A

PROJECT REPORT
ON
PROJECT APPRAISAL METHOD
OF
UNITED BANK OF INDIA

Name : Subhashis Dutta

Roll No. : 45B
PGDM (BM) 2009-11
EMPI Business School

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 PREFACE

Project appraisal is the systematic and comprehensive review of the economic,

environmental, financial, social, technical and other such aspects of a project to
determine if it will meet its objectives. It is important because this project
appraisal report forms the basis of disbursement of loans.

The objective of the project is to study and evaluate the effectiveness of the
present credit appraisal method of UBI, to determine the deficiencies, if any, in
the present method of credit appraisal and give the necessary recommendations
to redefine the process.

Through this study, an attempt was made to streamline the present credit
appraisal method and to make it more effective and efficient. This study was
carried out in the Credit Operations Department at the Head Office of United
Bank Of India, Hemanta Basu Sarani, Kolkata.

I would take the opportunity to thank Mr. Hirendra Nath Ghoshal, Chief
Manager, Mrs. Parul Mishra and the other employees of the department who
have extended their kind support and help towards accomplishing the project.
Besides, I am also thankful to Col. Arun Dhongde (Ret.), Dean of EMPI
Business School, my mentor Mrs. Smita Sahoo and other faculty members of
EMPI Business School for extending their help in all possible ways towards the
completion of the project.

2
 TABLE OF CONTETNS

Chapter Page No.

1. Executive Summary 4

2. Introduction
Company Profile 5
Project Appraisal 8
Basic Principles of Lending 10
Risk Rating 18
Term Loan 31
Shipping Industry Scenerio 37

3. Case Study : on Project Appraisal 44

of a Barge Manufacturing Company

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 EXECUTIVE SUMMARY

Summer Internship Project is one of the core part of MBA curriculum. I have
done my Summer Internship from one of the major nationalized bank of our
country, United Bank of India.

Here, my project topic is PROJECT APPRAISAL. The objective of this project

is to scrutinize that whether any company is capable of receiving loan from the
bank or not. The bank has a systematic credit project appraisal methodology,
which constantly reviews the financial condition of the company, the credit
worthiness and the feasibility of a new project undertaken by the company for
which they require the loan. However certain basic parameters have been
evolved for appraising working capital facilities and term loan facilities
considering the experiences gain from time to time.

In this project, I have revealed the credit appraisal report of Jindal Shipyards
Ltd. on their new proposal for sanction of Term loan and Working Capital for
their Barge Manufacturing project at Cossipore, Kolkata.

Here I have calculated few ratios to find the Credit Risk Rating of that particular
Co. Credit risk is simply defined as the risk of non payment of services due to a
loan, in time. There are two types of risk:-Business Risk and Borrower’s Risk.
Under these two components, again several sub-risks are there like under
Business Risk come Financial Risk, Operating Risk, Sales Risk, and Industry
Risk and under Borrowers Risk come Management Capability and Conduct of
account. To rate these risks I have calculated some ratios like Current Ratio,
Debt-Equity ratio, Debt Service Coverage Ratio, Internal Rate of Return and
Total Outside Liabilities-Tangible Net Worth.

Here I have made certain recommendations also.

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 RATIONALE FOR THE STUDY

Offering credit is an operation fraught with risk. Before offering credit to an

organization, its financial health must be analyzed. Credit should be disbursed
only after ascertaining satisfactory financial performance. Based on the financial
health of an organization, banks assign credit ratings. These credit ratings are
used to fix the interest rate and quantum of installment.

This study aims to analyze the credit health of organizations that approach
United Bank of India. After analyzing credit health, the credit rating is
determined. On the basis of credit rating, the interest rate guidelines circular is
consulted to fix a price for the credit facilities i.e. determine the interest rate.

OBJECTIVES OF THE REPORT

 To assess the financial health of organizations that approach United Bank

of India for credit for import export purposes. This would entail
undertaking of the following procedures:

 Analysis of past and present financial statements

 Analysis of Balance Sheet
 Analysis of Cash Flow Statements
 Examination of Profitability statements
 Examination of projected financial statements
 Examination of CMA data

 To assess the suitability of the company for disbursement of credit. This

would involve the following actions:

 Use of credit rating charts
 Evaluation of management risk
 Evaluation of financial risk
 Evaluation of market-industry risk
 Evaluation of the facility
 Evaluation of compliance of sanction terms
 Calculation of credit rating
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  Determination of interest rate: This would entail the following sequence
of actions.

 Collect data regarding financial health evaluation

 Noting down of credit rating
 Referencing the banks’ interest rate guidelines circular
 Choosing the interest rate from the circular on the basis of financial
health and credit rating

AN OVERVIEW OF UNITED BANK OF INDIA

United Bank of India (UBI) is one of the 14 major banks which were
nationalised on July 19, 1969. Its predecessor the United Bank of India Ltd., was
formed in 1950 with the amalgamation of four banks viz. Comilla Banking
Corporation Ltd. (1914), Bengal Central Bank Ltd. (1918), Comilla Union Bank
Ltd. (1922) and Hooghly Bank Ltd. (1932) (which were established in the years
indicated in brackets after the names). The origin of the Bank thus goes back as
far as 1914. As against 174 branches, Rs. 147 crores of deposits and Rs. 112
crores of advances at the time of nationalisation in July, 1969, today the Bank
has 1484 branches, over Rs. 54,536 crores of deposits and Rs. 35,727 crores of
gross advances as on 31-03-09. Presently the Bank has a three-tier
organisational set-up consisting of the Head Office, 28 Regional Offices
and 1510 branches.

After nationalisation, the Bank expanded its branch network in a big way and
actively participated in the developmental activities, particularly in the rural and
semi-urban areas in conformity with the objectives of nationalisation. In
recognition of the role played by the Bank, it was designated as Lead Bank in
several districts and at present it is the Lead Bank in 30 districts in the States of
West Bengal, Assam, Manipur and Tripura. The Bank is also the Convener of
the State Level Bankers' Committees for the States of West Bengal and Tripura.
UBI played a significant role in the spread of banking services in different parts
of the country, more particularly in Eastern and North-Eastern India. UBI has
sponsored 4 Regional Rural Banks (RRB) one each in West Bengal, Assam,
Manipur and Tripura. These four RRBs together have over 1000 branches.
United Bank of India has contributed 35% of the share capital/ additional capital
to all the four RRBs in four different states.In its efforts to provide banking
6
services to the people living in the not easily accessible areas of the Sunderbans
in West Bengal, UBI had established two floating mobile branches on motor
launches which moved from island to island on different days of the week. The
floating mobile branches were discontinued with the opening of full-fledged
branches at the centres which were being served by the floating mobile
branches. UBI is also known as the 'Tea Bank' because of its age-old association
with the financing of tea gardens. It has been the largest lender to the tea
industry.

The Bank has three full-fledged Overseas Branches one each at Kolkata, New
Delhi and Mumbai with fully equipped dealing room and SWIFT terminal. The
operations of 500 branches have been computerized either fully or partially and
Electronic Fund Transfer System came to be implemented in the Bank's
branches at Kolkata, Delhi, Mumbai and Chennai. The Bank has ATMs all over
the country and having Cash Tree arrangement with 11 other Banks. The Bank
has tie-up arrangement with WESTERN UNION to facilitate foreign currency
transfers.

Corporate Banking :

Corporate Business Group at Head office, Kolkata caters to the needs of large
Corporates, NBFCs, Housing Finance Companies etc. providing a wide range of
financial products/services with requirements exceeding Rs.25.00 Crores in the
form of :

I) Term loans to fund capital expenditure for setting up new units, expansion and
modernization projects, under Infrastructure and non-Infrastructure Sectors

II) Working capital finance to Units in various Sectors in the form oF

 Fund-based limits

 Non-fund based limits

III) Corporate Loans for a variety of business related purposes

IV) Export Credit

Proposals from the Corporates will be handled directly at Corporate Business

Group ensuring speedy disposal.

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Pricing : At competitive rates as decided by the Competent Authority of the
Bank and in commensurate with the rates offered by the other Banks / financial
institutions.

HISTORY

United Bank of India (UBI) has a pride place in the economy of the eastern and
north-eastern parts of the country. The Bank, which was formed out of the
amalgamation of four small banks of Bengal in December 1950, has a long
chequered history. One of the constituents of the Banks- Comilla Banking
Corporation Ltd. was established as early as in 1914. Other three constituents-
the Bengal Central Bank Ltd, the Comilla Union Bank Ltd. and Hooghly Bank
Ltd. were established in 1918, 1922 and 1932 respectively. Subsequently,
Cuttack Bank Ltd. and Tezpur Industrial Bank Ltd. got merged with UBI in the
year 1961. Hindustan Mercantile Bank Ltd. and Narang Bank of India Ltd. were
amalgamated with UBI in 1973 and 1976 respectively. Since inception the Bank
is known for its involvement with the economic growth and social development.
UBI with its headquarter at Kolkata is predominantly seen in the eastern and
north eastern parts of the country. UBI with its outstanding performance has
created the confidence in itself and it is that confidence of the people around
UBI branches and confidence of the clients will become the most precious assets
in the years to come. So to build that confidence and to enrich that asset further
in the face of the challenges of the emerging competitive scenario, UBI is
growing with its involvement and commitments in the overall development of
the country in conformity with the priority accorded by our Government.
Today, the banks are to operate in a more de-regulated and liberalized
environment for which steps are initiated for improvement of financial strength,
enhanced supervision and control and growth in competitive efficiency. To face
the challenges of the 21st century banking, UBI has devised schemes and
developed products, which are more customer friendly and technology oriented.
At the same time it has not lost sight of the importance of rural economy and
more particularly the agriculture and allied activities as well as SME sector
which are the prime source of occupation for our masses.

