1A.

1 INTRODUCTION TO FINANCE
Finance is defined as the provision for money at the time when it is required and is known to be the life-blood of business. It is extremely important to carefully look after the financial transactions and activities that go on in a business. Proper analysis and insight is necessary in order to plan for the future. The word finance comes from the Latin word finis. Finance is defined as the provision of money at the time when it is required. Every enterprise, whether big, medium or small, needs finance to carry on its operations and to achieve their targets. Without adequate finance, no enterprise can possibly accomplish its objectives. Finance is defines as the issuance of, distribution of and purchase of liabilities and equity claims issued for the purpose of generating revenue producing assets. These claims are commonly referred to as financial claims. Finance refers to the management of flows of money through an organization. It concerns with the application of skills in the manipulation, use and control of money.

Finance can be traditionally classified into public finance and private finance. Public finance deals with the requirements, receipts and disbursements of funds in the government institutions like states, local self-governments and central government.

Private finance is concerned with the requirements, receipts and disbursements of funds in case of an individual, a profit seeking organization and non-profit organization. Private finance includes personal finance, business finance and finance of non-profit organizations. Private finance is further classified into personal finance, business finance and finance of non-profit organizations. Personal finance deals with the analysis and principles and practices involved in managing ones own daily need of funds. The finance of non-profit organization is concerned with the practices. Procedures and problem involved in financial management of charitable, religious, educational, social and the similar organizations.

1A.2 INTRODUCTION TO FINANCIAL MANAGEMENT

Financial management is a managerial activity that is concerned with the planning and controlling of the firms financial resources. It deals with finding out various sources for raising funds for the firm. As a separate activity or as a discipline it is fairly recent. It was a part of economy until 1890. It is concerned with the managerial decisions that result in the acquisition and financing of short term and long term credits of the firm. As such it deals with the situation that requires selection of specific assets as well as the problem of size and growth of an enterprise. The analysis of these decisions is based upon expected inflows and outflows of funds and their effect upon managerial objectives. It primarily deals with raising, administering and disbursing funds by privately owned business units. Financial management deals with the financial problems of corporate enterprises. Financial management covers all financial activities and plays a very important role right from the stage of inception to its growth and expansion.

1A.3 IMPORTANCE OF FINANCIAL MANAGEMENT

Financial Management is applicable to every type of organization, irrespective of its size, kind or nature. The core of financial policy is to maximize earnings in the long run and optimize then in the short run. The reason for placing the finance function in the hands of top management may be attributed to any of these following reasons. Finance is needed to promote or establish the business, acquire fixed assets, make investigations such as market surveys, development of products. Financial decisions are crucial to the survival of the firm. At no cost can a firm affords to threaten its solvency because solvency is affected by the flow of funds that is a result of various financial activities, top management being in position to co-ordinate those activities retains financial function in its control. It deals with financial planning, acquisition of funds, use and allocation of funds, and financial controls.

1A.4 FUNCTIONAL AREAS OF FINANCIAL MANAGEMENT

Today, the changing business environment has widened the role of a financial manager. Some of the functional areas covered in financial management are:

Determining financial needs

This is done to ensure the availability of adequate funds. Financial needs must be assessed for different purposes. Money may be required for initial promotional expenses, fixed capital and working capital needs.

Determining sources of funds

The financial manager has to choose resources of funds. He may borrow from a number of financial institutions and the public. A firm is committed to the financial lenders and must meet the terms on which they offer credit.

Financial analysis

It is the evaluation and the interpretation of a firms financial position and operations and involves comparison and interpretation of accounting data.

Optimal capital structure

The financial manager must establish an optimal capital structure and ensure the maximum rate of return on investment. The ratio between equity and other liabilities carrying fixed charges has to be defined. In the process, he has to consider the operating and financial leverages of the firm.

Cost volume profit analysis

Fixed cost, variable cost and semi-variable cost have to be analyzed. It must be ensured that the income of the firm will cover its variable cost. Moreover, a firm must generate an adequate income to cover its fixed costs as well.

Profit planning and control

Economists have long considered the importance of profit maximization in influencing business decisions. Profit planning ensures attainment of stability and growth. It is necessary to determine profits properly for they measure the economic viability of the firm. The break-even analysis and the cost volume profit analysis relationship are important tools of profit planning and control.

Fixed assets management

The acquisition of fixed assets involves capital expenditure decisions and long-term commitment of funds. These fixed assets are justified to the extent of their utility or productive capacity. Due to these long term commitment of funds, decisions regarding their purchase replacement, etc, should be taken with great care and caution.

Project planning and evaluation

Decisions are to be taken on the basis of feasibility and project reports, which contain analysis of economic, commercial, technical, financial and organizational viabilities.

Capital budgeting

Capital budgeting is the process of making investment decisions in capital expenditures. Capital budgeting is concerned with the allocation of the firms scarce financial resources among the available market opportunities.

Working capital management

The funds, which are required for short-term purposes such as purchase of raw materials, payment of wages and other day-to-day expenses is known as working capital. Working capital is the amount of funds necessary to cover the cost of operating the enterprise.

1.A5 FINANCIAL MANAGEMENT DECISIONS

Financial decisions refer to decisions concerning financial matters of a business firm. The major financial decisions are: Investment decisions Investment decisions relate to the determination of total amount of assets to be held in the firm, the composition of these assets and the business risk of the firm as perceived by the investors. Since funds involve cost and are available in a limited quantity, its proper utilization is very necessary to achieve the goal of wealth maximization. The investment decisions can be long term or short term. Financing decisions Once the firm has taken the investment decision and committed itself to new investment, it must decide the best means of financing these commitments. Since, firms regularly make new investments, the need for financing and financial decisions are on going. Hence, a firm will be continuously planning for new financial needs. The financing decisions is not only concerned with how best to finance new assets, but also concerned with the best overall mix of financing for the firm. Dividend decisions The third major financial decision relates to the disbursement of profits back to investors who supplied capital to the firm. The term dividend refers to that part of the profits of a company, which distributed among the shareholders. The dividend decision is concerned with the quantum of profits to be distributed among shareholders. A decision has to be taken whether all the profits are to be distributed, to retain all the profits in the business or to keep a part of profits in the business and distribute others among shareholders.

1.A6 THE As OF FINANCIAL MANAGEMENT Anticipating financial needs

The financial manager has to forecast the expected events in business and note their financial implications. He is supposed to meet the financial needs of the enterprise. For this purpose, he should determine financial needs of the concern. He anticipates financial needs by considering a array of documents such as the cash budget, the pro-forma income statement, the pro-forma balance sheet, the statement of sources and uses of funds. Financial needs can be anticipated by forecasting expected funds in a business and noting their financial implications. Funds are needed to meet promotional expenses, fixed and working capital needs. The requirement of fixed assets is related to the type of industry. A manufacturing concern will require more investments in fixed assets than a trading concern. A wrong assessment of financial needs may affect the survival of a concern.

Acquiring financial resources

After making financial planning, the next step will be to acquire the financial resources. There are a number of sources for supplying funds. These sources may be shares, debentures, financial institutions, commercial banks, etc. The selection of an appropriate source is a delicate task. The choice of a wrong source for funds may create difficulties at a later stage. The pros and cons of various sources should be analyzed before making a final decision.

Allocating funds in business

The funds should be used in the best possible way. The cost of acquiring them and the returns should be compared. The channels that generate higher returns should be preferred. The technique of capital budgeting may be helpful in the allocation of funds in business. The objective of maximizing profits will be achieved only when funds are efficiently used and they do not remain idle at any time. A financial manager has to keep in mind the principles of safety, liquidity and soundness while investing funds.

1.A7 AIMS OF FINANCIAL MANAGEMENT

The primary aim of finance function is to arrange as much funds for the businesses as are required from time to time. This function has the following aims: Acquiring sufficient funds The main aim of Financial Management is to assess the financial needs of an enterprise and then finding out suitable sources for raising them. The sources should be commensurate with the needs of the business. When funds are needed for a long period then long-term sources like share capital, debentures, term loans may be explored. Proper utilization of funds The funds should be used in such a way that maximum benefit is derived from them. The returns from their use should be more than their cost. It should be ensured that funds do not remain idle at any point of time. The funds committed to various operations should be effectively used. Increasing profitability To increase profitability, sufficient funds should be invested. Finance function should be planned so that the concern neither suffers from inadequacy of funds nor wastes more funds than required. A proper control should also be exercised so that scarce resources are not frittered away on uneconomical operations. Maximizing firms value It is generally said that a concerns value is linked with its profitability. Even though profitability influences a firms value but it is not all. Besides profits, the type of sources used for raising funds, the cost of funds, the condition of money market, the demand for products are some other considerations which also influences a firms value.

1. A8 CRITICAL ANALYSIS
Profitability Analysis: Profitability Analysis is done by finding out the Operating Profit/Loss and the Net profit/ Loss over a period of time. Profit is the positive gain from an investment or business operation after subtracting for all expenses. Operating Profit is a measure of a company's earning power from ongoing operations,

equal to earnings before deduction of interest payments and income taxes. Also called EBIT (earnings before interest and taxes) or operating income. Operating Profit is the pre-tax, preinterest profit from the company's "operations". Operating loss occurs when the net operating expenses of a firm exceeds its income. Net Profit is Often referred to as the bottom line, net profit is calculated by subtracting a

company's total expenses from total revenue, thus showing what the company has earned (or lost) in a given period of time (usually one year). Also called net income or net earnings. Net Loss is the result that occurs when expenses exceed the income produced. A person

or company with a net loss has not made a profit. Newer businesses often run at a net loss for the first few years while acquiring one-time expenses (equipment, buildings, technology, rights, etc.). However, every business should have a plan to work towards a breakeven point, and then onwards to profit.

Loan Recovery Analysis: Only few studies exist concerning the recovery rate of bank loans. The recovery rate is defined as the payback quota of a defaulted borrower. Factors that influence the recovery rate can be divided into the group features of the borrower, intensity of the business connection, terms of credit and macroeconomic factors. According to the literature, the impact of the company size and the quota of collateral can be confirmed. Not yet analyzed is the detected influence of the probability of default, the intensity of the business connection and the sum of discounted out payments.

1B.1 INTRODUCTION TO THE BANKING INDUSTRY

People say it is the second oldest profession in the world and it shows no signs of going out of fashion. As long as savings form an important driver for growth, banking institutions will remain an integral part of the economy. Since 1969, when the then Prime Minister Indira Gandhi nationalized 14 banks, the going was relatively easy for the PSU banks till the early nineties. Then came the first whiff of liberalization and the industry saw the entry of several private players.

MEANING OF BANK According to banking regulation act of 1949 defines the term banking as accepting for the purpose of lending or investment of deposits of money from the public, repay on demand or otherwise and withdraw by cheques, draft or otherwise. INDIAN BANKING SYSTEM The Indian banking system has a large geographic and functional coverage. Presently the total asset size of the Indian banking sector is US$ 270 billion while the total deposits amount to US$ 220 billion with a branch network exceeding 66,000 branches across the country. While commercial banks cater to short and medium term financing requirements, national level and state level financial institutions meet longer-term requirements. This distinction is getting blurred with commercial banks extending project finance. The total disbursements of the financial institutions in 2001 were US$ 14 billion. Banks in India were started on the British pattern in the beginning of the 19th century. In those days, all the banks were joint stock banks and a large number of them were small and weak. At the time of the Second World War, about 1500 joint stock banks were operating in undivided India, out of which over 1400 were non scheduled banks. A quiet few of them were managed by bad and dishonest management and naturally there were a number of banks failures. Hence the Government had to step in and the Banking

Companies Act, 1949 (which was subsequently renamed as Banking Regulation Act) was enacted which led to gradual elimination of weak banks that were not in a position to fulfill the various requirements of the Act.

