Summer Internship Report On

CREDIT APPRAISAL OF CORPORATE LOANS AT PNB

Presented By: Kriti Agarwal, BM-A002

Company Guide: Mr. Rohit Grover (Chief Manager-Credit)

Faculty Guide: Dr. Vrinda Kamat

Prog. Chairperson (MBA BM)

Date: 9/6/2012

ACKNOWLEDGEMENT

Every work involves efforts and inputs of various kinds and people. I am thankful to all those people who have been helpful enough to me to the extent of their being instrumental in the completion and accomplishment of the project entitled Credit Appraisal of Corporate Loans at PNB. I sincerely acknowledge with deep sense of gratitude to my project guide, Mr. Rohit Grover (Chief Manager, Credit), PNB Circle Office for enhancing my understanding of the subject and enabling me to appreciate finer nuances of the subject. I extend my sincere gratitude to Mr. Manoj Kukreja (Senior Manager, Credit), and the entire Credit Department for their help and guidance, without which the completion of this project would have been extremely difficult.

I would also like to express my deepest gratitude to faculty guide, Dr. Vrinda Kamat for the continuous, creative, valuable and informative support extended to me, without which the project would not have been efficiently completed.

Lastly, I would like to thank Mr.D.S.Sharma (Chief Manager, HR) as he found me credible enough to work for PNB and selected me for challenging project.

TABLE OF CONTENTS
Acknowledgment List of Tables & Figures Summary (i) (ii) (iii)

INTRODUCTION.................................................................................................................................................. 7

OBJECTIVE OF THE STUDY .......................................................................................................... 7 SCOPE OF STUDY............................................................................................................................ 8 LIMITATIONS OF THE STUDY...................................................................................................... 9 SOURCES AND METHODS........................................................................................................... 10
INDUSTRIAL ANALYSIS .................................................................................................................................. 11

OVERVIEW OF BANKING INDUSTRY....................................................................................... 11 COMPANY BACKGROUND ......................................................................................................... 14 PNBs MISSION AND VISION ...................................................................................................... 15 PRODUCTS and SERVICES ........................................................................................................... 16 ORGANISATIONAL STRUCTURE ............................................................................................... 17
MAIN TEXT ........................................................................................................................................................ 18

WHAT IS A LOAN? ........................................................................................................................ 18 CREDIT APPRAISAL ..................................................................................................................... 24 CREDIT APPRAISAL PROCESS AT PNB .................................................................................... 26 CREDIT RISK MANAGEMENT .................................................................................................... 27 SME .................................................................................................................................................. 33 FINANCIAL RATIOS...................................................................................................................... 36 ASSESSMENT OF WORKING CAPITAL ..................................................................................... 38 PRE SANCTION APPRAISAL ....................................................................................................... 40 POST SANCTION AND FOLLOW UP OF LOANS ...................................................................... 44
CASE ANALYSIS ................................................................................................................................................ 46

ACTIVITY SHEET .......................................................................................................................... 47 FINANCIALS of Disha Engg. .......................................................................................................... 50 BRIEF DISCUSSION on Financial Indicators: ................................................................................ 53 SECURITY ....................................................................................................................................... 56 POSITION OF ACCOUNTS ............................................................................................................ 58 PRICING .......................................................................................................................................... 60

JUSTIFICATION ............................................................................................................................. 61 Calculation of Working Capital by MPBF ....................................................................................... 64 Calculation of Financial Ratios ......................................................................................................... 65
RECOMMENDATIONS ..................................................................................................................................... 67 CONCLUSION .................................................................................................................................................... 68 REFERENCES .................................................................................................................................................... 69

LIST OF TABLES & FIGURES

Tables Table 1.1: Performance of public, private and foreign banks Table 1.2: Net income and CAGR of public and private banks Table 1.3: ROA and CAR of public and private banks Table 3.1: Credit Risk Rating Models Table 3.2: Weightage under various Risk Areas Table 3.3: Rating Score, Category & Risk Indicators Table 3.4: Restrictions on Loaning Powers Table 3.5: Classification of Enterprises Table 3.6: Credit Exposure Ceiling Table 3.7: Ratios & their Significance 11 12 13 29 30 31 32 33 35 37

Figures Figure 2.1: Organisational Structure Figure 3.1: Classification of Corporate Loans Figure 3.2: Working Capital Cycle Figure 3.3: Cash Conversion Cycle Figure 3.4: Credit Appraisal Process 17 19 20 21 26

SUMMARY
The project on credit appraisal of corporate loans was done at Punjab National Bank. It is one of the leading banks in India that is engaged in various banking services. Credit appraisal is one of the major activities performed at the bank. It is an investigation/assessment done by the bank prior to providing any loans & advances. It is done to evaluate the credit worthiness of a borrower. This project also covers what a loan is and why loans are undertaken. Loan is a type of debt. It is generally provided at a cost, referred to as interest on the debt, which provides an incentive for the lender to engage in the loan. There are two types of loans- Personal and Corporate loans. And corporate loans can be either for day to day needs i.e. for working capital purposes or for purchase of fixed assets i.e. term loans. For calculation of working capital two methods are proposed: 1. Under Nayak committee, known as the Turnover Method and 2. Under Tondon Committee, known as MPBF method. The credit appraisals for any organization basically follow these steps: Assessment of credit need, financial statement analysis, and financial ratios of the company, credit rating, working capital requirement, term loan analysis, submission of documents, NPA classification and recovery. The main aim of research is to find out the truth which is hidden and which has not been discovered as yet. Though each research study has its own Specific purpose, we may think of following broad categories:

To gain familiarity with a phenomenon or to achieve new insights into it. To portray accurately the characteristics of a particular individual, Situation or a group. To determine the frequency with which something occurs or with which it is associated with something else.

It further gives an overview of credit exposure ceiling by the banks, the credit risk it faces and how bank performs credit risk rating for various proposals it receives. Credit risk is the risk that borrower might fail to meet its obligation towards the bank in accordance with the agreed terms and conditions of sanction. Further rating is done based on the amount of credit risk. Banks exposure in case of low rated accounts and industries faces certain restrictions. It is a way to systematically solve the research problem. It may be understood as a science of studying how research is done scientifically. In it we study the various steps that are generally adopted by a researcher in studying his research problem along with the logic behind them explaining the pre sanction and post sanction process. With the help of case study we analyze the credit appraisal process, post sanction steps, calculation of ratios, its analysis and justification.

INTRODUCTION OBJECTIVE OF THE STUDY

The purpose of study is to study and analyze the various aspects of financing the projects of the borrowers which are beyond the powers of the branches and within the ambit of the Circle Office of Punjab National Bank.

This study covers the process followed by Punjab National Bank to assess the credit worthiness of its clients and grant the finance for the setting up or expansion of their projects.

Identify various parameter on basis of which credit appraisal is conducted, reasons for choosing these parameter and to identify how scores are given against each of these parameter. To study the procedure adopted in evaluating credit proposal by using case analysis. To understand the basis of credit risk rating and its significance. This would entail undertaking of the following procedures: a. b. c. d. e. f. Management Evaluation Business / Industry Evaluation Technical Evaluation Legal Evaluation Financial Evaluation Credit Risk Rating

SCOPE OF STUDY
The Credit appraisal is a holistic exercise which starts from the time a prospective borrower walks into the branch and culminates in credit delivery and monitoring with the objective of ensuring and maintaining the quality of lending and managing credit risk. The process of Credit Appraisal is multidimensional and includes- Management Appraisal, Technical Appraisal, Commercial Appraisal, Financial Appraisal and Economic Appraisal. The Credit Policy of Banks has undergone changes to cope with the environmental changes, tap the available opportunities, achieve their commercial objective, fulfill social obligations and adhere to mandatory directed lending norms. The credit policy consists of both fund based credit exposure and non fund based credit exposure. The credit policy is studied under Coverage, Clientele, Marketing. This segmented approach is expected to provide both market and customer focus for ensuring better business development, better development of expertise and better customer satisfaction.

LIMITATIONS OF THE STUDY

Like any other study this study too is not free from limitations. The major limitations of the study are listed below: 1. The major limitation of this study shall be data availability as the data is proprietary and not readily shared for dissemination. 2. Also the geographical scope of the project was limited to PNB Circle Office and the loans studied were solely of businesses established majorly in NCR. 3. Due to ever changing environment, many risks are unexpected and the remedial measures available are based on general experience from the past. Therefore risks can only be minimized cannot be erased completely. Hence, out of the various ways in which risks can be managed, none of the methods is perfect and may be very diverse even for the work in a similar situation in the future.

SOURCES AND METHODS

TOOLS OF DATA COLLECTION: I. Primary sources of Information Meetings and discussion with the Chief Manager and the Senior Manager of both Credit and Credit Risk Management Department. II. Secondary sources of Information Loan Policy and Internal Circulars of the bank Research papers, power point presentations and PDF files prepared by the bank and its related officials Past and Present Financial Statements: i. ii. Balance Sheet Profitability Statements

Projected Financial Statements CMA data i.e. Credit Monetary Arrangement data which includes the following 6 forms: i. ii. iii. iv. v. vi. Particulars of existing/proposed limits for banking system Operating Statement Analysis of Balance Sheet Comparative Statement of current assets and current liabilities Computation of MPBF Funds Flow Statement

INDUSTRIAL ANALYSIS

OVERVIEW OF BANKING INDUSTRY

RBI has taken a few important steps to make the Indian Banking industry more robust and healthy. This includes de-regulation of savings rate, guidelines for new banking licenses and implementation of Basel Norm III. Since March 2002, Bankex (Index tracking the performance of leading banking sector stocks) has grown at a compounded annual rate of about 31%. After a very successful decade, a new era seems to have started for the Indian Banking Industry. According to a Mckinsey report, the Indian banking sector is heading towards being a high-performing sector. According to an IBA-FICCI-BCG report titled Being five star in productivity road map for
excellence in Indian banking, Indias gross domestic product (GDP) growth will make the

Indian banking industry the third largest in the world by 2025. According to the report, the domestic banking industry is set for an exponential growth in coming years with its assets size poised to touch USD 28,500 billion by the turn of the 2025 from the current asset size of USD 1,350 billion (2010). So, before going in its future, lets have a glance at its historical performance.

