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2)2014
Issn:2321-9246
Research Article
*1 Professor,
Department of Management Studies, Jeppiaar Engineering College, Rajiv Gandhi Salai, Chennai, India
Professor -Management Studies, Jeppiaar Engineering College, Rajiv Gandhi Salai, Chennai, India.
2Associate
Abstract: Credit appraisal is a holistic exercise which starts from the time a prospective
borrower walks into the branch and culminates in credit delivery and monitoring with the
objective of ensuring and maintaining the quality of lending and managing credit risk within
acceptable limits. The main objective of this study is to understand the procedure of lending
loans to Micro, Small and Medium Enterprises and to comprehend the complete procedure of
lending loans to MSME, terms and conditions adopted by Lakshmi Vilas Bank. The study
also aimed to identifying the reasons for delay in repayments and non-performing asset. The
analysis is done on the basis of secondary data and the period is limited to the past five years
starting from 2009 and ending with 2013. The statistical and financial tools used to evaluate
the credit appraisal procedure and disbursement of loans to MSME are regression, correlation
(financial performance analysis), trend analysis and risk analysis. The study is totally confined
to LVB, kodambakkam branch and to identify the banks position regarding Loans disbursed,
reimbursed and non-performing asset by MSME and made suggestions to improve the
existing recovery system.
Keywords: Credit Appraisal, MSME, NPA, Lakshmi Vilas Bank.
INTRODUCTION
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 in
order to measures the financial condition and the ability of the customer to repay back the
loan in future. Generally the credits 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 interest15.
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Issn:2321-9246
Research Article
Issn:2321-9246
Research Article
COMPANY PROFILE
The Lakshmi Vilas Bank Limited (LVB) was founded eight decades ago ( in 1926) by seven
people of Karur under the leadership of Shri V.S.N. RamalingaChettiar, mainly to cater to the
financial needs of varied customer segments. The bank was incorporated on November 03,
1926 under the Indian Companies Act, 1913 and obtained the certificate to commence
business on November 10, 1926, The Bank obtained its license from RBI in June 1958 and in
August 1958 it became a Scheduled Commercial Bank. At present, with a network of 312
branches and 8 extension counters, spread over 15 states and the union territory of
Pondicherry, the Bank's focus is on customer delight, by maintaining high standards of
customer service and amidst all these new challenges, the bank is progressing admirably. LVB
has a strong and wide base in the state of Tamil Nadu, one of the progressive states in the
country, has a vibrant industrial environment. LVB has been focusing on retail banking,
corporate banking and bancassurance, is rendering high-tech services. To facilitate all the
financial services under one roof, the bank has tied up for a bancassurance pact with Life
Insurance Corporation of India for marketing life insurance products, Bajaj Allianz General
Insurance Co. Ltd for General Insurance distribution business and arrangements for
distributing the mutual fund products of 13 various reputed AMCs. The Bank believes in cost
effective service delivery powered by appropriate technology to enhance value to
customers. All our bank branches are in the state-of-the-art core banking software viz.
Flexcube14.
RESEARCH REVIEW
Banks have credit policies that guide them in the process of awarding credit. The policy sets
the rules on who should access credit, when and why one should obtain the credit including
repayment arrangements and necessary collaterals. The method of assessment and evaluation
of risk of each prospective applicant are part of a credit control policy (Payle, 1997)9.
A firms credit policy may be lenient or stringent. In the case of a lenient policy, the firm
lends liberally even to those whose credit worthiness is questionable. This minimizes costs
and losses from bad debts but might reduce revenue earning from loans, profitability and cash
flow Simonson and Hempel (1999) 11, Hsiu-Kwang (1969) 4 and IMF (1997) 5 observe that
sound credit policy would help improve prudential oversight of asset quality, establish a set of
minimum standards, and apply a common language and methodology (assessment of risk,
pricing, documentation, securities, authorization, and ethics), for measurement and reporting
of nonperforming assets, loan classification and provisioning.
Chen and Shimerda (1981)2 review 26 articles that classify 100 financial indicators, 65 of
them financial ratios. They report that 41 financial ratios are considered important, given
citation in one more of the 26 articles. In identifying bankrupt firms: Their final model,
however, includes only seven financial indicators, namely, return on investment, debt ratio,
the current ratio, cash position, net working capital turnover, inventory turnover and accounts
receivable turnover. The bankruptcy model for industrial companies adds to these factors a
cash flow measure.