In order to strengthen the weak units and revive public confidence in the banking system, a new section 45 was inserted in the Banking Regulation Act in September 1960, empowering the Government of India to compulsorily amalgamate weak units with stronger ones on the recommendations of RBI.

RBI was empowered in 1960, to force compulsory merger of weak banks with the strong ones. The total number of banks was thus reduced from 566 in 1951 to 85 in 1969. In July 1969, government nationalized 14 banks having deposits of Rs 50 cores and above. In 1980, Government acquired 6 more banks with deposits of more than Rs. 200 cores. Nationalization of banks was to make them play the role of catalytic agents for economic growth. The Narsimham Committee report suggested wide ranging reforms for the banking sector in 1992 to introduce internationally accepted banking practices. The amendment of banking Regulation act in 1993 saw the entry of new private sector banks. ING Vysya bank has always been committed to making a positive contribution to Society. Promoting education for under-served children is one such cause which has been very close to the bank. Through the ING Vysya Foundation, it seeks to provide less advantaged children an opportunity to secure a better future by providing them with education. Born out of three business entities of ING in India, ING Vysya Bank, ING Life Insurance, and ING Investment Management, the Foundation has been able to strike the right balance between supporting organizations financially and contributing time and effort of the employees to nurture and mentor these children, for a better future. ING Vysya Foundation commenced its activities in December 2004 with a water-harvesting project in the Udaipur and Rajasmand districts of Rajasthan, North India. The initiative provided

villagers with access to clean water and recharged ground-water wells which in turn support the local agricultural industry. The Foundation has also been actively involved in relief efforts following the Tsunami that hit the South Indian coast on 26 December 2004. In cooperation with the regional headquarters of ING at Hong Kong, ING Vysya Foundation supported a number of projects, including the rebuilding of homes and schools, and other facilities for a number of villages. Another project included the micro-financing for 40 fishing boats and the attendant equipment for the villages of Mudaliyarkuppam and Arcotuthurai, in Tamilnadu. As part of the ING Chances for Children programme, the Foundation signed a five-year agreement to support 100 orphans' living and schooling expenses. Additional funds, set up enabled of a day-care centre with training facilities which is used by the community at large. Other initiatives include ING Investment Management's auctions of paintings drawn by street children for the NGO Pratham and ING Vysya Bank's 'Run Ricky Run' in which the bank sent a child back to school for each run the Australian cricket captain Ricky Ponting scored in international one-day matches during a one-year period ending September 2008. Today, Foundation partners with thirteen local charity organizations in India. It helps children to be in the primary schools to realize their right to education as the first step towards breaking the cycle of poverty.

Banking segment in India functions under the umbrella of Reserve Bank of India the regulatory, central bank. The different types of Bank are:

Commercial bank Industrial bank Foreign exchange bank Co-operative bank Agricultural bank Land and development bank
Saving bank

1B.2 COMMERCIAL BANKS

The commercial banking structure in India consists of:

Scheduled Commercial Banks

It constitutes those banks that have been included in the Second Schedule of Reserve Bank of India (RBI) Act, 1934. RBI in turn includes only those banks in this Schedule that satisfy the criteria laid down vide section 42 (60 of the Act. Some co-operative banks are scheduled commercial banks albeit not all co-operative banks are. Being a part of the second schedule confers some benefits to the bank in terms of access to accommodation by RBI during the times of liquidity constraints. At the same time, however, this status also subjects the bank certain conditions and obligation towards the reserve regulations of RBI during the times of liquidity constraints. At the same time, however, this status also subjects the bank certain conditions and obligation towards the reserve regulation of RBI. This sub sector can broadly be classified into:

Public sector

Private sector

Foreign Banks

Unscheduled commercial Banks

Unscheduled banks are those joint stock banks, which are not included in the second scheduled of the RBI Act on account of the failure to comply with the minimum requirements for being scheduled. As on 30th June 1997, there were only 3 non scheduled commercial banks

operating in the country with a total of 9 branches.

1B.3 FUNCTIONS OF COMMERCIAL BANKS

There are two functions namely primary and secondary function: Primary function includes acceptance of deposits, advancing of loans. Secondary function includes agency function General, utility services.

PRIMARY FUNCTIONS Acceptance of deposits Banks accept deposits from the public. People keep deposit of money for safety, interest, easy to transfer cheques. It is the business of the banker to accept deposits so that he can lend it to others and earn interest. Depending upon the liquidity position of the market and the size of deposit, the earning can vary and if the size of the deposit is big enough, it is advisable to shop around and get the best rate. Receiving deposits is one of the primary functions of a bank. It is through deposits that the banks receive founds for their loan operations. So they accept following types of deposit. Current Account Deposits These deposits constitute major portion of banks circulating medium of exchange. Normally business people keep money in his accounts as they can withdraw and issues cheques any number of times. Banks does not pay any interest for these deposits. Saving Bank Account Deposits

People with steady and monthly income save their excess earning through this account. There are certain restrictions in the withdrawals. Bank pays interest at a nominal rate. Small savings are encouraged in this account.

 Fixed Deposit Account

Money is accepted foe a fixed period it cannot be withdrawn before expiry of fixed period. The interest rate is higher than other accounts. The longer the period is the rate of interest.

Lending Money

Lending money is one of the two major activities of any Bank.

Banks accept from public for

safekeeping and pay interest to them. They then lend this money to earn interest on this money. The difference between the rates at which the interest is paid on deposits is charged on loans. Banks lend money in various forms and they lend for practically every activity. Let us first look at the lending activity from the point of view of security. Loans are given against or in exchange of the ownership (physical or constructive) of type of tangible items. Banks grand loans and advances to businessmen, firms and companies for their commercial operation. By doing so they are said activity participate in the other development of industry, trade, commerce and other business activities. The different types of Bank advances are: Loans

A loan is a lump sum advance given to a borrower under a loan agreement a specified sum of money is given to a person or a firm against some collateral. This may be given either in cash or by way of transfer to his current accounts. When a loan account is granted to a customer, the bank opens a separate loan account in the name of the customer and the entire loan amount is debited with it. If the amount is paid in cash the cash account is credited. Interest is charged on the entire amount of the loan sanctioned.

Loan can be classified as, term loans, consumer loans etc. When a loan is granted for a period exceeding one year it is called term loan. Consumer loans are personal loans made to customers to purchase durable consumer articles like radio, TV, etc. Overdraft

Overdraft is the most popular and convenient method of lending in India. This is a facility extended to respectable and reliable customers who are current account holders. Under this agreement, customers are permitted to overdraw their existing current account up to a specified limit and for an agreed period. Here a customer can withdraw money over and above what is standing to his current account. On the expiry of the agreed period the customer has to clear the overdraft. Interest is payable only on the amount actually overdraw during a particular period. Cash Credit

A Cash Credit is an agreement by which a customer is permitted to borrow money up to an agreed limit against a bond of credit executed by one or more severities certain other specified securities. At the time of providing cash credit a new Cash Credit account in the name of the customer and permits him to withdraw money up to a specified limit. The borrower is also permitted to deposit his surplus amount in to the cash credit account Discounting of Bills

Discounting of Bill of Exchange receivable by customer is one of the modes of lending by Banks. After talking a bill from a customer bank advances the present value of the bill. When the bill matured, the bank presents the bill before the accepter and receives the full amount of the bill. From the face value of the bill, bank deducts the discount charge and only balance is paid to the customer.

SECONDARY FUNCTIONS Agency function

Transfer of Funds Banks help customers in transferring of funds from one place to the other through drafts and other instruments, collect cheques, bills, salaries, pensions, dividends, and rents on behalf of customers form other agencies. Undertake the payments of subscription, insurance, premiums, rents, etc. Undertake to buy and sell securities, acts as representative for customers in other banks or financial institutions, acts as a trustee, execute and administrator to manage trust. Carry out deceased customers desire, signs, transfer forms and documents. Banks give advice to customers on income tax matters.

General Utility Service

The banks will safe keep valuables and documents. It collects credit information regarding customers, transfer of foreign exchange, providing advisory services to industry, commerce, trade, project, prospectus, order writing the issue of shares and debentures of companies.

2. COMPANY PROFILE 2.1 THE ORIGIN OF ING VYSYA BANK The Origin of Vysya Bank
The origin of the erstwhile Vysya Bank was pretty humble. It was in the year 1930 that a team of visionaries came together to found a bank that would extend a helping hand to those who weren't privileged enough to enjoy banking services. Its been a long journey since then and the Bank has grown in size and stature to encompass every area of present-day banking activity and has carved a distinct identity of being India's Premier Private Sector Bank.

In 1980, the Bank completed fifty years of service to the nation and post 1985; the Bank made rapid strides to reach the coveted position of being the number one private sector bank. In 1990, the bank completed its Diamond Jubilee year. At the Diamond Jubilee Celebrations, the then Finance Minister Prof. Madhu Dandavate, had termed the performance of the bank Stupendous. The bank rededicates to the service of the nation, on this momentous occasion. The long journey of over seventy-five years has had several milestones, a few of which may be observed from the following table:

Milestones of the Bank over the long years of its services

The long journey of over seventy-two years has had several milestones, a few of which may be observed from the following table:

Table No. 2.1 showing the Milestones of VYSYA Bank 1930 1948 1985 1987 1988 1990 1992 1993 1996 1998 2000 2001 2002 2002 2002 2003 2004 2005 2006 Set up in Bangalore Scheduled Bank Largest Private Sector Bank The Vysya Bank Leasing Ltd. Commenced Pioneered the concept of Co branding of Credit Cards Promoted Vysya Bank Housing Finance Ltd. Deposits cross Rs.1000 crores Number of Branches crossed 300 Signs Strategic Alliance with BBL., Belgium. Two National Awards by Gem & Jewellery Export Promotion Council for excellent performance in Export Promotion Cash Management Services, & commissioning of VSAT. Golden Peacock Award - for the best HR Practices by Institute of Directors. Rated as Best Domestic Bank in India by Global Finance (International Financial Journal - June 1998) State -of - the -art Date Centre at ITPL, Bangalore. RBI clears setting up of ING Vysya Life Insurance Company ING-Vysya commenced life insurance business. The Bank launched a range of products & services like the Vys Vyapar Plus, the range of loan schemes for traders, ATM services, Smartserv, personal assistant service, Save & Secure, an account that provides accident hospitalization and insurance cover, Sambandh, the International Debit Card and the mi-b@nk net banking service. ING takes over the Management of the Bank from October 7th , 2002 RBI clears the new name of the Bank as ING Vysya Bank Ltd, vide their letter of 17.12.02 Introduced customer friendly products like Orange Savings, Orange Current and Protected Home Loans Introduced Protected Home Loans - a housing loan product Introduced Solo - My Own Account for youth and Customer Service Line Phone Banking Service Bank has networked all the branches to facilitate AAA transactions i.e. Anywhere, Anytime & Anyhow Banking

Performance over the decades

In terms of pure numbers, the performance over the decades can better be appreciated from the following table:

TABLE No. 2.2 showing Performance of the Vysya Bank Year 1940 1950 1960 1970 1980 1990 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Networth 0.001 1.40 1.60 3.00 11.50 162.10 5900.00 6527.00 6863.24 7067.90 7473.20 7094.00 10196.70 11101.90 14260.00 15940.00 2223.00 Deposits 0.400 5.30 20.10 91.50 1414.30 8509.40 74240.00 81411.10 80680.00 91870.00 104780.00 125693.10 133352.50 154185.70 204980.00 248900.00 258650.00 Advances 0.400 3.80 13.50 62.80 813.70 4584.80 39380.00 43163.10 44180.00 56120.00 69367.30 90805.90 102315.20 119761.70 146500.00 167510.00 185070.00 Profits Outlets 0.001 0.09 0.13 0.74 1.13 50.35 443.10 371.90 687.50 863.50 590.01 (381.80) 90.6 889.0 1569.00 1888.00 2422.00 4 16 19 39 228 319 481 484 483 456 523 536 562 626 677 857 866*

*Outlets comprises of 468 branches, 13 ECs, 28 Satellite Offices and 357 ATMs as of March 31st 2010. bank also has Internet Banking, Mobile Banking and Customer Service Line for Additionally the Phone Banking Service

The origin of ING Group

The ING group originated in 1990 from the merger between Nationale Nederlanden NV the largest Dutch Insurance Company and NMB Post Bank Groep NV. Combining roots and ambitions, the newly formed company called Internationale Nederlanden Group.

