SUMMER INTERNSHIP PRESENTATION- 2012 Creditto edit Master subtitle styleat PNB Click Appraisal and Risk Rating

Abhay Thakur PGDM (Gen) 7/7/12 Roll No. 111

FLOW OF PRESENTATION
Company Profile Credit Appraisal Methods of Lending Risk Rating Of Borrower Post Sanction Follow-up Case Study Findings Suggestions Limitations Bibliography

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COMPANY PROFILE
Punjab National Bank (PNB) was set up in

1895 in Lahore - and has the distinction of being the first Indian bank to have been started solely with Indian capital.

Currently, PNB is a professionally managed

bank with a successful track record of over 110 years. The bank has the 2nd largest branch network in India, with 4525 branches .
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PNB was ranked as 248th biggest bank in

WHAT IS CREDIT APPRAISAL?

qCredit

appraisal means an investigation/assessment done by the bank prior before providing any loans & advances/project finance & also checks the commercial, financial & technical viability of the project proposed.
qProper

evaluation of the customer is preferred which measures the financial condition & ability to repay back the loan in future
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WHAT IS CREDIT APPRAISAL? (CONTD)

qFactors :-

Age Income Number of dependents Nature of employment Continuity of employment Repayment capacity Previous loans
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OBJECTIVES

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RESEARCH METHODOLOGY
Primary sources of Information
Meetings and discussion with the Chief

Manager and the Senior Manager of both Credit and Credit Risk Management Department

Meetings with the clients

Secondary sources of Information

Loan Policy and Internal Circulars of the

bank
Research papers, power point
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Overview of Loans

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METHODS OF LENDING
Working Capital Simplified Method
Simplified method based on turnover for

assessing working capital finance up to Rs.2 crore (upto Rs. 5 crore in case of SSI units)

MPBF System
Existing MPBF system with flexible

approach shall be followed for units requiring working capital finance 7/7/12 exceeding Rs 2 crore

In case of infrastructure/mega projects,

proper Loan Termappraisal will be made by utilizing the services of specialized / Technical officers.

The term loans with remaining maturity

period of above 5 years shall not exceed 50% of the term deposits with remaining maturity period of above 5 years after taking into account the renewal of term deposits as per the past trend.
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On Receiving Of Proposal
Financial statements, project report and other important documents are used to evaluate:
Maximum permissible bank finance (in case of WC limit) Techno Economic Feasibility Analysis of the project Various risks associated. Various approvals of issues the borrower seeks (reduction of ROI,

processing fee etc)

Risk rating of the borrower Reasonableness of estimates/projection in regard to sales,

chargeable current assets, current liabilities (other than bank borrowings) and net working capital conformity with the guidelines issued by the Reserve Bank/HO. 7/7/12

Classification of current assets and current liabilities in Maintenance of minimum current ratio of 1.33:1 .

An undertaking by the borrower to submit his annual accounts

promptly. Further annual review is carried out regularly by the

Risk rating of the BORROWER

CATEGORY Capital market perception of the group Management Evaluation Risk bearing capacity Track record in debt repayment

PARAMETERS / INPUTS Management Setup Integrity, commitment and sincerity Financial flexibility

Range of services Quality of service offered Business Evaluation Economies of operation Ambience of service outlet Effectiveness of distribution channels Quality of infrastructure available

Level of customer satisfaction Advertising / promotional strategies Brand equity Expected market growth Locational advantage Technology adopted in the process

Debt Equity Ratio Financial Evaluation Repayment Period (in yrs) Foreign exchange risk

Internal Rate of Return /TNW Working capital cycle (in months)

Project complexities Project Implementation Risk Evaluation Expected cost overrun Funding risk

Expected time overrun Status of obtaining clearances

7/7/12 Service period (in yrs)

Models
Models Financials Business Managem Conduct and ent of A/c Industry 40% 40% 40% 40% 25% 25% 25% 20% 25% 35% 25% 20% 20% 25% 40%
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Large Mid Small NBFC EMBM

10% 15% 20% 10% NA

POST SANCTION FOLLOW UP

PREVENTIVE MONITORING SYSTEM (PMS)
PMS Index
PMS Index is a numerical index consisting

of 29 indicators Parameters grouped into 6 sections. Penalty rates (weights) in the form of numerical values have been assigned to each indicator (parameter) depending upon their degree of impact on health of an account. PMS Report
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PMS Report, which has eight parts,