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 CREDIT DISBURSEMENT AT UNITED BANK OF
INDIA

This project was undertaken at the Industrial Finance Branch of United Bank of
India, at the Credit Department. Financial requirements for Project Finance and
Working Capital purposes are taken care of at the Credit Department.
Companies that intend to seek credit facilities approach the bank. Primarily,
credit is required for following purposes:-
1. Working capital finance
2. Term loan for mega projects
3. non fund based Limits Like Letter of Guarantee, Letter of Credit
Companies present audited balance sheets of the current and previous years.
These are used to determine the financial health, turnover trends and rise and fall
of profitability. Then credit rating is done.

The financial health and credit rating are theoretical methods for determining the
right interest rate. However, in practice, banks consider other factors such as
history with client, market reputation and future benefits with clients. Thus, a
difference exists between theory and practice.

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 PROJECT APPRAISAL

Project appraisal is necessary for evaluation of the project from different angles
namely, management, commercial, technical, financial and economic. With such
an evaluation the bank could justify the long term investment made in a project.
The relative importance of the feasibility study stated above may vary from
project to project depending upon its nature and size. There is no standard
criteria for appraising a term loan proposal and each one has to be decided on
merits setting weak points against the strong points and with striking a balance,
an integrated view has to be taken by a banker. Thus, the importance of project
appraisal in a nut shell is the following:-

 Justification for the project from a business perspective.

 Appraisal of various elements of the project to address the interests of
stakeholders.
 Financial Viability from a financing and a lender’s standpoint.
 Lender protections.
 Appraisal can be looked as consisting of the following components –
1. Technical Appraisal
2. Promoters’ and Managerial Appraisal
3. Market Appraisal
4. Financial Appraisal
5. Economic Appraisal
6. Legal aspects and Security Package.

Objective of Project Appraisal

 To understand the various non-discounting and discounting techniques of
project appraisal
 To understand the concept of sensitivity analysis.
 To create a bankable project. A bankable project means the following:
i) Well-conceived Business Model and Project Logistics
ii) Acceptable Project Developers
iii) Well-structured Project Consortium and Key Project Contracts with
suitability for risk mitigation and allocation.
iv) Acceptable Financing Mix and Core Promoters’ Contribution in
line with financing norms, Equity Consortium and inter-se
shareholders’ agreements.

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Key Issues in Analysis

Project Appraisal Techniques

 All the techniques require input of data relating to cash flows from the
project.
 The techniques attempt to establish whether the cash flows associated
with the project warrant the initial investment in the project.
 It is important that only relevant data is input while appraising the project
 Relevant cash flows to be included in any project appraisal calculations
are the marginal or incremental receipts and expenditures that can be
solely attributed to the project
 Sensitivity Analysis is another tool which is a fairly simple and traditional
approach of dealing with uncertainties and risk. It is important for the
decision makers to be aware of the difficulties that the uncertainties can
cause

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 BASIC PRINCIPLES OF LENDING

A bank has two basic functions : -

 Acceptance of deposit and
 Lending of fund.
Lending is always the prime source of earning for a bank. As such, for growth
and progress, extension of credit on sound basis is essential. The quality of
advance will chart out the path of success and failure.
Although receipt from non-interest income contributes a fair amount of profits,
the earnings of banks are mainly derived from interest charged on loans and
discounts. It is, therefore, necessary to consider carefully the loans and advances
of a bank. For this purpose a general principle of lending is to be followed
within the lending policy of the bank for building up good quality loans and
advances portfolio.
Certain aspects are to be considered before sanctioning or declining a proposal
in the line with the Credit Policy to be declared from time to time.
1. Applicant:
Applicant is the key person for success or failure of an enterprise. Honesty and
integrity of the borrower is of prime importance. The information about the
applicant is required to be collected from the market, from the banker and from
other sources. One information we must collect is his reputation to meet his
commitment in time. Visit to the place of business will tell us about the
managerial efficiency. Upkeep of the premises/factory is an index of efficiency.
By visiting the place of business and the residence of the applicant we will know
whether he/she has the tendency to live beyond his/her own means. In case of a
new entrepreneur his/her age, academic qualification, experience and social
status is to be enquired of.
2. Purpose of advance:
The loan should be sanctioned for a purpose that is permitted by the Bank. The
purpose of the advance should be in tune with the corporate goal. Advances
shall be required for any one or more of the following purposes:

12
 i) Repair/extension/renovation/up gradation of the property,
ii) Professional, business or any other productive purposes for
augmenting income,
iii) Repayment of any existing loan or outstanding loan availed against the
property, provided the rent receivables are fully unencumbered,
iv) Construction/purchase of any new house/flat for residential or
commercial purpose,
v) Personal requirement except speculation. The branch should ascertain
that the proposal that the borrower wants to take up is reasonable and
is not too ambitious or of a speculative nature. If the unit is an existing
one and the proposal is for expansion of the unit, it has to be ensured
that the expansion is not too rapid a rate that may prove to be fatal for
the unit.
The branch should ensure that the loan should be utilized for the
purpose for which it was sanctioned. The branch should closely
supervise all accounts after disbursement to ensure utilization of the
limit for the sanctioned purpose.
3. Source of Repayment:
Fund based limits granted by the bank will normally be of the following types:
(i) Term Loan to acquire fixed assets where the repayment is done over a
period of time.
(ii) Working Capital finance
(iii) Bridge loan to sound companies against public issue of
equity/expected proceed of NCD's, ECB, Global Depository Receipts
on satisfaction that firm arrangement has been made to raise such
resources.
(iv) Unsecured personal loan
Whatever may be the nature of the loan, the borrower will have to repay it. The
bank desires the loan to be repaid from the income generated, if it is a
productive loan. It has to be ascertained that for all types of loans the borrower
after drawing enough fund to maintain himself and his family, will be left with
sufficient surplus from operations to meet bank's commitment. However, if the
borrower has other source of income that can be apportioned towards repayment
of loan, it will be a collateral advantage for the bank.

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4. Projecting Cost And Profitability :
The following projections are made for assessing the profitability of the project:
Projected Cost & Profitability Statement:
While preparing the projected cost of production and profitability, various
assumptions are made by the entrepreneur/promoter. The Bank should first see
that the basic factors taken into consideration to arrive at the production figure,
such as installed capacity per annum, number of working days in a year, number
of shifts per day, capacity utilization level during initial years till optimum
output of the projects reached, are realistic and where applicable are comparable
with the performance of similar industries located in the country.
While examining the cost of production, it should also be ensured that a realistic
assessment of the cost of various inputs like raw materials, consumables,
powers, water and fuel, wages and salaries, repairs, maintenance, other
manufacturing expenses has been made. Wastage factor for raw material and
rejection rate for finished goods, where applicable should be assumed. There
should also be provision of say 5% to take care of possible increase in the
various items of cost. Further, in respect of Wages and salaries a provision of
say 5% increase at the end of each year should be made to take care of the
normal increase in wages.
While projecting the repayment, it should be ascertained that the projection is
realistic and it has been worked out taking all factors including margin for
contingency into consideration. It should also be ensured that the applicant
would not depend heavily on depreciation for repayment. The long-range
projection prepared by the borrower or a consultant should be interpreted based
on independent study and analysis.
Projected Balance Sheet:
Based on the projected cost of production and profitability and funds flow
statement, the projected Balance Sheet is drawn. The position of share capital,
term loans, sundry creditors, bank borrowings, fixed assets, inventory, sundry
debtors and the preliminary expenses (after deducting the amount already
written off) are ascertained at the end of each year.

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Projected Funds Flow Statement:
Funds flow projections help in keeping a track of the sources and uses of funds.
It is important to ensure that funds will be available when they are needed, be it
during the construction period of a project or the operation period. The quantum
of share capital to be raised may have been decided upon and the loan assistance
may have been sanctioned by the financial institutions; but if there is not
sufficient flow of funds to meet the various claims as and when they arise, the
entire project may be in jeopardy resulting in delay, overruns and litigation.
Likewise, a project may be in danger of ‘technical insolvency' during the
operational period if the proper estimates of the receipts and disbursements of
cash and the provision of their timely and adequate supply is not made.