Profile
ING has gained recognition for its integrated approach of banking, insurance and asset management. Furthermore, the company differentiates itself from other financial service providers by successfully establishing life insurance companies in countries with emerging economies, such as Korea, Taiwan, Hungary, Poland, Mexico and Chile. Another specialization is ING Direct, an Internet and direct marketing concept with which ING is rapidly winning retail

market share in mature markets. Finally, ING distinguishes itself internationally as a provider of employee benefits, i.e. arrangements of non-wage benefits, such as pension plans for companies and their employees.

MISSION & VISION

ING`s mission is to be a leading, global, client-focused, innovative and low-cost provider of financial services through the distribution channels of the clients preference in markets where ING can create value. ING Vysya Bank was formed with the joining of Indias Vysya Bank Limited and the Dutch bank ING. The financial institution offers banking services throughout India for retail, corporate, commercial, treasurer management and rural purposes. In 2006, ING Vysya supplied wholesale loans worth USD 17.9 million to Indian Microfinance Institutions. It also offers microfinance loans directly to individuals and members of Self Help Groups, with loans outstanding of USD 5.8 million.

2.2 ING Vysya Bank

ING Vysya Bank Ltd. is an entity formed with the Vysya Bank Ltd., a premier bank in the Indian Private Sector and a global financial powerhouse, ING (International Nederlanden Group) of Dutch origin, in the year 2002.

The new identity

The immediate benefit to ING Vysya Bank Ltd is the pride of having become a member of global financial services giant, with an asset base of 866 billion euros (Rs.4849 thousand crores), operating net profit of 5.97 billion euros (Rs33.43 thousand crores) as of 31/12/04. Further, the presence of the group in over 57 countries, employing over 113000 people, serving over 60 million customers across the globe, only multiplies the credibility, not only across the country

but also across the globe. The pride of this global identity, the back up of a financial power house and the status of being the first Indian International bank, would also greatly enhance productivity, profitability resulting in improved performance for the bank to translate into higher returns, to all the stake holders.

Corporate Statement
Ing Vysya will be an Entrepreneurial Integrated Financial services Institution where Innovation and Transformation are the way of life.

Key Performance Highlights 2012 Net Profit up 44% to Rs. 1,195 million. Net Profit has grown consistently, with this being the ninth sequential quarterly growth; with over 100% compounded growth since March 2006. NIMs improved from 3.10% to 3.49%. Cost income ratio lowered from 61.4% to 57.2%. Operating profit up 33% to Rs. 2,113 million. Gross Advances up 22% to Rs. 267,518 million. CASA Ratio at 32.59%. Provision cover up from 76.41% to 84.98%. Net NPA improves from 0.64% to 0.31%. Gross NPA improves from 2.66% to 2.01%. Return on Assets improves from 0.88% to 1.13%. Capital Adequacy at 14.08% and Tier 1at 10.99%.

Staff
Ing Vsya has 4963 employees and 370 branches. ING Vysya Bank in collaboration with ING Vysya Life Insurance Company Pvt. Ltd. and ING Investment Management Pvt. Ltd. has successfully enhanced a sense of pride and internationalization of common core values among the employees. One of the measures was to introduce and implement the BrandintentTM with a

view to appropriately position the ING Vysya Brand in the market place and to ensure that the employees live the Brand. Realizing that, in order to be a good employer, there is a need to attract, retain, develop, excite and utilize talent, the employees are also subjected to several value building exercises like Team Building, Competency Development, Customer Sensitization, Best Practice, Adoption and Practicing Know Your Customer norms. The skills and efficiencies of the staff are sharpened with cutting edge tools like e-learning methodology, where an employee can take up the training modules at any time and anywhere at his convenience. A unique ING Vysya Learning Centre has been set up to replicate training modules as provided by ING Business School, Amsterdam, and other international bodies covering the ING Group in India. These initiatives will enhance the competencies of the employees to global standards. The Bank has an Ethics policy for its staff members and as a part of this; the Officer Employees have adopted the Code of Conduct. The bank also has a Sexual Harassment Policy in place.

Corporate Culture
ING Vysya enables the customer to build wealth by providing integrated financial services and speaking the customers language. The Bank functions under a strong set of shared values. Its corporate culture consists of personality and performance associations. The employees associate themselves with values of being trustworthy, professional, Entrepreneurial, approachable and caring. At the performance level, the Bank believes in providing customer driven products and services, providing clear value for money, having competent and committed people and being accessible and responsive.

2.3 ING Vysya Banks Deposit Scheme

The following two types of deposits are offered by ING Vysya Bank Access Plus Features: A single Current Account, with access from 8 cities in India Separate cheque books for each center for easy reconciliation

Pooling of funds in the city of Residence A cost effective product A perfect product for the trading community

Current Account Eligibility: Individuals for single account More than one individual for joint account Sole proprietary concerns Partnership concerns Private and Public Ltd. companies Clubs, associations, benevolent and friendly societies Cooperative organizations Statutory bodies, municipalities and such other Quasi- Government Institutions Executors and Administrators Trustees Agencies/ Power of Attorney holders

2.4 ING Vysya Small and Medium Enterprise products

The Bank offers the following types of loans to the SME sector: 1. VYS-RENT Scheme: The product envisages grant of Term Loans to the Lessors of the properties by discounting / securitising the lease rentals receivable from the Lessees of the property.

Eligible Borrowers: Individuals, Proprietorships, Partnerships, Public & Private Limited Companies, Trusts, Registered Bodies like Educational Institutions, Societies, Associations of Persons, owning properties. Eligible borrowers will need to be, preferably, identified by the Marketing Officers. Eligible Properties: Commercial properties located in Metros and Urban Areas with Unencumbered Clear and marketable title. Property should be suitably located for easy marketability. Purpose of the Loan: a) To provide funds for investment by promoters and their friends and relatives in enterprises by way of subordinated unsecured loans to strengthen their net working capital. b) For repayment of high cost borrowings. c) To meet gaps in working capital requirements due to unforeseen circumstances. d) For capital investment. e) Any other purpose acceptable to the bank, but not for any speculative purpose whatsoever.

Amount of the Loan: Loan amount will be calculated on the basis of Net Monthly Rent by deducting from the Gross Monthly Rent, the following:a) TDS at the prevailing rates and b) Actual expenses such as Taxes, Insurance, Maintenance etc. subject to a minimum of 5% of the rent. If the maintenance is to be done by the Lessee and so stipulated in the Lease Agreement, then no Maintenance charges will be deducted. Where the amount payable by tenant to landlord is split up into actual rent and amenities charges, both these amounts can be reckoned for the purpose of working out the eligible loan amount. Rents for a maximum period of 72 months will be discounted. If the lease terms involve payment of Advance Rent / Security deposit from the Lessee this amount will be reduced to arrive at the eligible loan amount. The minimum amount of loan will be Rs.25.00 lacs and maximum is Rs.500.00 lacs under the product. The loan amount will be arrived as per the tables of EMI, already available, based on the Net Monthly Rent, Rate of Interest and Period. Eg. For a net monthly rent of Rs.10.00 lacs for a period of 5 years at 13% p.a., the amount of loan will be Rs.435.00 lacs. Precaution will be taken to ensure that the rent agreed to be paid by the tenant is in tune with the current market rents. The marketing officer / Relationship Manager should ascertain by discreet enquiries the current rate pattern in the area where the property is situated, and if warranted, a suitable downward adjustment need to be made to the agreed rate. Period of Loan: Maximum period of 6 years. Processing Charges:

0.25% of loan amount subject to a maximum of Rs.1 lac. However, in exceptional cases, the SBU Head has the discretion to relax the processing fee upto 25% (i.e. upto a maximum of Rs.25,000 per case).

Loan Set up Charges: Nil

Rate of interest: The risk perception in rent discounting is different from that in case of conventional finance to Manufacturing / Trading / Service units. While in case of latter, the repayment depends on the estimated cash generation from the activity and the element of uncertainty is high, in case of Rent Discount, the income is reasonably certain and the loan is self-liquidating in nature. Also, for such finance, the profile of lessee is equally or rather more important than that of our client. Therefore, linked to the strength of the tenant, the following interest rates would be applicable. a) Banks / Insurance Companies, MNCs / PSUs 13.00% p.a.

b) Reputed companies listed in Stock Exchanges, whose shares are frequently quoted and traded. 13.50% p.a. c) Other Companies / Entities in existence and making profits for previous 3 years 14.00% p.a. In all the above cases 0.50% the Head of Commercial SBU may give concession. These rates will be applicable only for the new proposals. Existing accounts under Vys- Rent Scheme will continue to have the existing rates.

Repayment: a) Through Lease Rentals directly received by the bank, in the form of EMIs . Post Dated Cheques should be obtained from the Borrower (Lessor), which will be returned on receipt of relevant lease rentals. b) Rent received by the Bank in excess of EMI shall be credited to borrowers Current Account. He will have the option to choose lesser repayment period (or higher EMI) Prepayment:

No penalty is envisaged for the prepayment of the loan. However, if the loan is taken over by other lender, a penalty of 2% on the outstanding principal amount will be charged. Discretion to waive upto 1% is given to SBU Head, depending upon the relationship with the clients, and future prospects of getting relationship to the bank. Security: Charge over the leased property by way of Simple / Equitable Mortgage. Guarantee: 1) Personal Guarantee of partners of firms / promoter directors of the company. 2) Third party guarantee, if available, preferably of legal heirs in case of individuals. 2. VYSVYAPAR PLUS SCHEME

Scheme: It has been the desire of our bank to identify niche products (without, however, sacrificing prudential safeguards), which cater to segments that have remained unattended to, hitherto, due to various reasons. One such product identified is Secured Overdraft christened as Vysvyapar plus Scheme. The requirement for working capital shall be worked out as a % of the turnover and the emphasis shall be more on the scale of operation than on maintenance of stocks/Debtors.

Eligible Borrowers: The borrowers who are eligible for the above are 1) Individuals 2) Sole Proprietary concerns, 3) Partnership Firms and 4) Limited companies. Segments of business proposed to be covered: Jewellery Shops, Wholesale dealers, Retailers dealing with large number of small items, Rice Merchants, Contractors, Commission agents and Other Borrowers whose credentials are sound but whose business is characterized by a Preponderant share of cash transactions or trade advances. Nature of facility: Overdraft /Demand loan Amount of the Loan:

The maximum amount of loan under this category is restricted to Rs. 50 lakhs per borrower and to Rs.75 lakhs to a group of borrowers. The actual requirement is to be

worked out at a maximum of 20% the Turnover of the business unit with the NWC being a minimum of 5% of the Turnover. No proposal shall be entertained for a limit below Rs.

15 lacs under this category in Metro/urban areas and for less than Rs.10.00 lakhs in Semi-urban areas.

