Credit Appraisal Report

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RESEARCH METHODOLOGY

Introduction to Credit Appraisal:
Credit appraisal means an investigation/assessment done by the bank prior before providing any loans &
advances/project finance & also checks the commercial, financial & technical viability of the project
proposed its funding pattern & further checks the primary & collateral security cover available for
recovery of such funds.
Problem Statement:
To study the Credit Appraisal System in SME sector, at State Bank of India (SBI), Uttarsanda.
Objectives:
To study the Credit Appraisal Methods.
To understand the commercial, financial & technical viability of the project proposed & its
funding pattern.
To understand the pattern for primary & collateral security cover available for recovery of such
funds.

Research Design:
Analytical in nature
Data Collection:
Primary Data:
Informal interviews with Branch Manager and other staff members at SBI bank.
E-circulars of SBI

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Secondary Data:
Secondary data: Secondary data was collected from various sources because the type of study did
not involve sampling or survey. The study was not done in the market place since I had to
evaluate the worthiness of the project of the particular client only based on the financial stability
of the client, and in the case of a corporate of MSME borrower, both the financial stability of the
client, the prevailing economic scenario and the possible prospects of the market in the future.
These data were collected from client specific documents, documents from other banks, literature
study of the market. Most of the sources of secondary data were mentioned in the loan policy
document of the bank.
Books and magazines
Database at SBI
Internal reports of the banks
Library research
Websites

Expected contribution of the study:
This study will help in understanding the credit appraisal system at SBI & to understand how to reduce
various risk parameters, which are broadly categorized into financial risk, business risk, industrial risk &
management risk associated in providing any loans or advances or project finance.
Beneficiaries:
Researcher:
This report will help researcher in improving knowledge about the credit appraisal system and to have
practical exposure of the credit appraisal scenario in SBI.
Management student:
The project will help the management student to know the patterns of credit appraisal in SBI
bank.

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SBI Bank:
The project will help bank in reducing the credit risk parameters and to improve its efficiencies.
It will also help to reduce risk associated in providing any loans & advances or project finance in
future and to overcome the loopholes.

Short write-up on the researcher and reason for taking up the project:
The researcher are MBA 2
nd
year students, studying in N.R.INSTITUTE OF BUSINESS
MANAGEMENT(GLS),AHMEDABAD.
The reason for taking up the project is to know and understand the credit appraisal system in
banking sector.
Credit appraisal is the major focus of banking industries these days, so the project will help in
understanding and analyzing the situation prevailing currently.

Limitations of the study:
As the credit rating is one of the crucial areas for any bank, some of the technicalities are not
revealed which may have cause destruction to the information and our exploration of the
problem.
As some of the information is not revealed, whatever suggestions generated, are based on certain
assumptions.
Credit appraisal system includes various types of detail studies for different areas of analysis, but
due to time constraint, our analysis was of limited areas only.

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CHAPTER-1
INTRODUCTION TO BANKING SECTOR AND SBI
A snapshot of the banking industry:
The Reserve Bank of India (RBI), as the central bank of the country, closely monitors
developments in the whole financial sector.

The banking sector is dominated by Scheduled Commercial Banks (SBCs). As at end-March 2002, there
were 296 Commercial banks operating in India. This included 27 Public Sector Banks (PSBs), 31 Private,
42 Foreign and 196 Regional Rural Banks. Also, there were 67 scheduled co-operative banks consisting
of 51 scheduled urban co-operative banks and 16 scheduled state co-operative banks.
Scheduled commercial banks touched, on the deposit front, a growth of 14% as against 18% registered in
the previous year. And on advances, the growth was 14.5% against 17.3% of the earlier year.
Higher provisioning norms, tighter asset classification norms, dispensing with the concept of past due
for recognition of NPAs, lowering of ceiling on exposure to a single borrower and group exposure etc.,
are among the measures in order to improve the banking sector.
A minimum stipulated Capital Adequacy Ratio (CAR) was introduced to strengthen the ability of banks
to absorb losses and the ratio has subsequently been raised from 8% to 9%. It is proposed to hike the CAR
to 12% by 2004 based on the Basle Committee recommendations.
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Retail Banking is the new mantra in the banking sector. The home loans alone account for nearly two-
third of the total retail portfolio of the bank. According to one estimate, the retail segment is expected to
grow at 30-40% in the coming years.
Net banking, phone banking, mobile banking, ATMs and bill payments are the new buzz words that
banks are using to lure customers.
With a view to provide an institutional mechanism for sharing of information on borrowers / potential
borrowers by banks and Financial Institutions, the Credit Information Bureau (India) Ltd. (CIBIL) was set
up in August 2000. The Bureau provides a framework for collecting, processing and sharing credit
information on borrowers of credit institutions. SBI and HDFC are the promoters of the CIBIL.
The RBI is now planning to transfer of its stakes in the SBI, NHB and National bank for Agricultural and
Rural Development to the private players. Also, the Government has sought to lower its holding in PSBs
to a minimum of 33% of total capital by allowing them to raise capital from the market.
Banks are free to acquire shares, convertible debentures of corporate and units of equity-oriented mutual
funds, subject to a ceiling of 5% of the total outstanding advances (including commercial paper) as on
March 31 of the previous year.
The finance ministry spelt out structure of the government-sponsored ARC called the Asset
Reconstruction Company (India) Limited (ARCIL), this pilot project of the ministry would pave way for
smoother functioning of the credit market in the country. The government will hold 49% stake and private
players will hold the rest 51%- the majority being held by ICICI Bank (24.5%).

Reforms in the banking sector:
The first phase of financial reforms resulted in the nationalization of 14 major banks in 1969 and resulted
in a shift from Class banking to Mass banking. This in turn resulted in a significant growth in the
geographical coverage of banks. Every bank has to earmark a minimum percentage of their loan portfolio
to sectors identified as priority sectors. The manufacturing sector also grew during the 1970s in
protected environs and the banking sector was a critical source. The next wave of reforms saw the
nationalization of 6 more commercial banks in 1980. Since then the number scheduled commercial banks
increased four-fold and the number of banks branches increased eight-fold.
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After the second phase of financial sector reforms and liberalization of the sector in the early nineties, the
Public Sector Banks (PSB) s found it extremely difficult to complete with the new private sector banks
and the foreign banks. The new private sector banks first made their appearance after the guidelines
permitting them were issued in January 1993. Eight new private sector banks are presently in operation.
This banks due to their late start have access to state-of-the-art technology, which in turn helps them to
save on manpower costs and provide better services.
During the year 2000, the State Bank of India (SBI) and its 7 associates accounted for a 25% share in
deposits and 28.1% share in credit. The 20 nationalized banks accounted for 53.5% of the deposits and
47.5% of credit during the same period. The share of foreign banks ( numbering 42 ), regional rural banks
and other scheduled commercial banks accounted for 5.7%, 3.9% and 12.2% respectively in deposits and
8.41%, 3.14% and 12.85% respectively in credit during the year 2000.
Classification of banks:
The Indian banking industry, which is governed by the Banking Regulation Act of India, 1949 can be
broadly classified into two major categories, non-scheduled banks and scheduled banks. Scheduled banks
comprise commercial banks and the co-operative banks. In terms of ownership, commercial banks can be
further grouped into nationalized banks, the State Bank of India and its group banks, regional rural banks
and private sector banks (the old / new domestic and foreign). These banks have over 67,000 branches
spread across the country. The Indian banking industry is a mix of the public sector, private sector and
foreign banks. The private sector banks are again spilt into old banks and new banks.

Banking System in India
Reserve bank of India (Controlling Authority)

Development Financial institutions Banks

IFCI IDBI ICICI NABARD NHB IRBI EXIM Bank SIDBI
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Commercial Regional Rural Land Development Co-operative
Banks Banks Banks Banks

Public Sector Banks Private Sector Banks

SBI Groups Nationalized Banks Indian Banks Foreign Bank

ABOUT SBI:

THE PLACE TO SHARE THE NEWS ...
SHARE THE VIEWS
The State Bank of India, the countrys oldest Bank and a premier in terms of balance sheet size, number
of branches, market capitalization and profits is today going through a momentous phase of Change and
Transformation the two hundred year old Public sector behemoth is today stirring out of its Public
Sector legacy and moving with an agility to give the Private and Foreign Banks a run for their money.
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The bank is entering into many new businesses with strategic tie ups Pension Funds, General Insurance,
Custodial Services, Private Equity, Mobile Banking, Point of Sale Merchant Acquisition, Advisory
Services, structured products etc each one of these initiatives having a huge potential for growth.
The Bank is forging ahead with cutting edge technology and innovative new banking models, to expand
its Rural Banking base, looking at the vast untapped potential in the hinterland and proposes to cover
100,000 villages in the next two years.
It is also focusing at the top end of the market, on whole sale banking capabilities to provide Indias
growing mid / large Corporate with a complete array of products and services. It is consolidating its
global treasury operations and entering into structured products and derivative instruments. Today, the
Bank is the largest provider of infrastructure debt and the largest arranger of external commercial
borrowings in the country. It is the only Indian bank to feature in the Fortune 500 list.
The Bank is changing outdated front and back end processes to modern customer friendly
processes to help improve the total customer experience. With about 11448 of its own branches
and another 6500+ branches of its Associate Banks already networked, today it offers the largest
banking network to the Indian customer. Banking behemoth State Bank of India is planning to
set up 15,000 ATMs in the country by March 2010 investing more than Rs 1,000 crore.
RP Sinha, deputy managing director (information technology) of the bank, said: "We plan to
have 25,000 ATMs in the country by March 2010. We will add 15,000 ATMs to the existing
ones by end of this fiscal." The bank has almost 10,300 ATMs in the country at present.
According to a senior SBI official, the spot for an ATM counter is taken on lease. It requires Rs
5.2-5.5 lakh to set up the infrastructure and almost Rs 3.5 lakh for an ATM machine. "All put
together, the cost is around Rs 9 lakh per counter," he said. Going by the estimate, SBI would
require a whopping Rs 1,350 crore for setting up 15,000 ATMs.
The Bank is also in the process of providing complete payment solution to its clientele with its ATMs,
and other electronic channels such as Internet banking, debit cards, mobile banking, etc.
With four national level Apex Training Colleges and 54 learning Centres spread all over the country the
Bank is continuously engaged in skill enhancement of its employees. Some of the training programes are
attended by bankers from banks in other countries.
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The bank is also looking at opportunities to grow in size in India as well as internationally. It presently
has 82 foreign offices in 32 countries across the globe. It has also 8 Subsidiaries in India SBI Capital
Markets Ltd, SBI Mutual Funds, SBI factor and commercial services Ltd, SBI DFHI Ltd, SBI Cards and
Payment Services Ltd, SBI Life Insurance Company Ltd, SBI Fund Management Pvt. Ltd, SBI Canada -
forming a formidable group in the Indian Banking scenario. It is in the process of raising capital for its
growth and also consolidating its various holdings.

Background:
State Bank of India is the largest and one of the oldest commercial bank in India, in existence for more
than 200 years. The bank provides a full range of corporate, commercial and retail banking services in
India. Indian central bank namely Reserve Bank of India (RBI) is the major share holder of the bank with
59.7% stake. The bank is capitalized to the extent of Rs.646bn with the public holding (other than
promoters) at 40.3%.
SBI has the largest branch and ATM network spread across every corner of India. Thebank has a branch
network of over 17000 branches (including subsidiaries). Apart fromIndian network it also has a network
of 73 overseas offices in 30 countries in all time zones, correspondent relationship with 520 International
banks in 123 countries. In recent past, SBI has acquired banks in Mauritius, Kenya and Indonesia. The
bank had total staff strength of 198,774 as on 31st March, 2008. Of this, 29.51% are officers, 45.19%
clerical staff and the remaining 25.30% were sub-staff. The bank is listed on the Bombay Stock
Exchange, National Stock Exchange, Kolkata Stock Exchange, Chennai Stock Exchange and Ahmedabad
Stock Exchange while its GDRs are listed on the London Stock Exchange.
SBI group accounts for around 25% of the total business of the banking industry while itaccounts for 35%
of the total foreign exchange in India. With this type of strong base, SBI has displayed a continued
performance in the last few years in scaling up its efficiency levels. Net Interest Income of the bank has
witnessed a CAGR of 13.3% during the last five years. During the same period, net interest margin (NIM)
of the bank has gone up from as low as 2.9% in FY02 to 3.40% in FY06 and currently is at 3.32%.
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KEY AREAS OF OPERATION:
The business operations of SBI can be broadly classified into the key income generating areas such as
National Banking, International Banking, Corporate Banking, & Treasury operations. The functioning of
some of the key divisions is enumerated below:

a) Corporate banking
The corporate banking segment of the bank has total business of around Rs1,193bn. SBI has created
various Strategic Business Units (SBU) in order to streamline its operations.
These SBUs are as follows:
a.1) Corporate Accounts
a.2) Leasing
a.3) Project Finance
a.4) Mid Corporate Group
a.5) Stressed Assets Management

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b) National banking
The national banking group has 14 administrative circles encompassing a vast network of 9,177 branches,
4 sub-offices, 12 exchange bureaus, 104 satellite offices and 679 extension counters, to reach out to
customers, even in the remotest corners of the country. Out of the total branches, 809 are specialized
branches. This group consists of four business group which are enumerated below:
b.1) Personal Banking SBU
b.2) Small & Medium Enterprises
b.3) Agricultural Banking
b.4) Government Banking
c) International banking
SBI has a network of 73 overseas offices in 30 countries in all time zones and correspondent relationship
with 520 international banks in 123 countries. The bank is keen to implement core banking solution to its
international branches also. During FY06, 25 foreign offices were successfully switched over to Finacle
software. SBI has installed ATMs at Male, Muscat and Colombo Offices. In recent years, SBI acquired
76% shareholding in Giro Commercial Bank Limited in Kenya and PT Indomonex Bank Ltd. in
Indonesia. The bank incorporated a company SBI Botswana Ltd. at Gaborone.

d) Treasury
The bank manages an integrated treasury covering both domestic and foreign exchange markets. In recent
years, the treasury operation of the bank has become more active amidst rising interest rate scenario,
robust credit growth and liquidity constraints. The bank diversified its operations more actively into
alternative assets classes with a view to diversify the portfolio and build alternative revenue streams in
order to offset the losses in fixed income portfolio. Reorganization of the treasury processes at domestic
and global levels is also being undertaken to leverage on the operational synergy between business units
and network. The reorganization seeks to enhance the efficiencies in use of manpower resources and
increase maneuverability of banks operations in the markets both domestic as well as international.

e) Associates & Subsidiaries
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The State Bank Group with a network of 14,061 branches including 4,755 branches of its seven Associate
Banks dominates the banking industry in India. In addition to banking, the Group, through its various
subsidiaries, provides a whole range of financial services which includes Life Insurance, Merchant
Banking, Mutual Funds, Credit Card, Factoring, Security trading and primary dealership in the Money
Market.
e.1) Associates Banks:
SBI has six associate banks namely
State Bank of Indore
State Bank of Travancore
State Bank of Bikaner and Jaipur
State Bank of Mysore
State Bank of Patiala
State Bank of Hyderabad

e.2) Non-Banking Subsidiaries/Joint Ventures
i) SBI Capital Markets Ltd,
ii) SBI Mutual Funds,
iii) SBI factor and commercial services Ltd,
iv) SBI DFHI Ltd,
v) SBI Cards and Payment Services Ltd,
vi) SBI Life Insurance Company Ltd,
vii) SBI Fund Management Pvt. Ltd, SBI

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CHAPTER 2
INDUSTRY ANALYSIS

Competitive forces model in the banking industry
(PORTERS FIVE-FORCE MODEL)
Prof. Michael Porters competitive forces Model applies to each and every company as well as industry.
This model with regards to the Banking Industry is presented below.

(2)
Potential Entrants is high as
development financial
institutions as well as private
and foreign banks have
entered in a big way.
(5)
Organizing power of the
supplier is high. With the
new financial instruments
they are asking higher
return on the investments.
(1)
Rivalry among existing firms
has increased with
liberalization. New products
and improved customer
services is the focus.

(4)
Bargaining power of buyers
is high as corporate can raise
funds easily due to high
competition.
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1. Rivalry among existing firms
With the process of liberalization, competition among the existing banks has increased. Each bank is
coming up with new products to attract the customers and tailor made loans are provided. The quality of
services provided by banks has improved drastically.
2. Potential Entrants
Previously the Development Financial Institutions mainly provided project finance and development
activities. But they now entered into retail banking which has resulted into stiff competition among the
exiting players.
3. Threats from Substitutes
Banks face threats from Non-Banking Financial Companies. NBFCs offer a higher rate of interest.
4. Bargaining Power of Buyers
Corporate can raise their funds through primary market or by issue of GDRs, FCCBs. As a result they
have a higher bargaining power. Even in the case of personal finance, the buyers have a high bargaining
power. This is mainly because of competition.
5. Bargaining Power of Suppliers
With the advent of new financial instruments providing a higher rate of returns to the investors, the
investments in deposits is not growing in a phased manner. The suppliers demand a higher return for the
investments.
6. Overall Analysis
The key issue is how can banks leverage their strengths to have a better future. Since the availability of
funds is more and deployment of funds is less, banks should evolve new products and services to the
(3)
Threat from substitute is high
due to competition from
NBFCs and insurance
companies as they offer a high
rate of interest than banks.

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customers. There should be a rational thinking in sanctioning loans, which will bring down the NPAs. As
there is a expected revival in the Indian economy Banks have a major role to play. Funding corporate at a
low cost of capital is a special requisite.

