed and paid-up equity capital
of Rs. 469.84 crores, constituting 469,844,553 equity shares of Rs. 10/- each. The Banks shares
are listed on the National Stock Exchange and the Bombay Stock Exchange. The GDRs issued
by the Bank are listed on the London Stock Exchange (LSE).

Shareholders Pattern

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Shareholders pattern

Indian Institutions; 7%
Others; 16%
GDR; 4%
SUUTI; 12%

LIC and Group Entities; 12%

Foregin Institutions; 47%

General Insurance; 3%

GDR

Indian Institutions

Foregin Institutions

General Insurance

LIC and Group Entities

SUUTI

Others

Figure 1: Shareholders Pattern

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Share Capital: 474.10 crores

Shareholders Fund: 44,677 crores
Book Value per share: 188.47
Diluted EPS (annualized): 30.85
Market Capitalization: 1, 26,974 crores (as on 28thApril, 2015)

As on 31st March, 2015 against GDR* issuance of 62.7 mn, outstanding GDRs stood at 17.6
mn.
*1GDR = 5 shares

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CH2: INTRODUCTION TO SME

Small Scale Industry

Small Scale Industry (SSI) plays a crucial role in the industry sector. It helps in generating
income, employment etc. Thus these industry play an important role in the growth of economy.
These industries are labor intensive creating employment opportunities. Small Scale Industries
enjoy lots of support from government in form of tax reliefs and subsidies.

From SSI to Small and Medium Enterprises (SME)

Government policy and credit policy are all concentrated on manufacturing and small-scale
sector. As the trading barriers are reducing the competition is increasing in the world where
technology also plays an important role. Thus the concept needed an upgradation from SSI to
SME.
The Government of India has enacted the Micro, Small and Medium Enterprises Development
(MSMED) Act 2006 which was notified on October 2, 2006. The definition of the small and
medium enterprises as provided in the Act (Annex VII) will have immediate effect.
SME can be defined as:
Micro Enterprises
Investment in plant
Manufacturin
and machinery upto
g Units
25 lakh.
Investment in
Service Sector equipment upto 10
lakh.

Small Enterprises
Investment more than
25 lakh but less than
5 crore.
Investment more than
10 lakh but less than
2 crore.

Medium Enterprises
Investment more than
5 crore but less than
10 crore.
Investment more than
2 lakh but less than
5 crore.

Table 1: SME Definition

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Banks may set targets for SME so as to show higher disbursement over the immediately
preceding year. RBI guidelines says that 60% of the banks MSE lending should constitute to
Tiny and Micro enterprises. Banks should also get year on year growth of 20%.
SME in Axis Bank
The SME business is a focus for the bank as it generates higher yields and helps disperse risk.

SME accounts with turnover above 5 crores and upto 150 crores.
Project stage companies with net worth upto 25 crores.
Shipping, Logistics, Media and hotel are classified as SME if their net worth less than or

equal to 50 crores and turnover is less than or equal to 100 crores.

Commercial Real Estate borrowers, other than LRD, with Project cost upto 200 crores
and less than or equal to 75 crores. Lease rental discounting borrowers with less than or

equal to 75 crores exposure.

Hospitals, Educational Institutions with turnover upto 150 crores or project stage

companies with net worth upto 25 crores.

SME segment comprises of MSME.
All entities which are part of top 50 groups funded by bank and identified from time to
time shall be assigned to LC/Infra segments and the processing of these proposals shall
be done at LC/Infra.

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Figure 2: SME Banking

Table 2: Industry-wise Distribution

>20,000
relationships

SME advances at 43,000

crores as on March 15

customer

SME BUSINESS
Employee strength of about
700 employees

Servicing
through
1000
branches across country

Operates through 51 Centers

and 17 Centers

Figure 3: PAN India SME network

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Customer Segmentation
SME department is responsible for business of Small and Medium Enterprises segment and
Corporate Agriculture customers. To optimize the utilization of resources following segmentation
is done:
Particulars

Segmentation
Owner of exposure in template/non-templated segment
upto 5 crores including funding to Micro enterprises.