Rate of interest: The applicable rate of interest will be: PLR+ 2.00% p.a. to PLR+3.00% p.a. for Overdraft PLR+ 1.50% p.a to PLR+2.50% p.a for Demand loan

Security: a) The Borrower shall provide collateral security worth 150% of the limit sanctioned. b) The Collateral security may comprise of (I) Easily realizable securities like NSCs, LIC policies (Surrender value), Govt. bonds or (ii) House sites / House properties or commercial properties in Metro / urban areas (Agri lands and under Developed lands are not acceptable) c) The collateral security offered must be in the name of borrower/partners/directors/ or in the name of the borrowers family members only. d) Stocks & Debtors shall be hypothecated/assigned to the Bank as Primary security

3. VYS- VIDYALAYA Scheme: Education is one of the key drivers of social and economic development. The present era is witnessing a major change in the development of educational institutions. Recognizing the inadequacy of infrastructure in the field of higher education, the government opened up the investment in educational field to private sector and as a consequence there has

been a tremendous growth in the private sector managed institutions in Technical, Medical and Managerial fields. These fields have achieved some degree of maturity in growth and the focus has now shifted to the Educational Institutions at the Pre-University levels. Vysya Bank has been one of the active participants in the financing of Medical & Engineering Colleges and continues this strategy albeit on a selective basis to the aforementioned disciplines and also to capitalize on the opportunities arising from the new focus on good quality schools. SME & Emerging Corporate has introduced an exclusive loan product to cater the needs of Educational Institutions under the title VYSVIDYALAYA. Types of Facilities The Type of Facilities required by Educational Institutions areFund Based Term Loan Short Term Loans To Meet Mismatches

Non-Fund Based Bank Guarantees Letter Of Credit

4. VYS-RICE MILLS Scheme: A portfolio / product approach will facilitate quick asset growth in an area familiar to the Bank where experience is satisfactory. The scheme to finance Rice Mills envisages simple assessment, liberal TOL / TNW and easy repayment terms. Eligibility:

Individuals, HUF, Sole Proprietorship, Partnership, Associations and Societies, Limited Companies. Coverage for existing as well as new customers.

Nature of facilities: 1. 2. Term loan Working Capital limit i) ODSIT and Book debts ii) Bill purchase / discounting iii) Produce loans

v) Loan against WHR 2. Non-fund based limit: LC and BGs 5. BUSINESS LOANS TRADE Scheme: This product aims at retaining the small value credits presently with SME and for acquisition of this potential segment across the branch network. Launching of this product is to provide necessary Working Capital and Term loans / Composite loans to the Small and Medium Enterprises engaged in Trading, Small Businesses and Service activities with simplified procedures / processes / appraisal and concessional pricing. The product does not cover manufacturing activities including SSI units. The maximum exposure is proposed to be capped at Rs.25 lakhs per borrower.

The key factors considered for the credit decision will be Track Record of their business, Acceptable level of trade activity & its consistency, Market reputation of the borrower, Past banking transactions, Adequate securities for the proposed exposure

Eligible borrowers: Necessarily, shall consider ING Vysya Bank as their Sole Bankers Individuals Self Employed Persons, Women Entrepreneurs, Agri-businessmen, etc. Proprietorship concerns / Partnership concerns HUF, Limited Companies.

Eligible Activities: Retail Traders and Small Business Professionals including Practicing Doctors / Advocates / Consultancy Units / Travel Agencies/Advertising and Publicity agencies etc., Wholesale Distributors & Dealers / Stockists, Commission Agents Jewellery Shops, Nursing Homes Contractors Transport Operators [only for working capital] Other thriving commercial activities characterized by major share of cash transactions.

Purpose of the Loan: Make sure that the purpose of the loan is strictly for business purposes for working capital or acquiring assets to be used for business activity. Under no circumstances personal loans of any kind should be considered under this scheme.

Nature of Facilities: Fund Based Limits i. ii. iii. Secured Overdraft limits (SOD) Term Loans Composite Loans covering both Working Capitals as well Term Loan

Existing Overdraft Accounts may also be considered for conversion as Term Loans as per convenience & mutual understanding.

Non-Fund Based Limits i. Bank Guarantees favoring Govt./ Quasi Govt. bodies, Public Sector Undertakings Performance as well as Financial Guarantees. Guarantees to be issued in approved BG formats only. ii. LCs are not to be covered under this product unless it is backed by 100% margin by way of deposits. Security: (a) Primary: Hypothecation of the Stocks / Book Debts / Assets financed (b) Collateral: i. Equitable Mortgage of the Immovable Landed Properties, (other than Agricultural Properties), situated in Metro / Urban / Semi Urban areas, in such a way that 125% of the limits sanctioned is covered. Market value of the properties as determined by the banks approved valuer. Clear Title by the property owner / mortgagor should be established by legal opinion as prescribed. Simple Mortgage is not necessary under this product, if valid equitable mortgage can be created. ii. Easily realizable securities like creation of the lien on Deposits of our bank, NSCs which have come out of the lock-in-period (Paid up Value + Accrued Interest only should be considered), Assigning the Life Insurance Policies (Surrender Value)& Government Securities. These should cover 100% of the credit exposure. iii. A combination of the above ( i ) or / and ( ii ) by parts, ensuring the overall security coverage proportionately. iv. The deposits kept as the margin money for Bank Guarantees can be considered towards the part of Collateral Security as stipulated above.

Rates Of Interest:

Minimum
PLR + 0.25% pa 1. SOD LIMITS 2. Term Loans 3.Composite Loans PLR + 0.5 % pa

PLR + 0.5 % pa

2.5 ING Vysya Bank NRI Services

The Bank offers the following products to the NRIs: Deposit Products Non Resident External Rupee Account (NRE) Foreign Currency Non-Residency (Banks) Account (FCNR (B)) Non- Resident Ordinary Account (NRO) Resident Foreign Currency Account (RFC)

Loan Products Loan against Deposits

AREA OF OPERATIONS Keeping in tune with the financial sectors need for austerity, Operations began the year with a focus on items which would give it a competitive edge cost, quality, time and flexibility, without compromising on operational efficiency. Reaching standards of 99.14% TAT adherence, successfully moving to an online platform for wealth management customers, migrating the treasury operations into a new software to ensure seamless processing, switching over NEFT/RTGS transactions to an improved version to make it more stable and efficient are some milestones, amongst others worth a mention. The Cash Management Services (CMS) customers have a new product ING PAY, a corporate payment sanguine, which would help them make their payments electronically or otherwise, by just handing over a debit mandate to the Bank with beneficiary and other details. Business continuity plans have been put in place and tested to ensure least disruption to customer services. Due emphasis was put on quality controls and projects undertaken to make processes leaner for faster delivery to customers. The efforts were duly acknowledged by Credit Information Bureau (India) Limited (CIBIL) as being the first Bank to submit the data with 99.5% success and by the Regulators as the first Bank to have submitted Basic Statistical Returns I & II. Operations will continue its drive in the coming year to provide consistent, uninterrupted, timely and effective service to its customers.

OWNERSHIP PATTERN
The Shareholding Pattern page of ING Vysya Bank Ltd. presents the Promoter's holding, FII's holding, DII's Holding, and Share holding by general public etc.

Shareholding pattern - ING Vysya Bank Ltd. Holder's Name Other Companies Foreign Promoter Foreign Institutions N Banks Mutual Funds General Public Foreign NRI Others Financial Institutions Foreign Industries No of Shares 9617365 65704254 37852894 18498425 13129485 2659486 1836146 712638 1000 % Share Holding 6.41% 43.80% 25.23% 12.33% 8.75% 1.77% 1.22% 0.48% 0.00%

Competitors information
Company Axis Bank Ltd. ICICI Bank Ltd. Jammu & Kashmir Bank Ltd. Kotak Mahindra Bank Ltd. HDFC Bank Ltd. Federal Bank Ltd. Karur Vysya Bank Ltd. YES Bank Ltd. IndusInd Bank Ltd. Karnataka Bank Ltd. Lakshmi Vilas Bank Ltd. Dhanalakshmi Bank Ltd. Current Price 1,170.55 910.80 862.25 551.20 530.50 406.10 378.95 349.35 304.05 101.35 90.50 73.75 Book Value 460.22 477.92 717.58 92.39 108.38 298.34 198.47 107.74 81.67 129.01 83.23 99.21 28.09 P/E Ratio 14.26 20.38 6.79 49.84 31.64 11.83 9.77 16.94 24.62 9.33 8.73 24.09 44.87 Market Cap (Rs. Cr.) 48,328.95 104,991.49 4,180.00 40,775.86 124,241.17 6,946.24 4,061.60 12,320.17 14,216.56 1,908.33 882.61 627.88 961.47

Development Credit Bank Ltd. 48.00

City Union Bank Ltd. South Indian Bank Ltd.

46.05 25.95

24.72 14.96

8.72 10.06

1,875.87 2,942.08

INFRASTRUCTUAL FACILITIES
BRANCH BANKING This year the Bank primarily focused on consolidating the expansion of 2008-09 and setup 27 new branches (including conversion of 19 Extension Counters to branches) across India. As a result the number of branches (excluding RCCs and ARMBs) increased from 441 to468. The Bank added six ATMs during the year, taking the total to 357 ATMs as of March2010. The Banks focus on semi-urban and under-banked markets continued with 37% of the branches outside the top 15 cities of India. The Savings Bank deposits during the year grew by 28%; this was a result of our distribution, differential sales model and customer segmentation. The Bank continued to provide unique products and services by providing customers an easier Banking experience, transparency and control as the key pillars. To ensure this the Bank product program approval process certifies that the new products are suitable to meet the customer needs and meets the standards of the key pillars. Internally, employees were trained on how to provide seamless, easier Banking experience to our customers. The Banks Platina Preferred Banking, Aspira Salary Solutions and Orange Banking services were segmented to address the diverse needs of different customer segments in the Retail Banking space, with specifically trained personnel and products. Keeping in mind the demands of the modern customers and their need for flexibility the Bank continued to invest in upgrading the key processes and products. The primary objectives of the several re-engineering projects were to reduce wait time and provide greater control to the customer. Some of the highlights were upgrade of mobile banking allowing customers to order cheques or book term deposits, allowing customers to access their wealth portfolio online and transact on mutual funds, single view statement of relationships held across branches and

products, automatic cheque re-order, instant replacement of lost PINs and instant replacement of debit cards at our branches. SMS update channel has emerged as a convenient option for the Banks customers, allowing them to keep themselves updated on the transactions in their account with 9.35 Lakh customers having signed up for this service. The internet banking usage also rose with user base increasing by 37% to 2 Lakh users. The Phone Banking centre expanded to cater to the needs of the growing customer base 24x7. Another initiative this year was to reduce consumption of paper with sign-up of e-Statements. The Bank was successful in encouraging a significant number of customers to sign-up for this service. The debit cards base increased by 3 lakh customers this year which translated to increased usage at our ATMs, providing greater convenience to customers and reducing servicing costs. The Bank also doubled the number of customers opting to use their debit cards at point-of-purchase through a series of targeted, sustained education campaigns and contests, resulting in a 30% increase in usage of debit cards for shopping. Platina Wealth Management Services witnessed a growth of 33% in the customer base, 34%growth in Assets under Management and doubling the income from cross-selling of third party products. This was a result of the personalized services offered through a dedicated Wealth Manager, backed by research, product team, support staff and a seamless online interface. The Credit Cards program has been revamped to offer more products and . The Bank is also partnering with the Government to offer Biometric cards to beneficiaries of the National Rural Employment Guarantee (NREG) and Social Security Pension Scheme (SSP) programs. The Bank has enrolled over 91,000 customers and has disbursed over Rs. 21 Crore of wages. The Bank participated and promoted the awareness of the Earth Hour as a social initiative by requesting support from employees, customers, service providers and the local Bangalore Community. The Bank launched a 360 degree advertising campaign to highlight the easier features embedded in its products and services. The advertisement aimed to reinforce the unique positioning of the Bank of having the benefit of strong Indian lineage resulting in personal service and backed by the experience of a global player, thus allowing the Bank to offer international products. The

series of three advertisements featured the benefits of auto-cheque reorder, instant debit cards replacement and mobile banking. helped increase the brand awareness and intention to purchase a product from ING Vysya Bank. The campaign was supported by a set of activities on other medium ,noteworthy being the launching of the advertisements on YouTube, which received over 3Lakh impressions and Meru Cab road shows in Delhi and Hyderabad. The campaign has won critical acclaim for the use of creative insight and media

Quality Management Team

MD & CEO Shailendra Bhandari
Experience in ING : 2 Years Former Managing Director and CEO of Centurion Bank of Punjab form 2004 until 2008

Seasoned banker with 27 years of experience Chief Corporate Audit Group Company Secretary

Country Head Retail Banking (Uday Sareen) Experience in ING: 4 Years

Country Head Private Banking (Samir Bimal) Experience in ING: 5 Years

Country Head Wholesale Banking (Janak Desai) Experience in ING: 6 Years

Head Operations (Meenakshi A) Experience in ING: 3 Years

Chief HR (J M Prasad)

Chief Financial Officer (Jayant Mehrotra) Experience in ING: 5 Years

Chief of Staff (Ashok Rao)

Chief Risk Officer (Jan Van Wellen) Experience in ING: 3Years

Chief Audit Executive (MSR Manjunatha) Experience in ING : 3Years

Experience in ING: 7 Years

Experience in ING: 9Years

13 years of prior Experience in Retail Banking at Citibank Worked across Geographies, Markets and Products

Worked for BNP Paribas India and Lazard India and carries a rich experience of 15 years both in India and the Middle East

Worked at ABN AMRO, Standard Character. Core team member at IDBI responsible for banks strategy & repositioning.