SWOT ANALYSIS
The banking sector is also taken as a proxy for the economy as a whole. The performance of bank should
therefore, reflect Trends in the Indian Economy. Due to the reforms in the financial sector, banking
industry has changed drastically with the opportunities to the work with, new accounting standards new
entrants and information technology. The deregulation of the interest rate, participation of banks in
project financing has changed in the environment of banks.
The performance of banking industry is done through SWOT Analysis. It mainly helps to know the
strengths and Weakness of the industry and to improve will be known through converting the
opportunities into strengths. It also helps for the competitive environment among the banks.

a) STRENGTHS

1. Availability of Funds
There are seven lakh crore wroth of deposits available in the banking system. Because of the recession in
the economy and volatility in capital markets, consumers prefer to deposit their money in banks. This is
mainly because of liquidity for investors.
2. Banking network
After nationalization, banks have expanded their branches in the country, which has helped banks build
large networks in the rural and urban areas. Private banks allowed to operate but they mainly concentrate
in metropolis.
3. Large Customer Base
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This is mainly attributed to the large network of the banking sector. Depositers in rural areas prefer banks
because of the failure of the NBFCs.
4. Low Cost of Capital
Corporate prefers borrowing money from banks because of low cost of capital. Middle income people
who want money for personal financing can look to banks as they offer at very low rates of interests.
Consumer credit forms the major source of financing by banks.

b) WEAKNESS

1. Loan Deployment
Because of the recession in the economy the banks have idle resources to the tune of 3.3 lakh crores.
Corporate lending has reduced drastically
2. Powerful Unions
Nationalization of banks had a positive outcome in helping the Indian Economy as a whole. But this had
also proved detrimental in the form of strong unions, which have a major influence in decision-making.
They are against automation.
3. Priority Sector Lending
To uplift the society, priority sector lending was brought in during nationalization. This is good for the
economy but banks have failed to manage the asset quality and their intensions were more towards
fulfilling government norms. As a result lending was done for non-productive purposes.
4. High Non-Performing Assets
Non-Performing Assets (NPAs) have become a matter of concern in the banking industry. This is because
of change in the total outstanding advances, which has to be reduced to meet the international standards.

c) OPPORTUNITIES

1. Universal Banking
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Banks have moved along the valve chain to provide their customers more products and services. For
example: - SBI is into SBI home finance, SBI Capital Markets, SBI Bonds etc.
2. Differential Interest Rates
As RBI control over bank reduces, they will have greater flexibility to fix their own
interest rates which depends on the profitability of the banks.

3. High Household Savings
Household savings has been increasing drastically. Investment in financial assets has also increased.
Banks should use this opportunity for raising funds.
4. Overseas Markets
Banks should tape the overseas market, as the cost of capital is very low.
5. Interest Banking
The advance in information technology has made banking easier. Business can effectively carried out
through internet banking.

d) THREATS

1. NBFCs, Capital Markets and Mutual funds
There is a huge investment of household savings. The investments in NBFCs deposits, Capital Market
Instruments and Mutual Funds are increasing. Normally these instruments offer better return to investors.
2. Change in the Government Policy
The change in the government policy has proved to be a threat to the banking sector.
3. Inflation
The interest rates go down with a fall in inflation. Thus, the investors will shift his investments to the
other profitable sectors.
4. Recession
Due to the recession in the business cycle the economy functions poorly and this has proved to be a threat
to the banking sector. The market oriented economy and globalization has resulted into competition for
market share. The spread in the banking sector is very narrow. To meet the competition the banks has to
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grow at a faster rates and reduce the overheads. They can introduce the new products and develop the
existing services.

CHAPTER 3
INTRODUCTION TO SME
SME

1 Concept:
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The small-scale industries (SSI) produce about 8000 products, contribute 40% of the industrial output and
offer the largest employment after agriculture. The sector, therefore, presents an opportunity to the nation
to harness local competitive advantages for achieving global dominance.

2 From SSI to SME:
Defining the New Paradigm2.1 Government policy as well as credit policy has so far concentrated on
manufacturing units in the small-scale sector. The lowering of trade barriers across the globe has
increased the minimum viable scale of enterprises. The size of the unit and technology employed for
firms to be globally competitive is now of a higher order. The definition of small-scale sector needs to be
revisited and the policy should consider inclusion of services and trade sectors within its ambit. In
keeping with global practice, there is also a need to broaden the current concept of the sector and include
the medium enterprises in a composite sector of Small and Medium Enterprises (SMEs). A
comprehensive legislation, which would enable the paradigm shift from small-scale industry to small and
medium enterprises under consideration of Parliament. The Reserve Bank of India had meanwhile set up
an Internal Group which has recommended: Current SSI/tiny industries definition may continue. Units
with investment in plant and machinery in excess of SSI limit and up to Rs.10 crore may be treated as
Medium Enterprises (ME). The definition may be reviewed after enactment of the Small and Medium
Enterprises Development Bill.
3 Definition of SMEs-
At present, a small scale industrial unit is an undertaking in which investment in plant and machinery,
does not exceed Rs.1 crore, except in respect of certain specified items under hosiery, hand tools, drugs
and pharmaceuticals, stationery items and sports goods, where this investment limit has been enhanced to
Rs 5 crore. Units with investment in plant and machinery in excess of SSI limit and up to Rs. 25 crore
may be treated as Medium Enterprises (ME).
The Government of India has enacted the Micro, Small and Medium Enterprises Development (MSMED)
Act 2006 which was notified on October 2, 2006. The definition of the small and medium enterprises as
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provided in the Act (Annex VII) will have immediate effect.

4 Eligibility criteria
(i) These guidelines would be applicable to the following entities, which are viable or potentially viable:
a) All non-corporate SMEs irrespective of the level of dues to banks.
b) All corporate SMEs, which are enjoying banking facilities from a single bank, irrespective of the level
of dues to the bank.
c) All corporate SMEs, which have funded and non-funded outstanding up to Rs.10 crore under multiple/
consortium banking arrangement.
(ii) Accounts involving willful default, fraud and malfeasance will not be eligible for restructuring under
these guidelines.
(iii) Accounts classified by banks as Loss Assets will not be eligible for restructuring.
(iv) In respect of BIFR cases banks should ensure completion of all formalities in seeking approval from
BIFR before implementing the package.

SME: At present, a small scale industrial unit is an industrial undertaking in which investment in plant
and machinery, does not exceed Rs.1 crore except in respect of certain specified items under hosiery,
hand tools, drugs and pharmaceuticals, stationery items and sports goods where this investment limit has
been enhanced to Rs.5 crore. A comprehensive legislation which would enable the paradigm shift from
small scale industry to small and medium enterprises is under consideration of Parliament. Pending
enactment of the above legislation, current SSI/tiny industries definition may continue. Units with
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investment in plant and machinery in excess of SSI limit and up to Rs.10 crore may be treated as Medium
Enterprises (ME). Only SSI financing will be included in Priority Sector.
All banks may fix self-targets for financing to SME sector so as to reflect a higher disbursement over the
immediately preceding year, while the sub-targets for financing tiny units and smaller units to the extent
of 40% and 20% respectively may continue. Banks may arrange to compile data on outstanding credit to
SME sector as on March 31, 2005 as per new definition and also showing the break up separately for tiny,
small and medium enterprises.
Banks may initiate necessary steps to rationalize the cost of loans to SME sector by adopting a
transparent rating system with cost of credit being linked to the credit rating of enterprise.
SIDBI has developed a Credit Appraisal & Rating Tool (CART) as well as a Risk Assessment Model (RAM)
and a comprehensive rating model for risk assessment of proposals for SMEs. The banks may consider to
take advantage of these models as appropriate and reduce their transaction costs.
In order to increase the outreach of formal credit to the SME sector, all banks, including
Regional Rural Banks may make concerted efforts to provide credit cover on an average to at
least 5 new small/medium enterprises at each of their semi urban/urban branches per year.
A debt restructuring mechanism for nursing of sick units in SME sector and a One Time Settlement
(OTS) Scheme for small scale NPA accounts in the books of the banks as on March 31, 2004 are being
introduced.
5 Challenges faced by SME:
The challenges being faced by the small and medium sector may be briefly set out as follows-
a) Small and Medium Enterprises (SME), particularly the tiny segment of the small enterprises
have inadequate access to finance due to lack of financial information and non-formal business
practices. SMEs also lack access to private equity and venture capital and have a very limited
access to secondary market instruments.
b) SMEs face fragmented markets in respect of their inputs as well as products and are
vulnerable to market fluctuations.
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c) SMEs lack easy access to inter-state and international markets.
d) The access of SMEs to technology and product innovations is also limited. There is lack of
awareness of global best practices.
e) SMEs face considerable delays in the settlement of dues/payment of bills by the large scale buyers.
With the deregulation of the financial sector, the ability of the banks to service the credit requirements of
the SME sector depends on the underlying transaction costs, efficient recovery processes and available
security. There is an immediate need for the banking sector to focus on credit and SMEs.

CHAPTER 4
OVERVIEW OF CREDIT APPRAISAL
Brief overview of credit:
Credit Appraisal is a process to ascertain the risks associated with the extension of the credit facility. It is
generally carried by the financial institutions which are involved in providing financial funding to its
customers. Credit risk is a risk related to non repayment of the credit obtained by the customer of a bank.
Thus it is necessary to appraise the credibility of the customer in order to mitigate the credit risk. Proper
evaluation of the customer is performed which measures the financial condition and the ability of the
customer to repay back the loan in future. Generally the credit facilities are extended against the security
know as collateral. But even though the loans are backed by the collateral, banks are normally interested
in the actual loan amount to be repaid along with the interest. Thus, the customer's cash flows are
ascertained to ensure the timely payment of principal and the interest.
It is the process of appraising the credit worthiness of a loan applicant. Factors like age, income, number
of dependents, nature of employment, continuity of employment, repayment capacity, previous loans,
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credit cards, etc. are taken into account while appraising the credit worthiness of a person. Every bank or
lending institution has its own panel of officials for this purpose.
However the 3 C of credit are crucial & relevant to all borrowers/ lending which must be kept in mind at
all times.
Character
Capacity
Collateral

If any one of these are missing in the equation then the lending officer must question the viability of
credit.
There is no guarantee to ensure a loan does not run into problems; however if proper credit evaluation
techniques and monitoring are implemented then naturally the loan loss probability / problems will be
minimized, which should be the objective of every lending officer.
Credit is the provision of resources (such as granting a loan) by one party to another party where that
second party does not reimburse the first party immediately, thereby generating a debt, and instead
arranges either to repay or return those resources (or material(s) of equal value) at a later date. The first
party is called a creditor, also known as a lender, while the second party is called a debtor, also known as
a borrower.
Credit allows you to buy goods or commodities now, and pay for them later. We use credit to buy things
with an agreement to repay the loans over a period of time. The most common way to avail credit is by
the use of credit cards. Other credit plans include personal loans, home loans, vehicle loans, student loans,
small business loans, trade.
A credit is a legal contract where one party receives resource or wealth from another party and promises
to repay him on a future date along with interest. In simple terms, a credit is an agreement of postponed
payments of goods bought or loan. With the issuance of a credit, a debt is formed.

Basic types of credit
There are four basic types of credit. By understanding how each works, you will be able to get the most
for your money and avoid paying unnecessary charges.
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Service credit is monthly payments for utilities such as telephone, gas, electricity, and water. You often
have to pay a deposit, and you may pay a late charge if your payment is not on time.
Loans let you borrow cash. Loans can be for small or large amounts and for a few days or several years.
Money can be repaid in one lump sum or in several regular payments until the amount you borrowed and
the finance charges are paid in full. Loans can be secured or unsecured.
Installment credit may be described as buying on time, financing through the store or the easy payment
plan. The borrower takes the goods home in exchange for a promise to pay later. Cars, major appliances,
and furniture are often purchased this way. You usually sign a contract, make a down payment, and agree
to pay the balance with a specified number of equal payments called installments. The finance charges are
included in the payments. The item you purchase may be used as security for the loan.
Credit cards are issued by individual retail stores, banks, or businesses. Using a credit card can be the
equivalent of an interest-free loan--if you pay for the use of it in full at the end of each month.

Brief overview of loans:

Loans can be of two types fund base & non-fund base:

FUND BASE includes:

Working Capital
Term Loan

NON-FUND BASE includes:

Letter of Credit
Bank Guarantee
Bill Discounting

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FUND BASE: -

WORKING CAPITAL: -
1. General
The objective of running any industry is earning profits. An industry will require funds to acquire
fixed assets like land, building, plant, machinery, equipments, vehicles, tools etc., & also to run the
business i.e. its day to day operations.
Funds required for day to-day working will be to finance production & sales. For production, funds are
needed for purchase of raw materials/ stores/ fuel, for employment of labour, for power charges etc., for
storing finishing goods till they are sold out & for financing the sales by way of sundry debtors/
receivables.
Capital or funds required for an industry can therefore be bifurcated as fixed capital & working capital.
Working capital in this context is the excess of current assets over current liabilities. The excess of current
assets over current liabilities is treated as net working capital or liquid surplus & represents that portion of
the working capital, which has been provided from the long-term source.

2. DEFINITION
Working capital is defined as the funds required to carry the required levels of current assets to enable the
unit to carry on its operations at the expected levels uninterruptedly.

Thus Working Capital Required is dependent on
(a) The volume of activity (viz. level of operations i.e. Production & sales)
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(b) The activity carried on viz. mfg process, product, production programme, the materials &
marketing mix.

3. Methods & Application

SEGMENT LIMITS METHOD

SSI Upto Rs 5 cr Traditional Method & Nayak Committee method
Above Rs 5 cr Projected Balance Sheet Method

SBF All loans Traditional / Turnover Method

C&I Trade &
Services
Upto Rs 1 cr Traditional Method for Trade &
Projected Turnover Method
Above Rs 1 cr
& upto Rs 5 cr
Projected Balance Sheet Method &
C&I Industrial
Units
Below
Rs 25 lacs
Traditional Method
Rs 25 lacs &
Over but upto
Rs 5 cr
Projected Balance Sheet Method &

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4. Operating cycle method

4.1 Any manufacturing activity is characterized by a cycle of operations consisting of purchase of
purchase of raw materials for cash, converting these into finished goods & realizing cash by sale of
these finished goods.

4.2 Diagrammatically, the OPERATING CYCLE is represented as under

4.3 The time that lapses between cash outlay & cash realization by sale of finished goods &
realization of sundry debtors is known as the length of the operating cycle.

4.4 That is, the operating cycle consists of:

Time taken to acquire raw materials & average period for which they are in store.
Conversion process time
Average period for which finished goods are in store &
Average collection period of receivables (Sundry Debtors)
cash
Raw
materials
Work-in-
progress
Finished
goods
debtors
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4.5 Operating cycle is also called the cash-to-cash cycle & indicates how cash is converted into
raw materials, stocks in process, finished goods, bills (receivables) & finally back to cash.
Working capital is the total cash that is circulating in this cycle. Therefore, working capital
can be turned over or redeployed after completing the cycle.

4.6 The length of the operating cycle = a+b+c+d (as in 4.4)

If a = 60 days
b = 10 days
c = 20 days
d = 30 days

The operating cycle is 120 days (nearly 4 months). This means there are 365/120 = 3 cycles of
operations in a year.

Sales = Rs. 1,00,000 per annum
Operating expenses = Rs. 72,000 per annum

But the working capital requirement, as you know, is not Rs. 72,000.

In these cases, there are 3 operating cycles in a year. That means each rupee of working
deployed in the unit is turned over 3 times in a year. (This is also known as working capital
turnover ratio).
Therefore WCR = Operating Expenses = Rs. 72,000/- = Rs. 24,000/-
No. of cycles per annum 3

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WCR is therefore not Rs. 72,000/- but only Rs. 24,000/-

4.7 Assessment of Working Capital Requirement & Permissible Bank Finance using Operating Cycle
Concept

Let us consider a case of a unit where:

Sales = Rs. 20,000 p.m. (A)
Raw Materials = Rs. 14,000 p.m.
Wages = Rs. 2,000 p.m.

Other manufacturing
Expenses = Rs. 3,000 p.m.
Total expenses = Rs. 19,000 p.m. (B)
Profit = Rs. 1,000 P.m. (C)

The operating cycle is
Raw Materials = 15 days
Stock in Process = 2 days
FG = 3 days
Sundry Debtors = 15 days
The total length of
Operating cycle = 35 days (D)

WCR = B * D = 19,000 * 35 = Rs. 22,167/- (approx.)
30 30
Where B = Operating Expenses; &
D = Length of Operating cycle
30

The length of the operating cycle is different from industry to industry and from one firm to another
within the same industry. For instance, the operating cycle of a pharmaceutical unit would be quite
different from one engaged in the manufacture of machine tools. The operating cycle concept enables us
to assess the working capital need of each enterprise keeping in view the peculiarities of the industry it is
engaged in and its scale of operations. Operating cycle is an important management tool in decision-
making.

Traditional Method of Assessment of Working Capital Requirement
The operating cycle concept serves to identify the areas requiring improvement for the purpose of control
and performance review. But, as bankers, we require a more detailed analysis to assess the various
components of working capital requirement viz., finance for
stocks, bills etc. Bankers provide working capital finance for holding an acceptable level of current assets,
viz. raw materials, stocks-in-process, finished goods and sundry debtors for achieving a predetermined
level of production and sales. Quantification of these funds required to be blocked in each of these items
of current assets at any time will, therefore provide a measure of the working capital requirement (WCR)
of an industry.

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It can thus be summarized as follows:

Projected Annual Turnover Method for SSI units (Nayak Committee)
For SSI units which enjoy fund based working capital limits up to Rs.5 cr, the minimum working capital
limit should be fixed on the basis of projected annual turnover. 25% of the output or annual turnover
value should be computed as the quantum of working capital required by such unit .The unit should be
required to bring in 5% of their annual turnover as margin money and the Bank shall provide 20% of the
turnover as working capital finance. Nayak committee Guidelines correspond to working capital limits as
per the Operating Cycle method where the average production / processing cycle is taken to be 3 months
(i.e. working capital would be turned over 4 times in a year).

Projected Annual Turnover Method for C & I industrial units (limits upto Rs 5 cr)
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Bank has decided to extend Nayak Committee approach for assessment of limits to C&I industrial units
requiring credit limits upto Rs.5 cr. That is, credit requirement up to Rs.5 crores of C&I borrowers
(industrial units) may be assessed at a minimum of 20% of projected annual turnover. In other words, the
working capital requirement will be assessed at 25% of projected annual turnover, of which 5% should be
borne by entrepreneur as margin and 20% would be allowed as Bank Drawings. While accepting
projected annual sales turnover, a cap of 25% over actual annual sales turnover in the immediately
preceding year should be set, except where production capacity has been substantially increased.