Risk rating of the account:

To decide whether to sanction a proposal or not and to price the loan risk rating
of the account has to be done. The Bank will issue circulars on this exercise
from time to time and the branches will follow the guidelines in this respect. Not
a single account shall be sanctioned without assigning the risk rating of the
account.
5. Security :
The bank sanctions loan after proper appraisal of the proposal. The assets
created out of bank loan remain charged to the bank as primary security.
Nevertheless, there is always an element of uncertainty. To take cover of the
uncertainty, additional securities are obtained. In case of priority sector advances
and Government Sponsored Schemes, the quantity of collateral security is
prescribed. For all other loans, the amount of collateral security will depend
upon the borrower and the risk perception, as assessed by the recommending
and the sanctioning authority.
Then comes the decision making process wherein a decision as to sanctioning or
declining the loan is to be made.
Sanctioning of proposal:
In branches having more than one officer, the officer in the advance department
or the Rural Development Officer or the Assistant Manager or the Deputy
Manager, as the case may be, will process the proposal and then place it to the

15
Manager for decision. In single officer branch, however, the only officer will
have to do the processing as well as the sanction.
Sanctioning proposal will depend upon the amount of the loan and discretionary
power of the Manager. If the loan amount falls within the DP of the Manager, it
shall be disposed of without any avoidable delay. We should never give an
impression that the applicant is not welcome even if we have already decided to
decline the proposal. If the proposal can be sanctioned, it should be sanctioned
without getting the applicant annoyed due to our response or attitude.
If the proposal is to be forwarded to the Regional Office or to Head Office
through the Regional Office, the Branch will forward the proposal along with
their recommendations. All necessary papers required for making the decision
should be sent along with the application. Similarly, if the decision is to be taken
at the Zonal Office or Head Office, the Regional Office will forward the
proposal with their recommendations.
Rejecting the proposal:
In case any proposal for advance has to be declined, the guidelines are to be
followed. The sanctioning authority should put forth cogent reasons for turning
down the proposal and should not be apologetic or tentative or evasive in his
approach. If the proposal has to be declined due to poor credit record, the matter
should be handled carefully and nothing should be said or given in writing
casting aspersion on the integrity of the party.
The next step in this regard is the disbursement, supervision and follow-up of
the loan. Even when a comprehensive appraisal has been made and sanction
accorded judiciously the same would be of no avail unless the branches ensure
post sanction close supervision and follow-up both during implementation
period and operative years.
Once sanction is accorded on a proposal, the branch shall advise the sanction to
the borrower along with stipulated terms and conditions and obtain acceptance
of the terms and conditions by the borrower and keep the same along with the
documents. The next stage would be completion of documentation formalities,
creation and registration of charges etc. that have been dealt with in details in
other Chapters. Disbursement should commence only after sanction stipulations
are duly complied with.

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The Branches shall periodically visit and obtain information/data to ensure that:
(a) The loan is disbursed according to the programme/in phases as approved by
the Sanctioning Authority after the pre-disbursement terms and conditions
regarding tie-up arrangements with other financial institutions/banks, broad-
basing of the Board, strengthening of the management set-up, etc. are complied
with and the promoter's contribution stipulated is actually brought in at each
stage, and that the disbursement of installments is related to the progress of
implementation of the Project. In general, the Bank in case of projects assisted
jointly by All India Financial Institutions and banks should make pro-rata
disbursement.
(b) The loan is used for the purpose for which it is intended, and incase of
deviation in respect of any aspect of the scheme, approval of the appropriate
authority is obtained.
(c) The progress made in implementation and operation is according to the time
schedule drawn, deviation, if any, is for valid reasons and appropriate steps are
taken to reduce delays.
(d) The cost incurred on the project is kept within the estimate and reasons for
overrun, if any, are examined carefully.
(e) The land, building, machinery etc. mortgaged/hypothecated are maintained
in good order by the borrower.
(f) The inventory position is satisfactory.
(g) Required margins are maintained in the account at all times.
(h) The stipulated installments/interest are paid regularly and promptly (in case
of defaults or delay in payment, the reasons should be looked into).
(i) The borrowing unit is functioning properly (to ensure this, the branch should
have a proper procedure of obtaining and scrutinizing quarterly progress reports,
statement of expenditure incurred (with sources) and assets created out of the
same at quarterly intervals annual financial statements etc. as also maintaining
personal link with the management of the unit through periodical post-
disbursement inspection etc); and
(j) The difficulties/deficiencies, if any, experienced by the unit in the course of
implementation of the scheme or in the smooth functioning of the unit after the
scheme has been implemented and any deviation from the stipulations made by

17
the Sanctioning Authority (major deficiencies could be – absence of proper
organizational set-up, inadequate maintenance of plant and machinery, absence
of effective controls on purchase of raw materials, rejections, etc., lack of
appraisal of market potential, market fluctuations and other environmental
factors affecting sales).
In the event of any act of misfeasance/malfeasance on the part of the unit's
management coming to notice, the bank should safeguard its position by
obtaining additional security e.g., shares including shares of the company held
by the promoters, immovable property, personal guarantees of directors/third
parties, etc.
The main purpose of supervision and follow up outlined above is to see whether
the project is progressing as originally scheduled and the working of the unit on
commissioning is satisfactory

RATIO ANALYSIS

Ratio Analysis is a widely-used tool of financial analysis. It is defined as the

systematic use of ratio to interpret the financial statements so that the strength
and weakness of the firm as well as its historical performance and current
financial condition can be determined. This is the most critical analysis in the
appraisal of a Project. The analysis of ratios is done on the basis of the lending
policy of the bank. The ratios are determined to evaluate a project from the
financial perspective. This is generally done on the basis of the audited Balance
Sheet that is provided by the company.
The rationale of ratio analysis lies in the fact that it makes related information
comparable. A single figure by itself has
no meaning but when expressed in terms of related figures it yields significant
inferences. Ratios can be classified into four broad groups

i) Liquidity Ratios.
ii) Capital Structure Leverage Ratios.
iii) Profitability Ratios.
iv) Activity Ratios.

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The first two ratios i.e. the liquidity ratios and the Capital Structure ratios are
generally used in the evaluation of Capital projects. This implies that when a
bank is going to finance a Term Loan the liquidity ratios and the capital
structure ratios are given more importance than the profitability and activity
ratios. And when the bank is financing Working Capital requirement of a
company than the last two ratios i.e. the Profitability ratios and the Activity
ratios are given more importance.

The important ratios that are considered while financing a long term projects
are.
1. Debt Equity Ratio
2. Debt Service Coverage Ratio.(DSCR)
3. Current Ratio.
4. Total Outside liabilities/ Tangible Net Worth (TOL/TNW).

5. Fixed Assets Coverage Ratio (FACR)

1. Debt Equity Ratio = Long Term outside liability

Shareholders' Fund

The relationship between borrowed funds and owner’s capital is a popular

measure of the long term financial solvency of a firm. This relationship is shown
by debt-equity ratios. This ratio reflects the relative claims of creditors and
shareholders against the assets of the firm. Alternatively, this ratio indicates the
relative proportions of debt and equity in financing the assets of a firm. The
relationship between outsiders claims and owner’s capital can be shown in
different ways and accordingly there are many variants of the debt equity ratio.
The minimum requirement of debt- equity ratio as per the lending policy of the
bank is 3:1(Infrastructure Sector).

2. Debt Service Coverage Ratio = (Profit after tax + Interest +

Depreciation)/ (Interest + Annual installment for term loan).

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It is considered as most comprehensive and apt measure to compute the debt
service capacity of a business firm. It provides the value in terms of the number
of times the total debt service obligations consisting of interest and repayment of
principal in installments are covered by the total operating funds available after
the payment of taxes. The higher the ratio the better it is. In general, lending
financial institutions consider 2:1 as satisfactory ratio.
The bank generally calculates two types of DSCR. The minimum DSCR
and the average DSCR, as per the lending policies of the bank the minimum
DSCR should be1.20 and the average DSCR should be 1.50. if the proposal
satisfies the minimum requirement than the project is considered as a good
proposal and further evaluation of the project is done.

3. Current Ratio = Current Assets

Current Liabilities.

The Current ratio of a firm measures its short term solvency, that is , its ability
to meet short term obligation. As a measure of short term/ current financial
liquidity it indicates the rupees of current assets available for each rupee of
current liability. The higher the ratio, the larger is the amount of rupees available
per rupee of current liability, the more is the firm’s ability to meet the current
obligation and the greater is the safety of funds of short term creditors. Thus the
current ratio in a way is a measure of margin of safety available to the creditors.
As per the lending policy of the bank, the current ratio of 1.33 is the minimum
requirement to finance a long term capital project, any value greater than the
above required value is considered to be favorable.

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 4. Total Outside Liabilities/Tangible Net Worth (TOL/TNW) =

Term liabilities+
Current Liabilities + Def liabilities.
Tangible Net
Worth.

This ratio determines the level of outsiders overall stake in the business. It
indicates what amount in the net worth of the company is held by the outsiders.
The total outside liability consists of term liabilities, current liabilities, and
deferred liabilities. The tangible net worth means the net worth of the company
excluding the intangible assets. For infrastructure projects the set value of the
ratio as per the lending policy of the bank is maximum 6. Any value which is
below the value given is preferred. The lower the ratio the better is this for the
company as the ownership and control is more in the companies hand than the
outsiders or the lenders of the company.

5. Fixed Assets Coverage ratio = Net Fixed Assets

Total Term liability

This ratio indicates what amount of fixed assets of the company is financed by
the lenders, the ratio shows the
proportion of the assets that are financed by the owners and the proportion that
is financed by the lenders. The lower the ratio the better is for the company as
the assets of the company would belong to the owners and the charge on the
assets would be less by the lenders. The ratio should not be too low as the
company would fail to get the advantage of leverage through the debt financing.
This ratio also indicates that the long term fixed assets of the company should
always be financed by the term loan and not through short term loans.
As per the lending policy of the bank the fixed assets coverage ratio should be
minimum 1.20.

21
 RISK RATING
Risk rating is an index of factors on borrower's financial position and its
reliability, quality of management, its size, its position within the industry it
belongs etc. Degree of risk involved may be evaluated on the basis of
magnitude, trends and volatility in financial performance, liquidity, leverage
trends as available from financial statements of a borrower. Other external
factors which may also help are degree of threats in market, competitiveness,
product life cycle, obsolence, economic considerations like recession, interest
rates, exchange fluctuations, inflations, various regulatory/pollution control
norms.