Worked at ICICI Bank Limited., Over 3 decades of experience in the Banking business

Over 15 years of experience in Human Resources in Financial Services and software Industry

Over 2 decades of experience across various industries and geographies Core team member at IDBI responsible for various strategic initiatives.

Over 2 decades of experience in banking Worked in various senior positions in Audit and Finance in India and overseas

More than two decades of experience in Banking across BBL and ING Worked across geographies in Credit and Risk function

Previously was working as an advisor to the Managing Director of PT Bank Indomonex, Jak arta, Indoneasia.

Business Strategy - Grow ahead of market with better asset quality

Focused growth engines
Asset Retail : Focus on growth in individual mortgages, Small and Medium Enterprises (SME) ; Explore Opportunities of launching secured retail lending products. Wholesale : Leverage ING Global relationships to service domestic clients, deepen relations with Large Indian corporates and greater support and co-ordination with international Clients Group. Grow the share of Emerging Corporates (EC) in the local balance sheet.

Grow and leverage the distribution franchise

Retail : Current branch distribution concentrated 68% in southern states which accounts for only 24% business of the Indian Banking business. Grow distribution in northern and western parts of the country, while consolidating in the South. Derive value from investments made in branch expansion and increase penetration within existing network Cater to high growth wealth management advisory business Wholesale: Leverage network to grow transaction banking platform to meet client needs. Improve the systems within EC business.

Increase low cost liabilities and better margin products

Retail : Deepen customer relationships with products aligned to target segments including a strategic push on current account of the business banking customer. Focus on operating account for corporate/salaried segment Wholesale: Increase the share of EC in local balance sheet. Increase penetration of fees products such as DCM, PCM, FM and CF Selectively look at structured financing

Enhance operating efficiency

Retail: Increase overall profitability both from legacy network and growing footprint. Continuous improvement in technology platform for cost efficient and customer centric model Increase per branch productivity closer to best in class Wholesale: Increase the share of customer wallet through new product introductions and deepen existing relationships.

Reposition as ING in select markets

To position as bank of choice to chosen customer segments Migrate global best practices and knowledge Continue investment in the brand as we expand footprint outside South India

3. DESIGN OF THE STUDY

3.1 TITLE OF THE PROJECT

A detailed study of Bank financing to the Small and Medium Enterprise sector and a critical analysis to evaluate the performance of Business Loans For Trade (BLT) portfolio at ING Vysya Bank Ltd.

3.2 STATEMENT OF THE PROBLEM

The current study was conducted to get a detailed overview of the Small and Medium Enterprise sector and find out the problems faced by this sector in obtaining loans from the Bank. The critical analysis was conducted to evaluate the growth or decline in the performance of the BLT portfolio.

3.3 OBJECTIVES OF THE STUDY

To study the Small and Medium Enterprise sector and analyze the problems faced by this sector in obtaining loans from banks. To analyze the performance of the Business Loans for Trade (BLT) portfolio. BLT is an SME product offered by ING Vysya Bank. To analyze the profitability, loan recovery percentage and application analysis of the BLT portfolio on a quarterly basis.

3.4 SCOPE OF THE STUDY

The study was conducted in the corporate office of ING Vysya Bank, Bangalore. The study was conduced by comparing the BLT portfolio review on a four-quarterly basis during the year 20042005.

3.5 METHODOLOGY

Type of research: The type of research was Observation, Interview and Analysis. Sample Size: Sample design includes four BLT portfolio reviews and the annual report of ING Vysya Bank. Data Collection: The data collection included both the primary as well as secondary data.

Primary Data: primary data was collected through information available at ING Vysya Bank.

Secondary Data: secondary data was collected through Newspapers, Internet and textbooks of reputed authors. Method of analysis: A logical and critical method of analysis was developed for the

study. Analysis was done by one to one comparison of the various factors available in the BLT portfolio review on a quarterly basis. The data collected has been presented in the form of

tables and graphs. The methods of analysis used are: 1. 2. 3. Profitability Analysis Application analysis Loan recovery Analysis.

3.6 LIMITATIONS OF THE STUDY

The study conducted at ING Vysya Bank and consequent data collected may have some hidden biases and prejudices which may in turn affect the study A clear picture of performance comparison may not be available as the study limits to only some facilities of the company Time is one of the constraints Confidentiality is also a limitation

4. ANALYSIS AND INTERPRETATION 4.1 Definition and Importance of the SME sector:
In India, the Small and Medium Enterprises (SMEs) play a very significant role in terms of balanced and sustainable growth; employment generation development of entrepreneurial skills and contribution to export earnings However SME is not defined in India. The present definition covers only SSI Trade and Service sectors are not defined. Parameters for definition (like turnover / investment / activity / no. Of employees also need to be defined. The draft of SME legislation, which is placed before the Parliament attempts to define the sector. However, till it is passed, the current definition on SSIs will hold. Other sectors like Trade and Service will have no official standing. Size: Table No. 4.1 showing the size of SME sector Regd. SSI Sector Size of the Sector 13,74,974 No. of SSIs 9,01,291 (65.55%) No. of SSSBEs (Scheme 4,73,683 for Small Scale Business (34.45%) Enterprises) No. of tiny units among 8,82,496 SSIs (99.9%)

Characteristics

Unregd. Sector Total SSI Sector 91,46,216 1,05,21,190 35,44,577 44,45,868 (38.75%) (42.26%) 56,01,639 60,75,322 (61.25%) (57.74%) 35,43,091 (97.9%) 44,25,587 (99.5%)

Table No. 4.2 showing the ownership of SME sector Regd.SSI Sector Unregd. Total Ownership Sector Sector Proprietrary Partnership Pvt. Company Cooperatives 12,21,702 (88.85%) 99,190 (7.21%) 33,284 (2.42%) 4,715 (0.34%) 88,82,548 (96.9%) 1,03,662 (1.13%) 38,153 (0.42%) 9,854 (0.11%)

SSI

1,00,84,250 (95.8%) 2,02,852 (1.9%) 71,437 (0.68%) 14,569 (0.14%)

Others

16,083 (1.17%)

1,31,999 (1.44%)

1,48,082 (1.41%)

Table No.4.3 showing other details of SME Sector Other Details Total SSI Regd.SSI Unregd. Sector Sector. Sector No. of stick units as per RBI Criteria Total Employment Per unit Employment Total fixed investment ( in Rs. Crores) Total Gross Output (in Rs. Lakhs) No. of exporting Unit Value of exports (in Rs. Lakhs) No. Of products/services as per ASICC Produced/rendered in SSI sector. 38,403 (19.6%) 61,63,479 4.48 0.92 2,03,25,462 7,344 12,30,826 5,983 46,887 (16.61%) 1,87,69,284 2.05 0.63 79,01,536 43,262 1,89,130 2,680 85,290 (17.8%) 2,49,32,763 2.37 1.54 2,82,26,998 50,606 14,19,956 6,003

Statistics as per 3rd Census-2002 [Source SSI Annual report 2004-05] The situation in other countries (selected) is given below: Table No. 4.4 showing situation of SME s in other countries Bulgaria 2 lac enterprises 99.10% of all businesses UAE 94.30% of all businesses In Dubal 70% of all business enterprises are SMEs 95% of all business enterprises are SMEs 98% of all business are SMEs 60% of all industrial production and 75% of people employed

3 4 5

Singapore Canada China

Business model of SMEs:

The SME units are in general characterized by the following: Mostly one man shows - majorities of the business are proprietorships with a tiny number of partnerships. There are very few joint stock companies.

4.2 SME/SSI Financing:

SMEs are major contributors to GDP, and an even larger contributor to exports and employment. Given this background, banks will find SME financing an attractive business opportunity rather than a compulsion, of lending to the priority sector. SIDBI and banks jointly have to play a pivotal and proactive role in financing the SMEs. The present slow down in lending to the SME sector is principally due to the risk aversion arising out of a high proportion of the lending becoming non- performing. This calls for reassessment of the strategy of lending to this sector and this reassessment has led to three principle elements of strategy. (1) One is directed at those units, which have linkages with large corporate undertakings as vendors or suppliers. To these units, provision and flow of credit could be tied up with the large undertakings which would facilitate recovery but more important than finance our proposal is that the linkage will have to be strong enough to ensure a win approach for both. This could be achieved by technology transfer of the large undertakings to the small units accompanied by a greater oversight and the quality of the products delivered; (2) the second leg of our strategy is aimed at developing a set of standard products for units belonging to the same cluster of industries; (3) the third leg of strategy is to develop local financial intermediaries specifically aimed at financing units in the tiny and small sectors and more particularly to the former. These would be in the nature of the NBFCs but without any permission to accept deposits from the public. They would draw their resources from the banking system, by originating the loans and selling the same to the banks as a portfolio with appropriate arrangements for risk sharing. This, therefore, emphasizes the need for new vehicles and instruments viz. bank promoted (nondeposit taking) NBFCs, micro credit intermediaries dedicated to SME financing, etc. Such micro

credit intermediaries (funded by individual or a group of banks) would be able to credit-rate and risk assess and serve as instruments for extending quick credit to SME clusters, accredited to them.

Chart No. 4.1 showing Credit Process of the Bank

4.3 CHALLENGES BEFORE SMEs IN OBTAINING LOANS

1. Government policies controlled by various nodal agencies The SMEs, especially the SSIs, are still dependent heavily on the support provided by the Govts. - Central and State - in the form of various subsidies and exemptions. These subsidies and exemptions have a bearing on the viability of units themselves and are administered by various agencies like Sales Tax dept, Income Tax dept, NSIC, SIDBI, Customs, DGFT, etc. The problems faced by the promoters of these are: The units therefore have a multiplicity of agencies to deal with. The promoters often spend more time chasing these benefits than on running their businesses. Withdrawal or even undue delay in getting these subsidies Sometimes force the units to seek adhoc / excess drawings from their Bankers to tide over mismatches in cash flows and thereby drive up costs.