Table 1.1: Performance of public, private and foreign banks In the last 5 years, foreign and private sector banks have earned significantly higher return on total assets as compared to their pubic peers. If we look at its trend, foreign banks show an overall decreasing trend, private banks an increasing trend and Public banks have been more

or less stagnant. The net NPA of public sector bank was also significantly higher than that of private and foreign banks at the end of FY11, which indicates the asset quality of public banks is comparatively poor. The Capital Adequacy ratio was also very high for private and foreign bank as compared to public banks. In conclusion, we could say that the current position of ROA, Net NPA and CAR of different kinds of players in the industry indicates that going ahead, public banks will have to face relatively more problems as compared to private and foreign banks. After looking at industry performance, lets see how the different players in the Banking Industry have performed in the last five years.

Table 1.2: Net income and CAGR of public and private banks The table above indicates that overall the top private banks have grown faster than that of public banks. Axis Bank, one of the new private sector bank, has shown the highest growth in all parameters i.e. net interest income, deposits, advances, total assets and book value. Among public sector banks, Bank of Baroda has been the outperformer in the last five years.

Table 1.3: ROA and CAR of public and private banks Kotak Mahindra Bank has reported the highest 5-year average net interest margin and currently, it also has the highest CAR whereas HDFC Bank has the highest CASA, the lowest net NPA to net advances ratio and the highest five-year-average ROA. On the other hand, Indias largest bank, SBI reported the lowest five-year-average ROA. Currently, it has the highest net NPA to net advances ratio and the lowest CAR. Looking at all of the above, it is expected that Private Banks are better placed to garner growth in the Indian Banking Industry.

COMPANY BACKGROUND
About Punjab National Bank 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. The bank was nationalized in July 1969 along with 13 other banks. Today, PNB is a professionally managed bank with a successful track record of over 110 years. Punjab National Bank is the 3rd largest bank in India. It is the first entirely Indian bank. Today it serves over 37 million customers with total assets of $60 billion. It has a total of around 5000 branches in around 764 cities with branches in Hong Kong, Dubai, Kabul and UK also. It is among the Big Five Banks of India others being State Bank Of India, ICICI Bank, Bank of Baroda and Canara Bank respectively. Punjab national bank is number one amongst the national banks and the second largest public sector bank in the country. It is the third biggest bank in terms of asset size among commercial banks. With a countrywide presence of over 5,000 branches, PNB has a strong deposit and credit base. The bank has developed a relatively strong franchise over the years, servicing both the corporate and retail sector and offering a wide variety of banking services, which include corporate and personal banking, industrial finance, agricultural finance financing of trade and industrial banking. Among the banks client are multinational companies, Indian conglomerates, medium and small industrial units, exporters and non-resident Indian etc.

PNBs MISSION AND VISION

MISSION "Banking for the unbanked VISION "To be a Leading Global Bank with Pan India footprints and become a household brand in the Indo-Gangetic Plains providing entire range of financial products and services under one roof"

PNBs VISION - 2013 10,00,000 crores business 15,00,00,000 crores customers

PRODUCTS and SERVICES

Savings Fund Account- Total Freedom Salary Account, PNB Prudent Sweep, PNB Vidyarthi SF Account, PNB Mitra SF Account Current Account- PNB Vaibhav, PNB Gaurav, PNB Smart Roamer Account Fixed Deposit Schemes- Spectrum Fixed Deposit Scheme, Anupam Account, multi /benefit Deposit Scheme Credit Schemes- Flexible Housing Loan, Car Finance, Personal Loan, Credit Cards Social Banking- Mahila Udyam Nidhi Scheme, Krishi Card, PNB Farmers Welfare Trust Corporate Banking- Gold Card Scheme for exporters, EXIM Finance Business Sector- PNB Karigar Credit Card, PNB Kushal Udhami, PNB Pragati Udhami, PNB Vikas Udhami Apart from these, the PNB also offers locker facilities, senior citizens schemes, PPF schemes and various E-services.

ORGANISATIONAL STRUCTURE

HEAD OFFICE CIRCLE OFFICE BRANCH OFFICE

Figure 2.1: Organisational Structure

MAIN TEXT WHAT IS A LOAN?

A loan is a type of debt. Like all debt instruments, a loan entails the redistribution of financial assets over time, between the lender and the borrower. The loan is generally provided at a cost, referred to as interest on the debt, which provides an incentive for the lender to engage in the loan. In a legal loan, each of these obligations and restrictions is enforced by contract, which can also place the borrower under additional restrictions known as loan covenants. Acting as a provider of loans is one of the principal tasks for financial institutions like banks. For other institutions, issuing of debt contracts such as bonds is a typical source of funding. Loans can be subcategorized according to whether the debtor is an individual person (consumer) or a business. CLASSIFICATION OF LOANS: 1. PERSONAL LOAN Consumer loan is granted for personal (medical), family (education), or household (extension, repairs, purchase of air conditioner, computer, refrigerator, etc.), use as opposed to business or commercial use. These loans are either unsecured, or secured by the asset purchased or by a co-signor (guarantor). Unsecured loans (called signature loans) are advanced on the basis of the borrower's credithistory and ability the loan from personal income. Repayment is usually through fixed amount installments over a fixed term.

2. BUSINESS LOAN A business loan is funding given to business by a bank, an individual(s), or an organization usually to be repaid by a certain date with a certain amount of interest. The amount of a loan, the amount of interest, the repayment date, the qualification of the loan recipient to merit the loan, the credit analysis, and the number of lenders used to achieve the desired loan amount are all variable. The bank finances the project of the borrower by assessing the various kinds of risks borne by the bank. In financing a project, a bank is exposed to various risks like financial, business, management, basic borrowers risk etc. It is important that the bank assesses these risks properly so as to avoid bad advances or NPAs. The amount of interest charged by the bank varies with the quantum of risk the bank is exposed to, by financing the project. The higher the exposure of the bank, higher will be the rate of interest charged by it.

Cash Credit Fund Based Bills Finance Working Capital Corporate Loans Term Loan Non Fund Based Letter of Credit

Bank Guarantee

Figure 3.1: Classification of Corporate Loans

a)

WORKING CAPITAL: Working capital for any unit means the total amount of

circulating funds required for meeting day to day requirements of the unit. The manufacturing unit needs a specific level of current assets such as raw material, stock in process, finished goods, receivables and other current assets such as cash in hand/ bank and advances etc. So the working capital means the funds invested in current assets. The trading units need the working capital for storing the goods and allowing credit to its customers. The service units need the working capital for meeting the expenditure, for making advance payments to its staff and providing credit to its customers. Thus, all type of units whether in manufacturing or trading or service sector need the working capital. Gross Working Capital and Net Working capital: Working capital may also be explained as gross working capital and net working capital. Gross working capital means the total funds required for financing the total current assets. Net Working capital means the difference of current assets and liabilities. It denotes the portion of gross working capital contributed from long term sources.

Working Capital = Current Assets Net Working Capital = Current Assets Current Liabilities As per practice of Indian banks, net working capital should normally be 25% of total current assets which will give a current ratio of 1.33:1. When net working capital is negative, it implies that the short term funds have been diverted / used for long term uses and the unit is facing a liquidity crunch. Such situation may also arise due to losses. In such a situation, the need of the hour is for raising long term sources. Working capital Cycle: The working capital cycle or operating cycle of a manufacturing unit means the time taken for converting cash into cash via raw material, stock in process, finished goods and receivables. So the time taken for storage of raw material, its conversion into finished products, the time taken to keep the finished product before it is sold and the time taken in realization from the customers all added together make the length of working capital cycle. It is described in terms of number of days or months.

Figure 3.2: Working Capital Cycle

CASH

RECEIVABLES

RAW MATERIALS

FINISHED GOODS

STOCK IN PROCESS

Figure 3.3: Cash Conversion Cycle

Working Capital Finance are broadly categorised under two heads: i) Fund Based: These are the facilities for which the bank provides funding and assistance to actually purchase business assets or to meet business expenses. The Cash credit is made by the bank to finance the working capital needs of the business. These working capital needs of the business vary from business to business because of various factors like nature of the business, size of the business, the length of the operating cycle, the state of the economy in which the business is functioning etc. These fund based facilities are extended by the bank in return of interest on the amount of funds lent. The interest, so charged by the bank is directly proportional to the risk involved in financing that project. Bills Finance: Advances against inland bills are sanctioned in the form of limits for purchase of bills (ODD) or discount of bills (BD) or bills sent for collection (ABC) to borrowers for their genuine trade transactions. Bills are either payable on demand or after usance period. Demand bills which are

payable on demand or at site are purchased from the parties who are sanctioned ODD limits and usance bills which are payable on maturity after certain period of time as per terms of contract are discounted for parties who are sanctioned BD limits.

ii) Non Fund Based: These are the facilities for which the bank can issue letters of credit or can give a guarantee on behalf of the customer to the suppliers, Government Departments for the procurement of goods and services on credit. Letter of Credit (LC) -A letter of credit is granted by the bank to its borrowers who purchase raw material, machinery etc against commission, in favor of seller. The payment is made by the bank as per the terms and conditions mentioned in the letter of credit on behalf of the borrower. Bank Guarantee-A Bank guarantee is a non- fund based facility extended by the bank. This helps the business to show its credit worthiness to various parties like vendors of fixed assets, suppliers of raw material etc. Bank Guarantee assures these parties that in case of default in payment by the business, the bank will pay their dues. A bank guarantee is given by the banks to their credit worthy borrowers against commission and the liability of the bank arises only in case of default by the borrower.

b)

TERM LOAN: These are made by the banks in order to finance the fixed assets of

the borrower. These loans are granted for a fixed period exceeding one year & is repayable in installments according to a schedule of repayment extending beyond three years it is commonly known as term loan. This loan is granted for purchase of fixed assets & is usually allowed against hypothecation mortgage of movables/immovable assets. Bankers tend to classify term loans into two categories: Intermediate-term loans. Usually running less than three years, these loans are generally repaid in monthly instalments (sometimes with balloon payments) from a business's cash flow. According to the American Bankers Association, repayment is often tied directly to the useful life of the asset being financed. In PNB it is also known as short term loans.

Long-term loans. These loans are commonly set for more than three years. Most are between 3 and 10 years, and some run for as long as 20 years. Long-term loans are collateralized by a business's assets and typically require quarterly or monthly payments derived from profits or cash flow.

