DEDICATION

Words are looking to express obligations to our affectionate parents and teachers for their love, good, wishes, inspirations, motivation, has enabled us to reach this stage. We remember their unceasing prayers without which the present destination would have been mere a dream.

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Table of Contents
DEDICATION ........................................................................................................................................ 1 ACKNOWLEDGEMENT....................................................................................................................... 4 Executive Summary.............................................................................................................................. 6 CHAPTER NO.1 ................................................................................................................................... 7 1.1 Overview of Credit Analysis and Investment Banking:- .......................................................... 7 Introduction ........................................................................................................................................ 7 Definition ............................................................................................................................................ 7 Why Credit Score Analysis is Important? ....................................................................................... 8 1.2 Importance of Credit Analysis of Individual Borrowers............................................................ 9 1.4 Investment banking ................................................................................................................. 9 CHAPTER NO.2 ................................................................................................................................. 12 2.1 Banking History:- ...................................................................................................................... 12 2.2 United Bank Limited: .................................................................................................................... 12 2.2.3 Functions of UBL: .................................................................................................................. 14 2.2.4 Role of UBL in Banking Sector:............................................................................................ 15 2.2.5 Computerization of UBL:....................................................................................................... 15 2.2.6 Credit Department of UBL: ................................................................................................... 16 CHAPTER NO.3 ................................................................................................................................. 18 NIMRA TEXTILE LIMITED .............................................................................................................. 18 3.1 Financial analysis:- ................................................................................................................... 20 CREDIT POLICY AND ITS IMPLEMENTATION ....................................................................... 30 Credit Policy: ............................................................................................................................... 30 Procedure for Financing from UBL ............................................................................................ 30 3.3.2.1 Purpose: .......................................................................................................................... 30 3.3.2.2 Business.......................................................................................................................... 30 3.3.2.3 Security: .......................................................................................................................... 30 CHAPTER NO.5 ................................................................................................................................. 33 2|P a ge

CREDIT PRINCIPLES AND OTHER REQUIREMENTS .......................................................... 33 5.1 The 5 C s of Credit.................................................................................................................... 35 5.2 SWOT Analysis:- ...................................................................................................................... 38 5.2.1 A strength could be: .......................................................................................................... 38 5.2.2 A weakness could be: ....................................................................................................... 39 5.2.3 An opportunity could be: ................................................................................................... 39 5.2.4 A threat could be: .............................................................................................................. 39 5.3 PEST Analysis: ......................................................................................................................... 40 5.3.1 Political Factors ..................................................................................................................... 40 5.3.2 Economic Factors.................................................................................................................. 41 5.3.3 Sociocultural Factors ............................................................................................................ 41 5.3.4 Technological Factors ........................................................................................................... 41 5.4 Porter s Five Force Analysis: ............................................................................................... 43 5.4.1 The threat of entry. ................................................................................................................ 43 5.4.2 The power of suppliers. ........................................................................................................ 44 5.4.3 The threat of substitutes ....................................................................................................... 44 5.4.4 Competitive Rivalry ............................................................................................................... 45 5.5 Macro-economic risk areas ..................................................................................................... 45 5.6 Micro-economic risk areas:...................................................................................................... 46 5.7 Rules followed by the bank for Credit Risk Management: .................................................... 46 CHAPTER NO.6 ................................................................................................................................. 49 Differences and Similarities in theoretical and practical approach ............................................. 49 CHAPTER NO.7 ................................................................................................................................. 52 Conclusion and Recommendation .............................................................................................. 52

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ACKNOWLEDGEMENT
All praise to Almighty Allah, the most Gracious and compassionate. Who created the universe and bestowed mankind with the knowledge and blessings of Allah be upon the Holy Prophet Muhammad (S.A.W.) who guided mankind with the Holy Quran and Sunnah, the everlasting source of guidance and knowledge for humanity.

It is an utmost pleasure to be able to express to heartiest gratitude and deep sense of devotion to our reverend and worthy supervisor respected SIR Syed Ahmed Gillani; who guide us to achieve this goal. We also like to thank Engr. Saqib Hassan Minhas (Regional Head of Credit Admin Deptt), Mohammad Shahzaib (processing manager), Asad Rasool (Credit Admin Officer) of UBL who gave us their precious time and provide us data and information. Place: Faisalabad

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Signatures of Participants of Project Group Leader Farman Ali 454

Group Members Javaria Iqbal (302) Muhammad Usman Virk (327)

Mian Mubeen Ahmed (339) M.Taimoor Saeed M.Rashid Latief (343) (344)

M.Shahid Rasheed (351) Rehana Hayat (354) Shymmal Khan (362)

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Executive Summary
UBL is the second largest bank of Pakistan with assets over Rs. 550 billion and a solid track record of 46 years in addition to the convenience of over 1400 branches serving its customers throughout the country and also at several overseas locations. In our project we first give an overview of credit analysis and investment policy and why credit analysis is important for evaluating the borrower .It highlights the factors that are important for credit analysis. The first chapter also provides an overview of the functions of investment banking. In chapter 2 a brief banking history is first provided And then banking in Pakistan. An overview of UBL is provided with Introduction of its departments and subsidiaries. By elaborating UBL role in economy our project specify how UBL help in the economic growth of the country. UBL has taken leading start in the introduction of computers in (1966- 1968) in important cities. By introducing UBL online system, money gram facility, and hajj services UBL is maintaining its leadership in the industry. Credit extension is the principal function of a bank, through which pace of activity is accelerated in the various sectors of economy. Chapter 3 majorly comprises financial analysis of an important client of UBL Name Nimra textiles. In which we Use different ratios to analyze the financial condition of Nimra textiles. Chapter 4 majorly comprises the credit policy and implications of UBL.A brief summary of procedures followed by UBL in financing is shown in this area. An attempt has been made by us to elaborate the security requirements for loan disbursement by UBL. Credit principles and other requirements are mentioned under chapter number four. The 5 c s of credit are also covered under this chapter. An attempt has been made to cover the stated prudential requirements of state bank of Pakistan for loan disbursement. Chapter 6 provides insight into difference between the practical and theoretical approach of UBL credit policies. It also provides an insight into loan covering process followed by UBL. At the end of this project,on the basis of our observations suggestions are recommended as per learning from analysis.This project also will provide a better and brief learning about United Bank Limited.