Small Enterprises Group (SEG)

Medium Enterprise Group (MEG)
Supply Chain Financing (SCF)

Owner with exposure more than 5 crores.

Channel Financing and Vendor Financing exposures.

Table 3: Customer Segmentation

SME includes Micro Small and Medium Enterprises (MSME) and also Supply Chain Financing
(SCF).

Organization Structure

Corporate Office
Geography Office
SME Centers
SME Cells
Figure 4: Organization Structure
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Corporate Office
It is the uppermost in the hierarchy. It has the major decision taking power. Axis Bank has

its corporate office in Worli.

Geography Office
Any sanction of loan is done by the geography department. The center reports to the

geography department.
SME Centers
SME Centers cover the different areas. They report to the geography department. Axis

Bank has 38 centers out of which Mumbai has 3 SME centers.

SME 1 covering CST to Sion
SME 2 covering Bandra to Virar
SME 3 covering Sion to Karjat, Navi Mumbai
SME Cells
SME cells are formed to cover areas which are difficult to cover by SME centers.SME
cells report to SME centers. Axis bank has 2 cells in Mumbai i.e in Thane and Vashi.

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Geography Head

MEG Head

SEG Sales Head

SCF Head

Credit Head

SEG Credit Head

Center Head

Credit Analysts

MEG RM

SCF RM

SEG Credit
Manager

Credit Analyst

Branch 1

Branch 2

SEG SM/RM

ASL
Executives

Branch 3

Figure 5: SME Structure

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Products
Types of Working Capital

Products

Templated

Non-templated
Figure 6: Products

Axis Bank divides there products in templated and non-templated products. Templated
products are products that are defined in nature. These are products designed by the bank
to suit different needs of customers. Non- template products are not defined i.e. the
products are made as per the demand of customer. It is flexible in nature as per customer

needs.
Following are the templated products provided by Axis Bank:
Micro and Small Enterprises (MSE) Power Scheme
This facility is provided for manufacturing activity only.
Limit / exposure from 5 lakhs to 500 lakhs
Under MSE Power Scheme the working capital products are:
a) Cash Credit
b) Pre-shipment Finance
c) Post-shipment Finance
d) Letter of Credit
e) Bank Guarantee
f) Discounting

Business MPower OD
It is an overdraft facility provided for general business, takeover of existing facility,
Schools and Educational Institutions for financing.
Limit / Exposure from 5 lakhs to 500 lakhs.

Service Power
This facility is provided for service industry only.

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 It is a part of MSE Power.

Limit / Exposure from 5 lakhs to 200 lakhs.
Under MSE Power Scheme the working capital products are:
g) Cash Credit
h) Pre-shipment Finance
i) Post-shipment Finance
j) Letter of Credit
k) Bank Guarantee
l) Discounting

Business Mpower Term Loan

It is a term loan facility provided for general business, takeover of existing facility,
Schools and Educational Institutions for financing.
The Business Mpower Term Loan aims to provide an opportunity to customers to
borrow against fixed asset at short notice with operational ease.
Limit / Exposure from 5 lakhs to 500 lakhs.

LCBN Power Scheme

Letter of Credit Backed by Negotiation (LCBN) is provided for bills backed by LC
provides bill finance facility to constituent borrowers and non-constituent borrowers.
It gives an opportunity to provide with required liquidity and also better credit terms.
Limit / exposure from 5 lakhs to 500 lakhs.
LCBN facility can be combined with any other product of SME.

ZCL collateral Loans to MSE

Zero Collateral Loans (ZCL) is a scheme for financing Micro and Small Enterprises
under Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) is a
trust formed under MSME.
It is a credit facility available for term loan as well as for working capital
requirements without any collateral security.
Limit / Exposure from 5 lakhs to 100 lakhs.
It is available for both manufacturing and service sector.

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Working Capital
Working Capital means that the fund required by organization to carry on their operations
without any interruption. It is considered as part of operating capital. Working capital is a
common measure of a company's efficiency, liquidity and overall health. Working capital
represents the liquidity in business i.e how the current liabilities are backed by current assets. It
includes accounts receivable, inventory, accounts payable, the portion of debt due within one
year, cash and other short-term accounts. A company's working capital reflects the results of the
company's activities, including inventory management, revenue collection, debt management and
payments to suppliers.
One of the most significant uses of working capital is to know the conversion time of inventory.
The longer inventory sits with company the longer the company's working capital is tied up.