QMS I

QUARTERLY MONITORING six weeks from close of the quarter to SYSTEM the gives information about which it relates. It
the operations of the unit and its performance for the quarter, also giving reasons for non-achievement of sales/production targets.
QMS II

This form is required to be submitted within

This form is required to be submitted within

7/7/12 two months from the close of the half-year

Case Study : Rathi Steel and Power Ltd

Nature Fund Based CC(H) Fund Based Ceiling Non Fund Based ILC/FLC ILG/ FLG Non Fund Based Ceiling Term Loan TOTAL COMMITMENT NA 0 15.00Secured 5.00Secured 20.00 45.00 95.00 0.00 30.00 Secured 30.00 Existing Proposed Secured/Unsecured (as RBIs guideline) per

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Background :
The Company is a profit making, dividend

paying and listed Company.

Company is engaged in the manufacture of

bars and wire rods which form part of the longer segment of the steel industry.
Company also manufactures stainless steel

products having an installed capacity of 40000 TPA. completed the project for setting up a backward integration plant at Orissa.
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In the year 2007-08 the Company had

Purpose

For Term Loan :

128.70 cr 93.50 cr

To Part Finance the Proposed

Cost of Project

Total Debt

Promoters contribution

35.20 cr

Proposed TL (our share)

45.00 cr

DER

2.66:1 cr

Repayment Period

8 years

Door to door tenor

10 years 6 months

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Security
Nature of limits Security Value of block assetsValue of block assetsExtent of first/ secondBalance/ residual value as on: 31.03.2012 excluding specificcharge holders as onof charge available to charge if any 31.03.2012 bank/ consortium

Term Loan

First Pari Passu Charge on Fixed Assets of the Company

347.82

347.82

226.26

121.56

Second Pari Passu 298. 22 Charge on Current Assets

298. 22

199.50

98.72

Working Capital

First pari passu charge on current assets of the Company

258.22

258.22

199.50

98.72

Second Pari Passu 347. 82 charge on Fixed Assets

347. 82

226.26

121. 5 6

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Justification for working capital sanction:

The Company wants to change the product

mix.

There has been a surge in the demand of

Stainless steel products. The future demand for stainless steel is also likely to be determined favorably from all the sectors.
Company has been able to improvise the

product mix from 10% in the year 2008-09 to 26% in the year 2010-11. Companys aim is to achieve 40-45% share of value added products in the overall product mix 7/7/12 which will help the company to maintain

Particulars

31.03.10 Audited

31.03.11 Audited

31.03.12 Estimated 31.03.13 Projected

1. Total Current Assets 2. Less Current Liabilities(other than Bank borrowing and installments due within 1 year)

117.43

144.23

182.52

235.01

39.67

43.79

37.33

45.96

3. Working Capital Gap 4. Actual / Projected bank borrowings 5. Total current liabilities (2+4) 6. NWC (1-5) 7. Minimum stipulated margin 25% of current assets 8. Item 3- Item 7 9. Item 3- item 6 10. MPBF(item 8 or 9, whichever is lower)

77.76 45.07 84.75 32.68 29.36

100.43 56.87 100.66 43.57 36.06

145.19 90.00 127.33 55.19 45.63

189.05 125.00 170.96 64.05 58.75

48.40 45.07 45.07

64.38 56.87 56.87

99.56 90.00 90.00 7/7/12

130.30 125.00 125.00

Justification for Non Fund based limits

Letter of credit
The Company has informed that they will

be procuring MS/SS Scrap and other Ferro alloys on a regular basis for manufacturing of higher grades of steels and accordingly require higher LC Limits(Inland/Foreign) and requested for RS.75.00 Cr limits for the year 2012-13.

Bank guarantee
Company has informed that one or two 7/7/12

regular suppliers (TATA STEEL) who was

The Company is promoted by Late Shri

Management :
Punam Chand Rathi.

Presently managed by Sh Pradeep Rathi

having experience of more than 40 years in Steel Melting and Rolling.

All the family members are actively

involved in running of this Company. Pradeep Rathi is Managing Director and other directors are Shri Shree Kumar Daga, Shri Prem Narayan Varshney, Shri Dwarka 7/7/12 Das Lakotia and Shri Ranjit Khattar.