2. Access to borrowings- from Banks/Institutions-Insistence on Collaterals: The limit for collateral free loans to tiny sector was RS.5 lacs and that for other SSI units was Rs.l lac. This limit has since been raised to Rs.5 lacs for other SSI units also. Many small-scale entrepreneurs are facing difficulties in providing collateral security as per the requirements of the financing banks. The limit of 5 lacs has been further increased to Rs.15 lacs in respect of SSI units with good track record and financial position. The problem is addressed to a certain extent with the introduction of the Credit Guarantee Fund Trust Scheme under which collateral free loans up to a limit of RS.25 lacs are guaranteed. However, the problem continues to persist for units, which are not covered by any of the above. Sufferers are Small Scale Entrepreneurs with a good record but no collaterals to offer.

The high cost of borrowings was a major constraint affecting the growth of the sector. The reduction in Bank rate announced in the last Monetary and Credit Policy or outside the policy from time to time has resulted in a consequential reduction in the lending rates. Banks have now the flexibility to offer lending rates on a fixed rate or on a floating rate.

The reduction in interest rates and the offer of floating rates will help the SSI units to procure funds at lower costs than what was prevailing in earlier years.

3. Sickness in small-scale industry - assuming alarming proportions and affecting credit flow Growing incidence of sickness of SSIs is yet another area of concern. When the sickness prolongs it leads to the closure of units and unemployment. Lately mortality of the SSI units has been showing increasing trend. This has wider implications including locking of funds of the lending institutions, loss of scarce material resources and loss of employment. The number of sick SSI units as a percentage to the total number of SSI units is around 18%. The number of units identified as potentially viable as a percentage to total sick SSI units is around 8%. The causes of sickness are both internal and external. The major causes are Limited financial resources, Lack of organizational, financial and management skills and expertise. Diversion of funds, diversification/expansion before stabilization, Non-availability of power supply Shortage of raw materials, Considerable delay in settlement of dues/payment of bills by the large Scale buyers Lack of marketing skills Delayed and inadequate credit, Obsolete technology, inadequate infrastructure, etc.

There is State Level Inter Institutional Committees (SLIIC) constituted in each state involving State Government, Financial institutions, commercial banks and SIDBI with a view to ensuring that potentially viable sick SSI units are provided with the timely and adequate assistance by all agencies concerned. However the efficacy of these agencies in tackling sickness is yet to be proven. RBI has recently issued a complete set of revised guidelines drawn up on the basis of the recommendations of a Working Group and these

include provisions / schemes for onetime settlement of dues by SSI on the lines of the Corporate Debt Restructuring (CDR) scheme.

Though the Government has enacted the Delayed Payments Act, many of the SSI units are reluctant to pursue cases against major buyers. The Act, since amended in 1998, has made it compulsory that the payment of SSI suppliers should be made within 120 days. To improve the plight of SSI entrepreneurs due to delayed payments, steps for strengthening and popularizing factoring services, without recourse to the SSI suppliers may have to be thought of seriously.

The banks have also been advised about sub-allotting overall limits to the large borrowers specifically for meeting the payment obligations in respect of purchases from SSIs. It is expected that these measures will improve the situation of delayed payments.

3. Lack of marketing arrangements Marketing remains the most critical area for the SSI Sector, as some of the units are very small and so is there output individually. Adopting consortium approach could best solve the marketing problems of the SSI sector. Again Govt. agencies like Khadi and Villages Industries Board have done some pioneering work in getting craftsmen and tiny units under their umbrella and provide a viable and strong selling platform. The concept is however, yet to catch up. Trade Bodies and Associations need to step in this area and help their members. Besides finance for marketing related activities etc could make dissemination of requisite information on demand pattern, futuristic trend, etc. available.

4. Globalization and liberalization The Indian industry remained within an inward oriented policy framework up to the 19905. With globalization, liberalization, financial and real sector reforms, the country adopted an outward looking approach. At present, both the industrial sectors in general and SSI sector in particular are exposed to international competitive environment. However, India has evolved a sound institutional set up for financing of the SSI sector. New industrial policy was announced as part

of the structural reforms in 1991, which eliminated various controls on the industrial sector, provided a greater role for the private sector and encouraged inflow of foreign investment and technology. The policy also contained specific initiatives for the development of the SSI sector.

5. Lack of transparency with regard to sharing of information Information relating to credit appraisal done by the banks is kept confidential. It would be helpful if the banks inform the units the areas where their performance has fallen below the rating parameters and counsel the units to perform better and measure up.

6. Delay in loan sanction and disbursement While the banks should observe all prudent norms while evaluating the loan applications, the decision on the loan application should be taken in a time bound manner. Presently, the amount of paperwork and formalities required is a big impediment and as a first step the banks should address the issue. Once the applicant has filed all the required documents, the application should be reviewed and a stand taken within 4 weeks.

7. Inadequate publicity given to various schemes and facilities provided by Banks for SSIs Information on schemes like collateral-free and composite loan schemes is not available to majority of the SSI units as a result SSI entrepreneurs are not aware of such schemes and are unable to take advantage of the same.

8. Operational issues

The banks even on limits not sanctioned, as the same needs to be paid with the application, charge the processing fee. Some of the bank branches do not have the forex facility. This proves to be a major hindrance for the SSI exporters as they receive payments in foreign currency. In computing maximum permissible bank finance, banks give a lot of weight age to stocks. This methodology adversely affects those SSI units, which through efficient inventory management have reduced their stocks and have greater bills receivables on their books. The time taken for collection of cheques deposited for realization is inordinately long.

4.4 CHALLENGES FACED BY BANKS IN PROVIDING LOANS TO THE SME SECTOR

Competition among Banks 1. Dilution of credit norms Over a period of time the competition among Banks has increased as everyone sees reasonable returns to be had in this segment. We now find more Banks chasing a customer, especially if he has got a reasonably good track record and the balance sheet is good. This competition is especially severe in major cities. Even PSU Banks, which were seen as relatively conservative in credit appraisal, have now relaxed norms considerably. Financials, MPBF, etc which were cornerstones of Bank lending earlier, are now often ignored if sufficient collaterals are available, This has resulted in excess liquidity for the have, which are often diverted into unrelated areas, like stock markets and real estate.

2. Pampering units with a good track record We also see the phenomenon of Banks vying with each other in taking over each others accounts by 1) sanctioning more limits than those being enjoyed at present 2) dropping Rate of interest below the rate being charged by the present bank. This practice has become so rampant that borrowers have started playing one bank against another to the detriment of both.

3. Decline / elimination of concept of end use monitoring End use monitoring has gone out of fashion now as more and more banks are jumping onto the "no questions asked" bandwagon. Loans / overdrafts are sanctioned just as a % of the property value offered as mortgage. There are no strings like MPBF, monthly stock statements, drawing power and yearly review/renewal of accounts, attached.

Table No. 4.5 showing the Operating Profit for the quarter ended 30th June 2004
Particulars To Interest expended (Interest on deposits, Interest on RBI/Inter bank borrowings, othersincluding interest on Tier 2 Bonds and IRS) Profit & Loss account (Rupees in Crores) Amt. Particulars Amt. 163.07

By Interest Earned
Interest/Discount on advances/bills. Income on investments. Interest on balances with RBI and other Inter Bank Funds. Others 148.69 70.73 5.52

To operating expenses
Payments to and provisions for employees. Other operating expenses 40.34

21.17 50.93

43.96

By other Income

To Operating Profit

49.67

297.04 Total Note: Here Other Income includes: Commission, exchange and brokerage. Profit/ (Loss) on sale and revaluation of investments (Net). Profit/ (Loss) on sale of building and other assets (Net). Profit on exchange transactions (Net). Income earned by way of dividends etc. Lease income. Miscellaneous income (including bad debt recoveries). Interpretation:

Total

297.04

The above table shows that the Operating profit for the quarter ended June 2004 was 49.67 crores as the incomes exceeded the operating expenses.

Table No. 4.6 showing the Operating Loss for the quarter ended 30th September 2004
Profit & Loss Account Amt. 143.06 42.14 (Rupees in Crores) Particulars Amt. Interest/Discount on advances/bills. Income on investments. Interest on balances with RBI and other Inter Bank Funds. Others 154.27 67.24 5.47

Particulars

To Interest expended (Interest on deposits, Interest on RBI/Inter bank borrowings, othersincluding interest on Tier 2 Bonds and IRS)

By Interest Earned

To operating expenses
Payments to and provisions for employees. Other operating expenses

8.79 (45.74) (38.83)

43.66

By other Income By Operating Loss

Total 228.86

Total

228.86

Interpretation: The above table shows that there was an Operating Loss of 38.83 crores for the quarter ended 30th September 2004.

The expenses exceeded the incomes and thus there was a loss. There was a decrease in the value of the other incomes resulting in the operating loss.

Table No. 4.7 showing the Operating Loss for the quarter ended 30th December 2004
Profit & Loss Account Amt. Particulars 151.14 44.42 (Rupees in Crores) Amt. 167.07 57.35 3.36

Particulars To Interest expended (Interest on deposits, Interest on RBI/Inter bank borrowings, othersincluding interest on Tier 2 Bonds and IRS)

By Interest Earned
Interest/Discount on advances/bills. Income on investments. Interest on balances with RBI and other Inter Bank Funds. Others

To operating expenses
Payments to and provisions for employees. Other operating expenses

14.74 (47.26) (44.51)

49.71

By other Income By Operating Loss

Total 245.27

Total

245.27

Interpretation: The above table shows that there was an Operating Loss of 44.51 crores for the quarter ended 30th December 2004.

The expenses exceeded the incomes and thus there was a loss. There was a decrease in the value of the other incomes resulting in the operating loss.

Table No. 4.8 showing the Operating Profit for the quarter ended 30th March 2005
Profit & Loss Account Amt. Particulars 633.82 (Rupees in Crores) Amt. 646.78 258.65 25.84

Particulars To Interest expended (Interest on deposits, Interest on RBI/Inter bank borrowings, othersincluding interest on Tier 2 Bonds and IRS)

By Interest Earned
Interest/Discount on advances/bills. Income on investments. Interest on balances with RBI and other Inter Bank Funds. Others

To operating expenses
Payments to and provisions for employees. Other operating expenses 176.11

59.31 120.50

201.82

By other Income

To Operating Profit

99.33

Total

1111.08

Total

1111.08

Interpretation: The above table shows that the Operating profit for the quarter ended 30th March 2005 was 99.33 crores as the incomes exceeded the operating expenses.

Table No. 4.9 showing Operating Profit/Loss for the quarters ending June, September, December and March.
Period June 2004 September 2004 December 2004 March 2005 Operating Profit/Loss 49.67 (38.83) (47.26) 99.33

Chart No. 4.2 showing Operating Profit/Loss during the year 2004-2005
Operating Profit for the year 2004-2005
120 100 80
Operating Profit

60
Operating Loss

40 20 0 June Sept Dec March

Year 2004-2005

Interpretation: The above table and chart shows the operating profits/losses on a quarterly basis for the year ending 2004-2005. There was an operating loss in the month of September and December. The operating profit was the highest in the month of March.

Table No. 4.10 showing the Net Profit/Loss for the quarter ended 30th June 2004
Particulars Operating Profit Less: Other provisions and contingencies Less: Provision for taxation (Rupees in Crores) Amt 49.67 84.34 (14.63)

NET LOSS Interpretation:

(20.04)

Net Loss is the result that occurs when expenses exceed the income produced. The above table shows that there was a net loss of 20.04 crores for the quarter ended 30th June2004.

Table No. 4.11 showing the Net Profit/Loss for the quarter ended 30th September 2004
(Rupees in Crores) Particulars Operating Profit Less: Other provisions and contingencies Less: Provision for taxation Amt (38.83) 8.64 (18.27)

NET LOSS Interpretation:

(29.20)

Net Loss is the result that occurs when expenses exceed the income produced. The above table shows there was a net loss of 29.20 crores for the quarter ended 30th June 2004.