RISK RATING AND PRICING OF CREDIT

In accordance with RBI's Risk Management Systems, the bank is having a

comprehensive risk scoring/rating system that serves as a single indicator of
diverse risk factors of a borrower for taking credit decisions in a consistent
manner. The risk rating system is drawn up in a structured manner
incorporating, inter alia, financial analysis, projections and sensitivity,
individual and management risk. As a prudent risk management policy, the bank
has prescribed the minimum rating below which no exposure would be
undertaken.
In a risk return setting, a borrower, with weak financial position and hence
placed in high credit risk category is priced high. The pricing of loan normally
has been linked to risk rating or credit quality.
Keeping the above in view, the bank has adopted an integrated risk rating
system as a single indicator for assessing the diverse risk factors in the matter of
taking credit decisions. Such risk rating system takes into account the various
risk elements namely –
i) Business Risk,
ii) Borrower's Risk.
While the Business Risks consist of Financial, Operational, Sales and Industry
Risk; Borrower's Risk is Management's capability and conduct of the account.
The various factors for assessing the Business Risk and Borrower Risk are
briefly stated below:

22
BUSINESS RISK:

Business Risk is measured by the following four parameters:

a) Financial Risk
b) Operational Risk
c) Sales Risk and
d) Industry Risk

Different weightages are assigned to these parameters. The Bank will circulate
such weightage from time to time. The Bank may assign same weightage for all
types of facilities or may assign different weightage for different types of
facilities like Cash Credit, Term Loan, and Working Capital advance to NBFC.

1. FINANCIAL RISK:
Financial Risk is measured by studying some ratios and variables viz. Current
Ratio, TOL/TNW, Debtor Turnover Ratio, and Loan to Value Ratio, Debt
Service Coverage Ratio, Priority Obligation Ratio, Fixed Assets Turnover Ratio,
TOL/NOF, and Financial Leverage Ratio. Each of these ratios and variables are
assigned some score and scoring pattern in each ratio is prescribed. For each
ratio there is maximum score and on the basis of the value of the ratio, scores
are obtained. Not all these ratios are considered for assessment of financial risk
of all types of facilities. A group of these ratios and variables are taken into
consideration or assessment of financial risk for working capital, term loan and
working capital finance to NBFC respectively.
2. OPERATIONAL RISK:
Operational Risk is measured on the basis of study of Inventory Turnover Ratio,
Return on Investment, Public Deposit to TOL, Growth of Gross Profit, Interest
Coverage Ratio, Priority Obligation Ratio, Operating Leverage, Capital
Adequacy Ratio, Non Performing Asset, Compliance of RBI norms. Each of
these items are assigned maximum score and based on the actual value of the
ratio, scores are obtained by the unit. For assessment of operational risk for
working capital finance, term loan and working capital finance for NBFC, there
are different groups of ratios containing some of these items/ratios.

23
3. SALES RISK:
Sales Risk is measured on the basis of increase or decrease in sales. Weightage
is assigned on the percentage of increase in a certain range. Like all other
parameters, there will be a maximum score and the score obtained will be on the
basis of the actual increase in sales during the year.
4. INDUSTRY RISK :
Industry Risk is measured on volatility of industry sales which should be
calculated taking sales for a minimum of five years. For this ratio there is a
maximum score and on the basis of actual ratio, the unit obtains the score.

BORROWER’S RISK:

1. Borrower’s Risk focuses the attention of the lender on the promoters and
the management of an enterprise. Management capability and conduct of
the account measure it.
2. Management Capability is measured on the basis of questionnaire
containing a number of variables which are circulated from time to time.
For each of the variables there are score values and individual weightage.
3. Conduct of the borrower's account is based on utilization of limit,
compliance of terms of sanction, operation in the account, submission of
Statements and Returns and submission of monthly stock statement,
project implementation, servicing of interest and installments.

PRESENT SYSTEM OF RISK RATING:

As stated above, each of the ratios and variable that are taken into consideration
for assessment of credit risk rating of a borrower have been assigned a
prescribed score on the basis of value of ratios and variables. Depending on the
borrower's financial parameters and management capabilities coupled with
conduct and operation in the account scores are to be obtained for arriving at the
Credit Risk Rating of that borrower.

24
 CREDIT RISK RATING FOR TERM LOAN
Scoring Maximum Scores Value of
1 Business Risk
scale Score Obtained ratio
1.1 Financial Risk
1.1.1 Curren Ratio 4
1.40 and above 4.00 0
<1.40 to 1.33 3.00 0
<1.33 to 1.20 2.00 0
below 1.20 0.00 0
1.1.2 TOL/TNW 4
1.50 and below 4.00 0
>1.5 to 2.0 3.00 0
>2.0 to 3.0 2.00 0
Above 3.0 0.00 0
1.1.3 Debt Service Coverage Ratio 4
1.5 and above 4.00 0
<1.5 to 1.3 3.00 0
<1.3 to 1.2 2.00 0
<1.2 to 1.1 1.00 0
Below 1.10 0.00 0
1.1.4 Fixed asset Turnover Ratio 3
Net Sales/Operating Fixed assets( after depre)
5 and above 3.00 0
<5 to 4 2.00 0
<4 to 3 1.00 0
Below 3 0.00 0
1.1.9 Total score for Financial Risk 15
1.2 Operating risk
1.2.1 Return on Investment 4
PBIT/Total operating assets
12% and above 4.00 0
<12% to 9% 3.00 0
<9% to 6% 2.00 0
<6% to 3% 1.00 0
Below 3% 0.00 0
Growth of Gross Profit 4
Increase in ratio of GP/Net sales
10% and above 4.00 0
<10% to 6% 3.00 0
<6% to 3% 2.00 0
<3% to 0% 1.00 0
Below 0% 0.00 0
1.2.3 Interest Coverage ratio 4
PBIT/Annual Interest Obligation
2.5 and above 4.00 0
<2.5 to 2 3.00 0
<2 to 1.5 1.00 0
Below 1.5 0.00 0
1.2.4 Priority Obligation Ratio 3

25
 Net Operating cash flow/Priority outflows
1.5 and above 3.00 0
<1.5 to 1.3 2.00 0
<1.3 to 1.0 1.00 0
Below 1 0.00 0
1.2.9 Total score for Operating Risk 15
1.3 Sales Risk 10
Increase in sales during the year
15% are more 10.00 10 10
<15% to 10% 8.00 0
<10% to 5% 5.00 0
<5% to 0% 3.00 0
below 0% 0.00 0
1.3.9 Total score for sales risk 10 10
1.4 Industry risk 10
Volatality of Industry sales
Standard deviation/Mean sales
20% or less 10.00 0
>20 % to 30% 8.00 0
>30 % to 35% 6.00 0
>35 % to 45% 4.00 0
>45 % to 50% 2.00 0
Above 50% 0.00 0
1.4.9 Total score for industry risk 10 0
1.9 Total score for business risk 50
2.1 Management capability & capacity risk 25
2.2 Conduct of borrower's account 25
2.2.1 Project Implementation 5
No time/cost overrun 5.00 0
Time/cost overrun (below 5%) 4.00 0
Time/cost overrun (>5% but less than 10%) 3.00 0
Time/cost overrun (>10% but less than 20%) 2.00 0
Time/cost overrun more than 20% 0.00 0
2.2.2 Compliance of terms of saction 10
All the terms complied 10.00 0
Delayed compliance not exceeding 1 month 6.00 0
Delayed compliance not exceeding 3 month 4.00 0
Delayed compliance beyond 3 month 0.00 0
2.2.3 Servicing of interest and insatlments 5
No default 5.00 0
Delayed payment upto 15 days 4.00 0
Delayed payment (> 15 days to 1 month) 3.00 0
Delayed payment (> 1 to 2 month) 2.00 0
Dealyed payment more than 2 months 0.00 0
2.2.4 Submission of audited BS and PL 5
Submits without delay 5.00 0
Submits with delay not exceeding 2 weeks 4.00 0
Submits with delay not exceeding 1 month 3.00 0
Submits with delay exceeding 6 weeks 2.00 0
Submits with delay not exceeding 6 weeks 0.00 0

26
 3.1 Business Risk
3.1.1 Finacial Risk 10 0
3.1.2 Operational Risk 15 0
3.1.3 Sales Risk 20 0
3.1.4 Industry Risk 5 0
3.2 Borrower Risk
Borrower Risk assesses on the basis of
3.2.1 questionnaire 25
3.2.2 Conduct of borrower's account 25 0
3.9 Total score for credit risk 100 0 0%

CREDIT RISK RATING FOR WORKING CAPITAL

Scoring Maximum Scores Value of

1 Business Risk
scale Score Obtained ratio
1.1 Financial Risk
1.1.1 Curren Ratio 2
1.40 and above 2.00 0
<1.40 to 1.33 1.50 0
<1.33 to 1.20 1.00 0
below 1.20 0.00 0
1.1.2 TOL/TNW 2
1.50 and below 2.00 0
>1.5 to 2.0 1.50 0
>2.0 to 3.0 1.00 0
Above 3.5 0.00 0
1.1.3 Debtor Turnover Ratio 2
(Debtor+receivables)x365/Gross Sales
90 days and below 2.00 0
>90 days to 120 days 1.50 0
>120 days to 180 days 1.00 0
Above 180 days 0.00 0
1.1.4 Loan to Value Ratio 2