Presently has five Directors on it. Shri

Reconciliation of TNW :
2010-11
178.45 Cr

2011-12 188.85 Cr

201213(projected) 214.62 Cr

Keeping in view of the past trend of profitability of Group concerns and financial strength of the promoters of the company, the estimates/projections 2010-11 2011-12 2012-13 of TNW can be accepted.

845.3 Cr Sales

954.6 , 1171.53 Cr 905.9(estimat ed)

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Profitability
2011-12 12.55 , 11.44 (expected) PBT 2012-13 23.73 PBT 2013-14 32.10

The profit of the company will increase

constantly with the increase in the turnover of the company.

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Current ratio
2010-11 1.37 2011-12 1.40 2012-13 1.39

Lead banks note current ratio (considering

the installments of TL due within one year as part of Current Liab.) was 1.22 as at 31.03.2010 and 1.24 as on 31.03.2011 and at 1.24 as at 31.03.2012 which is below the benchmark level of 1.33. Current ratio for the financial year 2012-13 & 2013-14 has 7/7/12 been estimated at 1.22:1 & 1.25:1.

Long Term Debt Equity Ratio

Current DER-1.16 Projected for 2012-13-1.32:1 The debt equity ratio of the company in all

the years under consideration is below the acceptable bench mark of the bank i.e. 2:1 and proves the long term solvency of the company.
Keeping in view the industry scenario and

financial strength and experience of the promoters of company into consideration estimates/ projections of Debt Equity ratio 7/7/12 of the company can be accepted.

Summary of cost of The Company has got the TEV study of the project and means of proposed expansion done by ITCOT finance and Services Limited, an Consultancy
approved agency.
The Company has estimated the total

capital expenditure for the scheme at Rs. 125.17 crore, which is proposed to be funded by way of long term loan of Rs. 93.50 crores and balance of Rs.31.67 crores by way of internal accruals/promoters contribution.
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Particulars

DSCR
2012 2013 8.36 16.07 7.87 10.79 34.73 18.42 10.79 29.21 1.19

Projections 2014 2015 2016

PAT 23.32 13.27 20.58 57.17 20.05 20.58 40.63 1.41 32.57 13.39 18.01 63.97 17.80 18.01 35.81 1.79 34.70 13.50 15.35 63.56 19.90 15.35 35.25 1.80 Add Depreciation 7.03 Add Interest 10.27 A. Total accrual Cash 25.66 10.86 Interest on TL 10.27 B. Total 21.13 DSCR (A/B) Average DSCR 1.21

TL Installments

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Summary
Stand Alone Project
Debt-Equity Ratio 2.95 Company as a whole 1.02

Average DSCR

1.95

8.0

Minimum DSCR

1.10

Interest coverage ratio (ISCR)

1.95

Internal Rate of Return (Pre Tax)

17%

Break Even Point

49.97

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Strengths
Strong Management team with professional

background and rich industrial experience of the promoters. indigenous machinery.

Latest technology based imported as well Location on which proposed expansion will

be implemented is in an industrial area and by the side of National Highway-24 and all types of Infrastructure facilities are available nearby.
7/7/12 Power Grid and presently power in the unit

The factory premise is within 1KM from

Weakness
Other big player in the steel industry can

give tough competition.

Change in the govt. policy for steel industry

may affect the profitability unit.

Rolling Mill industry is high turnover and

low margins industry.

Fluctuating prices of raw materials and

finished goods.

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Opportunities
The unit is already set in 1971 and has a

strong network of dealers. The Rathi brand is an established brand for the last more than 50 years. The unit after expansion will not face any problem in marketing its products.

The focus of the Central government on

road projects and the emphasis of the government on irrigation and water supply projects are expected to give fillip to the construction industry. 7/7/12

Threats
Frequent fluctuation in prices of Steel which

may affect the profitability of the Projects. ramping up the Capacity of SS Products.

Big Players like SAIL and Jindals are The Fortunes of the Steel Industry are

closely linked to that of the economy in general and infrastructure in particular.

Industry is highly cyclic in nature with high

mortality rates.
Change in the government policies related

to the construction/infrastructure industry 7/7/12 will have direct impact on Companys

Risk Rating
Benchmark Values Category Parameter CO Value 0 1 2 3 4 Rate

Growth Rate

16.31

<1

2.58

4.58

8.74

10.82

OPBDIT/Sales

8.23

2.6

3.88

6.4

8.17

9.05

3.07

Past Financials Short Term Borrowing/Net Absolute sales Comparison Operating Cashflow/Total Debt Net Operating CF/T Debt

14.26

28.5

23.7

14.22

10

2.