Term loan is normally extended to finance the acquisition of fixed assets. It is generally sanctioned for the following purposes: For setting up of new industrial units For expansion of an existing unit Modernization of existing unit, Diversification into different product lines Restructuring of existing units For backward integration i.e. for manufacturing certain products which are being used as raw material by existing units. For forward integration i.e. for manufacturing certain products of existing unit as raw material.

CREDIT APPRAISAL
Credit appraisal is an investigation/assessment done by the bank prior to providing any loans & advances. It involves checking the commercial, financial & technical viability of the project proposed its funding pattern & further checks the primary & collateral security cover available for recovery of such funds. The objective is to understand, measure and manage the credit risk and aims at ensuring sustained growth of healthy loan portfolio while dispensing the credit and managing the risk. It is generally carried out by the financial institutions which are involved in providing financial funding to its customers. The credit managers of banks and Non Banking Finance Companies (NBFCs) are duty bound to accept or reject a proposal on the basis of its viability or non - viability. Credit information of the borrowing company can be obtained by the following sources: 1. Banks and Financial Institution 2. Bank References 3. Trade References 4. Credit Rating Agencies 5. Published Books: Basic information about a company may be taken from printed sources like the Stock Exchange Year book, Corporate Path finders data base, etc. 6. Company Financial Reports 7. Press Reports 8. Stock Market Opinion 9. Charges Registered: Charges created on the assets of a company have to be registered with the Registrar of Companies. 10. Personal discussion 11. Factory Visit 12. Study of Financial Statements: Financial analysis determines the significant operating and financial characteristics of a firm from accounting data and financial statements. Analysis can be done through: a. Ratio Analysis

b. Trend analysis: Trend analysis can be through: i. Intra firm comparison that is review of the trend of the ratios over the years within the firm and ii. Inter firm comparison. c. Reading of notes to accounts and other information: Careful reading and analysis of the notes on accounts, one can gauge the policies of the management, performance of the company, and its future planning.

Information required to be submitted by the Company (Borrower) to the Bank The company should make sure that the following information required for processing credit requests are collected by the company for submitting it to the bank or financial institution in order to obtain the required credit facility: 1. Basic background information on the company: 2. Required facility 3. Key industry dynamics 4. Management 5. Management information system: Details of the planning, controlling and monitoring systems which have been put in place have to given. 6. Financials 7. Details of the Security to be pledged: 8. Present banking relationship: The bank requires full details of the present credit facilities being enjoyed at the moment.

CREDIT APPRAISAL PROCESS AT PNB

Submission of Project Report along with the Request Letter

Carrying out Due Diligence on the Client

Determining of Interest Rate and Preparation of Proposal

Feasible

Preparing Credit Report / Feasibility Report and Risk Rating Not feasible

Submission of Proposal to designated Authority (Circle office)

Submission of Proposal to designated Authority

Queries Re-verification and analysis of the Proposal No Queries Vetting of Credit Risk Rating Report Approval of request made by the client like Reduction of Interest Rates etc Meeting with the client to clarify the queries

Acknowledgement of Sanction Terms & Condition by the client

Sanction of Proposal on various Terms & Conditions

Application to comply with Sanction SME T&C. Execution of Loan Documents

Procedures at Branch Office Level

Disbursement of Sanctioned Amount from the branch office

Procedures at Circle Office Level

Figure 3.4: Credit Appraisal Process

CREDIT RISK MANAGEMENT

CREDIT RISK

Definition: Credit Risk is the possibility of loss associated with changes in the credit quality of the borrower or counter parties. The counter parties may include an individual, small & medium enterprise, corporate, bank, financial institution, or a sovereign. In a banks portfolio, losses stem from outright default due to inability or unwillingness of a borrower or counter party to honour commitments in relation to lending, settlement & other financial transactions. Framework: The overall framework of credit risk management in the bank would comprise of following building blocks: Credit Risk Management Structure Credit Risk Policy & Strategy Processes & Systems

Formation of Credit Committee: The bank has in place Grid/Committee system in credit sanction process. Consequent upon implementation of 3-tier structure where Circle Office headed by AGM/ GM has been acting as a sole tier between the branch and HO, the scope of Credit Committee has been widened to cover the proposals falling under the vested loaning powers of AGMs working as Circle Heads. Accordingly, every loan proposal falling within the vested powers of Circle Head and above is discussed in a Credit Committee, which, on the merit of the case, recommends the proposal to the sanctioning authority. Such committees have been formed both at HO and Circle Office levels. The Credit Committee at HO includes CGM/GMs-Credit, CGM/GM-IRMD, GM (Treasury) and GM (Marketing). For credit proposals falling within the vested power of CGM/GM, the credit committee at CO includes AGM/Chief Manager-Credit Division, AGM/Chief Manager-Non Credit Division and AGM/Chief Manager-IRMD. The current constitution of the committee at Circle Office is as under: One senior officer from credit department One senior officer from CRMD One independent senior officer not concerned with credit.

The members should preferably be in the rank of scale IV or above but not below the level of scale III in Circles where sufficient officers in scale IV and above are not available. The committee deliberates upon the credit proposals including risk rating of the borrower, risk specific to the borrower, risk in the industry and suggests mitigation thereof.

Proposals emanating from LCBs and falling under HO powers shall be placed to Credit Committee at HO level. However, the proposals from LCBs falling within the vested loaning powers of FGMs, shall be discussed in the Credit Committee of the Circle Office linked with the LCB with the condition that for such proposals the AGM of FGMO shall act as coordinator of the Committee and the Circle Head (in the absence 2nd man of the Circle Office) shall be one of the members of the Committee.

CREDIT RISK STRATEGY

Credit risk strategy is a meticulous exercise of achieving a balance between the risk to be taken & profitability to be achieved. The strategy has to spell out banks credit appetite vis--vis acceptable credit risk.

NEED FOR CREDIT RISK ASSESSMENT

If Terms & Conditions of Sanctions are stipulated without proper assessment of Credit Risk, Bank might charge: High Rate of Interest from a Good Quality Customer, which may drive them away to other bank. OR Low Rate of Interest from a Poor Quality Customer, thereby not compensating for higher losses due to higher probability of default.

CREDIT RISK RATING MODEL DEVELOPED BY PNB

Models (PNB TRAC) S.No 1 2 Credit Risk Rating Model Large Corporate Mid Corporate Applicability Total Limits Above Rs.15 Crore (OR) Sales Above Rs.100 Crore, except Trading concerns Above Rs.5 Cr and upto Above Rs.25 Cr and upto Rs.15 Cr (OR) Rs.100 Cr All trading concerns falling in the Large Corporate category shall also be rated under this model Above Rs.50 lakh & upto Upto Rs.25 Cr Rs.5 Cr (AND) Above Rs.2 lakh & upto Rs.50 lakh All Non Banking Financial Companies irrespective of

3 4 5

Small Loans Small Loans II NBFC

6 7

New Projects Rating Model Entrepreneur New Business Model

Limit Above Rs.5 Cr (OR)

Half Yearly Review of Rating

9 10 11 12

Facility Rating Framework Credit Risk Rating models for Banks/FI NPA Model

Borrower setting up new business and requiring finance above Rs.20 lakh upto Rs.5 Cr (AND) However, all new trading business irrespective of limits shall be rated under this model I ) All listed companies rated on large/ mid corporate rating models II ) Other borrowal accounts rated on large/ mid corporate rating models availing limits (FB+NFB) above Rs.50 Cr from the bank Assigning rating to facility sanctioned to the borrower based on default rating and securities available All Banks & Financial Institutions For marking NPA accounts in on-line PNB Trac Credit Risk Rating System Advances to property owners against future lease rentals

Cost of project above Rs.15 Cr. Cost of project upto Rs.15 Cr.

Future Lease Rental Model Table 3.1: Credit Risk Rating Models

AREAS FOR EVALUATION

All the models have four areas of evaluation Financials, Business & Industry, Management & Conduct of Account. The weightage under various risk areas vary from model to model as under:

Models

Financials

Business Industry

& Management

Conduct of A/c

Large Medium Small Small II New upto

40% 40% 40% 36% 25%

25% 25% 20% 16% 30%

25% 20% 20% 28% 45%

10% 15% 20% 20% NA

Implementaion New- after implementation ENBM 25% 35% 40% NA 30% 25% 30% 15%

Table 3.2: Weightage under various Risk Areas For any new project, fresh proposal less weightage is given to financials and more to management as there is less chance of any reliable past financials.

FINAL RATING SCORE, CATEGORY & RISK INDICATORS

The credit risk rating has been divided into 7 categories (from PNB AAA to PNB D) according to the total final score (%) obtained by the borrower as shown under:

Score Obtained Above 80.00 Above 77.50 upto 80.00 Above 72.50 upto 77.50 Above 70.00 upto 72.50 Above 67.50 upto 70.00 Above 62.50 upto 67.50 Above 60.00 upto 62.50 Above 57.50 upto 60.00 Above 52.50 upto 57.50 Above 50.00 upto 52.50