Working Capital = Current Assets Current Liabilities

If working capital is positive it means company is able to pay off its short-term liabilities
otherwise there is deficiency in working capital and it is required to raise money through loans to
carry out its operations. This situation usually occurs when a company has used all its cash to
pay for everything, rather than seeking financing that would make payments smooth and make
cash available for other uses. As a result, working capital shortages cause many businesses to fail
even though they may actually turn a profit.
Following are the products offered by Axis Bank under working capital:

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Loans/Advances

Non-fund Based

Letter of
Credit

Bank Guarantees

Buyers
Credit

Fund Based

Term loan

Export Financing

Cash
Credit
ncing

Import financing

Pre-Shipment
Post-Shipment
Financing
Financing

Suppliers
Credit

Discounting

Advance
against
Collection
Bills

Figure 7: Classification of loans

Working capital consists of fund based and non-fund based products. Fund based activity is
where cash is directly involved whereas non-fund activity means there is an assurance given by
bank for borrower. Following are the products under fund based and non-fund based:

Term Loan

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Term loan is a loan given by Axis bank towards infrastructure, project financing,
upgradation, expansion and other corporate purposes for both long and short term. The
interest rate charged depends on the risk, financials and security.

Export Financing
Export financing is financial services provided by banks for shipping products. The
assistance is extended to various stages of export. These assistance products are discussed
below
Pre-Shipment Financing:
Finance is provided by bank to exports for purchase of raw materials, processing
and packaging of good to be exported. This type of finance is also called as
packaging credit.
Post-Shipment Financing:
Finance provided by bank after the exporter has exported the goods. These funds
help the exporter to concentrate on other orders and gives a competitive edge.
Discounting:
The banks buys the exporters bills before the expiry at a lesser value as bank
charges and credit the remaining amount to the exporter. Later on the fully amount
is recovered from the importer who had imported goods.
Advance Against Collection Bills (AACB):
Banks offers loans to bridge the gap between working capital and before the export
proceeds. The loan amount is deducted by the bank when the export proceeds are
debited to the exporters account.

Import Financing
Import financing is a facility offered by bank for short and long term loans and advances
against shipping documents of import.

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 Buyers Credit:
Buyers credit is available for importer of goods. An overseas bank offer credit
against the bank guarantee provided by importers bank. It is a short term credit
against which bank charges a fees.
Suppliers Credit:
Suppliers Credit is a financial arrangement where an exporter gives credit to a
foreign importer to finance his purchases. Financing is carried on under L/C to
banks.

Cash Credit
Cash Credit is a type of loan account which helps to fulfill working capital requirement.
It is a continuous overdrawn limit which can be used again and again upto the limit
sanctioned by bank.

Letter of Credit
It is a document given by the bank of the importer to the exporter making the exporter
assuring of receiving payment from importer and on default bank pays. Letter of credit
ensures the payment of the products exported. Axis bank offers various services related to
letter of credit like Opening, Advising, Confirming, Negotiating or Discounting, Standby
LC, Reimbursement and Foreign Exchange services. Axis bank provides with a important
offering of advisory services to the exporter.

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Bank Guarantees
Bank guarantee is a

Figure 8: Letter of Credit

guarantee given by the

bank of performance under the contract to beneficiary on behalf of its client. Axis Bank
provides performance guarantees, financial guarantees, Export Promotion Capital Goods
(EPCG) etc for a tenure of 1 years to 10 years.