Table No. 4.12 showing the Net Profit/Loss for the quarter ended 30th December 2004
(Rupees in Crores) Particulars Operating Profit Less: Other provisions and contingencies Less: Provision for taxation Amt 44.51 -34.08 4.06

NET PROFIT Interpretation:

6.37

Net Profit is the result that occurs when incomes exceed the expenses produced. The above table shows there was a net profit of 6.37 crores for the quarter ended 30th December 2004.

Table No. 4.13 showing the Net Profit/Loss for the quarter ended 30th March 2005
(Rupees in Crores) Particulars Operating Profit Less: Other provisions and contingencies Less: Provision for taxation Amt 99.33 172.78 (35.27)

NET LOSS Interpretation:

(38.18)

Net Loss is the result that occurs when expenses exceed the income produced. The above table shows there was a net loss of 38.18 crores for the quarter ended 30th March2005.

Table No. 4.14 showing the Net Profits/Losses for the quarters ending June, September, December and March.
Period June 2004 September 2004 December 2004 March 2005 Operating Profit/Loss (20.04) (29.20) 6.37 (38.18)

Chart no. 4.3 showing Net Profit/Loss during the year 2004-200
Net Profits/Losses
45 40 35 30 25 20 15 10 5 0 June Sept Dec March Year2004-2005

Net loss Net profit

Interpretation: The above table and chart shows the Net profits/losses on a quarterly basis for the year ending 2004-2005. There was a net profit only in the month of December. All the other months suffered a net loss.

Table 4.15 showing the Number of Applications received for BLT Loans Overdraft
Period June 2004 September 2004 December 2004 March 2005 No. Of applications 920 897 1050 1358

Chart No. 4.4 showing the No. Of applications received for Overdraft
No. of applications received for Overdraft

1600 1400 1200 1000 800 600 400 200 0 June Sept Dec March

No. of applications

Year 2004-2005

Interpretation: The above table and column chart shows the number of applications that were received for the BLT loans over the four quarters for the year 2004-2005. 920 applications were received for the quarter ended June 2004 and there was a decrease by 2.5% in the applications received for the quarter ended September 2004. There after, the data shows a constant increase of applications received for the months of December and March. There was a 15 % increase for the quarter ended December 2004 and 23 % increase for the quarter ended March 2005

Table 4.16 showing the Number of Applications Approved for BLT Loans Overdraft
Period June 2004 September 2004 December 2004 March 2005 No. Of applications 708 748 840 1061

Chart No. 4.5 showing the No. Of applications approved for Overdraft
No. of applications approved for Overdraft
1200 1000 800 600 400 200 0 June Sept Dec March
No. of applications

Year 2004-2005

Interpretation: The above table and column chart show a constant increase in the no of applications approved. 708 applications were approved for the quarter ended 30th June 2004. There was a 5 % increase of the applications approved for the quarter ended 30th September 2004. There was an 11% increase of the applications approved for the quarter ended 30th December 2004 and a 20 % increase of the applications approved for the quarter ended 30th March 2005.

Table 4.17 showing the Number of Applications Rejected for BLT Loans Overdraft
Period June 2004 September 2004 December 2004 March 2005 No. Of applications 212 149 210 297

Chart No. 4.6 showing the No. Of applications rejected for Overdraft
No. of applications rejected for Overdraft
350 300 250 200 150 100 50 0 June Sept Dec March
No. of applications

Year 2004-2005

Interpretation The above table and chart shows the number of applications rejected for overdraft during the year 2004-2005. 297 applications were the highest no of that was rejected in the month of March. The least no of applications were rejected in the month of September.

Table 4.18 showing the Number of Applications received for BLT Loans Term Loans
Period June 2004 September 2004 December 2004 March 2005 No. Of applications 22 23 30 42

Chart No. 4.7 showing the No. Of applications received for Term Loans
No. of applications received for Term Loans

45 40 35 30 25 20 15 10 5 0 June Sept Year 2004-2005 Dec March

No. of applications

Interpretation:

The above table and chart shows the number of applications that were received as term loans during the year 2004-2005. 22 applications were received for the quarter ended 30th June 2004. There has been a continuous increase thereafter. There was a 5% increase in the no. of applications received in the month of September. There was an increase of 30% in the month of December and 40% in the month of March.

Table 4.19 showing the Number of Applications Approved for BLT Loans Term Loans
Period June 2004 September 2004 December 2004 March 2005 No. Of applications 18 20 25 29

Chart No. 4.8 showing the No. Of applications approved for TermLoans
No. of applications approved for Term Loans

35 30 25 20 15 10 5 0 June Sept Dec March

No. of applications

Year 2004-2005

Interpretation: The above table and column chart shows the number of applications approved as Term Loans for the BLT loans over four quarters for the year 2004-2005.The number of applications approved for the month of June was 18. There was an 11% increase in the month of September 2004, 25% increase in the month of December 2004 and 16% in the month of March 2005.

Table 4.20 showing the Number of Applications Rejected for BLT Loans

Term Loans
Period June 2004 September 2004 December 2004 March 2005 No. Of applications 4 3 5 13

Chart No. 4.9 showing the No. Of applications rejected for Term Loans

No. of applications rejected for Term Loan

14 12 10 8 6 4 2 0 June Sept Dec M arch June Sept Dec M arch

Year 2004-2005

InterpretationThe above table and chart shows the number of applications rejected for term loans during the year 2004-2005. 13 applications were the highest no of that was rejected in the month of September. The least no of applications were rejected in the month of June.

Table 4.21 showing the Amount of BLT Loans Classified under NPAs
(Rupees in lakhs)

Particulars

At the end of June 2004 0.23 0.00 0.00 0.23

At the end of Sept. 2004 0.00 0.00 0.00 0.00

At the end of Dec 2004 27.80 0.00 0.00 27.80

At the end of March 2005 0.27 0.00 0.00 0.27

Overdraft Term Loan Bills Purchase Total

Chart No. 4.10 showing the amt classified under NPA

Amt classified under NPA's
30 25 20 15 10 5 0 June Sept Dec March Year 2004-2005
Amt in lakhs

Interpretation: The above table and line chart shows the total amount of loans classified under NPAs during the year 2004-2005. The chart records the highest amount for the quarter ended December 2004, which was 27.80 lakhs. 0.23 and 0.27 lakhs were declared as NPAs inb the month of June and March. There was no amount classified as NPA in the month of September.

Calculation of Recovery percentage of BLT Loans at the end of June 2004

Overdraft: Amount of loan granted Balance outstanding 9366.84 5220.45 = 4146.39 4146.39 / 9366.84 * 100 = 44%

Term Loan: Amount of loan granted Balance outstanding 171.8 114.98 = 56.82 56.82 / 171.8 * 100 = 33%

Interpretation: The above calculation shows the recovery percentage of BLT loans for the month of June 2004. 44% of the loan amount was recovered under Overdraft. 33% of the loan amount was recovered under term loans.

Calculation of Recovery percentage of BLT Loans at the end of September 2004

Overdraft: Amount of loan granted Balance outstanding 10125.76 6468.73 = 3657.03 3657.03 / 10125.76 * 100 = 36%

Term Loan: Amount of loan granted Balance outstanding 197.60 122.88 = 74.72 74.72 / 197.60 * 100 = 38%

Interpretation: The above calculation shows the recovery percentage of BLT loans for the month of September 2004. 36% of the loan amount was recovered under Overdraft. 38% of the loan amount was recovered under term loans.

Calculation of Recovery percentage of BLT Loans at the end of December 2004

Overdraft: Amount of loan granted Balance outstanding 11317.16 7421.56 = 3895.6 3895.6 / 11317.16 * 100 = 34%

Term Loan: Amount of loan granted Balance outstanding 252.57 188.91 = 63.66 63.66 / 252.57 * 100 = 25%

Interpretation: The above calculation shows the recovery percentage of BLT loans for the month of December 2004. 34% of the loan amount was recovered under Overdraft. 25% of the loan amount was recovered under term loans.

Calculation of Recovery percentage of BLT Loans at the end of March 2005

Overdraft: Amount of loan granted Balance outstanding 20.811 14.413 = 6.398 6.398 / 20.811 * 100 = 31% Term Loan: Amount of loan granted Balance outstanding 8.919 7.177 = 1.742 1.742 / 8.919 * 100 = 20%

Interpretation: The above calculation shows the recovery percentage of BLT loans for the month of March 2005. 31% of the loan amount was recovered under Overdraft. 20% of the loan amount was recovered under term loans.

Table No. 4.22 showing the Loan Recovery Percentage Overdraft

Period June 2004 September 2004 December 2004 March 2005

% 44% 36% 34% 31%

Chart No. 4.11 showing the loan recovery percentage for Overdraft
Loan Recovery Percentage for Overdraft

50% 40% 30% 20% 10% 0% June Sept Dec March Year 2004-2005
%

Interpretation: The amount of loan recovered under overdraft over the past four quarters during the year 20042005 have decreased.

Table No. 4.23 showing the Loan Recovery Percentage Term Loans

Period June 2004 September 2004 December 2004 March 2005

% 33% 38% 25% 20%

Chart No. 4.12 showing the loan recovery percentage for Overdraft
Loan Recovery Percentage for Term Loans

40% 30% 20%

%

10% 0% June Sept Dec March Year 2004-2005

Interpretation: The amount of loan recovered under term loans show an increase between months of June and September. Then there is a significant decrease during the months of December and March.

FINDINGS
1. The various problems faced by the Small and Medium Enterprises are: Government policies controlled by various nodal agencies. Access to borrowings- from Banks/Institutions- Insistence on Collaterals. Sickness in the small-scale industry assuming alarming proportions and affecting credit flow. Lack of Marketing Arrangements. Globalization and Liberalization. Lack of transparency with regard to sharing of information. Delay in loan sanction and disbursement. Inadequate publicity given to various schemes and facilities provided by Banks for SSIs. Operational issues.

2. The various problems faced by the banks are: Dilution of credit norms. Pampering units with a good track record. Decline/elimination of concept of end use monitoring

The critical analysis helped to arrive at the findings given below:

3. The profitability analysis shows the following findings: The Operating Profit of the bank was 49.67 crores for the quarter ended June 2004. At the end of 30th September 2004, the Bank had an operating loss of 38.83 crores. This was because of decrease in the value of incomes and thereby the exceeding expenses. (As per Table No. 4.9 and Chart No. 4.2)

The bank continued to suffer an operating loss and it increased to 44.51 crores for the quarter ended 30th December 2004. However the bank increased its incomes over expenses and had an operating profit of 99.33 crores for the quarter ended 30th March 2005.

(As per table No. 4.9 and Chart No. 4.2) Net profit/Loss is calculated be deducting other provisions and contingencies and provision for taxation from the operating profit. (As per Table No. 4.14 and Chart No. 4.3)

The Bank suffered a continuous net loss for the quarters ended June and September. There wasa net loss of 20.04 crores in June which increased to 29.20 crores in September. (As per Table No. 4.14 and Chart No. 4.3)

In March 2004, the company had a net profit of 6.37 crores but then again in March, the Bank recorded a net loss of 38.18 crores as its expenses exceeded the income produced. (As per Table No. 4.14 and Chart No. 4.3)

4. The application analysis showed the following findings: The number of applications received for Overdraft under the BLT loans had increased over the four quarters during the year 2004-2005, except in the month of September. There were 920 applications that were received at the end of June 2004. However the number decreased be 2.5% and was 897 at the end of September. Then again there was an increase in the no. of applications received and there were 1358 applications received in the month of March 2005. (As per Table No. 4.15 and Chart No. 4.4)

The number of applications that were approved for Overdraft under BLT Loans showed a constant increase for all the four quarters during the year 2004-2005. (As per Table No. 4.16 and Chart No. 4.5)

There were 708 applications that were approved for the quarter ended 30th June 2004. There was a 5% increase of the applications approved for the quarter ended 30 th September 2004. There was an 11% increase of the applications approved for the quarter ended 30th December 2004 and a 20% increase of the applications approved for the quarter ended 30th March 2005.