Category PNB- AAA PNB- AA+ PNB-AA PNB-AAPNB- A+ PNB- A PNB APNB- BB+ PNB- BB PNB- BB-

Risk Indicator Minimum Risk Marginal risk

Modest risk

Average risk

Above 47.50 upto 50.00 Above 42.50 upto 47.50

Above 40.00 upto 42.50

PNB- B+ PNB- B PNB- BPNB C PNB D

Marginally acceptable risk

Above 30.00 upto 40.00 30.00 and below

High risk Caution

Table 3.3: Rating Score, Category & Risk Indicators

DECISION ON RISK ACCEPTANCE LEVELS

Linking loaning powers with Risk Rating: The Bank has in place a multi-tier credit approving system. In order to enable the field functionaries for taking expeditious decisions and also to attract quality accounts, higher loaning powers have been vested with the sanctioning officials in the rank of CMs/AGMs/DGMs/Circle Heads/GMs (HO) in case of borrowers with credit risk rating of A & above. In case of AAA & AA rated borrowers, 125% and in case of A rated borrowers, 110% of their normal loaning powers shall be exercised. No fresh exposure should be taken up to field level for borrowers under unfavourable industries irrespective of their credit risk rating. Only ad hoc/additional/ enhancement facilities may be considered at the field level for borrowers under unfavourable industries. However, GM (HO/Field) & above may consider fresh proposals under unfavourable industries within their vested loaning powers. In case of exporter borrowers, officials up to AGM level shall exercise powers upto 125% of aggregate commitment per borrower provided that additional 25% powers are utilized only for export limits. All officials can exercise their normal ad hoc powers over and above the increased powers vested in them. However, Circle Heads/DGMs/GMs while exercising powers of 125% in case of AA & AAA rated borrowers have to ensure that the total commitment does not exceed the aggregate powers vested with the next higher authority. To regulate Banks exposure in case of low rated accounts and industries, the following restrictions imposed for exercising of loaning powers shall continue to be followed: CRR B For other industries Enhancement/ than unfavourable *For unfavourable industries ad hoc Enhancement/additional/ad hoc exposure,

additional/

exposure, officials at all levels can cases shall be sanctioned by the next exercise their normal loaning powers. higher authority not below the level of For fresh exposure, officials other than Circle Heads CMD/ED/GM (HO/Field) shall exercise No fresh exposure should be taken up to 75% of vested loaning powers except in the level of Circle Heads. However, case of B-and B rated borrowers CMD/ED/GM (HO/Field) shall exercise where officials up to the level of Circle their normal loaning powers for Heads shall not exercise loaning powers considering enhancement/additional/ad for taking fresh exposure. However, hoc/ fresh exposure. CMD/ED/GM (HO/Field) shall exercise their normal loaning powers for considering enhancement/additional/ad hoc/fresh exposure. C & No fresh exposure is to be taken in C & D rated accounts. However, MC is empowered to consider fresh exposure in case of C & D rated borrowers. Renewals D shall be considered by competent authority if exit is not feasible. Ad hoc/additional/enhancement facility is to be sanctioned by the next higher authority not below the level of Circle Heads. However, ED/CMD shall exercise their normal loaning powers for considering enhancement/additional/ad hoc exposures. *A list of industry rating including the unfavourable industries have been advised vide L&A Circular No. 06 dated 14.01.2011. In case industry is upgraded, the restriction shall be removed automatically. Table 3.4: Restrictions on Loaning Powers

SME
The Indian micro- and small-enterprises (MSEs) sector plays a pivotal role in the country's industrial economy. These are companies whose personnel numbers fall below certain limits. In most economies, smaller enterprises outnumber large companies by a wide margin. SMEs are said to be responsible for driving innovation and competition in many economic sectors. It is a part of Government drive to encourage small manufacturers to enjoy credit facility from banks at concessional rates. It is estimated that in value, the sector accounts for about 39 percent of manufacturing output and about 33 percent of total exports. In recent years, the MSE sector has consistently registered a higher growth rate than the overall industrial sector. The major advantage of the MSE sector is its employment potential at a low capital cost. Classification of Enterprises

Micro, Small & Medium Enterprises Development Act 2006 Classification Manufacturing Services Micro Enterprise 25 lakh 10lakh Small Enterprise >25 to =< 5 Cr >10 to =< 2 Cr Medium Enterprise >5 Cr to =< 10 Cr >2 Cr to =< 5 Cr Manufacturing :- Maximum investment in Plant & Machinery for manufacturing or production of goods is pertaining to industry Services: - Maximum investment in equipments, for enterprise engaged in providing or rendering of services. Table 3.5: Classification of Enterprises

List of activities covered under SME

Background: RBI based on the recommendations of Prime Ministers High Level Task Force recommendations, has inter alia advised banks that the share of advances to Micro Enterprises out of total advances to Micro & Small Enterprises (MSEs) should reach a level of 60% by 31st March 2013 in stages i.e. 50% by 31st March 2011, 55% by 31st March 2012 and 60% by 31st March 2013. It is, therefore, necessary to step up and give focus for the attention for lending to micro enterprises. CGTMSE Coverage: All collateral free advances to MSEs (except trading and educational institutions) up to Rs 100 lakh are eligible for coverage under Credit Guarantee Trust for Micro & Small Enterprises (CGTSMSE). Further, even if the total advances to MSE are more

than 100 lakh, credit guarantee cover up to Rs 100 lakh is available, provided the same is collateral free/ without third party guarantee. Illustrative list for lending to Micro Enterprises in Service/Manufacturing Sectors (Common to all places): i. ii. iii. iv. v. vi. vii. viii. ix. x. xi. xii. xiii. xiv. xv. xvi. xvii. xviii. xix. xx. xxi. xxii. xxiii. xxiv. xxv. xxvi. xxvii. xxviii. xxix. xxx. xxxi. xxxii. xxxiii. xxxiv. xxxv. xxxvi. xxxvii. Consultancy Services including Management Services Renting of Agriculture Machinery (Harvesting) Composite Broker Services in Risk and Insurance Management Third Party Administration (TPA) Services for Medical Insurance Claims of Policy Holders Seed grading Services Training-cum-Incubator Centres Educational Institutions Training Institutes Retail Trade Practice of Law, i.e. legal services Trading in medical instruments (brand new) Advertising Agency Advances to Transport Sector Courier Services Catering Industrial Photography Oil mills Leather items Food Processing Papad and Mangori Making Confectionary and bakery Handmade Papers Ice Candy Handicrafts Kacha Brick manufacturers Jiggery Making Beauty Parlours and Creches Mini rice mills Sauce/Pickle Steel Furniture Woodcraft Weight Bridge Auto Repair and service centre Desk top Publishing Xeroxing Gems and jewellery designing Nursing Homes/clinics

xxxviii. xxxix. xl. xli. xlii. xliii. xliv. xlv. xlvi. xlvii. xlviii. xlix.

ISD/STD Booths X-ray Clinic Laundry and Dry Cleaning Tailoring , boutiques Washing powder and Soaps Ropeways in hilly areas Industrial R&D labs Event Management Readymade Garments Aluminum/Steel utensils Typing Centres Teleprinters/Fax services

Credit Exposure Ceiling

Exposure: Exposure shall include credit exposure (funded and non-funded credit limits) and investment exposure (including underwriting and similar commitments) as well as certain types of investments in companies. The sanctioned limit or outstanding, whichever is higher, shall be reckoned for arriving at exposure limit. Further, non-fund based exposure should also be reckoned at 100 percent of the limits or outstandings, whichever are higher. In case of fully drawn term loans, where there is no scope for redrawal of any portion of the sanctioned limits, the outstanding shall be reckoned as exposure. However, in case of other term loans, the exposure shall be computed as usual i.e. sanctioned limits or outstandings, whichever are higher. Prudential Exposure Limit for Single/Group Borrowers: As per RBI Guidelines Credit exposure ceiling shall be as under: (Rs. In crore) S.No 1. 2. Category of borrower Prescribed RBI ceiling %age of capital fund @ Amount for 2011-2012 15 4633.15 20 6177.53 12355.07 15443.84

Single Single (with additional 5% in infrastructure project) 3. Group 40 4. Group (with additional 10% in 50 infrastructure project) @Capital Fund as at 31.03.2011---Rs.30887.68 crore

Table 3.6: Credit Exposure Ceiling

FINANCIAL RATIOS
While analyzing the financial aspects of project, it would be advisable to analyze the important financial ratios over a period of time as it may tell us a lot about a units liquidity position, managements stake in the business, capacity to service the debts etc. The financial ratios which are considered important are discussed as under: Ratio Formula Remarks It indicates what proportion of equity and debt the company is using to finance its assets. Compares assets provided by creditors to assets provided by shareholders. There cannot be a rigid rule to satisfactory debt- equity, lower the ratio higher is the degree of protection enjoyed by the creditors. These days the debt equity ratio of 2:1 is considered reasonable. It, however, is higher i.e. 1.5:1 in respect of capital intensive projects. But it is always desirable that owners have a substantial stake in the project. Other features like quality of management should be kept in view while agreeing to a less favorable ratio. In financing highly capital intensive projects like infrastructure, cement, etc. the ratio could be considered at a higher level. DSCR is the ratio of cash available for debt servicing to interest, principal and lease payments. It is a popular benchmark used in the measurement of an entitys (person or corporation) ability to produce enough cash to cover its debt (including lease) payments. The higher this ratio is, the easier it is to obtain a loan. This ratio of 1.5 to 2 is considered reasonable. A very high ratio may indicate the need for lower moratorium period/repayment of loan in a shorter schedule. This ratio provides a measure of the ability of an enterprise to service its debts i.e. `interest and `principal repayment besides indicating the margin of safety. The ratio may vary from industry to industry but has to be viewed with circumspection when it is less than 1.5.

Debt (Term Liabilities) Debt-Equity Equity Ratio (Where, Equity = Share capital, free reserves, premium on shares, , etc. after adjusting loss balance)

DebtService Coverage Ratio

Debt + Depreciation + Net Profit (After Taxes) + Annual interest on long term debt Annual interest on long term debt + Repayment of debt

Tangible Net Worth (Paid up Capital + This ratio gives a view of borrowers capital Reserves and Surplus TOL / TNW Intangible Assets) structure. If the ratio shows a decreasing trend, it Ratio indicates that the borrower is relying more on his Total outside Liabilities own funds and less on outside funds and vice versa Tangible Net Worth The current ratio is a financial ratio that measures whether or not a firm has enough resources to pay its debts over the next 12 months. It compares a firms current assets to its current liabilities. Higher the ratio greater the short term liquidity. This ratio is indicative of short term financial position of a business enterprise. It provides margin as well as it is measure of the business enterprise to pay-off the current liabilities as they mature and its capacity to withstand sudden reverses by the strength of its liquid position. Ratio analysis gives indications; to be made with reference to overall tendencies and parameters in relation to the project.

Current Ratio 4

Current Assets Current Liabilities

Table 3.7: Ratios & their Significance

ASSESSMENT OF WORKING CAPITAL

Methods: I. Turnover Method: Turnover method also known as the simplified turnover method is based on the recommendations given by Nayak Committee. Under this method, the working capital requirement is 25% of average projected turnover, out of which the party has to contribute 5% of average projected turnover as margin and remaining 20% will be financed by bank. The minimum margin of 5% shall be by way of promoters contribution towards margin money. However, if the available NWC in the system exceeds stipulated 5% minimum margin, the same shall be reckoned for assessing the extent of bank finance and limits will be determined accordingly. This method is used for financing of loan within the limit of 2 crore for trading and service concerns or others and 5 crore for a manufacturing concern.