Methods
Following are the methods followed by Axis Bank to sanction loan:

MPBF
MPBF stands for Maximum Permissible Banking Finance. Like many other activities of
the banks, method and quantum of short-term finance that can be granted to a corporate
was mandated by the Reserve Bank of India till 1994. This control was exercised on the
lines suggested by the recommendations of a study group headed by Shri Prakash
Tandon. This study group was called as Tandon Committee. As per the recommendations
of Tandon Committee, the corporate are discouraged from accumulating too much of

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stocks of current assets and are recommended to move towards very inclined inventories
and receivable levels.
Depending on the size of credit required, two methods are in practice to fund the working
capital needs of the corporate.
Method 1
This method is used when the credit requirement is less than 5 lakhs.
75 [ Current Assets( Current LiabilitiesBank Borrowings ) ]
Method 2
This method is used when the credit requirement is more than 5 lakhs.
[ ( 75 X Current Assets ) ( Current LiabilitiesBank Borrowings ) ]
Axis Bank generally prefers 2nd method of MPBF

Cash Budgeting
Cash budgeting method was recommended by Kannan Committee. Bank finance is
sanctioned in the form of short term loan which may be repaid in suitable installments.
This is well suited particularly when SME units are dealing in seasonal products (Sugar/
Rice Mills/Textiles/Tea/Tobacco/Fertilizers)/ construction activities / Educational
Institutions/order based activities. The customer is assured of bank finance which is based
on projected cash flows which are estimated by him and approved by the bank. Hence,
the Cash Flow Based Lending method is popular in developed countries.

Turnover
The credit requirements of Micro Small and Medium Enterprises having aggregate fund
based working capital limits upto 5 crores from bank, will be computed on the basis of a
minimum of 20 % of their acceptable projected annual turnover for new as well as
existing units as per Nayak Committee recommendations.

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Exposures not handled by SME

Following sectors proposals is referred to LC department

Roads (Infra)
Power (Infra)
Ports (Infra)
Metro and Urban Development (Infra)
Airports (Infra)
SEZ (Infra)
Telecom (Infra)

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CH 3: CREDIT APPRAISAL
Introduction
Credit Appraisal is an assessment carried on by bank to assess the credit worthiness, risk,
financials, commercial and technical viability of the project, collateral security to recover dues
before sanction of any loan and advances. Credit Risk is the risk associated with non-payment of
installments towards the credit provided by bank. Thus a proper evaluation has to conducted
regarding the credibility of the borrower before bank sanctioning the loan. Though the loans are
provided against a collateral security, bank prefer the borrower to repay the loan amount and
interest. Thus there high importance given to the financials.
It is the process of appraising the credit worthiness of a loan applicant factors like repayment
capacity, nature of employment, income, age, continuity of employment, previous loans,
defaulters list, credit cards, etc. are taken into account while appraising the credit worthiness of a
person.
Thus these 5 Cs are very important to analysis

Character
Capital
Conditions
Capacity
Collateral

All the 5 Cs being present in a proposal makes the bank confident of sanction of loan as there is
safety in providing loan as well as a surety of principal and interest amount being paid by the
borrower.
Every bank has different norms to check before sanctioning of loan. One of the major norm
being Loan-To-Value (LTV). LTV is a determining factor to know the value of the collateral
against which loan is provided. Bank compares this LTV to the banks fixed defined LTV above
which only the bank sanctions loan.

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LTV =

Amount of loan
Value of Property

Parameters
These parameters are used to reduce the risk of failure as it checks the risk, exposure etc. These
parameters use the audited data provided by borrower, trend analysis, subjective and objective
parameters etc.
Parameters
Financial Performance
Operating Performance of Business
Quality of Management
Industry Outlook

Weightage (%)
40
22.5
22.5
15
Table 4: Parameters

Ratios

Net Sales Growth Rate

It is Compounded Annual Growth Rate (CAGR) of net sales over a period.
If the growth rate is high compared to the industry, then it will enable us to justify giving
loan.

CAGR=

year 1
([ Salescurrent
) 3 1] X 100
Initial Sales

PBDIT Growth Rate

It is Compounded Annual Growth Rate (CAGR) of profits before depreciation,
interest and tax over a period.
A constant growth shows improved performance of the company.
Profit current year 1
PBDIT Growth Rate=
1 X 100
Initial Profit
3

[(

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PBDIT
Sales

It shows profits before depreciation, interest and tax as a percentage of net sales
If the ratio is high it shows that the company is efficient and has high capacity to earn
profits and payoff the debts.