11.03

-10.84

-9.1

-5.63

1.59

5.2

-0.04

-23.5

-20.5

-14.4

-3.89

1.4

3.73

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Future risk and subjective assessment

Category Parameter Comments Rate Impact of contingent liability Future risk Impact of Expansion It will lead to more sales. 2.19 CL Rs 7.13 cr which is 3.99% of TNW 4.00

The financial statements are prepared in accordance with Transparency in accounting generally accepted accounting principles Subjective Assessment of Financials Quality of inventory

2.00

The expected variance in the value may be less than 5% S .Debtors >6 mnths old are rs 4.41 cr which 5.22% of 7/7/12 total receivables

3.00

Reliability of Debtors

3.00

Market position evaluation

Parameter Competitive position Expected sales growth The firm has achieved a sales growth of around 8.6% during FY 2010 11. & expected to be in position growth Comments Rate 2.00 2.00

Input related risk Availability of raw material and otherIndia is endowed with large reserves of iron critical inputs ore Proximity to raw material Company is not in advantageous position due to location of plant Proposed to setup backward integration plant at Orissa

2.33 3.00

2.00

Backward Integration Production related risk State of technology used

2.00 3.00

The firm has adopted Thermax technology

4.00

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Parameter Product related risk Product range

Comments

Rate 2.5

Firm is mainly engaged in the manufacturing of MS bars and Wire rods Quality of product is reported to be better than the peers

2.00

Product quality

3.00

Marketing Distribution network Firm has800 dealer network spread over north India. Prices are at par with the peers

2.00 2 .00

Price Competitiveness

2.00

Industry risk evaluation for Iron and Steel Products industry

50%

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Management Evaluation
S. No. 1 Parameter Management set up Comments Listed Company managed by experienced and professional promoters and directors The management is reported to be reliable and sincere Existing Plant at Ghaziabad and Orissa are running satisfactory The account is running satisfactorily with us Management is capable of arranging funds but with a time lag Rate 3.00

Commitment and sincerity Track Record in execution of projects Track record in debt payment

2.00

3 4

2.00 2.00

Financial strength/ flexibility

2.00

Capital Market Perception

The share is trading at a lower value .

1.00

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TOTAL SCORE
Factor % score obtained 53.95 54.75 Financial Evaluation Business Evaluation Management Evaluation 48.75 & Industry

Weight 40.00% 25.00%

Weighted Score 21.58 13.69

25.00%

12.19

Conduct of Account AGGREGATE SCORE

NA

0.00%

NA 52.73

Rating

BB

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DETERMINATION OF ROI
Facility Existing Proposed Derived rate Applicable Rate BR+3.5% Rate of interest CC NA BR+3.25% BR+4.50% PC

TL

NA

BR+2.25%+TP

BR+4.50+0.50

BR+2.5%+TP As per Banks clause

Processing Fee

As per Banks clause

As per Banks clause

Upfront Fee

Nil

Nil

Nil

Lead Bank Fee

NA

NA

NA

Commission on NFB LC/BG

NA

In line with Lead Bank**

Other charges, if any

NA

NA

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NA

Findings
Risk is the center most part of the analysis

and basis for the decision of the bank.

All the analysis is being done to generate a

grade, which represents the intensity of risk, that helps in determining the condition of the corporate applying for loan.
The whole process of credit appraisal helps

in providing a suitable measure to minimize the risk due to non repayment of loan to the bank.
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SUGGESTIONS
In the rating model there are constant

parameters with constant weightages irrespective of the company and the industry in which it operates. Weightage should be assigned to parameters according to the industry in which the company operates. calculating the worthiness of the client since the previous rating does not take into account the short term drastic changes such as price level changes etc.
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Rating should be performed when

The rating model should have some sort of

Limitations
Data availability as the data is proprietary

and not readily shared for dissemination.

Geographical scope of the project was

limited to PNB Circle Office and the loans studied were of solely of businesses established majorly in NCR

The credit appraisal decision are more of

intuition and experience and since the time period was limited, hence best7/7/12 efforts were made to grasp the process as much as

Bibliography
Books
Circulars and manuals from bank. PNBOA manual for Banks and RBIs policies

on lending.
Credit appraisal, risk analysis and decision

making by DD Mukherjee.

Annual reports of the company.

Internet
www.pnbindia.in en.wikipedia.org
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