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Issn:2321-9246
Research Article
Sun and Li (2006) 12 have developed a model to predict companies financial distress, testing
35 financial ratios for 135 pairs of listed companies. Their final distress prediction model
includes net profit growth rate, liabilities to tangible net assets, accounts receivable turnover,
liabilities to cash flow, liabilities to equity market value, total asset turnover and gross profit
margin. Giacomino and Mielke (1993)3 propose nine cash flow ratios to evaluate a company's
performance and use than to evaluate US companies in the chemical, food and electronic
industries, calculating three-year averages per industry. The industries were chosen had the
largest number of companies among the Fortune 500. The extensive research on financial
ratios reveals their importance in many important decisions, including financing and
investment decisions.
Sathya Varathan et al (2012)10 intended to study the credit policy and credit appraisal of the
bank process Credit rating methods followed by the bank for different credit ranges are also
analyzed. The bank must bring more transparency in appraisal of the project there should be
explanation for a appraisal of the project that was sanctioned by higher authority. Banks
concerned should continuously monitor loans to identify accounts that have potential to
become non-performing. Nancy Arora et al (2013) 8 research paper discussed the Credit Risk
Assessment Model of SBI Bank and check process of the commercial, financial & technical
viability of the project proposed & its funding pattern. The paper studied the movements to
reduce various risk parameters which are broadly categorized into financial risk, business risk,
industrial risk & management risk.
STATEMENT OF THE PROBLEM
A study on the credit appraisal process of capital financing to MSME special reference to
Lakshmi Vilas Bank Limited (LVB), Chennai. The study has been made as high amount of
loans have been lend to MSME. Also huge amount of NPA have been reported for MSME.
OBJECTIVE OF THE STUDY
To study the credit appraisal system for working capital finance to SMEs.
To understand the credit appraisal procedure followed to grant loans for MSME.
To calculate the disbursement of loans to MSME during the past five financial years.
To examine the reimbursement of loans by MSME to bank.
To explore the causes for default in returning the loans by MSME to bank and suggest
measures to reduce NPA.
To assess the total amount lend by the bank for past 5 years and assist the bank in
improving their financial performance.
The study aims at forecasting its future position in few aspects such as disbursement,
reimbursement and NPA of loans.
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Issn:2321-9246
Research Article
The study is done to analyze the procedures to MSME to sanction the grant loans by LVB.
The study also aims to identify the various reasons for delay in repayment and nonpayment of loans by MSME to LVB.
The study aims at analyzing the overall profitability and NPA of the enterprises during the
period of 5 years from 2009 to 2013.
RESEARCH DESIGN
The research design followed for the study is descriptive and analytical in nature as the study
describes the existing facts and figures. The study is based on secondary data like loans to
MSMEs for the last five years. The secondary data was collected with the help of internal
banks websites, journals, magazines and manuals and through personal discussion with the
LVB Bank officials. The collected data were analysed using statistical tools like regression,
correlation, risk analysis etc.
PROCEDURE FOR ASSESSMENT OF CREDIT TO MSME UNITS
A simplified procedure has been adopted for sanction of working capital limits. 20% of the
projected and accepted annual turnover will be extended as working capital limit to MSE
units requiring aggregate fund based working capital limits up to Rs.7.5 crore. Borrower
has to bring in 5% of the accepted turnover as margin. Current Ratio of 1.25 will be
acceptable in such cases.
For MSE units requiring working capital limits above Rs.7.5 crore and up to Rs.10 crore,
the Maximum Permissible Bank Finance (MPBF) method based on Credit Monitoring
Arrangement (CMA) data will be followed.
For MSE units requiring working capital limits over Rs.10 crore, Cash budget system or
MPBF method, at the option of the borrower, will continue to be followed.
A combined working capital limit will be allowed against the stock and receivables without
any sub limit for CC against receivables. However, different margins will be fixed for stock
and receivables.
Lending will be based on scoring model for advances upto Rs.2 crores. Information
required for scoring model will be incorporated in the application form itself. No individual
risk rating is required in such cases.
If the bank sanction term loan solely or jointly with one or more Banks, working capital
limit will also be sanctioned solely or jointly (in the ratio of term loan) to avoid delay in
commencement of commercial production. It will also be ensured that there are no cases
where term loan has been sanctioned but sanction of working capital facilities is awaited.
The interest payable up to six months after commercial production will be included as part
of the project cost for assessment of credit requirements. Sufficient moratorium period say,
upto six months, after commencement of commercial production, will be allowed for
repayment of principal amount wherever required, to enable the unit establish itself in the
market.