Total Outstanding Liability

Total Net Worth
It represents total outside liabilities in relation to tangible net worth of company. It
shows the capacity of business to pay both principal as well as interest to its creditors.
It indicates the extent to which the creditors are covered by asset.

Current Ratio
Current Ratio tells the easiness of liquidation of the current assets of the company. It
measures the short term liquidity and ability to meet companies short term
obligations.
Higher ratio is preferable by bank. Ideal ratio is 1.33
Current Ratio =

Current Assets
Current Liabilities

Debt Service Coverage Ratio (DSCR)

This ratio measures the capacity of the company to service its debt. This ratio will
help to evaluate if adequate cash flow will be available to meet debt obligation. This
ratio is a good indicator of the long-Term solvency of a company.
DSCR=

Net Operating Income

Total Debt

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 Operating Cash flow

Operating Cash flow measures the companys inflows and outflow. It helps to
calculate the companys ability generate cash and repay the debts, interest and
dividend. Operating cash flow indicates the companys need for external financing.
This indicator tries to capture the capability of the firm to be able to meet its business
obligations.
Operating cash flow 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

Amount

X
X
XX
(X)
XX
(X)
XX
X
X
X
(X)
XX
(X)
(X)
XXX

Table 9: Format of operating cash

flow

Foreign Exchange Risk

Movement in the exchange rate can affect the import and export activity. The rater
needs to know how the likely fluctuation in exchange rate that will be affecting the
profits of the company. Only the un-hedged part of the foreign exchange exposure
should be taken into account.
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
Credit Appraisal and Monitoring
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Score
0
1
2
36

The risk involved is less than 5% of TNW

Table 10: Rating of Foreign Exchange Risk

Debt Equity Ratio

This indicator gives us an idea about the future expected debt equity structure and
financial stability in an extreme situation. This is quite a good comforting factor for
the bank to sanction the loan.
Debt Equity Ratio = Long term + 50% of companys + Margin up for its
Debt
non-fund based
non-fund based
limits
limits

Realisability of Debtors
This indicates the quality of the debtors of the company and if money can be
recovered from them quickly and easily. Higher the score means better recovery.

Inventory Turnover (trading)

This ratio shows that how fast the company is able to convert its inventory into sales.
Higher ratio states that the company has high liquidity i.e the inventory is converted
into sales fast. It show the efficiency of the company.
Inventory=

Net Sales
Average Inventories

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 State of the export country economy

The economy of the country to which is being exported, will have a significant
impact on the exporters business. A slowdown in the economic growth might even
have a great impact on the exports profitability.

Credit Period Allowed

This indicates the period of realization of sales proceeds. It is the average time that
customers take to pay their dues. It indicates the efficiency of management in debt
collection. A lower value of this ratio indicates a speedy payment from customers
who buy the goods on credit.
Inventory=

Average Debtors
Average Daily Sales

Credit Period Availed

This ratio measures the average time taken by the company to pay its suppliers for
purchases made on credit. A stronger company will avail a longer credit period from
its suppliers. A longer credit period offered by suppliers also indicates that the
suppliers are confident of the ability of the company to pay them.
Credit Period Availed=

Average Creditors
Average Daily Cost of Sales

Working Capital Cycle (manufacturing, trading)

Working capital represents an important part of the employed capital. It also tells
about the good performance of the company and also about the management of the
company.
WorkingCapital Cycle=

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Net Sales
WorkingCapital

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 Tax Incentives
Tax incentives can be a major factor of profitability for many companies. Tax holiday
are helpful for company to take advantage to improve profitability of the company.
Thus higher the tax incentives by government improve profitability of the company.

Production Related Risk

This measure the risk related to production of goods. It evaluates the companys
capabilities to reduce risk. The lesser the risk involved in production improves the
efficiency, profitability of the company. The technology used in production activity is
also a determining factor.

Price Related Risk

This indicates the companys ability to decide the price of the product in the market.
The price competitiveness of a company is an important indicator of the company's
position. A company that is in a position to charge a premium to its customers over
competitors is better placed in the industry.

Sustainability of sales
An important driver of the success of a trading company, is the level of sales the
company 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 strong portfolio of
core products shows sustainability.