Bank borrowing/Working Capital Gap

70% and below 2.00 0
>70% to 75% 1.50 0
>75% to 80% 1.00 0
Above 80% 0.00 0
1.1.5 Priority Obligation Ratio 2

Net Operating cash flow/Priority Outflows

1.50 and above 2.00 0
<1.5 to 1.3 1.50 0
<1.3 to 1.0 1.00 0
Below 1 0.00 0

27
1.1.9 Total score for Financial Risk 10 0
1.2 Operational Risk
1.2.1 Inventory Turnover Ratio 3
Cost of production/Inv of raw material,Work-in-
process & finished goods
6 and above 3.00 0
<6 to 4 2.00 0
<4 to 3 1.00 0
Below 3 0.00 0
1.2.2. Return on Investment 4
PBIT/Total operating assets
12% and above 4.00 0
<12% to 9% 3.00 0
<9% to 6% 2.00 0
<6% to 3% 1.00 0
Below 3% 0.00 0
1.2.3 Growth of Gross Profit 4
Increase in ratio of GP/Net sales
10% and above 4.00 0
<10% to 6% 3.00 0
<6% to 3% 2.00 0
<3% to 0% 1.00 0
Below 0% 0.00 0
1.2.4 Operating Leverage 4
Net sales less variable costs/PBIT
1.5 and below 4.00 0
>1.5 to 2.0 3.00 0
>2.0 to 3.0 2.00 0
Above 3 0.00 0
1.2.9 Total score for Operational Risk 15 0
1.3 Sales Risk 20
Increase in sales during the year
15% are more 20.00 0
<15% to 10% 15.00 0
<10% to5% 10.00 0
<5% to 0% 5.00 0
below 0% 0.00 0
1.3.9 Total score for sales risk 20 0
1.4 Industry Risk 5
Volatility of Industry sales
Standard Deviation/Mean Sales
20% or less 5.00 0
>20% to 30% 4.00 0
>30% to 35% 3.00 0
>35% to 45% 2.00 0
>45% to 50% 1.00 0
Above 50% 0.00 0
1.4.9 Total score for Industry risk 5 0
2.1 Management capability & capacity risk 25
2.2 Conduct of borrower's account 25

28
2.2.1 Utilisation of the limit 5
90% and above 5.00 0
< 90% to 75% 4.00 0
<75% to 60% 3.00 0
<60% to 50% 2.00 0
Below 50% 0.00 0
2.2.2 Compliance of terms of sanction 5
All the terms of sanction complied 5.00 0
Delayed compliance not exceeding one month 3.00 0
Delayed compliance not exceeding three month 2.00 0
Delayed compliance beyond three month 0.00 0
2.2.3 Operation in the account 5 0
No irregularity in the operation 5.00
Irregularity continued not exceeding seven days
in a quarter 4.00 0
Irregularity continued for more than seven days
but not exceeding a fortnight 2.00 0
Irregularity continues for more than a fortnight 0.00 0
sumission of statement & returns ( Audited
2.2.4 balance sheet, QIS & CMA data) 5
Submits without delay 5.00 0
Submits with delay not exceeding 2 weeks 4.00 0
Submits with delay not exceeding 1 month 3.00 0
Submits with delay not exceeding one month 2.00 0
Submits with delay not exceeding 6 weeks 1.00 0
Submits with delay exceeding 6 weeks 0.00 0
2.2.5 Submission of monthly stock statements 5
Submits without delay 5.00 0
Submits with delay not exceeding 1 week 3.00 0
Submits with delay not exceeding 2 weeks 2.00 0
Submits with delay exceeding 2 weeks 0.00 0
2.2.9 Total score for conduct of account 25 0
3.1 Business Risk
3.1.1 Finacial Risk 10 0
3.1.2 Operational Risk 15 0
3.1.3 Sales Risk 20 0
3.1.4 Industry Risk 5 0
3.2 Borrower Risk
Borrower Risk assesses on the basis of
3.2.1 questionnaire 25
3.2.2 Conduct of borrower's account 25 0
3.9 Total score for credit risk 100 0 0%

29
 Questionnaire for evaluation of Borrower’s Management capability & capacity risk.

Variables Weig- Full Weigh- Obtained Weighted %

htage ted Score Score Score age
(c) = (b x 2)
(a) 0 1 2 (b) (d) (e)=(d)x(b)
1 Experience of the Not Not well Well 5 10 2 10 X
Promoters/directors experienced experienced experienced
as businessmen at all
2 Relationship among Bad Moderately Good 6 12 2 12 X
the promoters / good
directors
3 Willingness of the Unwilling/ Not very Willing and 6 12 2 12 X
promoters/directors Unable sure able
to bring in addl fund
in case of necessity
4 Attitude of the Not at all Highly Moderately 5 10 2 10 X
management aggressive aggressive aggressive
5 Meeting of the Board Rarely held Moderately Regular 3 6 1 3 X
of Directors regular
6 Composition of the Promoters Dominantly Dominan- 4 8 1 3 x
Board of Directors and their promoters tly professio-
relatives and their nals and
only relatives experts
7 Timely submission of Irregular Occasion- Regular 3 6 2 6 x
data/information to ally irregular
bank/lending
institution
8 Audit Qualification Serious Minor No 1 2 2 1 1 x
of accounting reports Qualifica- Qualifica- Qualification
tion Tion
9 Loss of working Too Many Moderate Too few 4 8 2 8 x
hours
10 Litigation cases Too many A Few None 2 4 1 2 x
pending against the
Company / promoters
11 Present health of the Closed On the verge Comfortable 3 6 - - X
enterprise of closure position
12 Raw material supply Irregular Moderately Regular 5 10 2 6 x
regular
13 Customers and Few Custo- Few Many 3 6 2 6 x
Market mers and Customers Customers
unsteady and steady and steady
market market market
14 Product Viability Becoming No partic- Comman- 2 4 2 4 x
Obsolete ular change ding market
15 Timely assessment of Not asses- Occasional Regular 2 4 1 2 x
contingent liabilities sed regularly assessment assessment
16 Environmental status Unsafe/ Moderately Safe and 2 6 2 6 x
unstable/ safe and stable/
clearance stable/ cleared by
from autho- Applied for authorities
rities not clearance
obtained

30
 Variables Weig- Full Weigh- Obtain- Weig- %
htage ted Score ed hted age
(c) = (b x 2) Score Score
(a) 0 1 2 (b) (d) (e)=(d)
x(b)
17 Creditors – Are they Many A few None 5 12 1 6 x
thinking of calling up
loans?
18 Chance of passing Exist Exist Does not 6 2 12 x
over of control moderately exist 12
19 Liquidity or working Serious Exist, but Not so 6 0 0 X
capital problem not out of serious 12
control
Price of the product Going Neutral to Favouring the 1 1 1 X
20 against the the Company 2
Company Company
21 Repayment of loan Defaulter May default No default 4 2 10 X
8
22 Relationship with the Poor Moderately Good 5 10 1 5 X
bank good
23 Product Development Not Some ate- Keeping up 4 8 1 4 X
keeping up mpts made well
well
24 Market and market No captive No captive Captive 2 6 0 0 X
share market and market but Market
share share high/
low/falling increasing
25 Selling and Poor Moderately Good 4 10 2 10 X
Distribution network good
26 Customer Confidence Losing No partic- Gaining 4 1 4 X
ular change 8
27 Order Book Position Insufficient Moderately Sufficient 6 2 12 X
order sufficient order 12
order
28 Technology Status Obsolescen Some Current / 5 1 5 X
t/not attempts in updated 10
updated updation properly
29 Economic environ- Recession Normal Boom 2 2 4
ment of the product demand 4 x
30 Corporate with No hedging Partially Adequately 4 NA NA x
Foreign Exposure arrangemen hedged hedged 8
with hedging t
arrangement
31 Expected change in Unfavoura No Favourable 2 1 2 x
Government Policy / ble change particular change 4
Global decisions change
affecting the business
32 Possibility of any No May be Just possible 5 10 2 10 x
upward spurt in possibility possible
demand, say by
export
TOTAL 242 156 64
%
Scoring out of 25 on the basis of above percentage = 16

31
In respect of advance of smaller limit of Rs. 2 lac upto Rs. 1 crore, it has been
experienced that adequate data/particulars are not available and computation of
credit risk rating in the above mode becomes difficult.

For advance having limits upto Rs. 2 lac and classified as Standard Assets shall
be rated as under for the purpose of assessing risk profile of the entire credit
portfolio of the Bank:

1) Advance against Bank's own TDR, NSC, KVP and LIP and advances
guaranteed by the Government shall be rated as ‘UBICR0' i.e. “Minimum Risk”
in Risk Rating Scale.
2) Advance under United Housing, United Personal and United Professional
Loan, United Car Loan, United Consumer Durable Loan, Trade Loan and
Education Loan Scheme and loan under United Pensioners Loan Scheme
shall be rated at ‘UBI CR 1' i.e. “Moderate Risk” in the Risk Rating Scale.
3) Advance to Landlords for branch premises shall be rated at ‘UBI CR 1' i.e.
“Moderate Risk” in the Risk Rating Scale.
4) All priority sector advance accounts (other than schematic lending) shall be
rated at UBICR-3 i.e. “Acceptable Risk with care in Risk Rating Scale.
5) Advance under all schematic lending like IRDP, PMRY,SEEUY, SEPUP
etc. under Government Sponsored Schemes shall be rated at UBICR- 3.
6) Advance through PACS/LAMPS/FSS shall be treated at UBICR 3 i.e.
acceptable risk with care.
7) Advance against shares and real estate loan shall be rated at UBICR-4 i.e.
“Tolerable Risk”.
8) Clean Advance and accounts where adhoc/excess drawings in an existing
advance account has been allowed will be rated at par with the risk rating of
such account. However, any other credit facility fully on clean basis shall be
rated at UBICR-5 i.e. “Risk requires attention” under Risk Rating System.
9) All other standard advance having limit upto Rs.2 lac shall be rated at
UBICR-3
10) Advance of all nature of loans, sanctioned to employees of the bank shall
be rated at UBICR0.