II.

Maximum Permissible Bank Finance Method: This method is based on the recommendations given by Tondon committee. As per the recommendations of Tandon Committee, the corporate should be discouraged from accumulating too much of stocks of current assets and should move towards very lean inventories and receivable levels. The committee even suggested the maximum levels of Raw Material, Stock-in-process and Finished Goods which a corporate operating in an industry should be allowed to accumulate. These levels were termed as inventory and receivable norms. Depending on the size of credit required, the funding of these current assets (working capital needs) of the corporate could be met by one of the following methods: First method of lending: Banks can work out the working capital gap, i.e. total current assets less current liabilities other than bank borrowings (called Maximum Permissible Bank Finance or MPBF) and finance a maximum of 75 per cent of the gap; the balance to come out of long-term funds, i.e., owned funds and term borrowings. This approach was considered suitable only for very small borrowers i.e. where the requirements of credit were less than Rs.10 lacs Second Method of Lending: Under this method, it was thought that the borrower should provide for a minimum of 25% of total current assets out of long-term funds i.e., owned funds plus term borrowings. A certain level of credit for purchases and other current liabilities will be available to fund the buildup of current assets and the bank will provide the balance (MPBF).

Consequently, total current liabilities inclusive of bank borrowings could not exceed 75% of current assets. RBI stipulated that the working capital needs of all borrowers enjoying fund based credit facilities of more than Rs. 10 lacs should be appraised (calculated) under this method. Third Method of Lending: Under this method, the borrower's contribution from long term funds will be to the extent of the entire CORE CURRENT ASSETS, which has been defined by the Study Group as representing the absolute minimum level of raw materials, process stock, finished goods and stores which are in the pipeline to ensure continuity of production and a minimum of 25% of the balance current assets should be financed out of the long term funds plus term borrowings. (This method was not accepted for implementation and hence is of only academic interest). Under MBPF method for assessment of borrowers working capital needs, the

projections submitted by borrowers are relevant. The first step in assessing the quantum of WC finance is to find out whether the projections given by the borrower are reasonable. Once the borrowers overall projections for the following year have been accepted then the actual requirement of the WC and bank finance can be worked out as: The actual requirement of WC can be arrived on the basis of position of current assets and other current liabilities The bank is to partly meet to difference between current assets and other current liabilities If the available NWC is more than the minimum stipulated WC under the second method of lending, the available NWC is to be taken into account for arriving at the permissible level of bank finance i.e. permissible bank finance will be reduced accordingly. III. Cash Budget System: In case of tea, sugar, film industries and service sector requirement of finance may be at the peak during certain months while the same proceeds may be realized throughout the year to repay the outstanding in the account. Therefore, credit limits are fixed on the basis of projected monthly cash budgets to be received before beginning of the season.

PRE SANCTION APPRAISAL

When a credit proposal is presented to a branch by a prospective borrower for sanction by an appropriate authority, the appropriate authority may either sanction or reject the proposal. The decision to sanction or reject the proposal has to be based on a careful analysis of various facts and data presented by the borrower concerning him and the proposal. Such an objective and in-depth study of the information and data should convince the sanctioning authority that the money lent to the borrower for the desired purpose will be safe and it will be repaid with interest over the desired period ,if the assumptions and terms and conditions on which it is sanctioned, are fulfilled. Such an in-depth study is called the pre-sanction credit appraisal. It provides the sanctioning authority with the reasons and justifications for either sanctioning or rejecting a credit proposal. It, thus, helps in the decision making process of the sanctioning authority. The entire gamut of credit appraisal can be segregated into 7 sections is under:
a. Borrower Appraisal.

b. Technical Appraisal. c. Management Appraisal. d. Financial Appraisal. e. Economic Appraisal. f. Market Appraisal. g. Environmental Appraisal. 1. BORROWER APPRAISAL / KNOW YOUR CUSTOMER (KYC) NORMS: The borrower is appraised on the following parameters also known as the 3 Cs of the borrower i.e. character, capacity and capital. (1) Character: Character is the greatest and the most important asset, which any individual can have. Even if a borrower has the capacity and capital to repay a loan, it is the character of the borrower which indicates his intention to repay. If the character or integrity of a borrower is known to be questionable, every banker would avoid him even if backed by sufficient collaterals. (2) Capacity: It deals with the ability of the borrower to manage an enterprise or venture successfully with the resources available to him. His educational, technical and professional qualifications, his antecedents, present activity, experience in the line of business, experiences of the family,

special skill or knowledge possessed by him, his past record etc. would give a hindsight into his capacity to manage the show successfully and repay the loan. (3) Capital: It is his ability to meet the loss, if any, sustained in the business or venture from his own investment or capital without shifting it to his creditor or banker. Unless a borrower has some Stake in the business, he may not take much interest in its success. Key Elements of the KYC Policy: a.) Customer Acceptance Policy b.) Customer Identification Procedures c.) Monitoring of Transactions d.) Risk Management

2. TECHNICAL APPRAISAL: The technical appraisal of a credit proposal involves a detailed study of the following aspects: 1) Availability of basic infrastructure. 2) Licensing/registration requirements. 3) Selection of technology. 4) Availability of suitable technical process, raw material skilled labor etc. 3. MANAGEMENT APPRAISAL: In case of projects, units or enterprises run by individuals as sole proprietors or partnership firms, it is usually one or two persons who manage the entire project, unit or the enterprise whether it be of manufacturing or trading. However, in case of corporate borrowers and also in case of large borrowal accounts, it is usually a set of professionals who manage the entity each specialized in a specific area of management i.e. production, finance, marketing, personnel etc. Unless there is a complete integration of all these functions within an organization, it cannot function effectively.

4. FINANCIAL APPRAISAL: The term financial appraisal refers to the study of the following aspects of the project/unit: i. ii. iii. iv. Determination of the cost of the project. Assessment of the source of funds/means of financing the project Profitability estimates. Break even analysis.

v. vi.

Cash flow projections. Projected balance-sheet.

5. ECONOMIC APPRAISAL: The performance of a project is influenced by a variety of other economic, social and cultural factors. Even if a project is technically feasible and financially viable, it may not satisfy the economic needs viz. employment potential, development of industrially backward areas, environmental pollution etc. Further as capital is a scarce resource, it is necessary that it must be allocated in such a way that it yields best possible return to the society in general and the investor in particular. As such a detailed appraisal of the project in terms of the return it generates to the investor and the lending institutions is necessary before a decision is taken to commit resources. One of the most important methods of appraising this is the computation of the Internal Rate of Return of the project. Internal Rate of Return (IRR): IRR is defined as the discount rate at which the present values of all investments made in a project are equal to the present value of all future returns from the project over the assumed life period of the project. Sensitivity Analysis: The actual results differ from the projected results. If the actual results are plus/ minus 10% of projections, it can be considered that the projections have been made very well. DebtService coverage ratio, break-even point and many other ratios have to be calculated on the basis of these financial projections. If the financial projections go wrong and the expected cash accruals are not available with the unit, the repayment of term loan will face difficulties. The appraising officers should ascertain the most sensitive areas of the project. If the working results of the project are highly sensitive to a particular variable, sufficient study should be done to find out the probability of change in that variable and its impact on the viability of the project. 6. MARKET APPRAISAL: While appraising a proposal it is not only necessary to find out whether it is technically feasible and financially viable, but also important to ascertain the marketability of the product manufactured/sold. If goods produced cannot be sold there would be no point in producing

them. Hence the marketability or salability of goods is of great importance. Existence of a market for the product provides the rationale for its production. If the product sought to be manufactured is the only one of its kind for which there are no substitutes, the marketing of the same may not be a problem excepting when it can be freely imported and that too at a lesser cost. However, if there are many competitors, the entrepreneur may find the going tough. However a combination of the factors like man behind the show, the quality of the product and the strategy for its sale will result in its successful marketing. In order to ensure that a project is viable, its viability should be appraised/gauged/examined from different aspects which are: TECHNICAL APPRAISAL FINANCIAL APPRAISAL MANAGERIAL APPRAISAL

1)

Manufacturing Process

1) Capital cost of 1) the project 2) Sources finance 3) Financial projections 4) Ratio analysis 5) Breakeven point 6) Discounted cash 3) of

Qualities

of

an entrepreneur

2)

Technical arrangements

2) Various forms of organizations

3) 4) 5)

Size of the plant Product mix Selection of plant & machinery

Organizational

setup

6) 7)

Plant layout Location project of the

flow techniques

4)

Management

problems

POST SANCTION AND FOLLOW UP OF LOANS

Supervision and Follow-up of bank credit has assumed considerable significance particularly after introduction of new norms of assets classification, provisioning and derecognition of interest income on NPAs, affecting profitability. System of supervision and follow up can be defined as the systematic evaluation of the performance of a borrowal account to ensure that it operates at viable level and, if problems arise, to suggest practical solutions. It helps in keeping a watch on the conduct and operational/financial performance of the borrowal accounts. Further, it also helps in detecting signals/symptoms of sickness and deteriorations, if any, taking place in the conduct of the account for initiating timely corrective actions to check slippage of accounts to NPA category. The goals and objectives of monitoring may be classified into fundamental and supplementary goals. Fundamental goals help a bank to ensure safety of funds lent to an enterprise while, supplementary goals are directed towards keeping abreast of problems arising out of changes in both the internal and the external environment for initiating timely corrective actions. Some of the important goals of monitoring are listed as under: i. To keep a watch on the project during implementation stage so that there are no time & cost overruns. ii. To ensure that the funds released are utilized for the purpose for which these have been provided and there is no diversion of such funds. iii. To evaluate operational and financial results, such as production, sales, profit/loss, flow of funds, etc. and comparing these with the projections/estimates given by the borrower at the time of sanction of credit facilities. iv. To ensure that the terms and conditions as stipulated in the sanction have been complied with. v. To monitor operations in the account particularly cash credit facilities which indicate health of the account. vi. To obtain market report on the borrower, to gather information like reputation/financial standing etc.

vii.

To detect signals and symptoms of sickness or deterioration taking place in conduct/performance of the account.

viii. ix.

To ensure that the unit's management and organizational set-up is effective. To keep a check on aspects like accumulation of statutory liabilities, creditors, debtors, raw-material, stocks-in-process, finished goods, etc.

x.