Fixed asset turnover (Manufacturing)

Fixed assets represent an important part of the capital employed in a manufacturing
companies. A good performing company should get maximum out of the machines
installed.

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Net Sales
Asset Turnover=
Tangible Assets

Product/service related risk

This measures the risk related to products manufactured / services provided by the
company. The risks associated with the product can be those related to 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

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PROCE

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Receipt of loan application from applicant

Preparing checklist (for various documents and clarrification)
Receipt of documents
Conducting Due Deligence (Check for RBI defaulters list,
CRILC/SMA CIBIL data, ECGC etc)

Legal and Valuation of colleteral security

Preparing Credit Monitaring Arrangement (CMA)
Schematic (Templated) / RAM (Non-templated) Rating
Acceptable Score
Templated (AB-EA, AB-PP1, AB-TA)
Non-templated ( SME1, SME2, SME3)

Preparing Assessement Notes and Financial Analysis

Puting The Proposal for Sanction
Sanction of Loan
Preparation of Sanction Letter
Preparation of Control Return
Figure 10: Process
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CH 4: MONITORING

Credit Monitoring & Supervision

Broadly, the objectives of post-sanction follow up, supervision and monitoring are as under:

Follow-up
Ensuring compliance with
terms and conditions of
sanction on an ongoing
basis.
Ensuring performance
safety and recoverability of
assets

Supervision

Ensuring effective
follow-up to maintain
asset quality.
Looking out for any
early warning signs.

Monitoring

Effective supervision
Customer Satisfaction
Responding to any early
warning signs.

Table11: Monitoring and Supervision

Rating Scales
The rating tool for SME has an 8-point rating scale, which ranges from SME 1 to SME 4.
Generally a company with rating SME1 to SME3 is approved. SME4 is not preferred specially
for a new proposal.
Rating
SME 1
SME 2
SME 3
SME 4

Range of Score
Above 85
76-85
69-75
58-68

Level of Risk
Lowest Risk
Lower Risk
Low Risk
Moderate Risk

Table 12: Rating score

Review in respect of SME exposure

Review of companies on annual basis with rating from SME1 to SME 4 on annual basis. The
sanctioning authority can increase the frequency of review

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Sub-categories
RBI has issued guidelines in preparing a sub-asset category. Bank will have 3 sub-categories as
following
SMA Sub-category
SMA 0
SMA 1
SMA 2

Classification
Principal or interest overdue not for more than 30 days
Principal or interest overdue between 31 60 days
Principal or interest overdue between 61 90 days
Table 13: Classification of SMA

This is applicable for accounts with aggregate fund based and non-fund based exposure more
than 5 crores.

Control Return
Control return is a note prepared for monitoring purpose. This note is given to higher authorities
for monitoring over credit analyst. Control return is a note prepared after sanction of loan. This
note is prepared on the bases of appraisal notes. Control return is a note which gives summary of
the appraisal notes. It is of 3-4 pages note giving all the necessary information regarding the
proposal.

Monitoring function
There are various types of monitoring activities carried on for working capital as mentioned
below:

Churning Report
Churning Report is conducted on a monthly basis to check the running of the account and
on finding any discrepancy to inform the Relationship Manager (RM).

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Reason for Discrepancy

Existing Account
with another Bank

No

Remittance
to be sent
to Axis
Bank

Fraud Book Entry

Dues

Possible to Take
close necessary actions
Yes
that account
Close the
account and
open a new
account with
Axis Bank

Credit Appraisal and Monitoring

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Follow-up in
next
Received
or month
not received
No

Take necessary actions

Figure 11: Flowchart for Churning report

45

Yes

OK

Portfolio Report
Portfolio Report is prepared on monthly basis until specified. Following are the reasons
for preparation of report
Check interest service.
Check submission of insurance policy being submitted on time.
Check renewal of existing insurance policy.
Renewal of limit every month on 11th.
No

Previous Month
Interest received
or not

Term Loan
Yes

Yes

Check for
EMI bounces
No

Inform RM

Inform RM

Ok

Figure 12: Flowchart to keep check on Interest

Stock and Book Debt Statement

The customer is supposed to send the stock statement every subsequent month. On delay
of submission on stock statement a penalty is charged and on delay of same in next moth
too would attract additional penalty.