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CHAPTER NO.1 INTRODUCTION TO SUBJECT CREDIT ANALYSIS AND INVESTMENT BANKING

1.1 Overview of Credit Analysis and Investment Banking:The process of credit analysis may be explained as a procedure, which is carried out in order to find out the capacity of an issuer to provide some credit to the debtor. This process is applicable to individual borrowers as well as the issuers of securities. Introduction Credit analysis focuses at determining credit risk for various financial and nonfinancial instruments as well as projects. Credit risk analysis can be separated into two steps. The first part consists of analyzing the credit risk of a particular asset. The second part analyses the risk of the whole portfolio which comprises the individual credit sensitive entities. And it is true that the measurement and management of Credit risk has become a key risk-management issue for both financial and non-financial institutions. With the improved liquidity in credit derivative market and advances in modeling, the accurate measurement and management of credit risk to achieve the desired exposure is not as difficult as before. Definition The process of evaluating an applicant's loan request or a corporation's debt issue in order to determine the likelihood that the borrower will live up to his/her obligations. Credit analysis is the method by which one calculates the credit worthiness of a business or organization. The audited financial statements of a large company might be analyzed when it issues or has issued bond or a bank may analyze the

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financial statements of a small business before advancing or renewing a commercial loan. Credit analysis involves a wide variety of financial analysis techniques, including ratio and trend analysis as well as the creation of projections and a detailed analysis of cash flows. Credit analysis also includes an examination of collateral and other sources of repayment as well as credit history and management ability. Before approving a commercial loan, a bank will look at all of these factors with the primary emphasis being the cash flow of the borrower. A typical measurement of repayment ability is the debt service coverage ratio. A credit analyst at a bank will measure the cash generated by a business (before interest expense and excluding depreciation and any other non-cash or extraordinary expenses). .What Does Credit Analysis Mean? A type of analysis an investor or bond portfolio manager performs on companies or other debt issuing entities about the entity's ability to meet its debt obligations. The credit analysis seeks to identify the suitable level of default risk associated with investing in that particular entity. Why Credit Score Analysis is Important? Credit score is the basis of sanction of loan by a lender and therefore credit scores analysis is very important for the borrower to know where exactly he or she stands. Credit score basically is the formula that the lenders use to calculate the risk factor while sanctioning loans for the prospective borrower. That objective is accomplished by lenders through credit score analysis relating to the prospective borrower. At the same time such credit score analysis is important for the prospective borrower to know exactly where he or she stands in the expectancy for the sanction of loan. Factors in Credit Score Analysis Major factors that are taken into account in the credit score analysis are Payment history of the prospective borrower. Current outstanding debt of the client. Length of the credit history.
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Sources for regular flow of income.

1.2 Importance of Credit Analysis of Individual Borrowers

In case of the individual borrowers the system of credit analysis is used in order to measure the economic capability. This is done in the context of repayment of debt. The system tries to find out if the borrower would be able to pay his debts at the proper time. With the help of credit analysis the lenders can also find out if the debtor would at all be able to pay back the debt.

1.3 Use of Credit Analysis of Corporate Entities

The system of credit analysis is also applicable for reviewing the financial capacities of a certain issuer who is dealing in debt instruments. This process is thus extremely crucial for those who put their money in these debt instruments. In Credit Analysis we discussed deeply about the Balance Sheet. Because on that bases bank decide that firm have long term debt paying ability or not. There are few mainly items are mentioned below; Fixed assets Current assets Stock Current ratio Long term liability Called up share / Treasury Stock Share Premium Revaluation Reserve P / L figure C P/L

Share holder Equity

1.4 Investment banking

Investment banking is a field of banking that aids companies in acquiring funds. Investment banks create securities, including stocks and bonds, for themselves and

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other companies, and facilitate the trade in them. They also help companies manage mergers and acquisitions. Through investment banking, an institution generates funds in two different ways. They may draw on public funds through the capital market by selling stock in their company, and they may also seek out venture capital or private equity in exchange for a stake in their company. Functions of Investment Bank: Unlike commercial banks and savings and loans, investment banks do not seek cash deposits from customers in the form of checking and savings accounts, and they do not make traditional interest-bearing loans to individual customers. Investment banks instead make their money primarily By advising corporate clients on the creation of stocks, bonds and other securities By underwriting securities By facilitating mergers and acquisitions, along with any due diligence and securities exchanges that may go along with them. And by brokering (or selling) securities to investors.

Investment bankers have also created a broad array of investment options to go along with traditional stocks and bonds, including securities derivatives such as call and put options, which allow investors to lock in a buy or sell price on an investment at a future date, and credit default swaps, which insure bond buyers against the risk that a bond seller will renege on the debt. Investment banks also lend stocks to facilitate short trades, in which speculators borrow stock and sell it in hopes that its price will decline before they buy it and return it to the lender. An investment banking firm also does a large amount of consulting. Investment bankers give companies advice on mergers and acquisitions, for example. They also track the market in order to give advice on when to make public offerings and how best to manage the business' public assets. Some of the consultative activities investment