Projected Annual Turnover Method for Business Enterprises in Trade & Services
Sector:
i) For working Capital limits up to Rs. 5 cr to C&I(Trade) sector, the assessment of credit limit is to be
based upon annual turnover. Thus, an across the board credit limit equal to 15% of projected annual
turnover be offered to business enterprises in the T&S sector. It would be available for utilization
generally as a cash credit limit. However, where needed an LC limit (as a sub-limit of total), may also be
allowed.
ii) The credit limit would be secured by hypothecation charge on the current assets of the enterprise.
Periodical stock statements are to be obtained and margin of 25% be retained.
iii) Credit limits under this assessment method may be offered to established (at least 3 years old) profit
making business enterprises, eligible for credit rating of SB-4 and above. Mortgage of property valued at
least at 33% of the limit is to be prescribed. Further, an interest rebate of 0.50% p.a. may be given to
borrowers who offer mortgage of property valued at over 75% of the credit limit.
iv) While accepting projected annual sales turnover, a cap of 25% over actual annual sales turnover in the
immediately preceding year should be set. When circumstances warrant its breach, reasons therefor
should be recorded.
v) Where borrowers indicate need for credit limits which are higher than the amount indicated above,
assessment under the traditional PBS method may be resorted to.
Projected Balance Sheet Method (PBS)
The PBS method of assessment will be applicable to all C&I borrowers who are engaged in
manufacturing, services, and trading activities, including merchant exports and who require fund based
33

working capital finance of Rs. 25 lacs and above. In the case of SSI borrowers, who require working
capital credit limit up to Rs.5 cr, the limit shall be computed on the basis of Nayak Committee formula as
well as that based on production and operating cycle of the unit and the higher of the two may be
sanctioned. Fund based working capital credit limits beyond Rs 5 cr for SSI units shall be computed in the
same way as for C&I units. For business enterprises in Trade and Services Sector, where the projected
turnover method is not applicable, PBS method shall be followed.
8.1 In the Projected Balance Sheet (PBS) method, the borrowers total business operations, financial
position, management capabilities etc. are analyzed in detail to assess the working capital finance required
and to evaluate the overall risk of the exposure. The following financial analysis is also to be carried out:

Analysis of the borrowers Profit and Loss account, Balance Sheet, Funds Flow etc. for the
past periods is done to examine the profitability, financial position, financial management, etc.
in the business.
Detailed scrutiny and validation of the projected income and expense in the business, and
projected changes in the financial position (sources and uses of funds) are carried out to
examine if these are acceptable from the angle of liquidity, overall gearing, efficiency of
operations etc.

8.2 There will not be a prescription like mandatory minimum current ratio or maximum level of a current
asset (inventory and receivables holding level norms) under PBS method. Under the PBS method,
assessment of WC requirement will be carried out in respect of each borrower with proper examination of
all parameters relevant to the borrower and their acceptability.

TERM LOAN:
1. A term loan is granted for a fixed term of not less than 3 years intended normally for financing
fixed assets acquired with a repayment schedule normally not exceeding 8 years.
2. A term loan is a loan granted for the purpose of capital assets, such as purchase of land,
construction of, buildings, purchase of machinery, modernization, renovation or rationalization of
34

plant, & repayable from out of the future earning of the enterprise, in installments, as per a
prearranged schedule.
From the above definition, the following differences between a term loan & the working capital
credit afforded by the Bank are apparent:
The purpose of the term loan is for acquisition of capital assets.
The term loan is an advance not repayable on demand but only in installments ranging over
a period of years.
The repayment of term loan is not out of sale proceeds of the goods & commodities per se,
whether given as security or not. The repayment should come out of the future cash
accruals from the activity of the unit.
The security is not the readily saleable goods & commodities but the fixed assets of the
units.
3. It may thus be observed that the scope & operation of the term loans are entirely different from
those of the conventional working capital advances. The Banks commitment is for a long period
& the risk involved is greater. An element of risk is inherent in any type of loan because of the
uncertainty of the repayment. Longer the duration of the credit, greater is the attendant
uncertainty of repayment & consequently the risk involved also becomes greater.
4. However, it may be observed that term loans are not so lacking in liquidity as they appear to be.
These loans are subject to a definite repayment programme unlike short term loans for working
capital (especially the cash credits) which are being renewed year after year. Term loans would be
repaid in a regular way from the anticipated income of the industry/ trade.
5. These distinctive characteristics of term loans distinguish them from the short term credit granted
by the banks & it becomes necessary therefore, to adopt a different approach in examining the
applications of borrowers for such credit & for appraising such proposals.
6. The repayment of a term loan depends on the future income of the borrowing unit. Hence, the
primary task of the bank before granting term loans is to assure itself that the anticipated income
from the unit would provide the necessary amount for the repayment of the loan. This will
involve a detailed scrutiny of the scheme, its financial aspects, economic aspects, technical
aspects, a projection of future trends of outputs & sales & estimates of cost, returns, flow of funds
& profits.

7. Appraisal of Term Loans
35

Appraisal of term loan for, say, an industrial unit is a process comprising several steps. There
are four broad aspects of appraisal, namely

Technical Feasibility - To determine the suitability of the technology selected & the
adequacy of the technical investigation & design;

Economic Feasibility - To ascertain the extent of profitability of the project & its
sufficiency in relation to the repayment obligations pertaining to term assistance;

Financial Feasibility - To determine the accuracy of cost estimates, suitability of the
envisaged pattern of financing & general soundness of the capital structure; &

Managerial Competency To ascertain that competent men are behind the project to
ensure its successful implementation & efficient management after commencement of
commercial production.

7.1 Technical Feasibility
The examination of this item consists of an assessment of the various requirement of the actual
production process. It is in short a study of the availability, costs, quality & accessibility of all the
goods & services needed.
a) The location of the project is highly relevant to its technical feasibility & hence special
attention will have to be paid to this feature. Projects whose technical requirements could
have been taken care of in one location sometimes fail because they are established in another
place where conditions are less favorable. One project was located near a river to facilitate
easy transportation by barge but lower water level in certain seasons made essential
transportation almost impossible. Too many projects have become uneconomical because
sufficient care has not been taken in the location of the project, e.g. a woolen scouring &
36

spinning mill needed large quantities of good water but was located in a place which lacked
ordinary supply of water & the limited water supply available also required efficient
softening treatment. The accessibility to the various resources has meaning only with
reference to location. Inadequate transport facilities or lack of sufficient power or water for
instance, can adversely affect an otherwise sound industrial project.
b) Size of the plant One of the most important considerations affecting the feasibility of a new
industrial enterprise is the right size of the plant. The size of the plant will be such that it will
give an economic product, which will be competitive when compared to the alternative
product available in the market. A smaller plant than the optimum size may result in
increased production costs & may not be able to sell its products at competitive prices.
c) Type of technology An important feature of the feasibility relates to the type of technology
to be adopted for a project. A new technology will have to be fully examined & tired before it
is adopted. It is equally important to avoid adopting equipment or processes which are
absolute or likely to become outdated soon. The principle underlying the technological
selection is that a developing country cannot afford to be the first to adopt the new nor yet
the last to cast the old aside.
d) Labour The labour requirements of a project, need to be assessed with special care. Though
labour in terms of unemployed persons is abundant in the country, there is shortage of trained
personnel. The quality of labour required & the training facilities made available to the unit
will have to be taken into account
e) Technical Report A technical report using the Banks Consultancy Cell, external
consultants, etc., should be obtained with specific comments on the feasibility of scheme, its
profitability, whether machinery proposed to be acquired by the unit under the scheme will be
sufficient for all stages of production, the extent of competition prevailing, marketability of
the products etc., wherever necessary.

7.2 Economic Feasibility
An economic feasibility appraisal has reference to the earning capacity of the project. Since earnings
depend on the volume of sales, it is necessary to determine how much output or the additional production
from an established unit the market is likely to absorb at given prices.
a) A thorough market analysis is one of the most essential parts of project investigation. This
involves getting answers to three questions.
a) How big is the market?
37

b) How much it is likely to grow?
c) How much of it can the project capture?
The first step in this direction is to consider the current situation, taking account of the total output of the
product concerned & the existing demand for it with a view to establishing whether there is unsatisfied
demand for the product. Care should be taken to see that there is no idle capacity in the existing
industries.
ii) Future possible future changes in the volume & patterns of supply & demand will have to be
estimated in order to assess the long term prospects of the industry. Forecasting of demand is a
complicated matter but one of the vital importance. It is complicated because a variety of factors affect
the demand for product e.g. technological advances could bring substitutes into market while changes in
tastes & consumer preference might cause sizable shifts in demand.
iii) Intermediate product The demand for Intermediate product will depend upon the demand &
supply of the ultimate product (e.g. jute bags, paper for printing, parts for machines, tyres for
automobiles). The market analysis in this case should cover the market for the ultimate product.

7.3 Financial Feasibility
The basis data required for the financial feasibility appraisal can be broadly grouped under the following
heads
i) Cost of the project including working capital
ii) Cost of production & estimates of profitability
iii) Cash flow estimates & sources of finance.

The cash flow estimates will help to decide the disbursal of the term loan. The estimate of profitability &
the break even point will enable the banker to draw up the repayment programme, start-up time etc. The
profitability estimates will also give the estimate of the Debt Service Coverage which is the most
important single factor in all the term credit analysis.
38

A study of the projected balance sheet of the concern is essential as it is necessary for the appraisal of a
term loan to ensure that the implementation of the proposed scheme.
Break-even point:
In a manufacturing unit, if at a particular level of production, the total manufacturing cost equals the sales
revenue, this point of no profit/ no loss is known as the break-even point. Break-even point is expressed
as a percentage of full capacity. A good project will have reasonably low break-even point which not be
encountered in the projections of future profitability of the unit.
Debt/ Service Coverage:
The debt service coverage ratio serves as a guide to determining the period of repayment of a loan. This is
calculated by dividing cash accruals in a year by amount of annual obligations towards term debt. The
cash accruals for this purpose should comprise net profit after taxes with interest, depreciation provision
& other non cash expenses added back to it.

Debt Service = Cash accruals
Coverage Ratio Maturing annual obligations

This ratio is valuable, in that it serves as a measure of the repayment capacity of the project/ unit & is,
therefore, appropriately included in the cash flow statements. The ratio may vary from industry to
industry but one has to view it with circumspection when it is lower than the benchmark of 1.75. The
repayment programme should be so stipulated that the ratio is comfortable.

7.4 Managerial Competence
In a dynamic environment, the capacity of an enterprise to forge ahead of its competitors depends to a
large extent, on the relative strength of its management. Hence, an appraisal of management is the
touchstone of term credit analysis.
If there is a change in the administration & managerial set up, the success of the project may be put to
test. The integrity & credit worthiness of the personnel in charge of the management of the industry as
39

well as their experience in management of industrial concerns should be examined. In high cost schemes,
an idea of the units key personnel may also be necessary.

NON-FUND BASE: -
LETTER OF CREDIT
Introduction
The expectation of the seller of any goods or services is that he should get the payment immediately on
delivery of the same. This may not materialize if the seller & the buyer are at different places (either
within the same country or in different countries). The seller desires to have an assurance for payment by
the purchaser. At the same time the purchaser desires that the amount should be paid only when the goods
are actually received. Here arises the need of Letter of Credit (LCs). The objective of LC is to provide a
means of payment to the seller & the delivery of goods & services to the buyer at the same time.
Definition
A Letter of Credit (LC) is an arrangement whereby a bank (the issuing bank) acting at the request & on
the instructions of the customer (the applicant) or on its own behalf,
40

i. is to make a payment to or to the order of a third party (the beneficiary), or is to accept & pay
bills of exchange (drafts drawn by the beneficiary); or
ii. authorizes another bank to effect such payment, or to accept & pay such bills of exchanges
(drafts); or
iii. authorizes another bank to negotiate against stipulated document(s), provided that the terms &
conditions of the credit are complied with.

Basic Principle:
The basic principle behind an LC is to facilitate orderly movement of trade; it is therefore necessary that
the evidence of movement of goods is present. Hence documentary LCs is those which contains
documents of title to goods as part of the LC documents. Clean bills which do not have document of title
to goods are not normally established by banks. Bankers and all concerned deal only in documents & not
in goods. If documents are in order issuing bank will pay irrespective of whether the goods are of
expected quality or not. Banks are also not responsible for the genuineness of the documents &
quantity/quality of goods. If importer is your borrower, the bank has to advice him to convert all his
requirements in the form of documents to ensure quantity & quality of goods.

Parties to the LC
1) Applicant The buyer who applies for opening LC
2) Beneficiary The seller who supplies goods
3) Issuing Bank The Bank which opens the LC
4) Advising Bank The Bank which advises the LC after confirming authenticity
5) Negotiating Bank The Bank which negotiates the documents
6) Confirming Bank The Bank which adds its confirmation to the LC
7) Reimbursing Bank The Bank which reimburses the LC amount to negotiating bank
8) Second beneficiary The additional beneficiary in case of transferable LCs
Confirming bank may not be there in a transaction unless the beneficiary demand confirmation by his
own bankers & such a request is made part of LC terms. A bank will confirm an LC for his beneficiary if
opening bank requests this as part of LC terms. Reimbursing bank is used in an LC transaction by an
opening bank when the bank does not have a direct correspondent/branch through whom the negotiating
bank can be reimbursed. Here, the opening bank will direct the reimbursing bank to reimburse the
41

negotiating bank with the payment made to the beneficiary. In the case of transferable LC, the LC may be
transferred to the second beneficiary & if provided in the LC it can be transferred even more than once.
BANK GUARANTEES:
A contract of guarantee is defined as a contract to perform the promise or discharge the liability of the
third person in case of the default. The parties to the contract of guarantees are:
a) Applicant: The principal debtor person at whose request the guarantee is executed
b) Beneficiary: Person to whom the guarantee is given & who can enforce it in case of default.
c) Guarantee: The person who undertakes to discharge the obligations of the applicant in case of his
default.
Thus, guarantee is a collateral contract, consequential to a main contract between the applicant & the
beneficiary.
Purpose of Bank Guarantees
Bank Guarantees are used to for both both preventive & remedial purposes. The guarantees executed by
banks comprises both performance guarantees & financial guarantees. The guarantees are structured
according to the terms of agreement, viz., security, maturity & purpose.
Branches may issue guarantees generally for the following purposes:
a) In lieu of security deposit/earnest money deposit for participating in tenders;
b) Mobilization advance or advance money before commencement of the project by the contractor
& for money to be received in various stages like plant layout, design/drawings in project finance;
c) In respect of raw materials supplies or for advances by the buyers;
d) In respect of due performance of specific contracts by the borrowers & for obtaining full payment
of the bills;
e) Performance guarantee for warranty period on completion of contract which would enable the
suppliers to realize the proceeds without waiting for warranty period to be over;
f) To allow units to draw funds from time to time from the concerned indenters against part
execution of contracts, etc.
g) Bid bonds on behalf of exporters
h) Export performance guarantees on behalf of exporters favouring the Customs Department under
EPCG scheme.

42

Guidelines on conduct of Bank Guarantee business
Branches, as a general rule, should limit themselves to the provision of financial guarantees & exercise
due caution with regards to performance guarantee business. The subtle difference between the two types
of guarantees is that under a financial guarantee, a bank guarantees a customer financial worth,
creditworthiness & his capacity to take up financial risks. In a performance guarantee, the banks
guarantee obligations relate to the performance related obligations of the applicant (customer).
While issuing financial guarantees, it should be ensured that customers should be in a position to
reimburse the Bank in case the Bank is required to make the payment under the guarantee. In case of
performance guarantee, branches should exercise due caution & have sufficient experience with the
customer to satisfy themselves that the customer has the necessary experience, capacity, expertise, &
means to perform the obligations under the contract & any default is not likely to occur.
Branches should not issue guarantees for a period more than 18 months without prior reference to the
controlling authority. Extant instructions stipulate an Administrative Clearance for issue of BGs for a
period in excess of 18 months. However, in cases where requests are received for extension of the period
of BGs as long as the fresh period of extension is within 18 months. No bank guarantee should normally
have a maturity of more than 10 years. Bank guarantee beyond maturity of 10 years may be considered
against 100% cash margin with prior approval of the controlling authority.
More than ordinary care is required to be executed while issuing guarantees on behalf of customers who
enjoy credit facilities with other banks. Unsecured guarantees, where furnished by exception, should be
for a short period & for relatively small amounts. All deferred payment guarantee should ordinarily be
secured.
Appraisal of Bank Guarantee Limit
Proposals for guarantees shall be appraised with the same diligence as in the case of fund-base limits.
Branches may obtain adequate cover by way of margin & security so as to prevent default on payments
when guarantees are invoked. Whenever an application for the issue of bank guarantee is received,
branches should examine & satisfy themselves about the following aspects:
a) The need of the bank guarantee & whether it is related to the applicants normal trade/business.
b) Whether the requirement is one time or on the regular basis
c) The nature of bank guarantee i.e., financial or performance
43

d) Applicants financial strength/ capacity to meet the liability/ obligation under the bank guarantee
in case of invocation.
e) Past record of the applicant in respect of bank guarantees issued earlier; e.g., instances of
invocation of bank guarantees, the reasons thereof, the customers response to the invocation, etc.
f) Present o/s on account of bank guarantees already issued
g) Margin
h) Collateral security offered

Format of Bank Guarantees
Bank guarantees should normally be issued on the format standardized by Indian Banks Association
(IBA). When it is required to be issued on a format different from the IBA format, as may be demanded
by some of the beneficiary Government departments, it should be ensured that the bank guarantee is
a) for a definite period,
b) for a definite objective enforceable on the happening of a definite event,
c) for a specific amount
d) in respect of bona fide trade/ commercial transactions,
e) contains the Banks standard limitation clause
f) not stipulating any onerous clause, &
g) not containing any clause for automatic renewal of the bank guarantee on its expiry
CREDIT APPRAISAL PROCESS

Receipt of application from applicant
|
Receipt of documents
(Balance sheet, KYC papers, Different govt. registration no., MOA, AOA, and
Properties documents)
|
Pre-sanction visit by bank officers
|
44

Check for RBI defaulters list, willful defaulters list, CIBIL data, ECGC caution
list, etc.
|
Title clearance reports of the properties to be obtained from empanelled advocates
|
Valuation reports of the properties to be obtained from empanelled
valuer/engineers
|
Preparation of financial data
|
Proposal preparation
|
Assessment of proposal
|
Sanction/approval of proposal by appropriate sanctioning authority
|
Documentations, agreements, mortgages
|
Disbursement of loan
|
Post sanction activities such as receiving stock statements, review of accounts,
renew of accounts, etc
(on regular basis)

45

CHAPTER-5
SBI NORMS FOR CREDIT APPRAISAL

1. Loan policy An Introduction
1.1 State Bank of Indias (SBI) Loan Policy is aimed at accomplishing its mission of retaining the
banks position as a Premier Financial Services Group, with World class standards & significant
global business, committed to excellence in customer, shareholder & employee satisfaction & to
46

play a leading role in the expanding & diversifying financial services sector, while continuing
emphasis on its Development Banking role.

