Chapter 19

Ruchi Mehrotra

B/Sheet is the financial mirror Analysis of past performance Study of future projections Banker uses going concern approach Borrowed amount is repaid from profits weightage to growth of industry managements efficiency Gone concern approach Situation liquidation of the company & financial loss the company

& &
of to

Current Ratio: Gives a measure of short term liability. Current assets /Current liabilities Compared with bench mark ratios & score awarded Liquidity is important
Benchmark value <1 1.00-1.25 1.25-1.50 1.50-2.00 >2.00 Score 0 2 4 6 8

Existing companies already availing term loan Repayment period in case of fresh loans The number of times a partys cash profit covers its repayment obligation PBDIA /Interest &Term loan commitments
Benchmark value >1.25 1.25-1.75 1.75-2.25 2.25-2.50 >2.50 Score 0 3 6 9 12

Cash flow adequacy of the party to meet its repayment obligation Cash profit+ interest (long & short)/debt repayable+ interest (short & long)
Benchmark value
<100%

Score
0

100-125%
125%-175%

2
4

175%-250%
>250%

6
8

Measures operating efficiency Number of times Inventory & debtors are recycled to generate sales Avg amount of inventory & receivables(beginning & end) /Average monthly net sales
Benchmark value > 5 months 4-5 months 3-4 months 2-3 months < 2 months Score 0 2 4 6 8

Existing companies propose to avail fresh term loan repayment period of the borrower It is compared with the benchmark values & score assigned
Benchmark value
>6 yrs 5-6 yrs 4-5 yrs

Score
0 3 6

3-4yrs
3yrs and below

9
12

Income earned per unit of capital employed in the business To earn profits to maximize the returns on capital invested PBIT /Avg capital employed
Benchmark value <4% 4%-8% Score 0 2

8%-12%
12%-16% 12%-16%

4
6 8

Total Outside liabilities /Tangible net worth Lower the ratio greater the long-term stability To what extent outside funds are used
Benchmark >5.0 4.00-5.00 2.50-4.00 1.00-2.50 <1.0 Score 0 2 4 6 8

Breakeven Analysis Units & Sales Capital Budgeting-ARR,Payback,NPV,IRR

Rs 50 crores and above -1997-Consortium lending No limit on the amount Credit exposure norm is 15% of banks capital fund in case of individual borrower 40% in case of group and goes up to 50% in case of infrastructure projects No ceiling on participatory banks No bank can leave before 2 yrs of joining the consortium Interest is common Lead bank

It is an arrangement where a pool of bank agrees to provide credit facilities The Lead manager prepares a Information Memorandum about the borrower Loan agreement is signed by all participating banks In case of default the lead bank will initiate recovery

Primary evidence Adversely affect the right of recovery of debt To be executed properly & correctly To be stamped if required Duly registered Source of rights and obligations Identify the concerned borrower / guarantor It is written evidence Documentary evidence in the court of law

To be executed in the presence of bank officer Alterations, additions, deletions authenticated with full signature. Should be completed in one sitting only Documents to be of full value of sanctioned limit Signatures of borrower to tally with specimen signature Documents to be stamped and bear stamp of proper value

Statistical tool used for predicting bankruptcy Model is based on

Operating leverage & Asset Utilization

Impact of change in sales on the net operating income Z > 2.99 Financially sound Z <1.81 Financially distressed / Bankrupt

Z =1.2 x1+1.4 x2 + 3.3 x3 + 0.6 x4 + 1.0 x5

Where
X1 X2 X3 X4 X5 working capital / total assets(%) retained earnings / total assets (%) EBIT / Total assets market value of equity /book value of debt (%) sales to total assets (times)

http://www.creditguru.com/CalcAltZ.shtml

The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, allows banks and financial institutions to auction properties (residential and commercial) when borrowers fail to repay their loans. It enables banks to reduce their non-performing assets (NPAs) by adopting measures for recovery or reconstruction.

How is the auction price decided? It depends on the market value of the property. Professional valuers determine the property value based on which banks fix a reserve or minimum bid price. The valuations tend to be on the conservative side as it is a distress sale. If the price fetched exceeds the banks dues, the excess amount is given to the borrower. Where can buyers get information about the auctions? Banks advertise such sales in at least one English and one regional newspaper, 30 days prior to the auction. Alternatively, you can look at websites like www.foreclosure.com. How can you bid? Interested bidders must submit their bids in a sealed envelope to the bank. Along with the bid, they must also deposit a certain percentage of the reserve price as earnest money deposit. This amount differs across banks and is refundable if one withdraws from the process or does not win.

It is an arrangement where in a pool of banks agrees to provide credit facilities to a borrower using a common loan document Lead Manager / Mandated Bank to arrange the credit for him detailing broad commercial terms of credit. He prepares the Info Memo & distributes it to the prospective lenders soliciting their participation in credit Default Lead Bank takes initiative of recovery process

It is an arrangement where a pool of banks join together to take care of the financial needs of the individual borrower or the entire group under common terms & conditions.
Earlier 50 crores & above fund base needs to have consortium lending now removed Substantial requirements of a party, banks prefer to have consortium lending to share the risk involved in the lending

No obligation for forming a consortium Banks are bound by credit exposure norm which is restricted to 15% of banks capital fund in case of individual borrower & 50% in case of group ( 10% additional if it is for infrastructure projects) No ceiling on number of banks but each bank should have 5% minimum of fund based credit or 100lacs whichever is more Member banks cannot leave the consortium before two years of joining

Quality of loan portfolio Pre-sanction process to be strong RISK ASSESSMENT TO BE STRONG

Industry risk Business risk Management risk Financial risk