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banking firms engage in overlap with those of a private brokerage, as they will often give buy-and-sell advice to the companies they represent. Investment banks provide a numerous finance-related services, including underwriting, raising capital for companies by issuing equity or debt securities

and facilitating mergers. When raising capital for a firm, an investment bank is acting as an intermediary between investors and the issuer. Capital raised can come from private investors (who often have a high net worth), or from pools of capital obtained within the public markets. Capital obtained from public markets is normally through an initial public offering (IPO); however, special purpose acquisition companies (SPACs) are another alternative. Role of Investment Banks in Economy: The primary role of investment banking in the economy has traditionally been to help businesses raise capital for their operations by selling investment securities to the general public. Through innovations of financial instruments and advisory to clients like corporate firms and government, which are main vehicles in growth of an economy, investment banks assist these clients to raise funds. One of the main functions of the money and capital markets is to allocate efficiently the flow of funds from savings surplus economic units to savings deficit units. The efficiency of capital market is instrumental in the channeling of savings to investment opportunities and in the growth and development of a viable economy. Substantial amounts of funds are raised by business firms and the Government through the issue of new securities. The major institutions acting as intermediaries between firm seeking external funds in capital markets and the investment public are investment houses. The investment banker assists the issuing firm in designing and timing securities offerings, formulates plans for raising funds through the capital markets and provide the distributing organization. One of the fundamental economic functions of the investment banker is to underwrite the risk of fluctuations in the market price of the securities being issued, during the time of offering.
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CHAPTER NO.2 INTRODUCTION TO THE BANK 2.1 Banking History:Consensus on the origination of word Bank is not yet reached at. Some authors opinion is that this word is derived from the words Bancus or Banque , which mean a bench and they further relate banking business inception to Jews in Lombardy. Other authorities state that the word Bank is derived form the German word Back which means Joint Stock fund and later on due to German occupation of Italy, this word was italianated into Bank. Authors quote Babylonians (few quotes Chinese) who developed banking system as early as 2000. B.C1 Banking in Pakistan Banking started in Pakistan after the bold and emergent decision of formulation of SBP on July 30, 1948. Thereafter this sector has witnessed enormous growth. In 1974 banks were nationalized, in the hope that new era of growth could be achieved through it. However the process is reverse since 1991, up till now MCB, ABL, and UBL have been privatized and HBL is in the process of its privatization.

2.2 United Bank Limited:

On November 9, 1959, UBL was notified and included as a private schedule bank with authorized capital of Rs. 20 million; issued and paid up capital of Rs. 10 million divided into 1 million shares of Rs. 10/ each. Currently BOD and president/ CEO Mr. Amar Zafar Khan being a member of this newly formed set up manage UBL. Chairman His Highness Shaikh Nahayan Mabarak Al Nahayan and Deputy Chairman Sir Mohammed Anwar Pervez are the two supreme controllers of the bank s affairs. Another development is the appointment of director operation, Nauman Hussain by the newly

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privatized bank. Senior management of the bank is shown in the chart given at the end of chapter.

2.2.1 Number of Branches:

UBL has a large network of branches, which extends to the remotest areas of the country. In December 1983, there were 1623 branches whereas in 1974 it had only 1238 branches and in October 2003 these figures show total number of 1007 branches3. UBL has been very active in increasing its overseas branches network. The first foreign branches were established in London in 1963. Now UBL has branches in Bahrain, Qatar, Saudi Arabia, United Arab Emirates, Yemen Arab Republic, UK Switzerland, Egypt, Oman and The United States. These branches are playing a significant role in channeling home remittances and foreign trade of Pakistan. Subsidiaries: UBL has four subsidiaries, namely: United National Bank Limited (UNB), UK United Bank AG (Zurich), Switzerland United Executers and trustees Company Limited United Bank Financial Services (Private) Limited

2.2.2 Departments:
Account department Deposit department Credit department Remittances department Clearing department Human resource department Bill department Lockers department
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Control and compliance department (CCD)

2.2.3 Functions of UBL:

UBL is a commercial bank, which transacts the business of banking in accordance with the provisions of BCO, 1962. Section 7 of the Act authorizes banks to engage in the prescribed form of business. In the light of this section UBL s functions can be categorized as under: Agency services General Utility Services

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Underwriting of loans raised by the Government or public bodies and trading by corporations etc. Providing specialized services to customers, and Hajj-related services.

2.2.4 Role of UBL in Banking Sector:

The impressive growth and development, which UBL achieve, present it undoubtedly the most dynamic and progressive. In a very shorter period of time it became one of the leading banks overtaking several other older and its competitorbanks4. The major contributions5 the bank ahs made are enlisted below: Record setting performance and commitment to serve the customers Personalized service and dynamic approach Catalyst of changes Professional management Modern banking policy Human resource development Small loans (or) micro credits Pacesetter in economic research established in 1967, department for economic research. Utility bills collection Credit cards (unicard-1970) Travelers Cheques (Humarah-1971) Diaries and calendars received prizes too.

2.2.5 Computerization of UBL:

UBL has taken leading start in the introduction of computers in (1966- 1968)6 in important cities. Its three computers centers Rawalpindi, Lahore and Karachi are equipped with the modern mainframe computers of various Capacities. Every branch has been decorated with microcomputers. The use of computers has enabled the bank to save time and efforts raise efficiency and deliver the goods speedily to its customers. This has also allowed the bank to maintain its leadership within the industry.

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i.

UBL - On line System7:

Themes of this service is Access anytime, anywhere, any device which Symbolizes comfort, convince and connectivity. UB-Online a web based service that can b accessed through multiple media link like, (i) PC via internet (00) Mobile phone with WAP or free SMS) (iii) Personal Digital (iv) assistants and (v) Plain telephone; following are some of the exciting features: o Accounts statement & electronic data interchange o Graphical analysis o Alerts service /facility, search facility and activity long o The banks as another computer-based system known as UIBANK 8, which is a welldevelop on-line branch-banking package. The system automatically prepares various report, central bank returns, and statement of accounts for customers. ii. Money Gram facility:

The bank has recently employed money gram service system, which can affect money transfers within minutes. Similarly the system used for local transfer of money transactions is called uni-remote. iii. Hajj service:

Keeping to its tradition is august 1982 provided electronic facility at its Hajj booth and has installed now modern computers at designated branches (Hajis) and increasing efficiency. This facility has reduced the service time to less than six minutes per Haji compare to about half-an-hour to 45 minutes per Haji earlier.