1.2 The Loan Policy of the any bank has successfully withstood the test of time and with inbuilt
flexibilities, has been able to meet the challenges in the market place. The policy exits & operates at
both formal & informal levels. The formal policy is well documented in the form of circular
instructions, periodic guidelines & codified instructions, apart from the Book of Instructions, where
procedural aspects are highlighted.

1.3 The policy, at the holistic level, is an embodiment of the Banks approach to sanctioning, managing
& monitoring credit risk & aims at making the systems & controls effective.

1.4 The Loan Policy also aims at striking a balance between underwriting assets of high quality, and
customer oriented selling. The objective is to maintain Banks undisputed leadership in the Indian
Banking scene.

1.5 The Policy aims at continued growth of assets while endeavoring to ensure that these remain
performing & standard. To this end, as a matter of policy the Bank does not take over any Non-
Performing Asset (NPA) from other banks.
1.6 The Central Board of the Bank is the apex authority in formulating all matters of policy in the bank.
The Board has permitted setting up of the Credit Policy & Procedures Committee (CPPC) at the
Corporate Centre of the Bank of which the Top Management are members, to deal with issues
relating to credit policy & procedures on a Bank-wide basis. The CPPC sets broad policies for
managing credit risk including industrial rehabilitation, sets parameters for credit portfolio in terms
of exposure limits, reviews credit appraisal systems, approves policies for compromises, write offs,
etc. & general management of NPAs besides dealing with the issues relating to Delegation of
Powers.

Based on the present indications, following exposure levels are prescribed:

47

Individuals as borrowers

Maximum aggregate credit facilities of
Rs. 20 crores
( Fund based & non-fund based )

Non-corporates
( e.g. Partnerships, JHF, Associations )

Maximum aggregate credit facilities of Rs.
80 crores
( Fund based & non-fund based )
Corporates Maximum aggregate credit facilities as
per prudential norms of RBI on exposures

Term Loans (loans with residual maturity of over 3 years) should not in the aggregate exceed
35% of the total advances of SBI.
The Bank shall endeavour to restrict fund based exposure to a particular industry to 15% of the
Banks total fund based exposure.
The Bank shall restrict the term loan exposure to infrastructure projects to 10% of Banks total
advances.
The Bank shall endeavour to restrict exposure to sensitive sectors (i.e. to capital market, real
estate, and sensitive commodities listed by RBI) to 10% of Banks total advances.
The Banks aggregate exposure to the capital markets shall not exceed 5% of the total outstanding
advances (including commercial paper) as on March 31 of the previous year.

2. Credit Appraisal Standards
1 (A) Qualitative:
At the outset, the proposition is examined from the angle of viability & also from the Banks prudential
levels of exposure to the borrower, Group & Industry. Thereafter, a view is taken about our past
experience with the promoters, if there is a track record to go by. Where it is a new connection for the
bank but the entrepreneurs are already in business, opinion reports from existing bankers & published
48

data if available are carefully pursued. In case of a maiden venture, in addition to the drill mentioned
heretofore, an element of subjectively has to be perforce introduced as scant historical data weightage to
be placed on impressions gained out of the serious dialogues with the promoter & his business contacts.

1 (B) Quantitative:
(a) Working capital:
The basis quantitative parameters underpinning the Banks credit appraisal are as follows:-
Sector/ Parameters Mfg Others
Liquidity
Current Ratio (min.)
1.33 1.20
(For FBWC limits above Rs. 5 cr.)
1.00
(For FBWC limits upto Rs. 5 cr.))
Financial Soundness
TOL/TNW (max.)
3.00 5.00
DSCR
Net (min.)
Gros (min.)

2:1
1.75:1

2:1
1.75:1
Gearing
D/E (max.)

2:1

2:1
Promoters contribution (min.) 30% of equity 20% of equity

(i) Liquidity:
Current Ratio (CR) of 1.33 will generally be considered as a benchmark level of liquidity. However the
approach has to be flexible. CR of 1.33 is only indicative & may not be deemed mandatory. In cases
where the CR is projected at a lower than the benchmark or a slippage in the CR is proposed, it alone will
not be a reason for rejection for the loan proposal or for the sanction of the loan at a lower level. In such
49

cases, the reason for low CR or slippage should be carefully examined & in deserving cases the CR as
projected may be accepted. In cases where projected CR is found acceptable, working capital finance as
requested may be sanctioned. In specific cases where warranted, such sanction can be with the condition
that the borrower should bring in additional long-term funds to a specific extent by a given future date.
Where it is felt that the projected CR is not acceptable but the borrower deserves assistance subject to
certain conditions, suitable written commitment should be obtained from the borrower to the effect that he
would be bringing in required amounts within a mutually agreed time frame.
(ii) Net Working Capital:
Although this is a corollary of current ratio, the movements in Net Working Capital are watched to
ascertain whether there is a mismatch of long term sources vis--vis long term uses for purposes which
may not be readily acceptable to the Bank so that corrective measures can be suggested.
(iii) Financial Soundness:
This will be dependent upon the owners stake or the leverage. Here again the benchmark will be different
for manufacturing, trading, hire-purchase & leasing concerns. For industrial ventures a Total Outside
Liability/ Tangible Net worth ratio of 3.0 is reasonable but deviations in selective cases for
understandable reasons may be accepted by the sanctioning authority.

(iv) Turn-Over:
The trend in turnover is carefully gone into both in terms of quantity & valve as also market share
wherever such data are available. What is more important to establish a steady output if not a rising trend
in quantitative terms because sales realization may be varying on account of price fluctuations.
(v) Profits:
While net profit is ultimate yardstick, cash accruals, i.e., profit before depreciation & taxation conveys the
more comparable picture in view of changes in rate of depreciation & taxation, which have taken place in
the intervening years. However, for the sake of proper assessment, the non-operating income is excluded,
as these are usually one time or extraordinary income. Companies incurring net losses consistently over 2
or more years will be given special attention, their accounts closely monitored, and if necessary, exit
options explored.
(vi) Credit Rating:
Wherever the company has been rated by a Credit Rating Agency for any instrument such as CP / FD this
will be taken into account while arriving at the final decision. However as the credit rating involves
50

additional expenditure, we would not normally insist on this and only use this tool if such an agency had
already looked into the company finances.

(b) Term Loan
(i) In case of term loan & deferred payment guarantees, the project report is obtained from the
customer,
(ii) which may be compiled either in-house or by a firm of consultants/ merchant bankers. The
technical feasibility & economic viability is vetted by the bank & wherever it is felt necessary,
the Credit Officer would seek the benefit of a second opinion either from the Banks Technical
Consultancy cell or from the consultants of the Bank/ SBI Capital Markets Ltd.
(iii)Promoters contribution of at least 20% in the total equity is what we normally expect. But
promoters contribution may vary largely in mega projects. Therefore there cannot be a definite
benchmark. The sanctioning authority will have the necessary discretion to permit deviations.
(iv) The other basic parameter would be the net debt service coverage ratio i.e. exclusive of interest
payable, which should normally not go below 2. On a gross basis DSCR should not be below
1.75. These ratios are indicative & the sanctioning authority may permit deviations selectively.
(v) As regards margin on security, this will depend on Debt: Equity gearing for the project, which
should preferably be near about 1.5: 1 & should not in any case be above 2:1, i.e., Debt should
not be more than 2 times the Equity contribution. The sanctioning authority in exceptional cases
may permit deviations from the norm very selectively.
(vi) Other parameters governing working capital facilities would also govern Term Credit facilities to
the extent applicable.

(C) Lending to Non-Banking Financial Companies (NBFCs)

(D) Financing of infrastructure projects

(E) Lease Finance

(F) Letter of Credit, Guarantees & bills discounting

51

(G) Fair Practices for lenders

Documentation standards
1: The systems and procedures for documentation have been laid down keeping in view
the ultimate objective of documentation which is to serve as primary evidence in any dispute between the
Bank and the borrower and for enforcing the Bank's right to recover the loan amount together with
interest thereon (through a court of law as a final resort), in
the event of all other recourses proving to be of no avail. In order that this objective is achieved, our
documentation process attempts to ensure that:
The owing of the debt to the Bank by the borrower is clearly established by the documents.
The charge created on the borrower's assets as security for the debt is maintained and enforceable
The Bank's right to enforce the recovery of the debt through court of law is not allowed to
become time-barred under the Law of Limitation.

52

2: Documentation is not confined to mere obtention of security documents at the outset. It is a continuous
and ongoing process covering the entire duration of an advance comprising the following stages :
(i) Pre-execution formalities:
These cover mainly searches at the Office of Registrar of Companies and search of the Register of
Charges (applicable to corporate borrowers), also capacity of borrowers to borrow and the formalities to
be completed by the borrowers, searches at the office of the sub-Registrar of Assurances or Land Registry
to check the existence or otherwise of prior charge over the immovable property offered as security,
besides taking other precautions before creating equitable / registered mortgage.
(ii) Execution of Documents
This covers obtention of proper documents, appropriate stamping and correct execution thereof as per
terms of the sanction of the advance and the internal directives of a corporate borrower such as
Memorandum and Articles of Association, etc.
(iii) Post-execution formalities
This phase covers the completion of formalities in respect of mortgages, if any, registration with the
Registrar of Assurances, wherever applicable, and the registration of charges with the Registrar of
Companies within the stipulated period, etc..
(iv) Protection from Limitation / Safeguarding Securities
These measures aim at saving the documents from getting time-barred by limitation and protecting the
securities charged to the Bank from being diluted by any charge that might be created by the borrower to
secure his other debts, if any. These objectives are sought to be achieved by:
(a) Obtention of revival letter within the stipulated period
(b) Obtention of Balance Confirmation from the borrower at least at annual intervals
(c) Making periodical searches at the Office of the Registrar of Companies.
(d) Insurance of Assets charged - (unless specifically waived) to insure the Bank against the risk of
fire, other hazards, etc..

3. Keeping the above broad objectives and the documentation process in view, the Bank
has devised standard documents in most cases for various types of loans given to the borrowers.
Wherever standard specimens have not been evolved, these are suitably drafted on a case-by-case basis
53

with the help of in-house legal department and, on occasions, with the help of reputed outside solicitors.
Furthermore, changes in the documentation procedures and the implications involved are circularised
from time to time to all the branches/offices so that those who are responsible for obtaining and
safeguarding the documents are made fully conversant with them. This is further strengthened through
on-the-job training at the branches as well as at the Bank's training colleges / centres, where the officials
are briefed on the documentation procedures so that the Bank's interest is protected in this crucial area.
4. In respect of consortium advances, the documents are generally executed in consultation with the other
member banks in accordance with the guidelines laid down by RBI /IBA in the matter. Similarly, where
advances are extended jointly with the financial institutions, documents are specially drafted in
consultation with the solicitors / in-house legal experts to ensure pari passu charge and / or second charge,
whichever is applicable, of the movable / immovable assets of the borrower to protect the Bank's
interests.

5. While it is the Bank's endeavor to standardize documents for all types of facilities, in cases where
documents have to be specially drafted, the Local Head Offices are empowered to vet and approve
such documents for facilities which are sanctioned at their level. For facilities requiring sanction of
COCC / ECCB, such specially drafted documents are cleared by the Corporate Centre.

3. Requirement of documents for process of loan

1. Application for requirement of loan

2. Copy of Memorandum & Article of Association

3. Copy of incorporation of business

4. Copy of commencement of business

5. Copy of resolution regarding the requirement of credit facilities

54

6. Brief history of company, its customers & supplies, previous track records, orders in
hand. Also provide some information about the directors of the company

7. Financial statements of last 3 years including the provisional financial statement for the
year 2008-09

8. Copy of PAN/TAN number of company

9. Copy of last Electricity bill of company

10. Copy of GST/CST number

11. Copy of Excise number

12. Photo I.D. of all the directors

13. Address proof of all the directors

14. Copies related to the property such as 7/12 & 8A utara, lease/ sales deed, 2R permission,
Allotment letter, Possession

15. Bio-data form of all the directors duly filled & notarized

16. Financial statements of associate concern for the last 3 years

55

4. Delegation of powers
1. A scheme of Delegation exercise by the various functional Powers comprehensively
documented in 1985 and amended from time to time is in operation in the Bank in respect of
financial and administrative matters for rise. This is based on the premise that an executive is
required to exercise only those powers which are related to the responsibilities and duties
entrusted to him/her. In exercising the powers, the authorities concerned are required to ensure
compliance also with the relevant provisions of the State Bank of India Act and the State Bank of
India General Regulations and any rules, regulations, instructions or orders issued from time to
time by appropriate controlling authorities.

2. The Executive Committee of the Central Board (ECCB) has full powers for sanctioning all credit
facilities.
3. The Scheme of Delegation of Financial powers for advances and allied matters in the Bank has a
graded authority structure. The Executive Committee of the Central Board (ECCB) has full powers for
sanctioning credit facilities. The sanctioning powers have been delegated down the line to Committees of
officials at various administrative offices and individual line functionaries.
4. An appropriate control system is also in operation in tune with the Delegation structure. The powers,
exercised by various functionaries, are required to be reported to the next higher authority as laid down in
the Scheme of Delegation of Financial Powers.
5. A system of loan review styled 'Credit Audit' which inter alia covers audit of credit sanction decisions
at various levels has been implemented. Presently, all accounts with total fund based indebtedness of Rs.5
cr. and above are subjected to credit audit. The audit system serves as an effective control on the system
of sanction of loans in the bank through widely delegated powers.

56

SCHEME OF DELEGATION OF FINANCIAL POWER

S
L
PARTICULARS LIMITS CCCC WBCC CCC-I CCC-II NLCC AGM
1
CORPORATES
SB-1 &
SB-2
Over
all
500.00 250.00 100.00 50.00 FBL 7.50 2.00
(TL) NA NA (35.00) (15.00) (TL) (5.00) (1.25)
(WC-1.00)
Others Over
all
400.00 200.00 70.00 35.00 NFBL 7.50 1.00
(TL) NA NA (20.00) (10.00) Overall 15.00 3.00
2
NON-
SB-1 &
SB-2
Over
all
60.00 60.00 40.00 20.00 FBL 5.00 1.00
57

CORPORATES (TL) NA NA (10.00) (5.00) (TL) (3.00) (1.00)
(WC-0.60)
Others Over
all
50.00 50.00 30.00 15.00 NFBL 5.00 0.60
(TL) NA NA (8.00) (4.00) Overall 10.00 1.20
3
INDIVIDUALS
SB-1 &
SB-2
Over
all
15.00 15.00 15.00 6.00 FBL 2.00 1.00
(TL) NA NA - - (TL) - (1.00)
(WC-0.60)
Others Over
all
10.00 10.00 10.00 5.00 NFBL 2.00 0.60
(TL) NA NA - - Overall 4.00 1.20

5. Pricing (Factors deciding interest rates and other charges)
1. Pricing in the Bank can be divided into interest pricing and non-interest pricing. Pricing of loans up to
Rs.2 lacs will be as prescribed by RBI. In line with RBI guidelines, he Bank announces from time to time
its single Benchmark Prime Lending Rate (BPLR), i.e., reference / indicative rates at which the Bank
would lend to its best customers. The BPLR would be referred to as State Bank Advance Rate (SBAR) in
our Bank. Interest rate without reference to SBAR could be charged in respect of certain categories of
loan / credit like discounting of bills, lending to intermediary agencies etc. Interest rates below SBAR
could be offered to exporters or other credit worthy borrowers including public enterprises on the lines of
a transparent and objective policy approved by the Bank's Board. All other loans are to be priced on the
basis of Bank's SBAR with the pricing being linked to grade of the risk in the exposure. The maximum
spread over SBAR which could be charged by the Bank will be decided by the Bank from time to time.
Within such ceiling, the pricing for various credit facilities, schemes, products, credit related services etc.,
including sub-SBAR pricing would be determined by ALCO or COCC, as considered appropriate. Bank
may also price floating rate products by using market benchmarks (e.g. G-Sec rates, MIBOR etc.) in a
transparent manner as per Board approved policies.
58

2. An internal Credit Risk Rating system covering all advances of Rs.25 lacs and above in C&I, SSI and
AGL segments has been put in place to facilitate structured assessment of credit risks. The system enables
evaluation of the fundamental strength of the borrower so as to charge a graded rate of interest based on
different ratings. However, taking into consideration the trends in movement of interest rates and market
competition, the Bank has also adopted an appropriate authority structure to facilitate competitive pricing
of loan products linked both to risk rating and overall business considerations.
3. Bank has introduced fixed interest rates in respect of certain categories of loans in personal segment,
e.g. housing term loans to individuals. Fixed interest rates are also extended for commercial loans, albeit
highly selectively.
4. Market related charges and a discretionary structure that enables branches to effectively face
competition are in place. These would be reviewed periodically based on feedback from operating units
and the market.
5. Pricing of Bank's funds and services while being basically market driven is also determined by two
important considerations, i.e., minimum desired profitability and risk inherent in the transaction. At the
corporate level, the applicable price for a particular advance or service is fixed taking into account the
marginal cost of Bank's funds and desired rate of return as calculated from indices like profitability levels
and return on capital employed. In case of corporate relationship where the value of connections and
overall potential for profitability from a particular account are more important than a particular
transaction, the price is fine tuned even to level of no-loss-no-profit in the transaction. For long term
exposures, the factors that weigh are the rate charged by the financial institutions, the period of exposure,
the pattern of volatility in the interest rates and the expected movement of the rates in the long term
perspective.
Review / Renewal of advances
1. Working capital facilities are granted by the Bank for a period of 1 year and thereafter they are required
to be renewed each year, i.e., fresh sanction is accorded for the limits. Where, however, renewal is not
possible for some reason, sanction for the continuance of the limits is obtained in each case by reviewing
the facilities.
2. Term loans which are irregular will be reviewed once in six months. (However, review of Term Loans
will be included in the periodical review of Special Mention Accounts.)
59

A separate authority structure, as given below, has been prescribed for above noted half-yearly review of
term loans:

3. In the case of all listed companies with credit rating of SB4/SBTL4 and below, a brief review is to be
put up on the basis of half-yearly working results published by them duly incorporating comments such as
extent of exposure, conduct of the account etc. Such review is to be submitted to the respective GE in
respect of ECCB sanctions, to the CGM (Circle) / CGM (CAG-Cen.) in respect of COCC-I&II sanctions
and to the GM (Network) in all other cases.
4. There will be no CRA rating review for term loans. However, in respect of term loans, the following
set of financial covenants is to be stipulated:
(i) Current Ratio
(ii) TOL/TNW
(iii) Interest Coverage Ratio
(iv) Default in payment of interest / installment
(v) Cross Default (default in payment of instalment/ interest to other institutions/ banks)

Default of these covenants would attract penal interest of 1% as under:
(a) Any adverse deviation by more than 20% from the stipulated levels in respect of any two of the
items (i) to (iii) above - penal interest to be levied for the period of non-adherence subject to a
minimum period of 1 year.
60

(b) Default in payment of interest/installments to the Bank or to other FI/Banks-penal interest to be
levied for the period of such defaults.