To ensure charging of applicable rate of interest/penal interest/ commitment charges as per bank's guidelines.

System of supervision & monitoring of credit as laid down by the Bank needs to be meticulously followed by the branches/controlling offices which, inter alia, covers the following: i. ii. iii. iv. v. vi. vii. Conveying the sanction Maintenance of Loan Document File Quarterly Review Sheet Preventive Monitoring System Quarterly Monitoring System Inspection and Physical Verification of stocks Stock Audit Inspection and physical Verification of Securities

CASE ANALYSIS
During my training at PNB, I assessed the proposal of Disha Engineering Ltd. The Company is a small scale unit incorporated under the Companies Act. The company is engaged in the manufacturing of various components and assemblies and sub-assemblies such as (a) Forging based (b) Steel components and (c) Sheet Metal Components used in Automobile and Tractor industry. The company proposed for renewal of loan, which includes: 1. Fund based- Existing Limit of 600 lakhs which is proposed to be enhanced to 1000 lakhs. 2. Non Fund Based- Existing Limit of 100 lakhs to be enhanced to 400 lakhs for ILG/ILC 3. Term Loan- Fresh Term loan of 250 lakhs, in addition to Existing Loan of 222 lakhs The following is enclosed proposal of Disha Engineering:

ACTIVITY SHEET
ABC Bank CO- South Delhi RefDated 28.01.2012 Circle Head- (South Delhi) COSD/CRNKK

The proposal falls under the powers of CH on account of total exposure is 1872 Lacs Name of the Borrower and BO & Controlling Office : M/s.Disha Engineering Co. Pvt.Ltd.: BO Old FARIDABAD : Circle Office : South Delhi AGM (B) has recommended for enhancement of FB, NFB Fund based & Fresh T/L limits along with approval of other issues detailed below in favour of the captioned party. (Branch proposal placed below forms part of this proposal). GIST OF THE PROPOSAL A. Renewal of Working Capital Limits Existing Limits FB CC-H & BD 600 Proposed Enhancement 1000 In Lacs Remarks

Book Debts not to exceed 50%

Non fund Based ILC/ILG TL existing Fresh T/L TOTAL COMMITMENT 922 100 222 400 222 250 1872

B- Other Issues Concession of 0..50 % on applicable rates in ROI on account of CRISIL rating SE-1A 50% Concession in Processing fee 0.25% Concession in Upfront fee

Loan Policy

The proposal exposure is within prudential norms and conforms to the loan policy of banks.

Audit Observations Particulars Remarks/Observations/Steps taken a) Annual inspection IR 30.06.2011 Since Closed b) Stock audit NO serious Observation c) RBI AUDIT No Observation in this account As per L&A circular no. 06.2012 dated 12.01.2012 IS neutral Auto Ancillaries and components SME- Manufacturing of Components and Assemblies for Auto and Tractor Parts

Industry Rating as per RMD Whether Agriculture/Retail/ SME/Others (Please specify) Asset Classification as on and last PMS score Consortium Banking /

Standard- PMS- 1

Multiple Presently Sole Banking

Credit risk rating

Rating

ABS

Score %

Model

Indicating

Current CO-

BB +

31.03.11 59.01%

Large Corporate

Average Risk

Key areas of Risks /Mitigation Factors-- As per ABS 31.03.2011

Risks

Mitigation /Observations reply of the branch

TOL /TNW on higher side TOL / TNW estimated to improve to 2.06 during the current 3.90 year on account of further introduction of capital and long terms funds. Current raio is 1.07 which is As per Provisional BS of 30.09.2011, current ratio improved lower than bench mark to 1.10. However, company will introduce sufficient capital and long terms funds to bring the ratio to 1.33 by 31.03.2012. Company has not achieved Mainly due to job work done from outside which is a costly PBT targets for 2010- 11 affair. Now company has reduced its dependency on job work from outside to save cost.

Credit rating by external Agencies By CRISIL is SE1 A as per rating done on 03.11.11 which reflects highest performance capabilities and high financial capabilities Brief history The Company is a small scale unit incorporated under the Companies Act vides Registration No. 55-21578 dated 26-07-1985. However the unit was originally established in the year 1982 as a partnership firm in the name and style of M. S. Engineering Co. and later converted into a private limited company in its present name in 1985. Initially the company was promoted and managed by Mr. Sanjeev Arora and Mrs. Seema Nayak .Later, Mrs. Seema Nayak retired in the year 2001 and presently the company is wholly owned and managed by Arora family. The company is engaged in the manufacturing of various components and assemblies and sub-assemblies such as (a) Forging based (b) Steel components and (c) Sheet Metal Components used in Automobile and Tractor industry. Company has its manufacturing units located at Faridabad, Haryana and Rudrapur, Uttarakhand equipped with latest plant and machinery. The company has grown substantially and consistently since inception. The company is a registered vendor of M/s Mahindra & Mahindra Ltd. and Maruti Udyog Ltd. (through Ancillaries). About 60% of companys production is consumed by M&M Limited. Company is also making headway into components manufacturing for Maruti Udyog Ltd. and about 25% of the total production facilities are reportedly earmarked for MUL. Company has also developed and is manufacturing components for various other automobile manufactures either directly or through their registered vendors.

FINANCIALS of Disha Engg.

31.03.09

31.03.10

31.03.11

31.03.12 31.03.13 PROJ. 8050.00 8050.00 0.00 15.00 0.00 420.94 420.94 309.51 425.25 397.00

AUDITED AUDITED AUDITED ESTI. I II III IV V VI VII VIII IX X Gross Sales *Domestic *Exports % Growth Other Income (Non Operational) Operating Profit Profit Before Tax. Profit After Tax Cash Profit Paid Up Capital Reserves & Surpluses Excluding Revaluation Reserves Misc. Exp. Not W/off Accumulated Losses Deferred Tax Liabilities/ Assets 3110.15 3110.15 0.00 #VALUE! 1.25 56.40 56.40 49.80 115.24 165.00 3430.26 3430.26 0.00 10.29 10.47 116.74 116.74 98.70 174.00 255.50 5259.36 5259.36 0.00 53.32 9.45 202.68 202.68 161.32 260.45 255.50 7000.00 7000.00 0.00 33.10 0.00 361.64 361.64 291.83 396.96 397.00

XI XII XIII XIV

228.63 0.51 0 32.76

227.27 0.17 0 48.58

392.16 0.00 0 45.01

729.00 0.00 0 0.00

1008.73 0.00 0 0.00

XV

Tangible Net worth

341.63

531.18

692.67

1106.00

1405.73

Investments in allied concerns and amount of cross holding Net Owned funds XVI XVII XVIII XIX XX XXI XXII XXIII XXIV XXV XXVI XXVII Unsecured Loans Total Borrowings Secured Unsecured Investments Total Assets Out of which net fixed assets Net Working Capital Current Ratio Debt Equity Ratio Operating profit/Sales(%age) TOL/TNW

0 341.63 115.02 1548.16 604.55 943.61 8.00 1890.30 696.60 54.48 1.03 1.20 1.81 4.61 751.06 696.60

0 531.18 115.02 1757.97 626.06 1131.91 1.75 2289.32 754.02 104.33 1.07 0.62 3.40 3.31 857.31 754.02

0 692.67 115.02 2739.71 964.39 1775.32 26.88 3432.38 891.11 177.15 1.08 0.54 3.67 3.90 1068.25 891.11

0 1106.00 115.02 2221.52 1433.61 787.91 0.00 3327.24 1096.44 469.75 1.25 0.40 5.46 2.06 1566.19 717.68

0 1405.73 115.02 2379.98 1420.66 959.32 0.00 3758.81 1150.43 682.54 1.33 0.31 5.24 1.76 1832.97 884.91

XXVIII Long Term sources XXIX Long Term Uses

XXX XXXI XXXII

Surplus/ Deficit Short Term Sources Short Term Uses

54.46 1168.84 1223.32 54.48 65.44

103.29 1432.00 1535.11 103.11 75.30

177.14 2322.76 2499.90 177.14 99.13

848.51 1877.64 2726.15 848.51 105.13

948.06 2043.61 2991.67 948.06 116.01

XXXIII Surplus/ Deficit Depreciation

KEY FINANCIALS Period ended Cumulative position as 30.09.11 Accepted for %age achievement Remarks on the current upto latest year quarter/HY/Q3

30.09.2011

3399

7000

48.55%

The projected sales seems to be achievable.

BRIEF DISCUSSION on Financial Indicators:

1. Paid up capital/TNW The Authorized and Paidup Capital of the company is Rs. 2.70 crores and Rs.2.55 crores respectively. TNW has improved from Rs. 3.42 Crores as at 31.3.2009 to Rs. 5.31 Crores as at 31.03.2010 to Rs.6.93 crores as on 31.03.11 due to plough back of profits. The Co. proposes to raise its Authorised Capital to Rs.4.00 crores and accordingly the paid up capital is proposed to be raised to Rs.3.97 crores as on 31.03.12. Reconciliation of TNW (Rs. in Crore) TNW as on close of FY ended 31.3.2010 Add: Retained profit for the year TNW as on close of FY ended 31.3.2011 5.31 1.61 6.92

2. Sales The Co. has achieved Gross sales of Rs.52.59 crores as on 31.03.11 (Audited) against projected sales of Rs.46 crores thus the company has not only achieved but also has surpassed the budget by 14.32%. The Co. has achieved growth of 53.32% as on 31.03.11 over 31.03.10.The sales were Rs.34.30 crores during 31.03.2010 and Rs 31.10 Crores during the year ended 31.03.2009. The company has achieved sales of Rs.33.99 crores up to 30.09.11 and the projected sales of Rs.70.00 crores during 2011-12, which seems to be achievable in view of past trend of growth and addition of new customers to companys clientele besides increase in demand from existing customers. The major contributor of the sales is Mahindra & Mahindra (M&M) which comprises about 60% of total sales. The same is expected to continue as the company has running orders and scheduled supply schedules from M&M till the close of the current financial year. The Rudrapur Factory of the company which is mostly catering to this demand, especially for M&Ms Rajkot Factory, has already achieved a sale of Rs. 8 crores in the first half of the FY 2012 and considering the orders in hand and available supply schedule, the company targets to achieve a sale of Rs. 20.00 crores from this unit itself. 3. Other income Company has not projected any other income, though in the past it has earned some interest and other misc income such as write-offs etc, which is not significant as compared to overall level of operations of the company.