2.2.6 Credit Department of UBL:

Credit extension is the principal function of a bank, through which pace of activity is accelerated in the various sectors of economy. Also the indicators, which mainly reflect the high quality of bank s management, are its prudent financing decisions, proper control of finance and prompt recovery. In this regard the credit policy of a bank play a very important role as it provides the overall framework, responsibilities, authorities and facilitate decision-making. Credit department performance is subject to a defined policy on credit control exercised by the SBP. SBP affect credit decisions through the weapons of bank rate, open market operations, variable reserve requirements, selective credit restrictions and prudential regulations.
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Importance
In the past decade, regulators have been gaining familiarity and experiences in the monitoring of banks and other financial institution in terms of solvency and capital adequacy. Some of the perverse effects of the Basle accord have been widely documented. With the arrival of the new Basle II accord around 2005 and other improvement in accounting, it is important for financial institutions to develop internal models to demonstrate the capability of risk management, including demonstrating the effectiveness of hedging which can result in freeing up of regulatory capital. Given the improvement in the regulatory regime, sound credit analysis, rather optimization according to arcane rules, are more relevant for the future. During 2001 and 2002, there have been very high profile cases of default, such as Enron and WorldCom with very large amount of outstanding debt. Some financial institutions have been caught unguarded with large amount of exposure. During the late 90 s, banks have been pressured to lend money to gain business in other areas such as merger and acquisitions, resulting in large exposure of idiosyncratic credit risk to particular companies. The current prevalent practice of marking loans at par value regardless of the counter party s credit risk poses significant problems in proper risk management. Therefore the correct credit analysis and accurate measurement of the amount of credit risk involved is very important in determining whether the extra benefit from other business can compensate. With the increasing usage of largely unfunded derivative transactions, such as swaps, it is increasing important to assess the counter party risk, as well as the correlation between market risk and credit risk, as the collapse of the trading company Enron readily demonstrated

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CHAPTER NO.3 INTRODUTION OF CLIENT OF THE BANK

In Faisalabad region UBL has got much customer base and most of industries are customers of bank .Some of the major customers who take loan facility from UBL are as under A.A Spinning Mills Limited Arshad Corporation Private Limited Crescent Textiles Mills Limited Huda Sugar Mills Interloop Private Limited Ittehad Fabrics Punjab Beverages Sitara Spinning Mills Limited United industries Zahid Jee Textiles Mills Limited Nimra Textile limited

NIMRA TEXTILE LIMITED

Nimra textile is remarkable bold figure among Top manufacturers & suppliers of Textile Woven Products (Home Textile) in Pakistan and it does not require any formal introduction. Business Type: Products/Services: Manufacturer, Trading Company

Garments,Curtains,Fabrications,Flat/ Fitted , Sheets, Duvet Covers,Matress Covers, Bed in a bag, Bed Spreads , Quilt
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Covers accessories, Bed Linen,Kitchen Production site: Number of employees: Year Established: Trade & Markets: Total Annual Sales Volume: Exports Per Annum: Production facilities: Quality control:

Bleaching, Dyeing, Rotary and flat bed above 1000 people 2001 North America Eastern Europe Western Europe US$50 Million - US$100 Million more than US $70

260 Sulzer Projectile / Air Jet looms, 400 Auto / Dobbies / Jacquad looms, CAD & Engraving Rotary Printing Stork / State of the Art Zimmer 5 machines, Reggiani Flat Bed Printing Machine, Thermosole Dyeing Babcock / Manforts 3 machines

18 Quilting machines 600 Stitching machines

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3.1 Financial analysis:These section efforts have been made to cover all relevant aspects of the financial performance of Nimra textiles limited. Overtime comparison and ratio analysis are carried out with the view to extract concrete conclusion to describe financial standing and performance of the company.

Liquidity Ratios:
3.1.1 Current Ratio Current Ratio= total current assets/total current liabilities

2009 1.012245127

2010 1.042310714

The current ratio shows the total current assets that are available to fulfill total current liabilities. They shows the liquidity position of the company. It shows the short term debt paying ability of the company. If compare this liquidity ratio for Nimera textiles for the years 2009 and 2010 then it shows that the liquidity position of the company has improved by 0.02%.IIt creates a feasible situation for UBL to grant loan to Nimera textiles.

1.05 1.04 1.03 1.02 1.01 1 0.99 Current Ratio 2009 2010

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3.1.2 Quick Ratio Quick ratio=Total current assets-inventories/total current liabilities 2009 0.40400925 2010 0.547899289

Quick ratio also refers to liquidity ratio and it depicts the liquidity position of the companies that depend upon their inventory that is seasonal functioning. So the current figures of quick ratio for Nimra textiles shows that that this company is very feasible for seasonal loaning as this ratio is improved by 0.1% in 2010.

0.6 0.5 0.4 0.3 0.2 0.1 0 Quick Ratio 2009 2010

3.1.3 Cash Ratio Cash ratio=Cash+Bank+Marketable securities/Total current liabilities 2009 0.008149897 2010 0.041725586

It extreme level of checking the liquidity position of the company as compare to current and quick ratio as it excludes all least liquid assets. If we look at above figures of cash ratio then we find that the ratio has increased by 0.032% it means that the company increasing its liquid assets.

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1.05 1.04 1.03 1.02 1.01 1 0.99 CASH RATIO 2009 2010

3.1.4 Working Capital Ratio Working Capital=Total current assets-Total current liabilities 2009 6691961 2010 24386376

Working capital management shows the amount that is left with the borrower company after it pays its debt liability. This amount is used for daily working needs of the company. The analysis of 2009 and 2010 shows a positive working capital left with the company .The difference of 2009 and 2010 working capital shows that in 2010 Nimra Textiles has Rs.7694415 excess working capital as compare to 2009.

25000000 20000000 15000000 10000000 5000000 0 Working Capital 2009 2010

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3.1.5 Profitability ratios:

Profitability= (Gross income/sales)*100 2009 13.4638 2010 11.5345

Gross profit is critical because it represents the amount of money remaining to pay operating expenses,financing cost and taxes.The gross income over sales ratio decreases by 2% in 2010 which shows the negative sign of profitability for Nimra textiles.

13.5 13 12.5 12 11.5 11 10.5 Profitablility Ratio 2009 2010

3.1.6 Operating income over sales ratio: (Operating income/sales)*100 2009 6.31586 2010 4.9712

Operating income over sales ratio shows that in 2010 the profitability of the firm has decreased by 2 % which goes against the Nimra textiles.