(As per Table No. 4.16 and Chart No. 4.5)

The number of applications rejected for Overdraft has increased over the four quarters. 297 applications were the highest no. of that was rejected in the month of September. There was a rejection of 212 applications in the month of June and 210 applications in the month of March. (As per Table No.4.17 and Chart No. 4.6)

The number of applications received for term loans under BLT loans has increased considerably over the four quarters during the year 2004-2005. (As per Table No. 4.18 and Chart No. 4.7)

There was a 5% increase in the no. of applications received in the month of September, a 30% increase in December and a 40% increase in the month of March. (As per Table No. 4.18 and Chart No. 4.7)

The number of applications approved for term loans under BLT loans also showed an increase during the four quarters. The number of applications approved for the month of June was 18. There was an 11% increase in the month of September 2004, 25% increase in the month of December 2004 and 16% increase in the month of March 2005. (As per Table No. 4.19 and Chart No. 4.8)

The number of applications rejected for term loans showed an increase only in the month of March. There were very few numbers of applications that were rejected in the months of June, Sept and December. (As per Table No. 4.20 and Chart No. 4.9)

5. The amount of BLT loan classified under Non Performing Asset was 0.23 lakhs in the month of June and was Nil in the month of September. The amount increased to 27.80 lakhs in the month of December 2004 and then decreased to 0.27 lakhs in the month of March 2005.

(As per Table No. 4.21 and Chart No. 4.10)

6. The loan recovery analysis helped to arrive at the following findings: In the case of Overdraft, the loan recovery percentage shows a decrease over four quarters during the year 2004-2005. 44% of the loan amount was recovered in the month of June, 36% of the loan amount was recovered in the month of September, 34% of the loan amount was recovered in the month of December and 31% of the loan amount was recovered in the month of March. (As per Table No. 4.22 and Chart No. 4.11)

In the case of Term Loans, the loan recovery percentage shows an increase of 5 % from June to September and then decreases in the months of December and March. 25% of the loan amount was recovered in the month of December and 20 % of the loan amount was recovered in the month of March 2005. (As per Table No. 4.23 and Chart No. 4.12)

RECOMMENDATIONS TO IMPROVE CREDIT FLOW TO THE SSI SECTOR

Priority Sector Lending Targets. In an environment of high economic growth, the priority sector lending is an attractive growth opportunity for banks. Slowing down of off-take of credit by the large corporates due to opening up of new sources for accessing finance by them and stagnation of credit demand by retail business makes financing the priority sector a~ opportunity to expand banks' business profitably. A uniform target in priority sector lending (including SSI) at 40% of Net Bank credit (NBC) for all domestic and foreign banks is recommended. This would provide a level playing field for all the banks and ensure active participation in the faster development of the priority sector. Risk Assessment Mechanism With growing opportunities for banks to extend credit to SMEs, it is essential for banks to put in place proper risk assessment mechanisms. This would facilitate objective and speedy decisions based on better client information. This will also help in improving quality of credit portfolio. Lending to SME Clusters A full-service approach to cater to the diverse needs of the SME sector may be achieved through extending banking services to recognized SME clusters by adopting a 4-C approach namely, Customer focus, Cost control, Cross sell and Contain risk. A cluster-based approach to lending may be more beneficial: (i) In dealing with well-defined and recognized groups; (ii) Availability of appropriate information for risk assessment and (iii) Monitoring by the lending institutions.

Clusters may be identified based on factors such as trade record, competitiveness and growth prospects and/or other cluster specific data.

In order to enable the lending institutions to take more objective decisions, an appropriate Rating mechanism for designated industrial clusters may be put in place. Accordingly CRISIL, IBA, SIDBI and SSI Associations may design a scheme jointly. This would enable institutional funding to be channeled through homogenous recognized clusters. Credit rating of clusters would aid not only the lenders but also the clusters themselves by providing information on wider market opportunities for their products, strengthen negotiability and adopt improved business practices and better quality control. Lenders, in turn, may be in a position to cross selling their financial products through better market penetration, monitoring and information sharing.

Formulating and institutionalizing rating for clusters or stand alone SMEs (through techniques such as balanced score card or appropriate software) is a key to rapid deployment of cost effective credit. It is important to encourage SSI Associations to take initiatives, which would enable their SSI members to be rated individually or as clusters, by banks or rating agencies. SIDBI is in the process of consultation with number of banks for setting up an independent rating agency. This should be expedited and implemented. Linking with Large Industry There is strong evidence those SSIs, which are linked as suppliers, service providers, etc. to successful large industries are usually successful ventures, in India as well as in many other countries. Such successful SSI/large industry linkages provide examples of best practices, which can be aggressively extended. There are a number of corporate in India who adopts Corporatelinked SME cluster models to gain competitive advantage in local as well as global markets and derive mutual benefits. Corporate-linked SME cluster models need to be actively promoted by banks and FIs.

Banks linked to large corporate houses can play a catalytic role in promoting this model. Financing SMEs linked to large corporates, covering suppliers, ancillary units; dealers etc. would also enhance competitiveness of the corporates as well as the SME participants. Though Government has enacted "Interest on Delayed Payment to Small Scale and Ancillary Industrial Undertakings Act" in order to ensure that the small scale units receive prompt and

timely payment of their dues, implementation of the provisions of the Act remains ineffective. The Government needs to take urgent steps to enforce the provisions of the Act especially in public sector enterprises. Adoption of "Best Practices Code" for large corporates dealing with the SME sector on the lines of "Code for Payments for large industries/corporates", formulated by ClI, would greatly help the sector regarding timely payment to SMEs. The other remedial measures that should be adopted by the Bank are: 1. The decision on the loan application should be taken in a time bound manner. Once all the required documents have been filed by the applicant, the application should be reviewed and a stand taken within 4 weeks.

2. Information relating to credit appraisal done by the bank should be shared with the applicants. It would be helpful if the banks inform the unit areas where their performance has fallen below the rating parameters and counsel the units to perform better and measure up.

3. In case the loan application is rejected, the bank must apprise the applicant about the reasons for not granting the loan. This will help the applicants in rectifying his application the next time he applies for a loan.

4. There should be devolution of greater authority at the branch manager level. Further as the branch manager is generally overworked with responsibilities vested in him, officers should be specified in all branches, which would be responsible for loans to the SME sector for limits within the sanctioning power of the branch manager.

5. Guidelines on the amount of collateral required for different loan amounts (both fresh loans and renewable) should be specified be the RBI and implemented by the Bank.

6. The present collateral-free loan limit is Rs. 5 Lakh. Further, as per the SSI charter of some banks, units with a good tract record and financial position are eligible for collateral-free loans over 5 lakh and up to Rs. 15 lakh. This limit for collateral-free loans should be enhanced further.

7. Information on all loan schemes pertaining to the SSI sector should be made readily available. The bank should interact readily with customers by way of mailers and keep them updated with regarded to changes in such schemes. 8. The present composite loan limit for SSIs, which is Rs. 25 lakhs, should be revised upwards.

9. Banks should revert to quarterly compounding of interest on working capital loans where it is presently being done on a monthly basis.

10. The processing fee should be commensurate with the loan amount sanctioned.

11. Forex facility should be made available at greater number of branches.

12. For the benefit of those SSI units, which through improved inventory management have reduced their stock, the bank must give consideration to other factors for computing maximum permissible bank finance.

13. The period of collection and credit of cheques should not exceed three days. In case it takes longer for the cheque to be cleared, bank should compensate the clients be paying penal interest for the inconvenience caused.

Suggestions for ensuring appropriate institutional arrangement for enhancing the credit delivery to the sector on a timely basis and in adequate measures. Credit Information Credit Information Bureau (India) Ltd (CIBIL) has been set up in January 2001 to serve as an effective mechanism for exchange information between banks aim financial institutions for curbing growth of NP As. This organization could be extremely effective in playing a proactive role for the SME sector as well. Venture Financing Recognizing the catalytic role of venture finance in the advancement of the SME sector, the Working Group strongly recommends that a dedicated National level SME Development Fund should be established. SIDBI may promote a NBFC (non-public deposit taking) exclusively for undertaking venture and other development financing activities for SMEs. Banks could also contribute to the corpus created by SIDBI (on risk sharing basis) or alternatively, set up their own venture financing instruments. Technology Transfer through Technology Bank In the current scenario, the growth and success of SMEs will be primarily determined by market forces rather than by reservation, preferential treatment, etc. The legacy SMEs has become identified with low technology, poor quality and weak management. In the current scenario for the SME sector to achieve economic efficiency and international quality standards, there is imminent need in many instances to upgrade technology. This will help the sector to break away from the protected environment of the past and to adapt and innovate in tune with changing market forces. Liberalization and globalization

requires technological up gradation, improved marketing and better infrastructure in SMEs. In order to facilitate technology access, transfer and absorption, the Technology Bureau of Small Enterprises (TBSE) was established in 1995 as a collaborative initiative between SIDBI and

United Nations-Asia and Pacific Center for Transfer of Technology. This was meant to help SSI units to attain international competitiveness through transfer of latest technology both from within and outside the country. Conversion of TBSE into an independent Technology Bank for the SMEs to facilitate technology transfer may be considered. The proposed Technology Bank may also provide services such as project evaluation, risk assessment and risk mitigation measures to the SMEs adopting new technologies. Such a service would improve the credit accessibility of the SMEs as well. Such a Technology Bank would facilitate building stronger linkage between R&D institutions and the SME sector for enhancing their productivity and competitiveness. Besides SIDBI, banks may also contribute to the corpus of the proposed Technology Bank to ensure its commercial viability and play an active role in enhancing the capabilities and credit worthiness of the SME sector. The cost involved in providing technology support should be recoverable over a period of time from the successful ventures. Credit Guarantee Scheme for Small Industries. The Working Group strongly feels that the banks should have the freedom to decide the terms of lending (with or without collaterals) depending on the risk perception of any proposal. However, till such time the policy relating to collateral-free lending is reviewed, as a prudent measure the existing credit guarantee scheme (CGTSI) may continue. The Credit Guarantee Scheme for Small Industries (CGTSI), however, must play a more proactive role to assist SSI entrepreneurs. The scheme needs to be revisited to make it more affordable for the intended users. SSI Associations, banks and the CGTSI should actively encourage SSI entrepreneurs to cover their loans under the Scheme.

Recommendations to improve the Performance of the BLT portfolio

1. Whenever there is an operating loss or a net loss, the bank should cut down expenses and follow a cost control technique. In this way the bank can improve its income earning and thereby minimize the loss.

2. There should be an organized system in the Bank to keep a track record of all the transactions taking place. A follow up staff should be appointed to keep a track of all records and those transactions that are due should be recorded and a follow up should be done on the same.

3. Educating the customers in terms of the loan repayment process is also another important suggestion.

4. There should be an increase in the penalty rate for defaulters. The customers who repay the loan on time should be given some concession in the form of gifts, reduced rate of interest and so on.

5. When the loan recovery process of the bank increases, the operating profit and thereby the net profit will also increase.

6. For the application processing, a customer help desk should be provided by the bank. The help desk can provide the customers with the exact documents, rules and regulations to be followed in filling the applications.

7. Posters providing information on the exact documents and requirements needed to fill the loan applications should be posted in all the areas within the bank.

8. If the bank ensures that the customers rightly fill the applications, then there will be a decrease in the number of applications getting rejected. This will reduce the time of the banker also.

9. In case the application is rejected then the reason behind it should be informed to the customer.

10. There should be a proper communication between the banker and the customer so that the bank can analyze its credit worthy customers and provide loans for the same.