4. Profitability The Operating Profit is Rs.116.74 lacs as on 31.03.10 which has increased to Rs.202.68 lacs as on 31.03.11 i.e. operating profit to sales is 3.40% as on 31.03.10 which has improved to 3.67% as on 31.03.11. The projected Operating Profit will be Rs.363.90 lacs and Rs.418.39 lacs as on 31.03.12 and 31.03.13 i.e. 5.20% and 5.20% respectively, the reason for increase will be the job-work that was previously outsourced will be done in-house, economies of scale, fixed overheads will not change with the increase in sales and saving of cost of funds due to low level of credit period allowed by suppliers of raw material because higher credit period entail higher cost. The net profit (after tax) of the company is reported at Rs.161.32 lacs as on 31.03.11 against Rs.98.70 lacs during the previous financial year 2010 and Rs. 49.80 lacs earned for FY 2009. The net profit margin is 3.07% as on 31.03.11 which has improved from 2.88% as on 31.03.10. Operating profit to sales has also improved from 1.81% as on 31.03.09 to 3.40% as on 31.03.10 to 3.67% as on 31.03.11, mainly on account of control of manufacturing and administrative overheads as a percentage of sales. Profit Before Depreciation, Interest and Taxes to Sales is 9.25% as on 31.03.10 which has marginally declined to 9.17% as on 31.03.11 but the same is expected to improve to 9.74% as on 31.03.12 and 10.06% as on 31.03.13 due to control over expenditure and better utilization of installed capacity. 5. Investments The company has not made any investments in associate concern. 6. TOL/TNW The gearing ratio increased to 3.90 times as at 31.3.2011 as compared to 3.31 times as at 31.3.2010 mainly on account of enhancement in working capital limits during last financial year. The TOL/TNW ratio is estimated to improve to 2.06 times during the current year and further to 1.76 times as at 31.03.13, on account of introduction of fresh Share Capital, enhanced retained profit and repayment of existing loans. 7. Current ratio/NWC The Net working capital of the company has increased from Rs.1.03 crores as at 31.03.2010 to Rs. 1.77 crores as at 31.03.2011 resulting in a marginal improvement in current ratio of the company from 1.07:1 to 1.08:1. The Current Ratio and NWC remain major shortcoming in the financial performance of the company with major reason of poor liquidity being

deployment of short term funds (advance from customers and sundry creditors) to long term uses (additions in fixed assets). The borrower has also informed that the investments in fixed assets are necessary to augment the production facility to execute the orders in hand as any order of a new product type/ mix from clients requires certain customization in the existing plant and new tools and dies for such product. The position of Block of assets also shows that the same has increased from Rs.995.81 lacs as on 31.03.09 to Rs.1128.02 lacs as on 31.03.10 to Rs.1338.77 lacs as on 31.03.11 to Rs.1501.70 lacs as on 30.09.11. 8. Debt Equity Ratio The debt equity ratio of the company is 0.54:1 as at 31.03.2011, which is within permissible limit of 2:1.

SECURITY
Primary--- For working capital limits: Hypothecation of stocks of RM, consumables, WIP, FG, bills, book debts and other current assets present & future, except only those bills which are discounted by Kotak Mahindra Bank under an arrangement with Mahindra & Mahindra Ltd. For Term Loan: Hyp of machinery, Tools & Dies already purchased and proposed to be purchased out of term loan and own funds. Collateral (Information in respect of mortgage of IP to be given only in the following format: i) Hypothecation/ Mortgage of Block Assets Immovable Properties (Rs. In Crore) Security Description Ownership Value Basis for valuati on Inc valuati on Date Whether existing/ fresh

Last sanct ion

Prese nt book value 5.76

Reali sable value

Factory Land & Disha Building Engg Co measuring 1477 Pvt Ltd Yrd of Land with constructions of about 18500 Sq. Ft.. situated at Plot No. 219, Sector-24, Faridabad

3.16

4.61

4.61

As per valuati on report dt. 04.11. 11 of Sh.M B Bhagat Banks approv ed valuer As per valuati on report

04.11.11 Existing

Factory Land & Disha Building Engg Co measuring 1477 Pvt Ltd Yrd of Land and

2.76

4.93

3.99

3.99

04.11.11 Existing

Building. situated at Plot No. 218, Sector-24, Faridabad

dt. 04.11. 11 of Sh.M B Bhagat Banks approv ed valuer 2.10 3.13 2.50 2.50 As per valuati on report dt. 04.11. 11 of Sh.M B Bhagat Banks approv ed valuer 04.11.11 Existing

Factory Land & Disha Building Engg Co measuring 3000 Pvt Ltd sq mts with constructions situated at Plot No. 54-55, Sector-6, Pant Nagar Industrial Estate, Rudrapur, Utrakhand.

TOTAL

11.10

Existing bank exposure of 922 lacs covered by 120 % of IP value collateral security but after enhancement total exposure of 1880 lacs remain covered by 59% . The bank accepted the collateral of 59% because the company is dealing with the bank since past 3years. Also it has a good rating without any default. The major advantage is that the company is an SME and as per the SME guidelines, the minimum exposure of collateral is 50%. Personal /Corporate Gurantee Rs in Lacs Name of Guarantor Relations hip with borrower Net Worth Immovable property Date of confidential report

Prev. as at 31.03.1 0 Mr. J. S. Virdi Director 275.88

Present as at 31.03.11

Prev. as at 31.03.10

Present as at 31.03.11

Prev

Present

299.42

150.00

180.00

25.10.1 0 25.10.1 0

07.01.12

Mrs. Sukhwant Kaur

Director

289.65

300.00

150.00

180.00

07.01.12

Mr. Vivek Director Singh Virdi Mr. Anoop Director Singh Virdi

81.62

106.08

25.10.1 0 25.10.1 0

07.01.12

69.98

71.50

07.01.12

POSITION OF ACCOUNTS as on: 28.01.2012

(Rs. in lacs) Nature Cash Credit(87-355) Limit* 535.00+ Ad hoc 150.00* Cash Credit(87-425) 65.00 231.58 173.68 52.72 Nil VS 1165.57 DP 874.00 Balance 678.32 Irregularity Nil

Term Loan (Rudrapur) Term Loan (2912) Term loan (2976) Term loan (3036)

200.00 50.00 120.00 68.00

250.00 72.00

31.70 31.77

31.70 30.50

Nil Nil Nil

161.00

99.86

99.86

NIL

100.00 BG/LC

92.00

60.96

59.79 NIL

92.43

Term Loans from other Banks/Financial Institutions/Other Institutions - (including Lease, ICDs, Corporate Loans, Debentures etc.)All accounts are running regular and no overdue as on 31.12.2011 Summary of cost of project and means of finance: Rs.crores Purpose Cost of Project Total Debt Promoters contribution (Internal Accruals) Proposed TL (our share) DER for this project DER present company as a whole DER proposed whole company as a Purchase of Machinery 3.33 2.50 0.83 (25%) 2.50 3.01 0.56 0.40

Repayment Period Door to door tenor

60 Months 69 Months (From first Disbursal)

T/L shall be disbursed in 2 installments of RS 50 Lacs up to 31.03.2012 and balance up to Sep 2012 Security Margin (Fixed Asset Coverage Ratio for term loans) : NA Existing Nature Book value FACR Book Value Proposed FACR on project completion 2.51

Primary

852.37

3.84

1185

PRICING
Interest on CC- BR+3.50 % - 0.50% (SMERA Ratng) = 13.75% subject to change as per bank / RBI guidelines Interest on fresh TL BR+3.50 %+0.50% TP - 0.50% (SMERA Ratng) = 14.25% subject to change as per bank / RBI guidelines Processing Fee- CARD RATES Upfront FEE - CARD RATES

Existing bank exposure of 922 lacs covered by 120 % of IP value collateral security but after enhancement total exposure of 1880 lacs remain covered by 59% . The bank accepted the collateral of 59% because the company is dealing with the bank since past 3years. Also it has a good rating without any default. The major advantage is that the company is an SME and as per the SME guidelines, the minimum exposure of collateral is 50%.

Facilities Recommended FOR ENHANCEMENT: (Rs. in LACS) Nature Fund Based CC(H) CC(H) Ad hoc WCTL FOBP/FOUBP/FABC Others (Sanctioned Limit) Fund Based Ceiling Non Fund Based ILC/FLC ILG/ FLG Non Fund Based Ceiling Term Loan (Existing) Outstanding *100 *100 *100 222 *400 *50 *400 222 Secured Secured Secured Secured 600 1000 Secured 600 150 NIL 1000 Nil NIL Secured Secured Secured Existing Proposed

Balance Term Loan Fresh for machinery Term Loan-Total 222 TOTAL COMMITMENT (Fund & NonFund Based) 922 1872 Secured 250 472 Secured

* ILC/FLC and ILG Limits are to be permitted as 100% interchangeable within limit of Rs.400 lac

JUSTIFICATION
1. Justification for Fund Based Limits

CC Facilities of Rs. 1000.00 Lacs

The operations of the company has shown substantial growth and this momentum is expected to continue for the current year, as the Company targets a Gross Sales of Rs. 70.00 Crores and Rs.80.50 crores for the financial year ended 31.03.12 and 31.03.13 respectively which shows growth of 33% and 15% over the sales of 52.59 Crores as on 31.03.11. In this current year in first half year sales have been achived of RS 3399 lacs and projected sales of 7000 seems achievable

The holding period of Raw Material is 1.89 months during 2011 and they are projected to be 1.30 months during 2012-13. The holding period of Raw Material has been projected at lower than 2011 because out of total purchases of raw material of Rs.4131 lacs during 2011, approx.40% purchases were done in the last four months so as to meet the demand of vendors for goods to be supplied during April12 onwards thus rising the average holding period during 2011-12. As the co. has already purchased the raw material therefore the holding period of 1.30 months for 201112/12-13 is justified and accepted by the branch

The holding period of Stock in Process is 2.60 months during 2011 and they are projected to be 1.50 months during 2012-13. The holding is projected on lower side because the Co. was using 95% Forging material and 5% Sheet Metal during 2011 and now it is shifting from Forging Material to Sheet Metal in the ratio of 75:25

respectively because in Forging material the Work-in-progress is more than 2.50 months as the same is to be got done through outsourcing whereas in the case of Sheet Metal the WIP is 10-15 days thus reducing the holding period of Stock-in-process.