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7 6 5 4 3 2 1 0 Operating income over sale Ratio 2009 2010

3.1.7 Earnings before Interest and tax ratio: (EBIT/sales)*100 2009 2.44486 2010 2.53265

Earnings before interest and taxes over sales ratio almost remained constant in both years. There is no significant change over the year It shows that company remained comparatively stable.

2.54 2.52 2.5 2.48 2.46 2.44 2.42 2.4 Earning before interest & tax ratio 2009 2010

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3.1.8 Earnings after Tax Ratio (EAT/sales)*100 2009 1.50125 2010 1.60368

This ratio shows the profit that is available form each rupee of the sale.Earnings after tax and gross spread ratio have increased by 0.1% in 2010 that is the positive sign of Nimra textiles. This can be because of new investment and business expansions.

1.62 1.6 1.58 1.56 1.54 1.52 1.5 1.48 1.46 1.44 Current Ratio

2009 2010

Activity Ratios:
3.1.9 Stock Turnover Ratio Stock turnover 2009 89.9139 = Stock/COGS*365 2010 61.0364

The stock turnover ratio shows that how many days inventory takes place to convert into finished goods if compare this ratio for 2009 and respectively for 2010 then it shows the positive condition of Nimra textiles as the days have decreased by 28 in 2010.

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100 80 60 40 20 0 stock turnover Ratio 2009 2010

3.1.10 Debtors to Sales Ratio Debtors to sales= trade debtors/sales*365 2009 23.8985 2010 37.082539

Debtors to sales ratio also shows that how many days the company recovers its receivables.if look at this ratio for 2009 and 2010 then it shows that company receivables turnover ratio is increased by 14 days. It shows a negative trend in a company.

40 35 30 25 20 15 10 5 0 Debtors to sales ratio 2009 2010

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3.1.11 Payable Turnover Ratio Payables turnover ratio= Accounts payables/COGS*365 2009 30.39299 2010 17.908361

Payable turnover ratio decreased by 50% in 2010 which shows a very positive sign for further lending to the company it means that Nimra textile is paying Back its payables 13 days early in 2010 than in 2009.

35 30 25 20 15 10 5 0 Payable turnover Ratio 2009 2010

3.1.12 Cash Conversion Cycle Cash conversion cycle= Stock turnover+ACP-APP 2009 83.41948 2010 80.21064

Cash conversion cycle shows days the company takes to convert its raw material into cash. In 2010 Nimra textile shows a short cash conversion cycle as compare to 2009 by 3 days.

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100 80 60 40 20 0 stock turnover Ratio 2009 2010

3.1.13 Interest Coverage Interest coverage= Profit before taxes/interest charges 2009 0.65089 2010 1.105823

Ratio used to determine how easily a company can pay interest on outstanding debt. The higher the ratio, the lesser the company is burdened by debt expense. so it shows the positive sign for the company as it increased by 0.5% in 2010 as compare to 2009.

1.2 1 0.8 0.6 0.4 0.2 0 Interest coverage 2009 2010

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3.1.14 Leverage Ratio Leverage ratio= Total liabilities/Equity 2009 1.99989 2010 1.89496

Any ratio used to calculate the financial leverage of a company to get an idea of the company's methods of financing or to measure its ability to meet financial obligations. It remains almost steady in both years and there is no significant change.

2 1.98 1.96 1.94 1.92 1.9 1.88 1.86 1.84 Leverage Ratio 2009 2010

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CHAPTER NO.4

CREDIT POLICY AND ITS IMPLEMENTATION

Credit Policy: Credits operations are undertaken in accordance to bank s credit policy. The policy strictly prohibits violation of SBP/Local central bank s rules and suggests financing of self liquidating, cash flow supported and well collateralized transactions, which equate the principle of lending (safety, liquidity, dispersal, remunerations and suitability). Procedure for Financing from UBL
When a party comes for financing, banker will ask the following questions.

3.3.2.1 Purpose:
In this the party mentions the purpose; they want to apply for the finances. No lending is done without purpose.

3.3.2.2 Business The party must have some specific running business i.e. general merchandise, construction business etc. The second question arises of the cash flow that how much flow is generated by the party from the current business. 3.3.2.3 Security:
The bank will secure itself against the lending. There can be two type of security. Commercial Residential

The bank prefers commercial security. Relationship Manager (RM) is mainly responsible for the relationship between the bank and party. He acts like a bridge between the two.
In the first instance the party would prepare the following property documents. AKS Shajarah Naqsha Tasveeri Approved Building Plan Tresh fard 30 | P a g e

 Intaqal Naqal The party is asked to contact any valuator on the panel of UBL. ICM&L and Tajak Builder are on the panel of UBL. The valuator will visit the site and set market value and FSV of the said property. He prepares report of at least three pages. These documents sent for one page legal opinion to any layer on the panel of UBL. Having clear legal opinion RM start preparing credit Approval (CA). The documents are signed by the RM & AM and then forwarded to UBL RHQ in Peshawar. Here SRM examines the CA if he found some exception he will send it back to the respective Rm. RM rectifies the acceptation and sends it back to SRM. SRM studied and pass it to credit officer. He has three hours of time to study the CA and if found correct then he pass it to another credit officer. After his examination the CA is passed on to the credit risk manager. He checks the CA and after signing it sent to CAD. He forwards the CA to SCO. Whose office is at UBL RUCO at Lahore, after his signature the C.A is sent back to RCAD. RCAD make a check less list and asked the RM to contact the party to complete the said documents they are. Letter of continuity Personal Guarantee Letter of hypothecation of stock D.P Note Mortgage Deed NIC of executants and witness Stock report Insurance policy Party profile After completion of charge document RM send it to RCAD when they found it correct, they issues DAC. A copy of DAC is sent to RM and NICF account is opened and debit transaction starts.