Takeover of advances
Bank needs to aggressively market for good quality advances. One of the strategies for increasing good
quality assets in the Bank's loan portfolio, would be to take over advances from other banks/FIs. Keeping
this in view and with the prime objective of adding only good quality assets, a common set of norms /
guidelines for C&I, SSI and AGL segments has been laid down for take over of advances.

A. Advances under SSI / C&I Segments
(i) The advance to be taken over should be rated SB3/SBTL3 or above.

(ii) The unit should score the minimum scores as prescribed, under the various risk
segments, in the Credit Risk Assessment.
(iii) The account should have been a standard asset in the books of the other bank/FI during the
preceding 3 years. (If this information is not forthcoming from the bank/FI, a certificate should be
obtained from the borrowers Auditor that the loan has been a standard asset during the preceding
3 years in the books of the bank/FI in terms of the asset classification norms of RBI. The services
of statutory auditors of our Bank may also be sought for this purpose). However, if a unit is not
having a track record for 3 years, as it has been in existence for a shorter duration, takeover can
be considered based on the track record for the available period, which should be at least one
year.

(iv) The unit should have earned net profits (post tax) in each of the immediately preceding 3 years.
However, if the unit has been in existence for a lesser period, it should have earned net profit
(post tax) in the preceding year of operation.

(v) The Term Loan proposed to be taken-over should not have been rephased, generally, by the
existing FI/Bank after commencement of commercial production. However, if a rephasement was
61

necessitated due to external factors and viability of the unit is not in doubt, such proposals may
also be considered for sanction on a case to case basis.

(vi) The remaining period of scheduled repayment of the term loan should be at least 2 years, when
only TLs are taken over.

For takeover of existing TLs, while the original time frame for repayment will be generally adhered to,
flexibility may be allowed in the quantum of periodical repayments. If sanction of fresh term loan is
proposed along with the takeover, the schedule of repayment for the existing term loans, if necessary,
may be permitted to extend up to 8 years. [The norms at (v), (vi) and (vii) above are not applicable for
take-over of working capital advances.
Note 1 : In the case of take-over proposals involving advances up to Rs.25 lacs, the rating
should be carried out, as per the scoring model prescribed under SME Smart Score (Refer page 170,
Chapter 34, Part III, Volume III of Manual on Loans & Advances). Other factors that may be kept in view
are: -
Continued viability
Track record
Standing in the market of the unit/ promoter.

Note 2: Take-over of units from our Associate Banks is not permitted.
Note 3 : In the cases of working capital finance through consortium or multiple banking, increasing our
share, and joining a consortium (or when a member bank exits consortium and we join the consortium in
its place), are not reckoned as take-over of advances from other banks.

B. Advances under Trade and Services Sector:
i) The current ratio and TOL/TNW ratio should be at acceptable levels, as per audited balance sheet not
older than 12 months. Current ratio of not below 1 is acceptable up to FBWC limit of Rs.5 cr. For FBWC
limits of above Rs.5 Cr. the current ratio of 1.33 will be indicative. It may be considered acceptable up to
62

1.20, depending on the activity. TOL/TNW ratio higher than 3 would be permissible depending on the
type of activity.
ii) The unit should have earned post-tax profits in each of the immediately preceding 3 years. However, if
the unit has been in existence for a lesser period, it should have earned net profit (post-tax) in the
preceding year of operation.

C. Other Guidelines:
(i) In all cases of take-over of advances from other banks, the credit information report in the format
prescribed by IBA should be obtained. The experience of the present banker (item 13 of the format)
should show satisfactory dealings with the unit. Where, from the point of competition, it is necessary not
to alert the bank concerned, the report may be obtained after the sanction of facilities but before release of
the facilities.
(ii) In all cases of take-over, branches should ensure proper documentation and other formalities to protect
the interest of our Bank.
(iii) In all cases of take-over, branches should assess the requirements of the borrower and obtain sanction
for the proposed limits before actually taking over the outstanding liability of the borrower to their
existing bank/ FI.
(iv) The following aspects should invariably be examined in each case of take-over.
Reasons for take-over
Market perception including the existing banks/FIs perception regarding the unit and its
management. (For this, the appraising officials may record briefly on their enquiries with
market sources/other bank/FI);
Potential ancillary business accruing to the Bank;
Terms and conditions stipulated by the existing bank and those proposed by our Bank,
particularly to ensure against dilution of security cover. No takeover of advances from
any Public Sector Bank will be resorted to by quoting finer rates

(v) The credit rating should be done based on the audited balance sheet which is not older
63

than 12 months. However if the audited balance sheet is more than 12 months old and the proposal has to
be considered from the business angle, then a provisional balance sheet as on a recent date may be
obtained from the unit and the CRA exercise done based on these figures, additionally. Unit should clear
the stipulated hurdle rate in both the exercises.
D. Administrative Clearance (AC)
In all the cases of take-over proposals, AC is required to be obtained. For this purpose, a brief proposal
containing, inter alia, the comments on compliance with the norms and the other guidelines as above
should be submitted to the appropriate authority as under:
(i) For take-over of units complying with all the norms prescribed:

(ii) For take-over of units not complying with any one or more of the norms prescribed:

E. While takeover of 'P' segment advances is not generally encouraged, in consideration of larger
business interests / valuable connections, takeover of housing loans is considered selectively after due
diligence and precautions, in cases where possession of the house / flat has been taken, repayment of
existing loan has already commenced and installments have been paid as per terms of sanction.
Credit facilities to companies whose directors are in the defaulters' list of RBI:
1. The Directors of any company may be classified as promoter / elected / professional/ nominee /
honorary directors. RBI has been collecting and circulating information on defaulting companies amongst
banks / FIs, including names of directors of such companies. Though RBI's defaulters' list is given due
64

cognizance in the appraisal process, a general policy on the issues relating to sanction / continuation of
credit facilities to such companies whose directors are in the RBI's defaulters' list needs to be put in place.
Accordingly, it has been decided to adopt the following approach:

The above policy on defaulters will be a broad framework for sanction / continuation of credit facilities to
companies whose directors are in the RBI's list of defaulting borrowers of banks / FIs with dues of Rs.1
Cr. and above. When the list of such defaulters is circulated by CIBIL instead of RBI), the same Policy
would continue to apply.
2. Willful default & action there against - The penal measures would be made applicable to all borrowers
identified as willful defaulters or the promoters involved in diversion / siphoning of funds with
65

outstanding balance of Rs.25 lacs or more without any exception. Similarly, the limit of Rs.25 lacs will
also be applied for the purpose of taking cognizance of instances of siphoning and diversion of funds.
3. Where a Letter of Comfort or guarantee furnished by the companies within a Group in favour of a
willfully defaulting unit is not paid when invoked by the Bank, such Group companies also may be
reckoned as willful defaulters.
4. In cases of project financing, Bank would endeavor to ensure end-use of funds by, inter alia, obtaining
certification from Chartered Accountants. In case of short term corporate/clean loans, such an approach
would be supplemented by due diligence on the part of the Bank. It shall be the endeavor of the Bank to
ensure that such loans are limited to borrowers whose integrity and reliability are above board. Bank will
also retain the right to get investigative audit conducted whenever it is prima facie satisfied that there is a
case for such investigative audit to detect siphoning/ diversion of funds or other malfeasance.
5. No additional facilities shall be granted by the Bank to the listed willful defaulters. Further,
entrepreneurs / promoters of companies where the Bank has identified siphoning /diversion of funds, mis-
representation, falsification of accounts and fraudulent transactions shall be debarred from Bank finance
for floating new ventures for a period of 5 years from the date the name of the willful defaulter is
published by RBI / CIBIL.
6. The legal process, wherever warranted, against the borrowers / guarantors and foreclosure of recovery
of dues should be initiated expeditiously. The Bank may also initiate criminal action against willful
defaulters, where necessary.
7. Where possible, Bank shall adopt a proactive approach for a change of management of the willfully
defaulting borrowing unit.

6. Credit Monitoring & Supervision
1. Broadly, the objectives of post-sanction follow up, supervision and monitoring are as under:
(a) Follow up function:
To ensure the end-use of funds
To relate the outstandings to the assets level on a continuous basis
To correlate the activity level to the projections made at the time of the
66

sanction / renewal of the credit facilities
To detect deviation from terms of sanction.
To make periodic assessment of the health of the advances by noting some of the key indicators
of performance like profitability, activity level, and management of the unit and ensure that the
assets created are effectively utilized for productive purposes and are well maintained.
To ensure recovery of the installments of the principal in case of term loans as per the scheduled
repayment programme and all interest.
To identify early warning signals, if any, and initiate remedial measures thereby averting the
incidence of incipient sickness.
To ensure compliance with all internal and external reporting requirements covering the credit
area.

(b) Supervision function:
To ensure that effective follow up of advances is in place and asset quality of good order is
maintained.
To look for early warning signals, identify incipient sickness and initiate proactive remedial
measures.
(c) Monitoring function:
To ensure that effective supervision is maintained on loans / advances and appropriate responses
are initiated wherever early warning signals are seen.
To monitor on an ongoing basis the asset portfolio by tracking changes from time to time.
Chalking out and arranging for carrying out specific actions to ensure high percentage of
Standard Assets.

2. Detailed operative guidelines on the following aspects of effective credit monitoring are in place:
Post-sanction responsibilities of different functionaries
Reporting for control
Security documents, Statement of stocks and book debts
Computation of drawing power (DP) on eligible current assets and maintaining of DP register
Verification of assets
Inspection by branch functionaries frequency, reporting, register etc.
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Stock Audit
Follow up based on information systems
Follow up during project implementation stage
Follow up post-commercial production
Monitoring and control
Detection and prevention of diversion of working capital finance
Monitoring of large withdrawals
Allocation of limit
Handling of NPA accounts etc.

7. Loan Administration - Pre-Sanction process
Appraisal, Assessment and Sanction functions
1. APPRAISAL
A. Preliminary appraisal
1.1 Sound credit appraisal involves analysis of the viability of operations of a business and the capacity of
the promoters to run it profitably and repay the bank the dues as and then they fall
1.2. Towards this end the preliminary appraisal will examine the following aspects of a proposal.
Banks lending policy and other relevant guidelines/RBI guidelines,
Prudential Exposure norms,
Industry Exposure restrictions,
Group Exposure restrictions,
Industry related risk factors,
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Credit risk rating,
Profile of the promoters/senior management personnel of the project,
List of defaulters,
Caution lists,
Acceptability of the promoters,
Compliance regarding transfer of borrower accounts from one bank to another, if
applicable;
Government regulations/legislation impacting on the industry; e.g., ban on
financing of industries producing/ consuming Ozone depleting substances;
Applicants status vis--vis other units in the industry,
Financial status in broad terms and whether it is acceptable

The companys Memorandum and Articles of Association should be scrutinized carefully to ensure (i)
that there are no clauses prejudicial to the Banks interests, (ii) no limitations have been placed on the
Companys borrowing powers and operations and (iii) the scope of activity of the company.

1.3. Further, if the proposal is to finance a project, the following aspects have to be examined:
Whether project cost is prima facie acceptable
Debt/equity gearing proposed and whether acceptable
Promoters ability to access capital market for debt/equity support
Whether critical aspects of project - demand, cost of production, profitability, etc. are prima facie in
order
1.4. After undertaking the above preliminary examination of the proposal, the branch will arrive at a
decision whether to support the request or not. If the branch (a reference to the branch includes a
reference to SECC/CPC etc. as the case may be) finds the proposal acceptable, it will call for from the
applicant(s), a comprehensive application in the prescribed proforma, along with a copy of the
proposal/project report, covering specific credit requirement of the company and other essential data/
information. The information, among other things, should include:
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Organisational set up with a list of Board of Directors and indicating the qualifications, experience and
competence of the key personnel in charge of the main functional areas e.g., purchase, production,
marketing and finance; in other words a brief on the managerial resources and whether these are
compatible with the size and scope of the proposed activity.
Demand and supply projections based on the overall market prospects together with a copy of the
market survey report. The report may comment on the geographic spread of the market where the unit
proposes to operate, demand and supply gap, the competitors share, competitive advantage of the
applicant, proposed marketing arrangement, etc.
Current practices for the particular product/service especially relating to terms of credit sales,
probability of bad debts, etc.
Estimates of sales, cost of production and profitability.
Projected profit and loss account and balance sheet for the operating years during the currency of the
Bank assistance.
If request includes financing of project(s), branch should obtain additionally

(i)Appraisal report from any other bank/financial institution in case appraisal has been done by them,
(ii) No Objection Certificate from term lenders if already financed by them and
(iii) Report from Merchant bankers in case the company plans to access capital market, wherever
necessary.
1.5. In respect of existing concerns, in addition to the above, particulars regarding the history of
the concern, its past performance, present financial position, etc. should also be called for. This
data/information should be supplemented by the supporting statements such as:

a) Audited profit loss account and balance sheet for the past three years (if the latest audited balance
sheet is more than 6 months old, a pro-forma balance sheet as on a recent date should be obtained
and analysed). For non-corporate borrowers, irrespective of market segment, enjoying credit
limits of Rs.10 lacs and above from the banking system, audited balance sheet in the IBA
approved formats should be submitted by the borrowers.
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b) Details of existing borrowing arrangements, if any,
c) Credit information reports from the existing bankers on the applicant Company, and
d) Financial statements and borrowing relationship of Associate firms/Group Companies.
B. Detailed Appraisal
1.6 The viability of a project is examined to ascertain that the company would have the ability to service
its loan and interest obligations out of cash accruals from the business. While appraising a project or a
loan proposal, all the data/information furnished by the borrower should be counter checked and,
wherever possible, inter-firm and inter-industry comparisons should be made to establish their veracity.
1.7 The financial analysis carried out on the basis of the companys audited balance sheets and profit and
loss accounts for the last three years should help to establish the current viability.
1.8 In addition to the financials, the following aspects should also be examined:
The method of depreciation followed by the company-whether the company is following straight line
method or written down value method and whether the company has changed the method of depreciation
in the past and, if so, the reason therefor;
Whether the company has revalued any of its fixed assets any time in the past and the
present status of the revaluation reserve, if any created for the purpose;
Record of major defaults, if any, in repayment in the past and history of past sickness,
if any;
The position regarding the companys tax assessment - whether the provisions made
in the balance sheets are adequate to take care of the companys tax liabilities;
The nature and purpose of the contingent liabilities, together with comments thereon;
Pending suits by or against the company and their financial implications (e.g. cases
relating to customs and excise, sales tax, etc.);
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Qualifications/adverse remarks, if any, made by the statutory auditors on the
Companys accounts;
Dividend policy;
Apart from financial ratios, other ratios relevant to the project;
Trends in sales and profitability, past deviations in sales and profit projections, and
Estimates/projections of sales values;
Production capacity & use: past and projected;\
Estimated requirement of working capital finance with reference to acceptable build up
of inventory/ receivables/ other current assets;
Projected levels: whether acceptable; and
Compliance with lending norms and other mandatory guidelines as applicable
1.9. Project financing:
If the proposal involves financing a new project, the commercial, economic and
Financial viability and other aspects are to be examined as indicated below:
Statutory clearances from various Government Depts./ Agencies
Licenses/permits/approvals/clearances/NOCs/Collaboration agreements, as applicable
Details of sourcing of energy requirements, power, fuel etc.
Pollution control clearance
Cost of project and source of finance
Build-up of fixed assets (requirement of funds for investments in fixed assets to be critically examined
with regard to production factors, improvement in quality of products, economies of scale etc.)
Arrangements proposed for raising debt and equity
Capital structure (position of Authorized, Issued/ Paid-up Capital, Redeemable Preference Shares, etc.)
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Debt component i.e., debentures, term Loans, deferred payment facilities, unsecured loans/ deposits. All
unsecured loans/ deposits raised by the company for financing a project should be subordinate to the term
loans of the banks/ financial institutions and should be permitted to be repaid only with the prior approval
of all the banks and the financial institutions concerned. Where central or state sales tax loan or
developmental loan is taken as source of financing the project, furnish details of the terms and conditions
governing the loan like the rate of interest (if applicable), the manner of repayment, etc.
Feasibility of arrangements to access capital market
Feasibility of the projections/ estimates of sales, cost of production and profits covering
the period of repayment
Break Even Point in terms of sales value and percentage of installed capacity under a normal production
year
Cash flows and fund flows
Proposed amortization schedule
Whether profitability is adequate to meet stipulated repayments with reference to Debt
Service Coverage Ratio, Return on Investment
Industry profile & prospects
Critical factors of the industry and whether the assessment of these and management
Plans in this regard are acceptable
Technical feasibility with reference to report of technical consultants, if available
Management quality, competence, track record
Companys structure & systems
Applicants strength on inter-firm comparisons
For the purpose of inter-firm comparison and other information, where necessary, source data from Stock
Exchange Directory, financial journals/ publications, professional entities like CRIS-INFAC, CMIE, etc.
with emphasis on following aspects:
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Market share of the units under comparison
Unique features
Profitability factors
Financing pattern of the business
Inventory/Receivable levels
Capacity utilization
Production efficiency and costs
Bank borrowings patterns
Financial ratios & other relevant ratios
Capital Market Perceptions
Current price
52week high and low of the share price
P/E ratio or P/E Multiple
Yield (%)- half yearly and yearly

Also examine and comment on the status of approvals from other term lenders, market view (if
anything adverse), and project implementation schedule. A pre-sanction inspection of the project
site or the factory should be carried out in the case of existing units. To ensure a higher degree of
commitment from the promoters, the portion of the equity / loans which is proposed to be
brought in by the promoters, their family members, friends and relatives will have to be brought
upfront. However, relaxation in this regard may be considered on a case to case basis for genuine
and acceptable reasons. Under such circumstances, the promoter should furnish a definite plan
indicating clearly the sources for meeting his contribution. The balance amount proposed to be
raised from other sources, viz., debentures, public equity etc., should also be fully tied up.

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C. Present relationship with Bank:
Compile for existing customers, profile of present exposures:
Credit facilities now granted
Conduct of the existing account
Utilization of limits - FB & NFB
Occurrence of irregularities, if any
Frequency of irregularity i.e., number of times and total number of days the account
was irregular during the last twelve months
Repayment of term commitments
Compliance with requirements regarding submission of stock statements, Financial Follow-up
Reports, renewal data, etc.