The Sundry Creditors is 2.59 months as on 31.03.11 and is estimated to further reduce to 1.50 months in the current year ended 31.03.12 as suppliers are increasingly resorting to lower credit periods, release of enhanced limits and introduction of capital.

The Companys Receivable Periods is 1.60 months as on 31.03.11 which is mainly due to lower credit offered to new clients added during the period. However, M&M remains the largest contributor to the Companys sale with more than 60% of share and the company has limited bargaining with them since it is also amongst the oldest client and thereby subscribing to older credits. Therefore the Debtors have been accepted for a period of 1.65 months during 2012-13.As on 31.03.11, the co. is having only 4.21% debtors above 90 days. 2. Justification for Non Fund based limits (ILC/ILG) -400 Lacs Rs.lacs Total purchases of raw material 2012-13 Usance period of LC Time gap in opening of LC and dispatch of material Purchases proposed on LC 25% LC requirement for 2012-13 6043.65 3 Months 6 days (6/30)=0.2 month 1510.91 (1510.91*3.2)/12=402.91 lacs say Rs.400 lacs

3. Justification for term loan Fresh TL of Rs 2.50 crore - The company requires a fresh loan of Rs.2.50 crores for purchase of plant & machinery for meeting its new orders in hand from its main vendors. Average DSCR from 31.03.2011 to 31.03.2018 comes to 2.77 which is acceptable TEV of the project Branch vide letter dated 23.01.2012 informed that TEV is not required as this is an existing unit going for capacity expansion for which it requires to install new machinery 4. Justification of other Issues ROI- Concession of 0.50% applicable as CRISIL has allotted SE-1A rating (Highest) valid up to 02.011.12 ( Cir no 130/2012) branch vide mail dated 27.01.2012 confirmed that the account will remain in MSME after proposed expansion

Processing Fee Branch has recommended for 50% concession in processing fee in NFB but no justification in the proposal hence concession is not proposed Upfront Fee - Branch has recommended for 25 % concession in processing fee in upfront fee but no justification in the proposal hence concession is not proposed

Terms and conditions of previous sanction not complied Current ratio to remain 1.25 of 31.03.2011 but in actual it is 1.07. Now party propose to bring it to 1.25 on 31.03.2012 & 1.33 on 31.03.2013 by induction of fresh capital / internal accruals/ long term funds . In view of the AGM- Branch recommendations and reply of observations for enhancement of limits the proposal may be discussed in Credit Committee before placing it for approval of CH for the followings: Enhancement of FB limits from 600 lacs to 1000 lacs Enhancement of NFB limits from 100 lacs to 400 lacs Additional T/L of RS 250 Lacs for purchase of machinery with total cost of 333 Lacs Additional Stipulation Branch to take undertaking from the party to increase the capital by 141.50 lacs in addition to additional long term funds to bring the current Ratio to 1.33 by 31.03.2012 otherwise panel interest will be charged for non compliance. Enhanced limits will be released after introduction of required funds to bring the current ratio to 1.33 As recommended by branch CC facilities of 800 lacs to be allowed up to 31.03.2012 AGM Branch to ensure that prices of the machineries proposed are competitive, Supplier are genuine and verification of end use to be done and kept on record Company to close the accounts with KOTAK Mahindra Bank and HDFC bank and undertake to deal exclusively with us.

Senior Manager

AGM- Credit

CREDIT COMMITTEE RECOMMENDATIONS .The above proposal was discussed in the Credit Committee meeting held on ............... and Committee recommended for approval of the note Senior Manager(Convener) Chief ManagerCredit AGM RMD Chief ManagerNon Credit

In view of above study and depending upon risk rating, security and Bank guidelines, we may accept the proposal as above, for meeting the credit needs of company to run the business.

ANNEXURES Calculation of Working Capital by MPBF

Particulars Sales ( % age growth) Cost of Sales Cost of Production Raw Material holding Basic Data (value per month) Sales Cost of Sales Cost of Production RMC Holding Levels Raw Material Consumption WIP Finished Goods Receivables Chargeable Current Assets Raw Material WIP Finished Goods Sundry Debtors Chargeable Current Assets Other Current Assets Total Current Assets Other Current Liabilities Working Capital Gap NWC PBF Build up of NWC Capital + Reserves Term Liabilities Total Net Block NCA Total NWC 31/03/11 Audited 5259.36 53.63 4578.75 4581.81 4050.80 438.28 381.56 381.82 337.57 1.89 2.60 0.02 1.60 636.74 990.83 6.71 699.41 2333.69 155.49 2489.18 1727.38 761.80 166.55 595.25 31.03.12 Estimated 7000.00 33.10 6047.33 6065.82 4889.35 583.33 503.94 505.49 407.45 1.30 1.50 0.05 1.65 529.68 758.23 25.20 962.50 2275.61 43.61 2319.22 877.64 1441.58 441.58 1000.00 31.03.13 Projected 8050 15 6949.54 6953.3 5930.82 670.83 579.13 579.44 494.24 1.30 1.50 0.05 1.65 642.51 869.16 28.96 1106.88 2647.51 38.59 2686.10 1043.61 1642.49 642.49 1000.00

692.67 375.72 1068.39 852.37 49.47 901.84 166.55

1127.83 440.19 1568.02 1084.58 41.86 1126.44 441.58

1405.68 427.24 1832.92 1138.57 51.86 1190.43 642.49

Purchase

4050.80

4889.35

5930.82

Purchase/Month Creditors Creditors/Holding

337.57 954.28 2.83

407.45 601.77 1.48

494.24 760.49 1.54

Calculation of Financial Ratios

31/03/11 Audited 255.5 437.17 0.00 692.67 260.70 115.02 375.72 595.38 954.28 0.80 15.72 756.58 2322.76 3391.15 1338.77 486.40 852.37 1634.28 699.41 68.80 86.69 2489.18 37.61 11.86 0.00 0.00 49.47 3391.02 5259.36 31.03.12 Estimated 397 730.83 0.00 1127.83 0.00 0.00 440.19 1000.00 601.77 0.00 16.00 259.87 1877.64 3445.66 1676.11 591.53 1084.58 1313.11 962.50 13.61 30.00 2319.22 30.00 11.86 0.00 0.00 41.86 3445.66 7000.00 31.03.13 Projected 397 1008.68 0.00 1405.68 0.00 0.00 427.24 1000.00 760.49 0.00 17.00 266.12 2043.61 3876.53 1846.11 707.54 1138.57 1540.63 1106.88 1.59 37.00 2686.10 40.00 11.86 0.00 0.00 51.86 3876.53 8050

Particulars Share Capital Reserves/Surplus Deffered Tax Liability Net Worth Term Liabilities Secured Loans Unsecured Loans Current Liablites Working Capital Sundry Creditors Adv. Payments Statutory Liablities Other CL Total Liabilities Fixed Assets Depreciation to date Net Block Current Assets Inventories Sundry Debtors Cash & Bank balance Other Current Assets Non-current Assets Investments Security Deposits Margin Money Other NCA Total Assets Sales Turnover

Other income Profit before tax Provision for taxes Profit after tax Depreciation Cash profit Intangible Assets TNW Current Ratio Debt/Equity NWC TOL/TNW PBT/Sales Long Term Sources Long term uses Surplus\Deficit Short Term Sources Short Term Uses Surplus/Deficit

9.44 202.68 41.36 161.32 99.13 260.45 0.00 692.67 1.07 0.54 166.42 3.90 3.85 1068.39 901.84 166.55 2322.76 2489.18 -166.42

0.00 363.90 70.24 293.66 105.13 398.79 0.00 1127.83 1.24 0.39 441.58 2.06 5.20 1568.02 1126.44 441.58 1877.64 2319.22 -441.58

0.00 418.39 110.76 307.63 116.01 423.64 0.00 1405.68 1.31 0.30 642.49 1.76 5.20 1832.92 1190.43 642.49 2043.61 2686.10 -642.49

RECOMMENDATIONS
The Credit Department at PNB Circle Office Delhi, works at its full potential and the staff is highly experienced and has a very strong intuitive sense. So, there is no such recommendation on the entire process. However to make the process more flexible and efficient it is important to keep following things in mind:

Electronic database should be designed carrying all the available and important information related to the proposals accepted. This will help reduce paperwork and loss of information. Financial Analysis is not the only requirement-overall analysis is must. Updating on technology and tools is a must be it individual or organization. Understanding the nature of business and the market conditions is crucial for effective credit appraisal Real time communication with clients helped me enhance my communication skills. Decent understanding of the credit appraisal techniques.

CONCLUSION
The study at PNB gave a vast learning experience to me and has helped to enhance my knowledge. During the study I learnt how the theoretical financial analysis aspects are used in practice during the working capital finance and term loan assessment. I have realized during my project that a credit analyst must own multi-disciplinary talents like financial, technical as well as legal know-how. The credit appraisal for business loans has been devised in a systematic way. It is a process of appraising the credit worthiness of loan applicants. Thus it extremely important for the lender bank to assess the risk associated with credit; thereby ensure the security for the funds deposited by the depositors. There are clear guidelines on how the credit analyst or lending officer has to analyze a loan proposal. It includes phase-wise analysis which consists of 6 phases: 1. Financial statement analysis 2. Working capital and its assessment techniques 3. Techno Economic Feasibility Analysis 4. Credit risk assessment 5. Documentation 6. Loan administration Punjab National Banks adoptions of the Projected Balance Sheet method (CMA) of assessment procedures are based on sound principles of lending. This method of assessment has certain flexibility required to avoid any rigid approach to fixing quantum of finance. The PBS method have been rationalized and simplified to facilitate complete flexibility in decision-making.

REFERENCES
IBA-FICCI-BCG report PNB Journals (For internal circulation only) Credit Management & Risk Policy Loans & Advances Circulars on a. BPLR b. Project Finance c. Industry Rating d. Loaning Powers and Guidelines for exercising such powers RBI Circulars and Guidelines Guidelines on Credit Appraisal Basel II Accord Base Rate www.pnb.co.in