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Process Flow Diagram of Loan Disbursement

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CHAPTER NO.5 CREDIT PRINCIPLES AND OTHER REQUIREMENTS

This section outlines the basic principles that UBL will pursue for extending credit facilities. These principles will serve as useful guidelines and precautionary measures for prudent lending. a) UBL will not extend any such credit facilities, which violate the rules and regulations prescribed by the State Bank of Pakistan and/or local Central Banks from time to time. b) UBL will consider financing of self-liquidating, cash flow supported and well collateralized transactions within a Business Group s target market and risk acceptance criteria. c) UBL will participate in syndicated facilities if the transaction fulfils the parameters established by the Bank. d) UBL will, prior to allowing the facilities, satisfy itself that these are adequately secured with relevant and legally enforceable documents. e) UBL will ensure that facilities allowed are well aligned to customers' business structure and specific needs. f) UBL will assess the customer s character for integrity and willingness to repay by studying the background and credit history of the customer to establish commitment to repay. g) Facilities provided by UBL will be well diversified into such industrial/trading sectors where UBL has the necessary skills and resources to achieve a strong market position and adequate return on capital. h) UBL shall only lend up to the amount that the customer has capacity and ability to repay. Customer's liquidity and repayment capacity will be determined by

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careful analysis of financial statements and future projections to ensure that customer s financial condition remains satisfactorily liquid to repay the bank. i) It is against UBL s policy to provide financing for speculative purposes and/or undesirable activities. For Islamic Banking business, Shariah compliant business activities shall be financed based on evaluation on Islamic Financial Accounting Standards. j) UBL shall not allow any credit facility to clients, who have been allowed waivers/write offs in UBL. Any exception to this will need approval of the highest level of Credit Committee including the Group Executive Risk & Credit Policy. k) UBL shall maintain adequate margin against credit facilities, in accordance with State Bank of Pakistan s Prudential Regulations and/or local Central Banks instructions. If deemed necessary, the appropriate business unit / credit authority may specify a higher margin. l) UBL shall continue to invest in development of officers dealing with credit related matters, to ensure maximum output and utmost participation of individuals involved with credit risk management and the credit process. m) Documents included as annexures of this manual will require regular updates and modification as per the requirements and needs of the businesses and changing market dynamics. The Group Executive Risk & Credit Policy will

approve any and all updates and modifications in such documents. Any major structural changes and/or modifications will require ratification by the Board Credit Committee / Board of Directors as well as clearance by the State Bank of Pakistan. n) Any addition/amendment/deletion/deviation in this manual to meet changing conditions and/or regulatory/legal requirements of any domestic or overseas location will be approved by the Group Executive Risk & Credit Policy. However, if any such change weakens any provision in this manual, the same shall require

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ratification by the Board Credit Committee / Board of Directors as well as clearance by the State Bank of Pakistan.
o)

This Manual represents policies and procedures introduced to streamline and consolidate all rules applicable to credit process globally. However, management reserves the right to formulate auxiliary Credit Policies for any domestic or overseas location within parameters laid down in this Manual.

5.1 The 5 C s of Credit

It's one of the most common questions among small business owners seeking financing: "What will the bank be looking for from me and my business?" While each lending situation is unique, many banks utilize some variation of evaluating the five C's of credit when making credit decisions: character, capacity, capital, conditions and collateral. We'll take a look at each of these ingredients and how they may impact your funding request. Review each category and see how you stack up. 5.1.1 Character What is the character of the management of the company? What is management's reputation in the industry and the community? Investors want to put their money with those who have impeccable credentials and references. The way you treat your employees and customers, the way you take responsibility, your timeliness in fulfilling your obligations these are all part of the character question.

This is really about you and your personal leadership. How you lead yourself and conduct both your business and personal life gives the lender a clue about how you are likely to handle leadership as a CEO. It's a banker's responsibility to look at the downside of making a loan. Your character immediately comes into play if there is a business crisis, for example. As small business owners, we place our personal stamp on everything that affects our companies. Often, banks do not even differentiate between us and our businesses. This is one of the reasons why the credit scoring process evolved, with a large component being our personal credit history. 5.1.2 Capacity
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What is your company's borrowing history and track record of repayment? How much debt can your company handle? Will you be able to honor the obligation and repay the debt? There are numerous financial benchmarks, such as debt and liquidity ratios, that investors evaluate before advancing funds. Become familiar with the expected pattern in your industry. Some industries can take a higher debt load; others may operate with less liquidity. 5.1.3 Capital How well-capitalized is your company? How much money have you invested in the business? Investors often want to see that you have a financial commitment and that you have put yourself at risk in the company. Both your company's financial statements and your personal credit are keys to the capital question. If the company is operating with a negative net worth, for example, will you be prepared to add more of your own money? How far will your personal resources support both you and the business as it is growing? If the company has not yet made profits, this may be offset by an excellent customer list and payment history. All of these issues intertwine, and you want to ensure that the bank perceives the business as solid. 5.1.4 Conditions What are the current economic conditions and how does your company fit in? If your business is sensitive to economic downturns, for example, the bank wants a comfort level that you're managing productivity and expenses. What are the trends for your industry, and how does your company fit within them? Are there any economic or political hot potatoes that could negatively impact the growth of your business? 5.1.5 Collateral While cash flow will nearly always be the primary source of repayment of a loan, bankers look at what they call the secondary source of repayment. Collateral represents assets that the company pledges as an alternate repayment source for the loan. Most collateral is in the form of hard assets, such as real estate and office or

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manufacturing equipment. Alternatively, your accounts receivable and inventory can be pledged as collateral. The collateral issue is a bigger challenge for service businesses, as they have fewer hard assets to pledge. Until your business is proven, you're nearly always going to pledge collateral. If it doesn't come from your business, the bank will look to your personal assets. This clearly has its risks you don't want to be in a situation where

you can lose your house because a business loan has turned sour. If you want to be borrowing from banks or other lenders, you need to think long and hard about how you'll handle this collateral question. Keep in mind that in evaluating the five C's of credit, investors don't give equal weight to each area. Lenders are cautious, and one weak area could offset all the other strengths you show. For example, if your industry is sensitive to economic swings, your company may have difficulty getting a loan during an economic downturn even if all other

factors are strong. And if you're not perceived as a person of character and integrity, there's little likelihood you'll receive a loan, no matter how good your financial statements may be. As you can see, lenders evaluate your company as a total package, which is often more than the sum of the parts. The biggest element, however, will always be you.