Stock turnover, realization of book debts
Value of account with break-up of income earned
Pro-rata share of non-fund and foreign exchange business
Concessions extended and value thereof
Compliance with other terms and conditions
Action taken on Comments/observations contained in RBI Inspection Reports:
CO Inspection & Audit Reports
Verification Audit Reports
Concurrent Audit Reports
Stock Audit Reports
Spot Audit Reports
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Long Form Audit Report (statutory audit)
D. Credit risk rating: Draw up rating for (i) Working Capital and (ii) Term Finance.
E. Opinion Reports: Compile opinion reports on the company, partners/ promoters and the proposed
guarantors.
F. Existing charges on assets of the unit: If a company, report on search of charges with
ROC.
G. Structure of facilities and Terms of Sanction:
Fix terms and conditions for exposures proposed - facility wise and overall:
o Limit for each facility sub-limits
o Security - Primary & Collateral, Guarantee
o Margins - For each facility as applicable
o Rate of interest
o Rate of commission/exchange/other fees
o Concessional facilities and value thereof
o Repayment terms, where applicable
o ECGC cover where applicable
o Other standard covenants
H. Review of the proposal: Review of the proposal should be done covering
(i) strengths and weaknesses of the exposure proposed
(ii) risk factors and steps proposed to mitigate them
(iii) deviations, if any, proposed from usual norms of the Bank and the reasons therefor.
I. Proposal for sanction: Prepare a draft proposal in prescribed format with required backup details and
with recommendations for sanction.
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J. Assistance to Assessment: Interact with the assessor, provide additional inputs arising
from the assessment, incorporate these and required modifications in the draft proposal and generate an
integrated final proposal for sanction.

2. ASSESSMENT: Indicative List of Activities Involved in Assessment Function is given below:
Review the draft proposal together with the back-up details/notes, and the borrowers
application, financial statements and other reports/documents examined by the appraiser.
Interact with the borrower and the appraiser.
Carry out pre-sanction visit to the applicant company and their project/factory site.
Peruse the financial analysis (Balance Sheet/ Operating Statement/ Ratio Analysis/ Fund Flow
Statement/ Working Capital assessment/Project cost & sources/ Break Even analysis/Debt
Service/Security Cover, etc.) to see if this is prima facie in order. If any deficiencies are seen, arrange
with the appraiser for the analysis on the correct lines.
Examine critically the following aspects of the proposed exposure.
o Banks lending policy and other guidelines issued by the Bank from time to time
o RBI guidelines
o Background of promoters/ senior management
o Inter-firm comparison
o Technology in use in the company
o Market conditions
o Projected performance of the borrower vis--vis past estimates and performance
o Viability of the project
o Strengths and Weaknesses of the borrower entity.
o Proposed structure of facilities.
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o Adequacy/ correctness of limits/ sub limits, margins, moratorium and repayment schedule
o Adequacy of proposed security cover
o Credit risk rating
o Pricing and other charges and concessions, if any, proposed for the facilities
o Risk factors of the proposal and steps proposed to mitigate the risk
o Deviations proposed from the norms of the Bank and justifications therefor
To the extent the inputs/comments are inadequate or require modification, arrange for additional inputs/
modifications to be incorporated in the proposal, with any required modification to the initial
recommendation by the Appraiser
Arrange with the Appraiser to draw up the proposal in the final form.
Recommendation for sanction: Recapitulate briefly the conclusions of the appraisal and state whether
the proposal is economically viable. Recount briefly the value of the companys (and the Groups)
connections. State whether, all considered, the proposal is a fair banking risk. Finally, give
recommendations for grant of the requisite fund-based and non-fund based credit facilities.

3. SANCTION: Indicative list of activities involved in the sanction function is given below:
Peruse the proposal to see if the report prima facie presents the proposal in a comprehensive manner as
required. If any critical information is not provided in the proposal, remit it back to the Assessor for
supply of the required data/clarifications.
Examine critically the following aspects of the proposed exposure in the light of corresponding
instructions in force:
o Banks lending policy and other relevant guidelines
o RBI guidelines
o Borrowers status in the industry
o Industry prospects
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o Experience of the Bank with other units in similar industry
o Overall strength of the borrower
o Projected level of operations
o Risk factors critical to the exposure and adequacy of safeguards proposed there against
o Value of the existing connection with the borrower
o Credit risk rating
o Security, pricing, charges and concessions proposed for the exposure and covenants stipulated vis--vis
the risk perception.
Accord sanction of the proposal on the terms proposed or by stipulating modified or additional
conditions/ safeguards, or Defer decision on the proposal and return it for additional data/clarifications,
or Reject the proposal, if it is not acceptable, setting out the reasons.

5. MONITORING DELAY IN PROCESSING LOAN PROPOSAL :
Branches have to submit a report on credit proposals pending for more than 30 days in two parts. Part I
will comprise proposals requiring sanctions at the Branch/ SECC/ ZCC and Part II will contain sanctions
by CCC-II and above. Review reports to CCC-I and later to Group Executive for information at
prescribed intervals will be coordinated by DGM (CCFO). The consolidated position in this regard in
respect of all the Circles will be put up to MD & GE (NB) through GM (SME).

Loan Administration - Post sanction credit process
General
1. Need
Lending decisions are made on sound appraisal and assessment of credit worthiness. Past record of
satisfactory performance and integrity are no guarantee for future though they serve as a useful guide to
project the trend in performance. Credit assessment is made based on promises and projections. A loan
granted on the basis of sound appraisal may go bad because the borrower did not carry out his promises
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regarding performance. It is for this reason that proper follow up and supervision is essential. A banker
cannot take solace in sufficiency of security for his loans. He has to -
a) make a proper selection of borrower
b) Ensure compliance with terms and conditions
c) Monitor performance to check continued viability of operations
d) Ensure end use of funds.
e) Ultimately ensure safety of funds lent.
2. Stages of post sanction process
The post-sanction credit process can be broadly classified into three stages viz., follow-up, supervision
and monitoring, which together facilitate efficient and effective credit management and maintaining high
level of standard assets. The objectives of the three stages of post sanction process are detailed below.

8. TYPES OF LENDING ARRANEMENTS

Introduction
Business entities can have various types of borrowing arrangements. They are
One Borrower One Bank
One Borrower Several Banks (with consortium arrangement)
One Borrower Several Banks (without consortium arrangements Multiple Banking
One Borrower Several Banks (Loan Syndication)

A. One Bank
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The most familiar amongst the above for smaller loans is the One Borrower-One Bank
arrangement where the borrower confines all his financial dealings with only one bank.
Sometimes, units would prefer to have banking arrangements with more than one bank on
account of the large financial requirement or the resource constraint of his own banker or due to
varying terms & conditions offered by different banks or for sheer administrative convenience.
The advantages to the bank in a multiple banking arrangement/ consortium arrangement are that
the exposure to an individual customer is limited & risk is proportionate. The bank is also able to
spread its portfolio. In the case of borrowing business entity, it is able to meet its funds
requirement without being constrained by the limited resource of its own banker. Besides this,
consortium arrangement enables participating banks to save manpower & resources through
common appraisal & inspection & sharing credit information.

The various arrangements under borrowings from more than one bank will differ on account of
terms & conditions, method of appraisal, coordination, documentation & supervision & control.
B. Consortium lending
When one borrower avails loans from several banks under an arrangement among all the lending
bankers, this leads to a consortium lending arrangements. In consortium lending, several banks
pool banking resourses & expertise in credit management together & finance a single borrower
with a common appraisal, common documentation & joint supervision & follow up. The
borrower enjoys the advantage similar to single window availing of credit facalities from several
banks. The arrangement continues until any one of the bank moves out of the consortium. The
bank taking the highest share of the credit will usually be the leader of consortium. There is no
ceiling on the number of banks in a consortium.

C. Multiple Banking arrangement
Multiple Banking Arrangement is one where the rules of consortium do not apply & no inter se
agreement among banks exists. The borrower avails credit facility from various banks providing
separate securities on different terms & conditions. There is no such arrangement called
Multiple Banking Arrangement & the term is used only to donote the existence of banking
arrangement with more than one bank.
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Multiple Banking Arrangement has come to stay as it has some advantages for the borrower &
the banks have the freedom to price their credit products & non-fund based facility according to
their commercial judgment. Consortium arrangement occasioned delays in credit decisions & the
borrower has found his way around this difficulty by the multiple banking arrangement.
Additionally, when units were not doing well, consensus was rarely prevalent among the
consortium members. If one bank wanted to call up the advance & protect the security, another
bank was interested in continuing the facility on account of group considerations.

Points to be noted in case of multiple banking arrangements
Though no formal arrangement exists among the financing banks, it is preferable to have
informal exchange of information to ensure financial discipline
Charges on the security given to the bank should be created with utmost care to guard
against dilution in our security offered & to avoid double financing
Certificates on the outstandings with the other banks should be obtained on the periodical
basis & also verified from the Balance sheet of the unit to avoid excess financing.
D. Credit Syndication
A syndicated credit is an agreement between two or more lending institutions to provide a
borrower a credit facility using common loan documentation. It is a convenient mode of raising
long-term funds.
The borrower mandates a lead manager of his choice to arrange a loan for him. The mandate
spells out the terms of the loan & the mandated banks rights & responsibilities. The mandated
banker the lead manger prepares an information memorandum & circulates among
prospective lender banks soliciting their participation in the loan. On the basis of the
memorandum & on their own independent economic & financial evolution the leading banks
take a view on the proposal. The mandated bank convenes the meeting to discuss the syndication
strategy relating to coordination, communication & control within the syndication process &
finalises deal timing, management fees, cost of credit etc. The loan agreement is signed by all the
participating banks. The borrower is required to give prior notice to the lead manger about loan
drawal to enable him to tie up disbursements with the other lending banks

Features of syndicated loans
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Arranger brings together group of banks
Borrower is not required to have interface with participating banks, thus easy & hassle
fee
Large loans can be raised through syndication by accessing global markets
For the borrower, the competition among the lenders leads to finer terms
Risk is shared
Small banks can also have access to large ticket loans & top class credit appraisal &
management

Advantages
Strict, time-bound delivery schedule & drawals
Streamlined process of documentation with clearly laid down roles & responsibilities
Market driven pricing linked to the risk perception
Competitive pricing but scope for fee-based income is also available
Syndicated portions can be sold to another bank, if required
Fixed repayment schedule & strict monitoring of default by markets which punish
indiscipline

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CHAPTER 6
CREDIT RISK ASSESSMENT
For a bank, what is RISK?

Risk is inability or unwillingness of borrower-customer or counter-party to meet their
repayment obligations/ honor their commitments, as per the stipulated terms.

Lender task

Identify the risk factors, and
Mitigate the risk

How does risk arise in credit?

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In the business world, Risk arises out of
Deficiencies / lapses on the part of the management (Internal factor)
Uncertainties in the business environment (External factor)
Uncertainties in the industrial environment (External factor)
Weakness in the financial position (Internal factor)

To put in another way, success factors behind a business are: -

Managerial ability
Favorable business environment
Favorable industrial environment
Adequate financial strength

As such, these are the broad risk categories or risk factors built into our CRA models. CRA takes
into account the above types of risks associated with the borrowal unit. The eventual CRA rating
awarded to a unit (based on a score of 100) is a single-point risk indicator of an individual credit
exposure, & is used to indentify, to measure & to monitor the credit risk of an individual
proposal. At the corporate level, CRA is also used to track the quality of Banks credit portfolio.

Credit & Risk
Go hand in hand.
They are like twin brothers.
They can be compared to two sides of the same coin.
All credit proposals have some inherent risks, excepting the almost negligible volume of
lending against liquid collaterals with adequate margin.

Lending despite risks:
So, risk should not deter a Banker from lending.
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A bankers task is to identify/ assess the risk factors/ parameters & manage / mitigate
them on a continuous basis.
But its always prudent to have some idea about the degree of risk associated with any
credit proposal.
The banker has to take a calculated risk, based on risk-absorption/ risk-hedging capacity
& risk-mitigation techniques of the Bank.

CREDIT RISK ASSESSMENT (CRA):

Credit is a core activity of banks & an important source of their earnings, which go to pay
interest to depositors, salaries to employees & dividend to shareholders
In credit, it is not enough that we have sizable growth in quantity/ volume, it is also necessary to
ensure that we have only good quality growth.
To ensure asset quality, proper risk assessment right at the beginning, that is, at the time of
taking an exposure, is extremely important.
Moreover, with the implementation of Basle-II accord4, capital has to be allocated for loan assets
depending on the risk perception/ rating of respective assets. It is, therefore, extremely important
for every bank to have a clear assessment of risks of the loan assets it creates, to become Basle-II
compliant.
That is why Credit Risk Assessment (CRA) system is an essential ingredient of the Credit
Appraisal exercise.

Indian Scenario:
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In Indian banks, there was no systematic method of Credit Risk Assessment till late
1980s/ early 1990s.
Health Code System (1985) / IRAC norms (1993) are Asset (loan) classification systems,
not CRA systems.
RBI came out with its guidelines on Risk Management Systems in Banks in 1999 &
Guidance Note on Management of Credit in October, 2002.

SBI Scenario:
However, like in many other fields, in the field of Credit Risk Assessment too, our Bank played a
proactive & pioneering role. We had our Credit Rating System (CRA) in 1988. Then, the CRA
system was introduced in the Bank in 1996. The first CRA model was rolled out in 1996 to take
care of exposures to the C & I (Manufacturing) segment. Thereafter, separate models for SSI &
AGL segments were introduced in 1998, when the C&I (Mfg) CRA model was developed for
Non Banking Finance Companies (NBFCs).
As of now, in SBI, CRA is the most important component of the Credit Appraisal exercise for all
exposures > 25 lacs & a very important tool in decision-making (a Decision Support System) as
well as in pricing.

CREDIT RISK ASSESSMENT (CRA) Minimum scores / Hurdle rates

1. The CRA models adopted by the Bank take into account all possible factors which go
into appraising the risks associated with a loan. These have been categorized broadly into
financial, business, industrial & management risks and are rated separately. To arrive at
the overall risk rating, the factors duly weighted are aggregated & calibrated to arrive at a
single point indicator of risk associated with the credit decision.

2. Financial parameters: The assessment of financial risk involves appraisal of the
financial strength of the borrower based on performance & financial indicators. The
overall financial risk is assessed in terms of static ratios, future prospects & risk
mitigation (collateral security / financial standing).

87

3. Industry parameters: The following characteristics of an industry which pose varying
degrees of risk are built into Banks CRA model:
Competition
Industry outlook
Regulatory risk
Contemporary issues like WTO etc.

4. Management parameters: The management of an enterprise / group is rated on the
following parameters:
Integrity (corporate governance)
Track record
Managerial competence / commitment
Expertise
Structure & systems
Experience in the industry
Credibility: ability to meet sales projections
Credibility: ability to meet profit (PAT) projections
Payment record
Strategic initiatives
Length of relationship with the Bank

Bank has introduced New Rating Scales for borrower for giving loans. Rating is given on the
basis of scores out of 100. Bank gives loans to the borrower as per their rating like SBI gives
loans to the borrower up to SB8 rating as it has average risk till SB8 rating. From SB9 rating the
risk increases. So banks do not give loans after SB8 rating.

5. The risk parameters as mentioned above are individually scored to arrive at an aggregate
score of 100 (subject to qualitative factors negative parameters). The overall score thus
obtained (out of a max. of 100) is rated on a 8 point scale from SB1/SBTL1 to SB 8
/SBTL8.
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CRA model also stipulates a minimum score under financial, business, industry and management
risk parameters for a proposal to be considered acceptable in a given form.

The details of such minimum scores are as under:
a. Minimum scores General
b. Minimum scores under Management Risk : (Integrity/Corporate Governance, Track Record
and Managerial Competence/ Commitment)

An applicant unit will be required to score minimum 2 marks each (out of 3) in the above three
parameters of Management Risk to qualify for Banks assistance. In case of existing accounts if the
company scores less than this stipulated minimum marks (02), the Bank would explore all possibilities to
exercise exit option.
c. Minimum Score under Business Risk:

Compliance of Environment Regulations To qualify for financial assistance, an applicant unit would have
to secure full marks (02) under the parameter, Compliance of Environment Regulations. In case, the
existing units in the books of the bank do not secure full marks (02), the bank would explore all
possibilities for the exercise of exit option.
Hurdle rates:
No new connections are to be considered in respect of accounts rated below SB4/
SBTL4, subject to exceptions like availability of Central Govt. guarantees and / or
availability of a Corporate guarantee of parent / group company with a CRA rating of SB3 /
SBTL3 and above.
No enhancements in credit limits are to be considered in existing accounts rated below
SB4/SBTL4. (Deviations may be permitted by CCC-I and above, as provided in the Loan Policy.)
Risk Management Dept., would issue advisories on the general outlook for the industry from time
to time.

Salient features of CRA models:
(a) Type of Models
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S.
No.
Exposure Level (FB + NFB Limits ) Non Trading Sector
(C&I , SSI , AGL)
Trading Sector
( Trade & Services)
(i) Over Rs. 5.00 crore Regular Model Regular Model
(ii) Rs 0.25 crore to Rs. 5.00 crore Simplified Model Simplified Model
(b) Type of Ratings
S. No. Model Type of Rating
(i) Regular Model (i) Borrower Rating
(ii) Facility Rating
(ii) Simplified Model Borrower Rating

(c) Type of Risks Covered:
(i) Borrower Rating
S.
No.
Risk Category Maximum Score
Regular Model Simplified Model
Existing
Company
New
Company
Existing
Company
New
Company
(i) Financial Risk (FR) 65 25
(65 x 0.39)
70 35
(70/2)
(ii) Qualitative Factors (-ve) (-10) (-10) (-10) (-10)
(iii) Business & Industry Risk (BR & IR)
/Business Risk (for Trading Sector)
20 30
(20 x 1.5)
20 40
(20 x 2)
(iv) Management Risk (MR) 15 45 10 25
90

( 15 x 3) ( 10 x 2.5)
(v) Qualitative Parameter
(External Rating)
(+5) (+5) (+5) (+ 5)
Total 100 100 100 100
(vi) Borrower Rating based on the
above Score

(vii) Country Risk (CR)
(viii) Final Borrower Rating after CR
(ix) Financial Statement Quality Excellent/Good/Satisfactory/Poor
(x) Risk Score/Rating Transition Matrix Comments on Trend in Rating
(ii) Facility Rating (Regular Model)
S. No. Parameter Maximum Score
(a) Risk Drivers for Loss Given Default (LGD)

(i) Current Ratio [Working Capital/ Non-Fund Based
Facility (except Capex)] Or Project Debt/Equity[Term
Loan/Non-Fund Based Facility (for Capex)]

6
(ii) Nature of Charge

4
(iii) Industry /(Trade- for Trading Sector) # 6
91

(iv) Geography #

2
(v) Unit Characteristics
(a) Leverage/ Enforcement of Collateral-4
(b) Safety, Value & Existence of Assets-4

8
(vi) Macro-Economic Conditions
(a) GDP Growth Rate : Impact of Business Cycle - 2
(b) Insolvency Legislation in the Jurisdiction-1
(c) Impact of Systemic/Legal Factors on Recovery-1
(d) Time Period for Recovery-1

5
(vii) Total Security (Primary + Collateral)

60
(b) Risk Drivers for Exposure at Default (EAD)

(i) Nature of Commitment
(Revolving/Non-Revolving)

1
(ii) Credit Quality of Borrower @

5
92

# No Scoring under these two parameters for AGL & Trade Segments due to non-availability of relevant
LGD Data; Score out of 92 to be normalised to 100 for these segments.
@ Marks linked to Borrower Rating Score of the Unit.