32
 RISK DESCRIPTION
Based on the scoring obtained in the manner as advised above the integrated
credit risk rating of a borrower's account are placed in 9 scales ranging from
UBCR-0 to UBICR- 8. The corresponding pricing along with risk description
are shown below:

Credit Risk (%) Credit Risk rating Risk Description Applicable Rate of
Interest

90% and above UBICR 0 Minimum Risk BPLR

86% to less than 90% UBICR 1 Moderate Risk BPLR+0.50%

80% to less than 86% UBICR 2 Acceptable Risk BPLR+1.50%

70% to less than UBICR 3 Acceptable risk with BPLR+2.50%

80% care

60% to less than 70% UBICR 4 Tolerable risk BPLR+3.25%

Below 60% UBICR 5 Risk requires BPLR+3.50%

management attention

Substandard asset UBICR 6 Very high risk -

Doubtful asset UBICR 7 Very high risk -

Loss asset UBICR 8 Very high risk -

33
 TERM LOANS
Term Loans are granted for

 Acquisition of fixed assets like land, building, plant & machinery for setting
up a new unit
 Modernization / renovation / expansion of an existing unit
 Meeting preliminary & preoperative expenses
 Purchase Of Second Hand Machinery
(After obtaining opinion from an approved value regarding working condition and
residual life of the machinery)

On The Basis Of Repayment, Term Loans Are Classified Into :

 Short term loans (repayable within 2 / 3 years)

 Medium term loans (repayable within 5 / 7 years)
 Long term loans (Repayment period above 7 years)
Banks normally grant short-term loans.
 Depending on the cash surplus generated, term loans should normally be
repaid in 3 to 7 years. Repayment period beyond 10 years in exceptional
cases only
 In cases of second hand machinery financing, the period of repayment not to
exceed residual life of the machinery
 Development financial institutions usually grant long-term loans.

ASSESSMENT OF TERM LOANS



Term loan appraisal is a comprehensive appraisal of the entire project itself. It
consists of the following:

 Appraisal of the promoters,

 Appraisal of managerial competency
 Verification of technical feasibility
 Assessment of economic viability &
 Examination of financial feasibility

34
What do you see in Technical Feasibility?
 New or proven technology? If new, expert opinion to be sought
 Product performance / quality specification (bis, agmark etc.)
 Capacity of the unit
 Land & location
 Machinery, manpower, power & utilities
 Raw materials

What do you see in Economic Viability?

 Cost of production & selling
 Selling price
 Marketing

And, what are the components of Financial Feasibility?

 Cost of the project

 Means of finance
 Profitability
 Debt service coverage ratio
 Break even point

Cost of the Project includes

 Land
 Building
 Plant & Machinery
 Other Fixed / Misc. Assets
 Technical Know - how fees etc.
 Power Connection & Installation Charges
 Preliminary & Pre-operative expenses
 Contingencies
 Margin on WC requirements

35
 Means of Finance includes
 Own Capital
 Debentures
 Unsecured Loans
 Loans from Friends & Relatives
 Term Loans
 Government Incentives

Steps to scrutinize a Term Loan Proposal

 Check the Break-Even Point
(To be calculated for the first full year of commercial production and the
year of maximum capacity utilization during the repayment period)
 Verify whether the Debt / Equity Ratio & TOL / TNW Ratio are within the
acceptable norms
 Verify the Gross Debt Service Coverage Ratio
 Verify the Yearly Debt Service Coverage Ratios
 Verify the Net Fixed Asset ratio

Financial Covenants for Term Loans

In Respect of new Term Loans and old Term Loans (On Rescheduling), a set of
financial covenants should be stipulated covering the following :-

 Current Ratio
 TOL / TNW
 Interest Coverage Ratio
 Default in payment of interest / installment
 Cross Default (Default in payment of installments / interest to institutions / banks

36
Steps in term loan processing

Submission of Project Report along with the Request Letter.

Carrying out due diligence

Preparing Credit Report

Determining Interest Rate

Preparing and submission of Term Sheet

If not approved if approved

Preparation of proposal

Submission of Proposal to designated authority

If No queries raised If queries raised

Sanction of proposal on various

Project Rejected Terms & Condition Solve the queries

Communication of Sanction
Terms & Condition

Acknowledgement of Sanction
Terms &

Condition
Application to comply with
Sanction Terms & Condition &
execution of Loan Documents

Disbursement

37
 NON FUND BASED BUSINESS (BANK GUARANTEE)

Bank Guarantee

A contract to perform the promise or discharge the liability of a third person in

case of his default

The contract of guarantee is distinctly different from the contract of

indemnity.
Indemnity is a contract by which one party promises to save the other from loss
suffered by him by the conduct of the promissor himself or by the conduct of
any other person.

PARTIES TO THE CONTRACT OF GUARANTEE

 Applicant: The principal debtor – person at whose request the guarantee is
executed
 Beneficiary: Person to whom the guarantee is given and who can enforce it
in case of default.
 Guarantor: The person who undertakes to discharge the obligations of the
applicant in case of his default.

Thus, the guarantee is a collateral contract, consequential to a main contract

between the applicant and the beneficiary.

PARTIES TO THE CONTRACT OF INDEMNITY

Indemnifier: person who promises to make good the loss

Indemnified: Whose loss is to be made good?

38
 NECESSITY FOR BANK GUARANTEE
 In lieu of security deposit / earnest money deposits for participating in
tenders.
 Mobilisation advance/advance money before commencement of the project
by the contractor and for money to be received in various stages like plant
layout, design/drawings in project finance.
 In respect of raw material supplies or for advances by the buyers.
 In respect of due performance of specific contracts by the borrowers and for
obtaining full payment of the bills.
 Performance guarantee for warranty period on completion of contract that
would enable the supplier to realise the proceeds without waiting for
warranty period to be over.
 To allow units to draw funds from time to time from the concerned indenters
against part execution of contracts, etc.

APPRAISAL OF BANK GUARANTEE

The following aspects must be examined:
 Purpose – for genuine business requirements?
 Need for BG – Related to normal trade / business?
 Nature of Bank Guarantee – Financial / Performance?
 Amount of BG – needs to be specific
 Applicant’s financial strength / capacity
 Past record in respect of BGs issued earlier
 Present outstanding on account of BGs already issued
 Margin
 Collateral Security Offered

TYPES OF BANK GUARANTEE

 Financial - Guarantees customer’s credit worthiness

 Advance payment
 Retention money
 Security deposit
 Performance – Guarantees obligations relating to capacity of customer to execute
 Bid-bond,
 Performance bonds
 Inland, Foreign - export & import
39
PRECAUTIONS
 Should not be open ended
 Should stipulate maximum liability – crystallized
 Should not contain onerous clauses
 Ensure customer’s ability to reimburse
 Other bank customer - ask why?
 Performance guarantee – assess capacity of customer, means to carry out contract,
experience
 Guarantee liability to have reasonable relation to equity of borrower
 Counter guarantee by authorized person

40
 PROJECT APPRAISAL OF A BARGE
MANUFACTURING COMPANY

Brief history of the company :

Jindal Shipyards Ltd. (JRIL), promoted by P R Jindal Group was incorporated

on 29.03.2007. P R Jindal Group (PRJ) is a part of erstwhile O P Jindal Group.
PRJ’s flagship Company is Jindal Saw Ltd. (JSL), a market leader in the
segment of SAW pipes, seamless tubes, Ductile Iron pipes.
As a part of new business initiatives of the group, JSL incorporated Jindal ITF
Ltd. (JITF), a wholly owned subsidiary, as a holding company of other step-
down subsidiaries for undertaking different projects. Since JITF intends to focus
on water infrastructure, shipbuilding, water transportation, rail wagon
manufacturing, urban waste management by waste to power projects, it formed
the following subsidiaries :
 Jindal Water Infrastructure Ltd.
 Jindal Shipyards Ltd.
 Jindal Waterways Ltd.
 Jindal Urban Infrastucture Ltd.
 Jindal Rail Infrastructure Ltd. (JRIL)
JSYL proposes to set up a Barge manufacturing facility at Cossipore, Kolkata
with the installed capacity to produce 4 barges per annum. The plant will be
equipped of state-of-art manufacturing, technologically advanced fabrication
equipment.

Internal Credit Risk Rating :

Since the company is in implementation phase of its project, entry level

rating at UBICR 3 has been considered. IMaCS score for JSL (Sponsor) with
respect to audited b/s dt.31.12.2008 works out at LC1 (2.34) which is equivalent
to UBICR 1.