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5.2 SWOT Analysis:-

5.2.1 A strength could be:

Your specialist marketing expertise. A new, innovative product or service. Location of your business. Quality processes and procedures. Any other aspect of your business that adds value to your product or service.

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5.2.2 A weakness could be:

Lack of marketing expertise. Undifferentiated products or services (i.e. in relation to your competitors). Location of your business. Poor quality goods or services. Damaged reputation.

5.2.3 An opportunity could be:

A developing market such as the Internet. Mergers, joint ventures or strategic alliances. Moving into new market segments that offer improved profits. A new international market. A market vacated by an ineffective competitor

5.2.4 A threat could be:

A new competitor in your home market. Price wars with competitors. A competitor has a new, innovative product or service. Competitors have superior access to channels of distribution. Taxation is introduced on your product or service.

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5.3 PEST Analysis:

5.3.1 Political Factors The political arena has a huge influence upon the regulation of businesses, and the spending power of consumers and other businesses. You must consider issues such as: 1. How stable is the political environment? 2. Will government policy influence laws that regulate or tax your business? 3. What is the government's position on marketing ethics? 4. What is the government's policy on the economy? 5. Does the government have a view on culture and religion? 6. Is the government involved in trading agreements such as EU, NAFTA, ASEAN, or others?

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5.3.2 Economic Factors Marketers need to consider the state of a trading economy in the short and long-terms. This is especially true when planning for international marketing. You need to look at: 1. Interest rates. 2. The level of inflation Employment level per capita. 3. Long-term prospects for the economy Gross Domestic Product (GDP) per capita, and so on. 5.3.3 Sociocultural Factors The social and cultural influences on business vary from country to country. It is very important that such factors are considered. Factors include: 1. What is the dominant religion? 2. What are attitudes to foreign products and services? 3. Does language impact upon the diffusion of products onto markets? 4. How much time do consumers have for leisure? 5. What are the roles of men and women within society? 6. How long are the population living? Are the older generations wealthy? 7. Do the population have a strong/weak opinion on green issues? 5.3.4 Technological Factors Technology is vital for competitive advantage, and is a major driver of globalization. Consider the following points:

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1. Does technology allow for products and services to be made more cheaply and to a better standard of quality? 2. Do the technologies offer consumers and businesses more innovative products and services such as Internet banking, new generation mobile telephones, etc? 3. How is distribution changed by new technologies e.g. books via the Internet, flight tickets, auctions, etc? 4. Does technology offer companies a new way to communicate with consumers e.g. banners, Customer Relationship Management (CRM), etc?

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5.4 Porter s Five Force Analysis:

Five force analysis helps the marketer to contrast a competitive environment.It has similarities with other tools for environmental audit,Such as PEST analysis,but tends to focus on the single,stand alone,business or SBU (Strategic Business Unit) rather than a single product or range of products.For example,DELL would analyse the market for business computers i.e one of its SBUs.

Five forces analysis looks at five key areas namely the threat of entry, the power of buyers, the power of suppliers, the threat of substitutes, and competitive rivalry. 5.4.1 The threat of entry.

Economies of scale e.g. the benefits associated with bulk purchasing. The high or low costs of entry e.g. how much will it cost for the latest technology? Ease of access to distribution channels e.g. Do our competitors have the distribution channels sewn up?

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Cost advantages not related to the size of the company e.g. personal contacts or knowledge that larger companies do not own or learning curve effects.

Will competitors retaliate? Government action e.g. will new laws be introduced that will weaken our competitive position?

How important is differentiation? e.g. The Champagne brand cannot be copied. This desensitizes the influence of the environment.

This is high where there a few, large players in a market e.g. the large grocery chains.

If there are a large number of undifferentiated, small suppliers e.g. small farming businesses supplying the large grocery chains.

The cost of switching between suppliers is low e.g. from one fleet supplier of trucks to another.

5.4.2 The power of suppliers. The power of suppliers tends to be a reversal of the power of buyers.

Where the switching costs are high e.g. Switching from one software supplier to another.

Power is high where the brand is powerful e.g. Cadillac, Pizza Hut, Microsoft. There is a possibility of the supplier integrating forward e.g. Brewers buying bars. Customers are fragmented (not in clusters) so that they have little bargaining power e.g. Gas/Petrol stations in remote places.

5.4.3 The threat of substitutes

Where there is product-for-product substitution e.g. email for fax Where there is substitution of need e.g. better toothpaste reduces the need for dentists.

Where there is generic substitution (competing for the currency in your pocket) e.g. Video suppliers compete with travel companies.

We could always do without e.g. cigarettes.

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5.4.4 Competitive Rivalry

This is most likely to be high where entry is likely; there is the threat of substitute products, and suppliers and buyers in the market attempt to control. This is why it is always seen in the center of the diagram.

5.5 Macro-economic risk areas

In considering a structured approach to credit, the process requires a categorization of each risk element. It should be noted that there exists considerable overlap and interrelationship between these elements. The aspects considered in this section have substantial interconnections and interrelationships with each having an effect upon another

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5.6 Micro-economic risk areas:

One of the most fundamental non-financial aspects crucial for the long term success of a business is its strategy and plans. Corporate strategy is developed by management and will reflect their judgment using their skills, expertise, experience and entrepreneurial flair. At the strategic level they will establish the fundamentals of the business and the basic direction for the future. At the business plan level they will address the practical implementation of the strategic decisions.