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Research Article
Margin Norms
No margin is required for loans up to Rs.50000/ Minimum margin requirements for loans/credit facilities above Rs.50000/- are as under:
A. Term Loans
For loans above Rs.50000/- and up to Rs.5 Lac 10%
For loans above Rs.5 Lac
15%
In case of Term Loans for acquiring second hand machineries, higher margin may be
stipulated on case-to-case basis.
B. Working Capital Finance
Working Capital against hypothecation of raw materials, work in Process, finished goods
etc.,
Above Rs.50000/- and up to Rs.5 Lac
15%
Above Rs.5 Lac
20%
Working Capital against Book Debts/Receivables
Margin to be taken as per our Banks general loan policy document, without any
concession.
C. Minimum cash margin of 10% will be prescribed in respect of non fund based limits
such as LG and LC.
D. For loans under Government sponsored schemes and Banks special credit schemes;
margin will be obtained as stipulated in the scheme even if it is different from the levels
indicated above.
E. In exceptional cases, margins lesser than indicated above can be prescribed with the
approval of the appropriate authority as per powers delegated in banks concession
policy.
Security Norms
1. No collateral security or third party guarantee is required for loans to micro and small
enterprises upto Rs.5 lacs (up to Rs.10 Lacs for loans sanctioned after May 2010). Such
loans will invariably be covered under Credit Guarantee Scheme of CGTMSE
2. Loans above Rs.5 lacs (above Rs.10 Lacs for loans sanctioned after May 2010) and upto
Rs.100 lacs (to micro and small enterprises will also be sanctioned without collateral
security or third party guarantee subject to following conditions:
The unit should be eligible to be covered under Credit Guarantee Scheme of CGTMSE
The bank is fully satisfied with regard to viability of project and track record of the
promoter/units.
In all other cases of credit facilities to micro and small enterprises (other than a and b)
suitable collateral security and or third party guarantee will be obtained based on risk
perception and judgment of sanctioning authority.
Even when the loan is eligible to be covered under the Guarantee cover of CGTMSE, if the
borrower prefers to bring acceptable collateral security and third party guarantee, in lieu of
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Issn:2321-9246
Research Article
the CGTMSE Guarantee Cover, the same will be considered. All collateral free loans above
Rs.5 lacs and upto Rs.100 lacs will be brought under cover of Credit Guarantee Scheme of
CGTMSE.
3. As per General Loan Policy Document secured advances can be sanctioned by Branch
Managers upto the level of Scale IV only by taking collateral securities to a minimum
extent of 75% of the credit limits sanctioned. This will be relaxed in respect of MSE
advance and Branch Managers upto the level of Scale IV will be allowed to sanction
secured advances to MSE sector by taking collateral securities to a minimum extent of
60% of the credit limits sanctioned. Such sanctions should be supported by sound
reasoning.
4. All branch Managers can sanction collateral free loans to MSE sector with CGTMSE
Guarantee cover up to their per borrower limits.
5. The Banks calculation method for providing credit is like Turnover method, Traditional
method, whichever is high will be taken for consideration by the bank authorities for
further proceedings.
DATA ANALYSIS
Table 1: Disbursement Of Loans For Micro Enterprises
YEAR
Quarters
Q1
(1-3m)
Q2
(4-6m)
Q3
(7-9m)
Q4
(10-12m)
TOTAL
2009
No Of
Customer
2010
2011
2012
2013
Micro
Amount
No Of
Customer
Micro
Amount
No Of
Customer
Micro
Amount
No Of
Customer
Micro
Amount
No Of
Customer
Micro
Amount
962000
467000
42000
222200
20
2500000
290000
10
1517000
157600
306000
35000
132000
15
1621000
216000
536000
40000
583000
12
956099
50000
14
179700
10
542000
20
2274000
40
2956899
33
307200
During maximum disbursement of loans are made to the extent in quarter 1 about Rs
25,00,000 in year 2013, quarter 2, Rs 15,17,000 in year 2011, quarter 3, Rs 2,16,000 in year
2013, quarter 4 Rs 9,56,099 in year 2012, The minimum disbursement has taken place to the
extent of Rs 40000 in year 2010. In two years 2009 and 2010 no disbursement has been
happened.