41
 MANAGEMENT STRUCTURE

The Board Of Directors of JSYL are as under :

Director Name Designation

Mr. Indresh Batra Director
Ms. Sminu Jindal Director
Mr. Sunil Kumar Jain Director

The current shareholding pattern of JSYL as on 31st Dec, 2008 is as under :

Shareholders No. Of Shares % Holding

Jindal ITF Ltd. 5349300 99.9869%
Sh.P R Jindal 100 0.0019%
Ms. Sminu Jindal 100 0.0019%
Sh. Indresh Batra 100 0.0019%
Sh. Sunil Jain 100 0.0019%
Renuka Financial 100 0.0019%
Services Ltd.
Manjula Finances Ltd. 100 0.0019%
Goswami Investment & 100 0.0019%
Credits Ltd.
Total 5,350,000 100.00%

MANAGERIAL COMPETENCY OF THE BOARD OF

DIRECTORS
Here, by analyzing defaulter status of the Board Of Directors we are judging the
competency of the Company.

42
 Default status :

a) Whether the name of the Company &/or Director appears in Yes

the Defaulter’s list of RBI as on 30.09.2008
b) Whether the name of the Company &/or any Director appears Yes
in the Willful Defaulter’s list (non-suit) of RBI as on 30.09.2008
c) Whether the name of the Company &/or any Director appears Yes
in the CIBIL suit filed list as on 30.09.2008
d) Whether the name of the Company &/or any Director appears Yes
in the CIBIL suit filed (willful) list as on 30.09.2008
e) Whether the name of the Company &/or any Director appears Yes
in the ECGC SAL as on 31.03.2009

Comments :
The details of the defaulters are given below

Defaulters’ Reporting
Name List Defaulter Co. Bank Remarks
Sunil K Jain RBI 30.09.08 I C Textiles Ltd. IFCI Ltd.
RBI (willful) Blackberry Sunil Kumar
Sunil Jain 30.09.2008 Commercial P Ltd. SBI Jain of JSYL is
ECGC SAL Proprietor, Hasti the Company
31.03.2009 Exports Secretary of
Partner, India Jindal Saw Ltd.
Overseas Mfg. Co. And is a
Sunil Kumar RBI United Bank different
Jain 30.09.08 Dhanraj Kumar Jain Of India person. As per
United Bank statutory
Dhanraj Kumar Jain Of India declaration dt.
RBI (willful) 31.12.08 in
30.09.2008 Jain Enterprises Canara Bank from 24AA u/S
Lifeline Suppliers P 299 of
Ltd. Bank Of India Companies Act
CIBIL Swaran Gems P Indian he is not
30.09.2008 Ltd. Overseas Ltd. associated with
ECGC SAL Proprietor, Kamla the reported
31.03.2009 Corporation companies.

43
 SWOT ANALYSIS OF THE COMPANY :
Strengths
 Premier location
 Excellent road/rail connectivity
 Availability of skilled manpower
and supplier
 160 m long slipway with winch
 Availability of raw materials
 Good past history of shipyard
 Demand of barge from IWT
 Good track record of Promoters
Weaknesses
 Ships Span limited max up to 12 m
only. This facility can manufacture
barges of 2500-3000 DWT, which
has a good demand.
 Low riverfront. This is however,
sufficient to take care of size of
barges the company proposes to
manucture.

Opportunities Threats
 Lighterage and barging industry in  Demand of barge may fluctuate.
India confined mainly in four However, the company will have
regions viz. Gujrat, Goa, Mumbai the demand from Jindal
Harbor, Kerala and Kolkata. The Waterways (JWWL), who are into
industry is highly fragmented with inland water.
the presence of a handful of  Risk of loss in initial stages.
service providers. The total However, the chances are
number of lighterage vessels or minimized because of barge off
barges in India could be around take from JWWL.
350-400, whereas the total  High initial investment for
turnover of ligherage and barge modernization. However, this
industry in India is assumed to be investment will pay in the long
around Rs. 2.5 billion. run.
 Cargo transport by water way is
cheaper than other mode.
 Scope Switch over to Aluminium
Vessel (Indian Navy) interceptor
boat

44
 RISKS & THEIR MITIGATION :

Risks Description Mitigation Factors

Delay in getting Getting order and finalization Order of barges available
orders may take considerable time. from IWT and Port Trusts.

Order price The shipbuilding industry is The company proposes to

fluctuation quiet competitive. The order focus on superior quality
price by L-1 price is subject toand lower operating cost
fluctuations. to continue to stay
competitive.
Input material Timely availability of input The company shall enter
availability and material is crucial for meeting into job wise purchase
price fluctuations order deadlines for customers; agreements with its
price of input materials are vendors for vital items and
subject to fluctuations, high LD also develop extensive
may impose by customers. vendor base in and around
Kolkata.
Financing Risk The company’s asset acquisition The company has
requires adequate financing of adequate financial strength
debt. as well as experience in
arranging funds from
banks and FIs.

PRESENT PROPOSAL
The present proposal is for sanction of an overall limit of Rs. 21.57 crores
comprising of Term Loan of Rs. 10.86 crores (including a Capex LC sub-limit
of Rs. 6.00 crores within Term Loan) to finance a Barge manufacturing project
at Cossipore, Kolkata with a total project cost of Rs. 15.51 crores, for a door to
door tenure of 8 yrs. two months (98 months) at a floating interest rate linked
with BPLR with initial effective rate @ 11.00% p.a. at the time of
documentation, keeping the spread fixed throughout the tenure, along with
sanction of working capital limit of Rs. 10.71 crores (comprising of cash Credit
limit of Rs. 5.71 crores and LC/BG limit (with full interchangeability) of Rs.
5.00 crores)

45
 Cost of Project and Means of Finance
( Rs. in crores )
Cost Means
Particulars Amount Particulars Amount
Land & site development 5.05 Equity 4.65
Building &other civil works 0.79 Term Loan 10.86
Material Handling 2.09
Equipments
Plant & Machinery 3.93
Other fixed assets 0.98
Vehicles 0.08
Consultancy Fees 0.20
Interest during construction 0.10
Margin Money for WC 1.86
Contingencies 0.43
Total 15.51 Total 15.51
D/E Ratio 2.33

Observation on Means of Finance :

The project shall be financed with a debt : equity ratio of 2.33:1. The total equity
requirement of Rs. 4.65 crores shall be brought in by the promoters through
Jindal ITF Ltd. Subsidiary of JSL, and its associates. The financial strength of
JSL, the ultimate sponsor and the flagship company of the group, as well as the
group’s ability to mobilize fund may be considered as satisfactory to bring in the
required contribution.
The company has already brought in Rs. 4.31 crores in the form of equity.
Increase in cost, if any, shall be borne by the promoters/Sponsors through
equity/subordinated unsecured loan (quasi-equity) and JITF shall undertake to
that effect prior to disbursement.

46
 BACKGROUND OF THE PROPOSAL

JSYL plans to develop a barge manufacturing facility at Cossipore in Kolkata,

West Bengal, with an installed capacity of four barges p.a., with a focus to meet
the increase in demand of barges because of the cargo owners’ propensity to
shift to alternate mode of cheaper transport.

With the increase in cargo traffic at all the major ports in India; the demand of
barges is increasing simultaneously. Even though 2008-09 is considered as one
of the toughest years for the world economy, as far as cargo traffic at major
ports in India is concerned, the traffic handled at major ports in the country grew
by about 2.13 per cent on the whole, despite the slump in international trade.
(Source : IWAI Website)

To meet with this quantum jump in freight traffic, induction of new barges is
required \, thereby enhancing the demand for barges.

JSYL has identified potential business opportunity in this regard and proposes to
set up a barge manufacturing facility with an installed capacity to produce 4
barges / annum.

47
 SHIPPING INDUSTRY OVERVIEW
There are 4 basic modes of transportation viz. air, rail, road and sea. Of these
rail and road transport are used mainly for domestic movement of goods and
passengers, whereas air travel is used mainly for passenger traffic. As it proves
costly for transport of voluminous goods, shipping is the preferred mode of
transportation when the source and destination are waterfront locations.
Inland water transport includes natural modes such as navigable rivers and
artificial modes such as canals. The inland waterways have played an important
role in the Indian transport system since ancient times. It consists of
transportation through a network of lakes, rivers, canals, creeks and backwaters.
However, it is location-specific, confined to regions that have waterways.
Water based transport is effective as generally speaking, operating costs of fuel
are low and environmental pollution is lower than the main infrastructure – the
waterway – is often naturally available, which then has to be “trained”,
maintained and upgraded.
Despite huge network of inland waterways which is spread over 14,500 km,
India has not adequately exploited this form of transport. Inland Waterways
Transportation (IWT) contributes a minuscule 0.15% of the total inland cargo
transportation in terms of tonne kilometer. This slow progress can be blamed on
the lack of supporting infrastructure, navigational constraints, and the absence of
governmental encouragement.
In contrast, some of the most developed countries depend heavily on this mode
of transportation. IWT carries 14% of the cargo traffic in the US while in
Netherlands it accounts for 46% of the traffic. In China, IWT accounts for
almost 10% of the total freight tonnage carried in the country, and of that, two
thirds is carried on the Yangtze River.
Traditionally, IWT was used to carry dry and liquid bulk or low-unit value cargo
all over the world. There has been change in the global IWT cargo mix with the
introduction of higher speed inland watercraft and increasing rail & road
congestion. Now a significant volume of higher value goods, including container
and break-bulk cargo, is transported through inland waterways.