(d) New Rating Scales - Borrower Rating: 16 Rating Grades
(iii) Tenor of Facility 3
Total Score 100
Facility Rating based on the above Score
S.
No.
Borrower
Rating
Range of
Scores
Risk Level Comfort Level
1 SB1 94-100 Virtually Zero risk Virtually Absolute safety
2 SB2 90-93 Lowest Risk Highest safety
3 SB3 86-89 Lower Risk Higher safety
4 SB4 81-85 Low Risk High safety
5 SB5 76-80 Moderate Risk with Adequate Cushion Adequate safety
6 SB6 70-75 Moderate Risk

Moderate Safety
7 SB7 64-69
8 SB8 57-63 Average Risk Above Safety Threshold
9 SB9 50-56
93

(e) New Rating Scales - Facility Rating (Separate for each Fund Based / Non- Fund Based Facility): 16
Rating Grades
10 SB10 45-49 Acceptable Risk
(Risk Tolerance Threshold)
Safety Threshold

11 SB11 40-44 Borderline risk Inadequate safety
12 SB12 35-39 High Risk Low safety
13 SB13 30-34 Higher Risk Lower safety
14 SB14 25-29 Substantial risk Lowest safety
15 SB15 <24 Pre-Default Risk (extremely
vulnerable to default)

Nil
16 SB16 - Default Grade
S
NO
FACILITY
GRADES
RANGE
OF
SCORES
LGD LEVEL
(Recovery Level)
RISK LEVEL COMFORT
LEVEL
1 FR1 94-100 Virtually Zero LGD Virtually Zero Risk Virtually Absolute
Safety
2 FR2 87-93 Lowest LGD
(Highest Recovery)
Lowest Risk Highest Safety
3 FR3 80-86 Lower LGD
(Higher Recovery)
Lower Risk Higher Safety
4 FR4 73-79 Very Low LGD Low Risk High Safety
94

(f) Mapping to Existing Borrower Rating Bands
S. No. New CRA Model Existing CRA Model
Score Grade Grade Score
1 94-100 SB1 SB1 >= 90
(High Recovery)
5 FR5 66-72 Low LGD
(Adequate Recovery)
Moderate Risk with
Adequate Cushion
Adequate Safety
6 FR6 59-65 Moderate LGD
(Moderate recovery)
Moderate
Risk
Moderate
Safety 7 FR7 52-58
8 FR8 45-51 Average LGD
(Average Recovery)
Average Risk Above Safety
Threshold 9 FR9 38-44

10

FR10

31-37
LGD Tolerance Threshold
(Recovery Tolerance
Threshold)
Acceptable Risk
(Risk Tolerance
Threshold)
Safety Threshold
11 FR11 24-30 High LGD (Low recovery) High Risk Low Safety
12 FR12 17-23

Higher LGD
(Lower Recovery)
Higher Risk Lower Safety
13 FR13 11-16 Substantial LGD
(Small recovery)
Substantial Risk Lowest Safety
14 FR14 5-10
15 FR15 1-4 Highest LGD
(Minimal/zero recovery
Highest Risk
NIL 16 FR16 0
95

2 90-93 SB2
3 86-89 SB3
SB2

>=75 4 81-85 SB4
5 76-80 SB5
6 70-75 SB6
SB3

>=65 7 64-69 SB7
8 57-63 SB8 SB4 >=50
9 50-56 SB9
10 45-49 SB10 SB5 >=45
11 40-44 SB11 SB6 >35
12 35-39 SB12
13 30-34 SB13 SB7 >=25
14 25-29 SB14
15 < 24 SB15 SB8 <25
16 - SB16

(g) Qualitative Parameter (External Rating)
Solicited Rating by a recognized External Credit Rating Agency (ECRA) translates to additional Score.
Following ECRAs recognised by RBI are considered for this purpose:

. S. Type ECRA
96

No.
1 Domestic

(a) Credit Analysis & Research Limited;
(b) CRISIL Limited;
(c) FITCH India;
(d) (d) ICRA Limited.
2 International

(a) FITCH;
(b) Moodys;
(c) Standard & Poors

RBI has clarified that Cash Credit Exposures tend to be generally rolled over and also tend to be drawn
on an average for a major portion of the sanctioned limits. Hence even though a cash credit exposure
may be sanctioned for a period of one year or less, these exposures should be reckoned as Long Term
Exposures and accordingly, the Long Term Ratings accorded by the chosen Credit Rating Agencies will be
relevant.
CHAPTER 7
CASE STUDY

Case Study-1
Details of case:
Company:- Akshat Polymers

Firm:- Partnership Firm (M/S Umiya Polymers)
* Shri Amrutbhai Laljibhai Desai
* Shri Gunvantbhai Ambaramdas Patel
* Shri Natvarlal Mohanlal Patel
* Shri Dharamsinhbhai Lallubhai Desai
97

* Shri Kanjibhai Maljibhai Desai

Industry:- Manufacturing

Activity:- Maufacturing of HDPP woven sacks

Segment:- SSI

Date of Incorporation:- 19.11.07

Banking arrangement:- Sole Banking

Regd. & Admin. Office:- RS No. 840,
Kadi Thol Road,
Tal-Kadi, Dist-Mehsana
The unit will have installed capacity of 2520 MT. The unit is expected to start commercial production
from first week of September, 2008. The capacity utilization for the year 2008-09 has been projected at
70% of installed capacity in terms of the utilization of the machines. Accordingly the unit is projected to
achieve a sale of Rs.9.26 crores for the year 2008-09 in the first six months of operations.
Further, the unit is projected to achieve capacity utilization of 80% during the year 2009-10 (the first full
year of operations) and accordingly the sale for the year is projected at Rs.19.77 crores. The projections
are considered acceptable in view of the following factors:
i) The unit plans to initially market its product in Gujarat, Maharastra, Rajasthan and sale to
Central Govt. who purchases the HDPP woven sacks for grains through open tenders. The
unit has started negotiating for booking of the orders for the proposed plant and results are
promising as advised.
ii) HDPP woven sacks are widely used as packaging material in Cement, Fertiliser, storage of
the AGL commodities. All these segments are reported to have good demand for the
HDPP/PE woven sacks in the Indian market.
98

iii) As per ICRA report, grading and research services (2006) Flexible packaging sector is
expected to grow at the rate of 12.40%.
iv) The promoters have sufficient experience in the line of activity. The promoters had already
made negotiations of the some of the industries as detailed under for selling the HDPP
woven sacks:
Indian Farmers Fertilizers Company Limited
GUJCOMASOL
Birla cement
Sanghi Cement
Ambuja cement
Various grain & Food Export units of Gujarat, etc.
v) The firm has also started marketing activity for their products by making personnel
contacts & writing introductory letters to potential customers & as the promoters are
in the same line of business activity for the last 15 years they are having very good
market contacts for the sales of the Finished Goods.
vi) The orders worth Rs.2.50 crores is expected to be finalized by end of August, 2008 and
before commissioning of the plant as advised.
Proposal:
Sanction for;
i) FBWC limits of Rs.2.25 crores
ii) Fresh Term Loan of Rs.2.00 crores
Approval for:
i) CRA rating of SB- 6 (71 marks) based on projected financials as on 31.03.2010.
ii) Pricing for WC facilities @1.00% above SBAR as applicable for SB-5 minimum @13.75and for
TL 1.50% above SBAR minimum @14.25%

Performance & Financial Indicators: (Rs. in Crores)
Year 2009 2010 2011 2012 2013 2014
Installed cap Qty. 2520 2520 2520 2520 2520 2520
99

(MT/pa.)
Net Sales Qty.
(approx) (MT) 1029 2016 2091 2142 2217 2268
Net Sales (Value) 9.26 19.77 20.58 21.09 21.82 22.34
(Export) 0.00 0.00 0.00 0.00 0.00 0.00
Operating profit 0.44 1.18 1.19 1.23 1.31 1.33
Profit before tax

0.43 1.17 1.18 1.22 1.30 1.32
PBT/Net sales (%)

4.64 5.92 5.73 5.78 5.96 5.91
Profit after tax

0.29 0.78 0.79 0.82 0.87 0.88
Cash accruals

0.66 1.10 1.09 1.15 1.24 1.32
PBDIT

1.20 2.04 1.96 1.97 2.02 2.05
Paid up capital

0.95 0.95 0.95 0.95 0.95 0.95
Tangible net worth

1.23 2.01 2.80 3.62 4.49 5.38
Adjusted TNW
1.73 2.51 3.30 4.12 4.99 5.88
TOL/TNW

4.11 2.50 1.67 1.19 0.88 0.66
TOL/Adjusted TNW
2.64 1.80 1.27 0.92 0.81 0.62
Current ratio

1.34 1.52 1.53 1.53 1.57 1.81
NWC 1.01 1.71 2.40 2.57 2.74 3.28

100

Balance Sheet: (Rs. In crores)

Sources of funds 31.03.2009 31.03.2010
Share Capital 0.95 0.95
Reserves and Surplus 0.29 1.07
Secured Loans : short term CC 2.25 2.25
: long term TL 2.00 1.60
Unsecured Loans 0.50 0.50
Deferred Tax Liability
Total 5.99 6.37
Application of Funds
Fixed Assets (Gross Block) 2.67 2.67
Less Depreciation 0.37 0.69
Net Block 2.30 1.98
Capital Work in Progress
Investments
Inventories 1.73 2.13
Sundry debtors 1.85 2.40
Cash & bank balances 0.15 0.15
Loans & advances to suppliers of
Raw material / spares
0.14 0.12
Advance tax 0.10 0.23
( Less : Current liabilities ) 0.31 0.67
(Less : Provisions )
Net Current Assets 3.66 4.36
Misc. Expenditure
(To the extent not written off or adjusted )

Non-Current Assets/ Deposits 0.03 0.03
Total 5.99 6.37

101

Movement in TNW: -

Movement in TNW Projected
31.03.2009 31.03.2010 31.03.2011
Opening TNW 0.00 1.23 2.01
+ PAT 0.29 0.78 0.79
+ Inc. in Equity / Premium 0.95
+/- Change in Int. Assets -0.01
+/- Adj. of prior year exp.
- Dividend payment
Closing in TNW 1.23 2.01 2.80

Bank Income Analysis (Rs. in crores)
From Projection
31.03.2009
Projection
31.03.2010
WC Int. 0.16 0.27
TL Int. 0.14 0.29
LC - -
BG - -
Bill - -
Others loan processing 0.03 0.01
Total 0.33 0.57

102

Deviations in Loan Policy:

Parameters Indicative Min/Max level
as per loan policy
Company's
level as on
31.03.2009 @
Company's level as
on 31.03.2010
Liquidity 1.33 1.34 1.52
TOL/TNW
TOL/Adj. TNW
3.00 4.11
2.64
2.50
1.80
Average gross DSCR (TL) 1.75 2.54 2.54
Debt / equity
Debt/Quasi equity
2:1 2.01:1
1.15:1
1.03:1
0.64:1
Any others - - -

Defaulters List:-
Whether names of promoters, directors, company, group concerns figure in :
RBI defaulters list dated 30.09.2007 No
Wilful defaulters list dated 31.12.2007 No
ECGC caution list No
Warning signals / Major irregularities in
Credit audit:
inspection report :
Other audit reports :

Not applicable new unit
Adverse observations in Balance sheet Not applicable new unit
Adverse observations in Auditors report Nil.
103

About unit and the promoters:
AKSHAT POLYMERS (AP) has been established as a partnership firm on 19
th
November, 2007
at Kadi. The partnership was constituted for manufacturing and selling of HDPP woven sacks to
be manufactured from HDPP granules.

The firm consists of total six partners. The brief background of the partners is as follows :

Name Age Brief Background
M/s Umiya Polymers 46

Sri Prahaladbhai Hargovandas Patel is the
main partner in M/s Umiya Polymers with 30
share. Sri Prahaladbhai is SSC and have 10
years of experience as Production Manager
in Asia Woven Sacks Ltd., Kadi who are
engaged in similar activity. M/s Umiya
Polymers are engaged in plastic waste
recycling at Kadi.

Sri Amrutbhai Laljibhai Desai 43 Sri Desai is SSC and have 15 years of
experience as Production Manager in reputed
Any NPAs among associate concerns None
104

Gopala Polyplast Ltd., Santej. He had good
contacts in the market and will look after
production department & raw material
purchases.
Shri Dharamsingbhai Lallubhai Desai 35 Sri Dharamsinhbhai is a partner in the local
unit M/s Ajay Ginning Industries, Kadi
Shri Kanjibhai Malibhai Desai 44 Sri Kanjibhai is a farmer by profession and
sleeping partner.
Shri Gunvantbhai Ambaramdas Patel 42 Sri Gunvantbhai also is a partner in M/s Ajay
ginning Industires, Kadi and has been
inducted in the partnership as a investment
partner.
Shri Natvarlal Mohanlal Patel 48 Shri Natvarlal Patel is a B.Com. and has 10
years of experience in accounting. He is also
partner in M/s Shiv Shakti Steel, Kadi. He
will be looking after general administration
and accounts of the firm.
The overall quality of the management is considered satisfactory.
Commercial viability: (Rs.in crores)
Year ending
31
st
March
2008-09 2009-10 2010-11 2011-12 2012-13 2013-14 Total
Net Sales 9.26 19.77 20.58 21.09 21.82 22.34
Net Profit 0.29 0.78 0.79 0.82 0.87 0.88
Cash Accruals 0.66 1.10 1.09 1.15 1.24 1.32 6.56
Interest on TLs 0.16 0.27 0.22 0.16 0.11 0.05 0.97
Sub Total (A) 0.82 1.37 1.31 1.31 1.35 1.37 7.53
Total repayment 0.00 0.40 0.40 0.40 0.40 0.40 2.00
Interest on TL 0.16 0.27 0.22 0.16 0.11 0.05 0.97
Sub Total (B) 0.16 0.67 0.62 0.56 0.51 0.45 2.97
DSCR (Gross) 5.13 2.04 2.11 2.34 2.65 3.04
105

Net DSCR - 2.75 2.73 2.88 3.10 3.30
Average Gross
DSCR
2.54
Average Net
DSCR
3.28

Break-even and sensitivity analysis and whether acceptable: (Rs. in crores)
Break even analysis 31/03/09 31-Mar-10 31-Mar-11 30-Mar-12 31-Mar-13 31-Mar-14
Capacity Utilization 70% 80% 83% 85% 88% 90%
Net Sales (A) 9.26 19.77 20.58 21.09 21.82 22.34
Variable costs
Raw material 8.74 17.13 17.77 18.20 18.84 19.27
Consumable spares 0.00 0.00 0.00 0.00 0.00 0.00
Power and Fuel 0.26 0.47 0.50 0.53 0.56 0.59
Other operating Exp. 0.09 0.13 0.15 0.16 0.17 0.18
Stock Changes 0.73 0.39 0.06 0.03 0.04 0.04
Total Variable Cost(B) 8.36 17.34 18.36 18.86 19.53 20.00
Fixed Costs
Direct Labour 0.08 0.13 0.14 0.15 0.16 0.17
Selling, Admin. & General
Expenses 0.06 0.10 0.11 0.12 0.13 0.14
Interest Expenses 0.40 0.55 0.48 0.42 0.35 0.29
Depreciation 0.37 0.32 0.30 0.33 0.37 0.44
Total Fixed Cost ( C) 0.91 1.10 1.03 1.02 1.01 1.04
Contribution (D=A-B) 0.90 2.43 2.22 2.23 2.29 2.34
Contribution ratio (E=D/A) 0.10 0.12 0.11 0.11 0.10 0.10
BE sales (F=C/E) 9.10 9.17 9.36 9.27 10.10 10.40
BE sales as % of Net
Sales 98.27 46.38 45.48 43.95 46.29 46.55
Interfirm Comparison: (To be given only where data from comparable units is available.)
106

(Amt in Cr)
Name of Company FBL NFBL Year Sales PBT /
Sales %
TOL /
TNW
CR
Ahmedabad Packaging
Industries Ltd.
3.30 1.20 2007 23.11 2.16 1.47 1.16
Singhal Industries Pvt. Ltd 6.70 -- 2010 15.19 6.52 2.90
1.90
Asia Woven Sacks Pvt. Ltd. 7.44 1.00 2008 22.98 4.53 3.14
1.08
Akshat Polymers 4.25 -- 2010 19.77 5.92 2.50
1.52

Raw material The major raw material for this plant is HDPP in the form of granules. This raw
material is available locally by sales & distribution network of the major suppliers as under:

Reliance Industries Limited
Nand Agencies
Labdhi International
Hadlia petrochemicals Ltd.
Sharada Polymers
IPCL

The raw materials are purchased from the suppliers against the advance payment only and cash
discounts are offered resulting in the increase n profitability. Any variation in the cost of raw
material is proposed to be passed on to the finished products and will not affect the profitability.
107

Analysis:-

The firm is into manufacturing of HDPP woven sacks which are widely used as
packaging material in cement, fertilizer, etc.
As per ICRA report, grading and research services (2006) Flexible packaging sector is
expected to grow at the rate of 12.40%.
The promoters have sufficient experience in the line of activity. The promoters had
already made negotiations of the some of the industries as detailed under for selling the
HDPP woven sacks:
GUJCOMASOL
Birla cement
Sanghi cement
Ambuja cement
108

Various grain & Food Export Unit of Gujarat

The orders worth Rs.2.50 crores is expected to be finalized by end of Agust, 2008 and before
commissioning of the plant as advised.
The companys borrower rating is SB-6 based on projected financials as on 31.03.2010 (the first
full year of operations).
Projected financials are in line with the financials of the some of the unit in similar line of activity
and production level.
The promoters are having experience of more than 15 years in the line of the activity.
The affairs of the firm are expected to be managed on professional lines based on their past
experience.
The conduct of accounts of associate with the existing bankers has been satisfactory.
The short and medium term outlook for the industry is stable
Availability of collateral security reflected in collateral coverage of 50.566%.
Gross average DSCR of 2.54.
Average security margin of 48%.
The company has adequate management skills and production/marketing infrastructure in place
to achieve the projected trajectory. There is steady demand for the product.
Case Study 2

(1). Details of case study
Company:- Janak Transport Co.