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Issn:2321-9246
Research Article
2009
Quarters
Q1
(1-3m)
Q2
(4-6m)
Q3
(7-9m)
Q4
(10-12m)
TOTAL
2010
Amount
2011
2012
2013
Amount
Amount
Amount
Amount
200680
20.86%
189290
40.53%
0.00%
132747
59.74%
1198450
47.94%
108457
37.40%
0.00%
637750
42.04%
87671
55.62%
198326
64.81%
0.00%
0.00%
37828
28.66%
665272
41.04%
136144
63.02%
305857
57.06%
19971
49.92%
291438
49.99%
710076
74.27%
39641
79.28%
614994
34.40%
209261
38.61%
967016
42.52%
1595766
53.97%
1572561
51.19%
The maximum potential NPA of loans in 2009 is Rs 305857 (Quarter 4) , in 2010 Rs. 189290
(quarter 1), in 2011 is Rs 637750 (quarter 2), Rs. 710076 in 2012 (quarter 4), Rs 1198450 in
2013 (quarter 1). The minimum potential NPA has taken place of Rs 37828 in 2012 for
quarter 3 and Rs 39641 in 2013 for quarter 4. During quarter 3 of 2009, quarter 2 & 3 of 2010
NPA has not recorded.
Table 3: Disbursement Of Loans Enterprises To Small Enterprises
YEAR
Quarters
Q1
(1-3m)
Q2
(4-6m)
Q3
(7-9m)
Q4
(10-12m)
TOTAL
2009
No Of
Customer
2010
2011
2012
2013
Micro
Amount
No Of
Customer
Micro
Amount
No Of
Customer
Micro
Amount
No Of
Customer
Micro
Amount
No Of
Customer
Micro
Amount
1500000
467000
1000000
2000000
1150000
500000
1000000
35000
40000
500000
1000000
265000
10
542000
1500000
3500000
1000000
The table above depicts the loan disbursement for the small enterprises by the bank. Only few
small enterprises have taken the loan from the bank. The maximum amount has been
dispersed in the year 2012 for the Rs. 3500000, in 2013 just Rs 1000000 which is Rs 2500000
lakhs less than previous year has been dispersed to one customer.
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Research Article
Quarters
Q1
(1-3m)
Q2
(4-6m)
Q3
(7-9m)
Q4
(10-12m)
TOTAL
2009
2010
2011
2012
2013
Amount
Amount
Amount
Amount
Amount
952568
63.50%
0.00%
597148
59.71%
1147355
57.37%
0.00%
66028
5.74%
856660
85.67%
268544
53.21%
574329
57.43%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
372346
74.47%
564764
56.48%
1018596
38.43%
856660
85.67%
865692
57.71%
2094030
59.82%
564764
56.48%
The maximum potential NPA of loans in 2009 is Rs 952568 (Quarter 1), in 2010 Rs 856660
(quarter 2), in 2011 is Rs 597148 (quarter 1), Rs 1147355 in 2012 (quarter 1), Rs 564764 in
2013 (quarter 4). The low level of NPA recorded in the year 2009 for the quarter 2 of Rs
66028 and in the year 2013 Rs 564764.
Table 5: Risk Analysis For Micro Enterprises
YEAR
LD
NPA
% of NPA on LD
2009
1788000
614994
34.40
2010
542000
209261
38.61
2011
2274000
967016
42.52
2012
2956899
1595766
53.97
2013
3072000
1572561
51.19
TOTAL
10632899
4959598
220.69
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Research Article
LD
NPA
% of NPA on LD
2009
2650000
1018596
38.44
2010
1000000
856660
85.67
2011
1500000
865692
57.71
2012
3500000
2094030
59.83
2013
1000000
564764
56.48
TOTAL
9650000
5399742.00
298.12
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Research Article
SUGGESTIONS
Loans disbursement of LVB to MSME shall be done only according to the credit appraisal
procedure of the bank.
LVB may adopt zero tolerance procedure for any deviation by MSME from the rules and
regulations stated in the credit appraisal procedure.
The creditability of MSME shall be appraised by the bank based on the past transactions
with the enterprises and by conducting status enquires of the borrower.
Bank may strengthen the credit collection system, so that loans lent are collected on time
from MSME.
The recovery system of banks should be improved in order to reduce the NPA percentage
and increase profitability of the bank.
CONCLUSION
This study on the Credit appraisal procedure and disbursement of loans to MSME with special
reference to Lakshmi vilas bank,kodambakkam Branch, Chennai. 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 this measures the
financial condition and the ability of the customer to repay back the Loan in future. Generally
the credits 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.
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Research Article
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www. rbi.org.in
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