Drawing Power Working Report

Drawing power (DP) is the limit the borrower is allowed to withdraw from the limit
sanctioned for working capital. The limit sanctioned by bank depends on the stock
statement and book debt.
Drawing power = total value of stocks + total value of book debt Margin
(Margin are the funds raised from long term sources)
Thus the borrower has to submit his stock and book debt statements of trade creditors regularly. It
is calculated every month based on statements given by borrower.
In Axis Bank the margin on stocks in 25% and no such margin of creditors.

Stock Statement Submission

on 15th of every month

No

Penalty charges

Credit Appraisal and Monitoring

Yes
of SMEs

Comparing
Calculate
with
Drawing
Send
sanction
Power
intimation
limit
Update
letter
Informing
system
to
RMwith
Customer
new limit
Apply
margin
Figure 13:approved
Flowchart
to keep
up on
stock
statement
DP < OK
Sanction
DP
> Sanction

46

Stock Audit
Stock Audit is conducted on quarterly/ half yearly/ yearly depending on the requirement.
The audit is conducted by internal or external auditors.

Visit by Internal/External auditors

Calculation of Drawing
Power
Match as per book

OK

Deviation reasonable or not

Yes

No

Intimidation to RM

Figure 14: Flowchart of stock auditing

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CH 5: METHODOLOGY

Research Design
To study the Credit Appraisal and Monitoring System in SME sector, at Axis Bank,
Mumbai.

Primary Data:
This data is practically used in analysis of a company and deciding on the approval of
proposal by Axis Bank.
Observations and discussions with the manager.

Secondary Data
Books
Database of Axis Bank
Websites
Old and New sanction papers

Limitation of the Study

As the credit rating is one of the crucial areas for any bank, some of the technicalities
are not revealed which may have cause destruction to the information and exploration
of the problem.
As some of the information is not revealed, whatever suggestions generated, are
based on certain assumptions.
Credit appraisal system includes various types of detail studies for different areas of
analysis, but due to time constraint, below done analysis was of limited areas only.

Period
Period of study is 8 weeks.

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CH 6: OBSERVATIONS

Credit Risk Assessment (Credit Appraisal) is done to examine the companys financial,
commercial and technical viability for the project for which funding is sanctioned.

Examining the security kept against the loan and whether the amount is recoverable
through security.

Banks task is to identify the risk related to loan and manage the risks on regular basis.

Credit and Risk goes hand in hand.

The credit appraisal process takes into account all the possible risks towards the loan.

Bank considers the norms as guiding tools and not as decision making tool.

Axis Bank provides various schemes to cover the requirements of all SME units.

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CH 7: CONCLUSION

The financial sector is at boom where the SMEs will play an important role as it
constitutes largely to economy. As financial sector being the backbone of economy
generates large opportunities of employment

From studying the credit appraisal process of SMEs, the major factors considered in
appraisal process are:
Business Performance
Financial Performance
Industry Outlook
Quality of Management
Conduct of Account

Axis Bank has different types of loans and contains different norms for each type of loan.
These all norms may not apply to each and every case. Norms of loans given by Axis
Bank are flexible in nature depending on case to case.

Initially it was seen that credit appraisal is basically done on the basis of fundamental
soundness. But after analyzing various case studies, our conclusion was such that credit
appraisal system is not only looking for financial wealth but also other parameters are
taken into consideration in analyzing credit worthiness of the company.

Overall the viability of the project is analyzed on various aspects of business like type of
business, industry, past records, promoters, experience, goals, long term plans, projected
data and estimates plays crucial role in increasing the chances of getting project
approved for loan.

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CH 8: BIBILOGRAPHY

http://www.axisbank.com/
http://en.wikipedia.org/wiki/Small_and_medium-sized_enterprises
http://www.axisbank.com/business-banking/credit-financing/solutions-smes/sme-fast-

track/sme-fast-track.aspx
http://www.banknetindia.com/banking/loans.htm
www.investopedia.com
www.indianbankassociation.com
www.bankersindia.com

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Credit Appraisal and Monitoring

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