Firm:- Partnership
* Shri Harisinghbhai Lavjibhai Chaudhari;
* Shri Jesangbhai Lavjibhai Chaudhari;
* Shri Vinodkumar Lavjibhai Chaudhari;
* Shri Pratapbhai Lavjibhai Chaudhari;&
* Shri Janakkumar Jesangbhai Chaudhari
109

Industry:- Transport Activity

Segment:- C& I

Date of Incorporation:- 03.09.82

Banking with SBI since:- 16 years as a current A/C holder

Banking arrangement:- Multiple Banking Arrangement

Regd. & Admin. Office:- Opp. Simandhar Flat,
Nr. Pashabhai Petrol Pump,
Highway, Mehsana.

Janak Transport Co. is a partnership firm established in 1982 for carrying a transport business.

As the company is in this business since incorporation & the unit has good contracts with ONGC
since last 26 years so it has a good repo with ONGC.

As the company has a good repo with ONGC, the ONGC outlook of the business is considered
positive.

The firm has approached for term loan of Rs. 295 lacs to finance the purchase of Mahindra-
Bolero. The total project cost is estimated to be Rs. 363.44 lacs.

Brief of Contract:

110

(1). Fixed hire charges/ taxi/ month: Rs. 29150
(with fixed 3000 Km run/ month & 12 hours duty/ day)

(2). Additional/ km charges beyond 3000 km. Rs. 3.57

(3). Duration of contract = 3 Years

Proposed Credit Requirement:

Fund Based = Rs. 295 lacs

Performance Details
a) PERFORMANCE AND FINANCIAL INDICATORS:
(Rs. in lacs)
Aud. Aud. Esti. Proj. Proj. Proj. Proj.
31
st
March 2007 2008 2009 2010 2011 2012 2013
Net Sales 501.78 546.65 713.82 898.65 898.65 898.65 898.65
Operating Profit (after
interest) 149.64 182.92 234.24 326.69 374.32 404.08 425.06
PBT 1.20 2.90 22.48 92.62 125.47 143.51 151.96
PBT/Sales (%) 0.24 0.53 3.15 10.31 13.96 15.97 16.91
111

PAT 1.20 2.90 22.48 92.62 125.47 143.51 151.96
Cash Accruals 39.05 40.51 129.25 233.74 224.25 212.66 200.36
PBDIT 54.44 52.41 150.01 266.99 247.21 226.20 203.72
Paid up Capital 21.04 22.56 91.00 113.48 181.10 256.57 340.08
TNW 21.04 22.56 113.48 181.10 256.57 340.08 427.04
Adjusted TNW 21.04 22.56 113.48 181.10 256.57 340.08 427.04
TOL/TNW 12.22 12.80 5.04 2.15 1.01 0.47 0.27
TOL/Adjusted TNW 12.22 12.80 5.04 2.15 1.01 0.47 0.27
Current Ratio 1.57 1.42 2.22 2.53 2.71 3.80 6.47
Current Ratio (Excl. TL
instalments)
2.34 1.97 3.93 4.49 5.66 5.83 6.47
NWC 100.20 103.87 386.14 349.18 323.80 361.29 438.25

b) Synopsis of Balance Sheet :

Sources of funds 31.03.2007 31.03.2008
Share Capital 21.04 22.56
Reserves and Surplus

Secured Loans : short term 2.57 14.66
: long term 102.87 100.10
Unsecured Loans 39.92 36.21
Deferred Tax Liability
Total 166.40 173.53
Application of Funds
112

Fixed Assets (Gross Block)
Less Depreciation
Net Block
Capital Work in Progress
Investments 52.48 39.3
Inventories (Movable Assets) 110.59 134.66
Sundry debtors 92.61 78.70
Cash & bank balances 11.93 48.15
Loans & advances to
subsidiaries and group companies

Loans & advances to others 10.58 10.49
( Less : Current liabilities ) 109.22 136.74
(Less : Provisions ) 2.57 1.03
Net Current Assets 113.92 134.23
Misc. Expenditure
(To the extent not written off or adjusted )

Total 166.40 173.53

c) Movement in TNW (Rs. in lacs)
2007 2008 2009 2010 2011 2012 2013
Opening TNW 17.63 21.04 22.56 113.48 181.10 256.57 340.08
Add PAT 1.20 2.90 22.48 92.62 125.47 143.51 151.96
Add. Increase in equity /
premium
8.42 10.17 68.44
Add./Subtract change in
intangible assets

Adjust prior year
expenses

113

Deduct Dividend
Payment /Withdrawals
6.21 11.55 25.00 50.00 60.00 65.00
Closing TNW 21.04 22.56 113.48 181.10 256.57 340.08 427.04

Appraisal Memorandum for term loan:
Circle: Ahmedabad
Branch: Mehsana
Company: Janak Transport Company(JTC)
Term Loan :
a) Proposal: Term Loan of Rs.295.00 lacs under the Transport Plus Scheme.
b) Project / Purpose: To purchase 59 new Mahindra Bolero under tie-up arrangement with
ONGC.
c) Appraised by: Inhouse examined by the Branch and found to be economically viable
114

d) Cost of Project & Means of finance:
Cost Means
MAHINDRA Bolero DI-2WD 328.63 Equity :

68.44
Insurance 15.34
RTO Tax 19.47
WC Margin Debt: 295.00
Total 363.44 Total 363.44

e) Remarks on Cost of project & Means of finance (in brief):
Each vehicle shall cost Rs. 6.16 lacs as per details given below:
Basic Price: Rs. 5.57 lacs
RTO : Rs. 0.33 lacs
Insurance : Rs. 0.26 lacs
The cost mentioned above is as per the quotation submitted by Shrijee Motors, Mehsana.
The firm is required to purchase 59 Mahindra Bolero for this purpose. Total cost of
vehicle including the insurance and R.T.O. is Rs.363.44 lacs.
The project is proposed to be financed by way of medium term loan of Rs.295.00 lacs
and firm shall raise capital of Rs. 68.44 lacs as a margin.
Break-even and sensitivity analysis and whether acceptable:
Break even analysis 31/03/09 31/03/10 31/03/11 31/03/12 31/03/13

Net Sales (A) 713.82 898.65 898.65 898.65 898.65
Variable costs
Power and Fuel 223.76 253.68 253.68 253.68 253.68
Other operating Exp. 44.89 47.39 48.89 50.89 55.98
Total Variable Cost(B) 268.65 301.07 302.57 304.57 309.66
115

Commercial viability:
Year ending 31
st
March 2009 2010 2011 2012 2013 Total
Capacity utilization % 100% 100% 100% 100% 100%
Sales 713.82 898.65 898.65 898.65 898.65
Net Profit 22.48 92.62 125.47 143.51 151.96 536.04
Depreciation 106.77 141.12 98.78 69.15 48.40 464.22
Cash Accruals 129.25 233.74 224.25 212.66 200.36 1000.26
Interest 20.76 33.25 22.96 13.54 3.36 93.87
TOTAL 150.01 266.99 247.21 226.20 203.72 1094.13
TL / DPG repayments 83.75 132.92 94.58 93.85 43.02 448.12
Interest 20.76 33.25 22.96 13.54 3.36 93.87
TOTAL 104.51 166.17 117.54 107.39 46.38 541.99
Fixed Costs
Direct Labour 72.40 85.52 87.52 90.72 94.07
Selling, Admin. & General
Expenses 8.50 9.50 10.50 11.50 12.50
Interest Expenses 20.76 33.25 22.96 13.54 3.36
Depreciation 106.77 141.12 98.78 69.15 48.40
Total Fixed Cost ( C) 208.43 269.39 219.76 184.91 158.33
Contribution (D=A-B) 445.17 597.58 596.08 594.08 588.99
Contribution ratio (E=D/A) 0.62 0.66 0.66 0.66 0.66
BE sales (F=C/E) 336.18 408.17 332.97 280.17 239.89
BE sales as % of Net Sales 47.10 45.42 37.05 31.18 26.69
Fixed cost with out
depriciation G 101.66 128.27 120.98 115.76 109.93
Contribution (H=A-B) 445.17 597.58 596.08 594.08 588.99
Contribution ratio (I=D/A) 0.62 0.66 0.66 0.66 0.66
Cash BE sales (J=G/I) 163.97 194.35 183.30 175.39 166.56
CASHBE sales as % of Net
Sales 22.97 21.63 20.40 19.52 18.53
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Gross DSCR 1.44 1.61 2.10 2.11 4.39
Net DSCR 1.54 1.76 2.37 2.27 4.66
Average Gross DSCR 2.02
Average Net DSCR 2.23

Deviations in Loan Policy/ Scheme:

Parameters Indicative
Min/Max level as per
Scheme
Company's level as on 31/03/2008
Liquidity Min. 1.33 1.42
TOL/TNW Max. 3.00 12.80*
Average gross DSCR (TL) Min. 2.00 2.002
Promoters contribution (under tie-up) Min. 10 % 18.86%
profits in the last two Min. Rs.3.00 lacs with
rising trend
Actual profit Rs. 1.20 lacs for
year 2006-07 and Rs.2.90 lacs for
year 2007-08*
Others Nil Nil

Analysis:-

Janak Transport Company is an existing profit making unit

The main chunk behind giving loan is that Janak Transport Company is doing contract
with ONGC since incorporation

The promoters are having considerable experience as transport contractor with ONGC

The unit has got confirm order/ tie-up with ONGC

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A letter of authority from ONGC was received, that if Janak Transport Company will not
make the payment than ONGC will directly make the payment to the bank

The promoters contribution to the project is 18.86% which is above the margin
requirement

The current ratio is 1.42 that is satisfactory

Profits in the last two years:-

Min. Rs. 3 lacs with rising trend

Actual profit Rs. 1.20 lacs for year 2006-07 & Rs. 2.90 lacs for the 2007-08

If the partners remuneration & interest is included, the profit for the year ended 31.03.07
& 31.03.08 is Rs. 4.81 lacs & Rs. 6.21 lacs

TOL/TNW should be max. 3 which is 12.80 here, as the co. has done multiple banking
arrangement it has o/s loans with other banks also but the co. is regularly making the
payment of loans of principal amount along with the interest so the loan is given.
Also the contract awarded is backed by guarantee from ONGC regarding direct payment
of monthly bills to SBI. Hence, surety of repayment is assured.

The bank also checks commercial viability of the company & found that the DSCR for
term loan is 2.02 which is considered satisfactory

Despite that the bank has also done B.E. analysis & found that the B.E. sales was 47.10%
of net sales for this current year

The net sales & PAT of the company is increasing year after year so overall profitability
is good
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The overall projected performance & financial of the unit are considered satisfactory.

CHAPTER 8
FINDINGS

Credit appraisal is done to check the commercial, financial & technical viability of the project
proposed its funding pattern & further checks the primary or collateral security cover available
for the recovery of such funds

Credit is core activity of the banks and important source of their earnings which go to pay interest
to depositors, salaries to employees and dividend to shareholders

119

Credit and risk go hand in hand

In the business world risk arises out of:-
Deficiencies /lapses on the part of the management
Uncertainties in the business environment
Uncertainties in the industrial environment
Weakness in the financial position

SBI loan policy contains various norms for sanction of different types of loans

These all norms does not apply to each & every case

SBI norms for providing loans are flexible & it may differ from case to case

Different appraisal scheme has been introduced by the bank to cater different industries such as:-
Doctor plus scheme for doctors
Transport plus scheme for transport
School, colleges and educational institutions
Traders easy loan
Warehouse receipt financing for commodity traders
(agriculture related stock, cotton ginning, etc.)

Banks main function is to lend funds/ provide finance but it appears that norms are taken as
guidelines not as a decision making

A bankers task is to identify/ assess the risk factors/ parameters and manage/ mitigate them on
continuous basis

The CRA models adopted by the bank take into account all possible factors which go into
appraising the risk associated with a loan

These have been categorized broadly into financial, business, industrial, management risks & are
rated separately

120

The assessment of financial risk involves appraisal of the financial strength of the borrower based
on performance & financial indicators

After case study, we found that in some cases, loan is sanctioned due to strong financial
parameters

From the case study analysis it was also found that in some cases, financial performance of the
firm was poor, even though loan was sanctioned due to some other strong parameters such as the
unit has got confirm order, the unit was an existing profit making unit and letter of authority was
received for direct payment to the bank from ONGC which is public sector

CHAPTER 9
RECOMMENDATIONS AND SUGGESTIONS
The problems faced by the bank and the suggestions given are with regards to increase credit flow the
SMEs not only with respect to working capital finance but also project finance and asset finance.
Problems faced by the Bank for SME lending and suggestions to overcome some of these problems:
Banks are now better equipped to handle the varied needs of the SME sector due to better technology and
risk management. Thus, it recommends, may be achieved by extending banking services to recognize
SME clusters by adopting the 4-C approach: Customer focus, cost control, cross-selling and containing
risk.
121

To enable the banks take more objective decisions, the Government plans to introduce a rating
mechanism for designated industrial clusters; this may be designed jointly by CRISIL, IBA, SIDBI and
SSI Associations. This would enable institutional funding to be channeled through homogenous
recognized clusters.
There is a critical need to devote substantial resources to improving the skills and capabilities of banks'
lending officers, especially with regard to the analysis of the SMEs' financial statements. Understanding
the nature of the borrower's business and the cash-flow required is paramount to preventing the creation
of NPAs.
Another way of extending loans to the SMEs is the relationship-lending rule, where the lending partly
bases its decision on proprietary information about the firm and its owner through a variety of contacts
over time. The information may be gathered from such stakeholders as suppliers and customers, who may
give specific information about the owner of the firm or general information about the business
environment in which it operates.
Insufficient data on the SMEs, the lack of credible published information about their financial health, the
high vulnerability of small players in a liberalizing market and the inadequacy of risk management
systems in banks are factors leading to higher NPAs and lower profitability than potential in SME
lending. This can be overcome by collection of authentic data on the SME segment, educating the
enterprises on the need for reliable financial data, evolving suitable risk models and close monitoring of
accounts by the bank.
SMEs are increasingly using products such as derivatives to manage their forex flows. Bank needs to
offer sophisticated products to the SMEs in a simplified manner.
They need to innovate their delivery platforms by using Internet banking, mobile banking and card-based
platforms for delivery of transaction-banking as well as credit products, and enhance the service element.
SMEs look for convenience and simplicity in their banking requirements and banks should deliver these
through an effective use of technology.
The Bank should keep on revising its Credit Policy which will help Banks effort to correct the course of
the policies

122

The Chairman and Managing Director/Executive Director should make modifications to the procedural
guidelines required for implementation of the Credit Policy as they may become necessary from time to
time on account of organizational needs.

Banks has to grant the loans for the establishment of business at a moderate rate of interest. Because of
this, the people can repay the loan amount to bank regularly and promptly.

Bank should not issue entire amount of loan to agriculture sector at a time, it should release the loan in
installments. If the climatic conditions are good then they have to release remaining amount.

SBI has to reduce the Interest Rate.

SBI has to entertain indirect sectors of agriculture so that it can have more number of borrowers for the
Bank.

CHAPTER 9
CONCLUSION
It is boom time for those working in the financial sector. There are opportunities galore in finance and
more will come in the next few years so finance is exciting is exciting both as a subject and a career
option with the greater expansion of the global economy.
Finance management is the backbone of any organizations and hence yields a number of job options
ranging from strategic financial planning to sales.
123

SBI load policy contains various norms for sanction of different types of loans. There all norms does not
apply to each & every case. SBI norms for providing loans are flexible & it may differ from case to case.
The CRA models adopted by the bank take into account all possible factors, which go into appraising the
risk associated with a loan, these have been categorized broadly into financial, business, industrial, and
management risks & are rated separately.
Usually, it is seen that credit appraisal is basically done on the basis of fundamental soundness. But, after
different types of case studies, our conclusion was such that, in SBI, credit appraisal system is not only
looking for financial wealth. Other strong parameters also play an important role in analyzing
creditworthiness of the firm.
Morover, The study at SBI gave a vast learning experience to us and has helped to enhance our
knowledge. During the study We learnt how the theoretical financial analysis aspects are used in practice
during the working capital finance assessment. We 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 working capital finance system has been devised in a systematic way. 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 5 phases:

1. Financial statement analysis
2. Working capital and its assessment techniques
3. Credit risk assessment
4. Documentation
5. Loan administration
To ensure asset quality, proper risk assessment right at the beginning, is extremely important. That is why
Credit Risk Assessment system is an essential ingredient of the Credit Appraisal exercise. The SBI was
the first to formulate a Credit Risk Assessment model. It considers important parameters like profitability,
repayment capacity, efficiency of the unit, historical / industry comparisons etc which were not
124

factored in other models. It is equally efficient as the SIDBIs CART (Credit Assessment and Rating
Tool) model.
In all, the viability of the project from every aspect is analyzed, as well as type of business, industry,
promoters, past records, experience, projected data and estimates, goals, long term plans also plays crucial
role in increasing chances of getting project approved for loan.

BIBLIOGRAPHY

WEBSITES:
www.rbi.org.in
www.sbi.co.in
www.indianbankassociation.com
125

www.bankersindia.com
www.wikipedia.com
www.iibf.co.in

BOOKS:
Vaidhyanathan, T.S., Credit Management
Internal circular of SBI

Credit and Banking
By: K. C. Nanda

JOURNALS:
1) Agarwal, R. G., Banking Finance A Leading monthly of Banking and Finance
Published by Sashi Publications

2) K.Ramakrishnan, Indian Bankers
Published by Indian Bank Association

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