5.7 Rules followed by the bank for Credit Risk Management:

5.7.1 PRs. For SMES Regulation R-1 Sources and capacity of repayment and cash flow backed lending. Regulation R-2 Personal guarantees. Regulation R-3 Limit on clean facilities. Regulation R-4 Securities. Regulation R-5 Margin requirements. Regulation R-6 Per party exposure limit. Regulation R-7 Aggregate exposure of a bank/DFI on SME sector. Regulation R-8 Minimum conditions for taking exposure. Regulation R-9 Proper utilization of loan. Regulation R-10 Restriction on facilities to related parties. Regulation R-11 Classification and provisioning for assets. 5.7.2 PRs for Corporate Commercial RISK MANAGEMENT (R) Regulation R-1 Limit on exposure to a single person.
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Regulation R-2 Limit on exposure against contingent liabilities. Regulation R-3 Minimum conditions for taking exposure. Regulation R-4 Limit on exposure against unsecured financing facilities. Regulation R-5 Linkage between financial indicators of the borrower and total exposure from financial institutions. Regulation R-6 Exposure against shares/TFCs and acquisition of shares. Regulation R-7 Guarantees Regulation R-8 Classification and provisioning for assets. Regulation R-9 Assuming obligations on behalf of NBFCs. Regulation R-10 Facilities to private limited company. Regulation R-11 Payment of dividend. Regulation R-12 Monitoring. Regulation R-13 Margin requirements. 5.7.3 PRs for Consumer Loaning Regulation R-1 Facilities to related persons & utilization of clean loans for Initial Public Offerings (IPOs) Regulation R-2 Limit on exposure against total consumer financing. Regulation R-3 Total financing facilities to be commensurate with the income. Regulation R-4 General reserve against consumer finance. Regulation R-5 Bar on transfer of facilities from one category to another to avoid classification. Regulation R-6 Margin requirements.

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5.7.4 PRs for Credit Cards Regulation O-1 Receipt of credit cards. Regulation O-2 Statement of accounts. Regulation O-3 Unauthorized/wrong transactions. Regulation O-4 Partial payment by cardholder. Regulation O-5 Due date for payment. Regulation R-7 Maximum card limit. Regulation R-8 Classification and provisioning.

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CHAPTER NO.6 Differences and Similarities in theoretical and practical approach

We visited United Bank Limited (UBL) and conducted meeting with CAD Manager and other concerned persons and found following that UBL follow most of the credit principal that we have studied during our course. The difference and similarities are as under (1) The Prudential regulations (PRs) of state bank of Pakistan are strictly followed and in case of any violation of these regulation SBP impose the penalties or issue different warning to banks (2) The documents needed for advancing loan must be duly approved by concerned authorities. (3) The character of the borrower is evaluated by different out sourcing firm and Electronic Credit Information Bureau (ECIB) report. (4) The usual principal of lending like 5 C,S of credit, financial analysis of the borrower is done by the bank RM department of UBL (5) The SWOT analysis of the borrower is done by the borrower himself and some outsource agencies employed by the bank also conduct SWOT analysis for the banks.UBL has contract with the risk consulting firm ICIL. This firm provides UBL all the information about the character, SWOT analysis etc. of the borrower. The bank gives due weight age to this analysis report. (6) The pest analysis is also taken into consideration when it is applicable. (7) The loan collection procedure as we have studied is followed almost in the same order i.e. Recovery letter Telephone call Personal visit
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The collection agencies (in case of car financing only) Legal action

UBL try to solve the problems up to first three steps because last two steps involve legal actions which prolong to some period and also hurt the reputation of the banks. (8) For rescheduling of loan 90 days as grace period allowed to borrower. (9) For restructuring bank decrease the mark up rate and also increase the installment period. (10) When we ask about the borrower risk assessment the manager

have not enough knowledge about Michael porters risk assessment model and Porter five competitive forces. They use traditional method to assess the borrower risk. (11) The financial statements are accepted as it is provided by the

borrower. The only thing important is the statements should be audited by some approved charted accountant firms. Because audited financial statement of the borrower is only requirement by SBP. The bank loan processing officers has no concern with window dressing or any other fake information showed in the financial statement. (12) As for securities against loan is concern the security is critical

analyze it should have sufficient market value, liquidity, and not perishable in nature. (13) The security against the loan is valued according to the Forced

Sale Value (FSV). the Forced Sale Value(FSV) of the securities depend on the type of security and its value. the UBL usually value security on following ways Land =15% Building =20%
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 (14)

Machinery=25% The industry condition of the borrower also given due

consideration. (15) The economic condition of the country has also impact on credit

policies of banks; unfavorable economic condition leads to strict credit policy and vice versa.

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CHAPTER NO.7 Conclusion and Recommendation 7.1 Conclusion

The study is mainly focused on the credit policies and the tools used for credit risk analysis. Present study is done on one of the leading bank of Pakistan UBL. We critically examined and analyze documents procedures, rules and regulations regarding financing decision of banks. We elaborate different tools and techniques used by UBL management and to assess borrower risk. We also elaborate different aspect of UBL credit policy. UBL human resources are highly qualified and have update knowledge about present developments in the areas of credit risk analysis. Still there are some minute difference in practical approaches and techniques used by the bank for risk assessment. The reason is behind these differences are traditional method of risk assessment, unqualified borrower, and unavailability of sufficient documents and less use of credit rated agencies. The present study also enables us to get familiar with financing decision process and evaluation of borrower risk.

7.2 Recommendations
Although UBL have wonderful credit policies but still there is room for a lot of improvement and innovations. Following are some of the suggestions and recommendations that I want to make: A regular contact with the customers should be maintained in personally. Because there is an era of retaining the customers. So I recommend that there should be CRM to get feedback from customers.
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 A proper timeline in cas disbursement should be defined which is usually comprised due to lengthy processing and documentation requirements. Relationship managers should be fully trained and need to be fully equipped with requisite knowledge and skills. A proper infrastructure should be defined for carrying out computerized financial analysis of borrower s business. Heavy collaterals requirements should be avoided to serve large pool of borrowers. Heavy collaterals requirements restrict credit business of the bank. The credit proposal and other documents at times should be properly and sufficiently prepared before taking approval. Filing and record maintenance of credit related documents should be done efficiently. There is no facility for students to get mark free loan in this bank. So, this bank should provide free of mark up or easy terms and conditions loan to students and deserving persons on merit. I hope this scheme will be successful in producing intelligent, intellectual and brilliant students.

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