Realizing the importance of IWT, the Indian government has announced policy
and tax incentives to attract private investment and increase productivity in the
sector, with the objective of raising the share of IWT to 2% by 2025.

48
 INLAND WATER TRANSPORTATION

Global IWT Scenario :

Bangladesh : A significant fraction (about 35%) of the freight movement in the

country is by IWT because of the region. Riverline ports are quite well
developed and competing modes (rail and road) are not as developed in
comparative terms.

Thailand : IWT is next to road in share of freight carried (about 20 million

tons). Passenger movement in and around Bangkok is significant, with different
types of services, including express services.

North America : Freight movements on the Great Lakes and the Mississippi
continue to be important modes. Leisure activities based on water movement are
quite common.

Europe : IWT estimated to carry about 7% (and growing) of freight traffic in

those EU states. In the EU states with waterways, this proportion is 12% overall
and it accounts for more than 40% of ton-km in some regions {European
Commission, 2011}. River training and use of rivers and canals for a variety of
purposes has been common for a number of years. IWT is seen as a
complementary mode of transport, and offers another option as part of the
environmental impacts of different modes of transport and the increasing role of
multi-modal transport and containerization. The current challenges are safety
and the development of information systems to harmonize IWT traffic across
Europe.

China : The navigable inland waterways in China are more than 100,000
kilometers and there are a large number of inland port facilities with berths for
large vessels. IWT accounts for almost 10 per cent of the total freight tonnage
carried in the country, and of that, two thirds is carried on the Yangtze river
(including commodities like coal, steel, cement, containers and LPG). In
particular, many steel mills are located along the Yangtze river and use barges
for transport of material. The downstream part of the river carries barges up to
10000T capacity.s

49
Domestic IWT Scenario :

India has a network of inland waterways in the form of rivers, canals,

backwaters and creeks. The total length of these waterways is 14,500 km, out of
which about 5,200 km of river and 465 km of canals can be used by mechanized
crafts. Five waterways in the country have been designated as National
Waterways (NW-1, NW-2, NW-3, NW-4 and NW-5). These are depicted below,

 National Waterways 1 (NW - 1) : Allahabad to Haldia stretch (1620 km) of

the Ganga-Bhagirathi-Hoogly river system.
 National Waterways 2 (NW
- 2) : Sadiya-Dhubri stretch
(891km) of the Brahmaputra
River.
 National Waterways 3 (NW
- 3) : Kottapuram-Kollam
stretch (163 km) of the West
Coast Canal along with
Champakara canal (923 km)
and Udyogmandal canal (14
km).
 National Waterways 4 (NW
- 4) : Kakinada-Pondicherry
stretch of canals consisting of
Kakinada canal. Elru canal,
commamur canal,
Buckingham canal and Kaluvelly tank along with Bhadrachalam-
Rajahmundry stretch of river Godavari and Wazirabad-Vijayvada stretch of
River-Krishna (1095 km) in the states of Andhra Pradesh and Tamil Nadu
and Union Territory of Pondicherry.
 National Waterways 5 (NW - 5) : Talcher-Dhamra stretch of Brahmani-
Kharsua-Dharma river system along with Geondhali-Charbatia stretch of the
east coast canal, Charbatia-Dhamra stretch of Matai river and Mahanadi delta
river systembetween Mangalgadi and Paradip (623 km) in the states of Orissa
and West Bengal.

50
Of the above mentioned Natinal waterways, NW-4 and NW-5 have been
declared by th Government as National Waterways in November ’2008.
ADVANTAGES AND DISVANTAGES OF IWT
Advantages of Inland Waterway Transportation :

The advantages of IWT vis-à-vis other modes of transport are as below :

 Low capital cost : Cost of development of inland waterway has been

estimated to be a mere 5-10 percent of the cost of developing an
equivalent 4-lane highway or railway.

 Low maintenance cost : Cost of maintenance of inland waterway is

placed at 20 percent of that of road.

 Low fuel cost : IWT is a highly fuel-efficient mode of transport. This fact
borne out by the estimate that one litre of fuel can move 24 tonne-km of
freight by road, 85 by rail and 105 by IWT.

 Cost-effective transport mode : It has also been estimated that diversion

of one billion tonne-km of cargo to the IWT mode will reduce transport
fuel costs by 5 million USD and the overall transport costs by 9 million
USD.

Disadvantages of Inland Waterway Transportation :

The disadvantages of inland water transportation vis-à-vis other modes of

transport are as below :

 Low availability of inland waterway : There are numerous criteria for

water body to be navigable. Out of the total inland water body available
in the world, very low percentage of it is potentially navigable.
However, with the continued focus of the National waterways Authority of
India on identification and maintenance of new waterways, it is envisaged
that there shall be sufficient inland water navigability in the future.

 Low speed : Water transport, as a whole is much slower than its road,
rail or air competitors.

51
 However, given the cost advantage of inland water transportation vi-a-vis
any other means, the time constraint gets suitably negated.

OPPORTUNITIES IN IWT
Inland Water Transport (IWT) has not been able to realize its full growth
potential. India has navigable waterways aggregating 14,500 km. of which 5,200
km of major rivers and 485 km of canals are navigable for mechanized crafts.
About 45 million tons of cargo (2.50 billion ton-km) is being moved annually by
IWT.

The congestion in the ports is increasing and at some ports big ships can not
enter. To overcome these problems, the lighterage is gaining importance,
wherein the Cargo is unloaded on barges in the sea and transported to the port.
Moreover, in the Eastern India, transportation of Coal by barges is increasing
and many corporates including NTPC are planning to use this facility. Barge
capacity addition is essential for transportation of domestic cargo by inland
waterways as it is the most cost effective way of transporting cargo. Thus there
are numerous opportunities in the Inland Waterways Transportation and there is
a huge market for Barges.

GOVERNMENT INITIATIVES :
The various initiatives being undertaken by the Government to promote the
inland waterways transportation systems include:

 IWT sector accorded status of Infrastructure under Section 80 I A Income

Tax Act. The company operating the barges will get tax exemption for
any 10 years during its first 15 years of operations.
 The Role of Inland Waterways Authority of India (IWAI) has been
enlarged to facilitate its participation in commercial/joint ventures with
equity participation.
 Vessel building subsidy of 30% of the cost to the ship is given to vessel
owners for inland vessels built in India which operate on National
Waterways.
 Higher depreciation rate of 20% as per IT act for inland vessels at par
with sea going ships.
 Cargo allocation of 5% of the Govt. controlled cargo to the IWT
corridors where waterways are functional.

52
Looking at the above initiatives of the Government, and the prevailing
opportunities, the future outlook of the inland water transportation industry is
positive.
DEMAND-SUPPLY SITUATION IN IWT IN INDIA
Global Scenario – Barge Industry :

Keeping pace with the global maritime transportation, the share of cargo being
moved through Inland Waterways both in India and World across is rapidly
increasing. There are a number of factors contributing to the increasing demand
of Barges.

Factors accelerating demand of barges :

A number of factors contributing to the increase in demand of barges are as

under –

 Replacement of existing fleet

 Water Transport is environmentally friendly
 Transshipment-key Requirement of barges at Major Ports
 India-Bangladesh Protocol on Trade and Transit
 Kolkata Port Trust Working on package to boost barge operations
 Huge Imported Coal requirement on the eastern coast

53
 MAJOR BARGE MANUFACTURERS
Presently there are 9 Barge Manufacturers in India on which Indian Barge
building industry is based.

Name of the Location Year Product segment Max. Length DWT

Yard of vessel (M) capacity
Shalimar Works Kolkata 1981 Small Ships 55 1500
Hoogly Dock & Kolkata 1984 Small Ships 85 1000
Port Engineers
Ltd.
Dempo Goa 1963 Small Ships, Barges 85 3500
Sesa Goa Goa 1984 Small Ships, Barges 80 3500
Chowgule & Co Goa 1965 Small Ships, Barges 100 3300
AC Roy Kolkata 1969 Boats, Barge, Small 65 1500
ships
Empreiteiros Goa 1962 Barges 75 1000
Gerais
PS & Co. Vizag 1996 Small Ships, Barges 12 1000
Western Marine Kochi 1983 Boats, Barges 45 350
Eng.
Total 11650

The total installed capacity is only 16650 DWT. Considering an average size of
1500 DWT, only 10-11 barges per year can be manufactured by the existing
capacity.
A study by IWAI says, a target of 20 billion tonne-kms would require about
2000 inland cargo vessels, about 30,000 trained crew, a number of terminals
with intermodal linkages and warehouse/mechanical loading facilities and above
all a well developed/maintained fairway.
Moreover, with the improvements being carried out by IWAI in the National
Waterways and approval of two more new waterways, the traffic on these
waterways would increase and there will be requirement of additional barges for
IWT.

54
The IWAI is taking initiatives to improve the Inland Waterways, and the present
capacity of the existing barge manufacturers is not sufficient to meet the
demand, it is the right time to make the investment in setting up a barge
building facility.
BALANCE SHEET ANALYSIS

Balance sheet analysis is done to find out the financial position of the company
profitability. I found the current status of the Assets and the Liabilities of the
company. Liabilities are of two types :
 Internal Liability or the Capital brought in by the owner.
 External Liability or the outside debt taken by the company.
From the Balance sheet I also had to check the profitability of the company
seeking loan. If the sales and the annual turnover of the company are on a high it
increases its chances of getting the desired financial aid from the bank. I also
had to check the Total net Worth of the company which is the summation of the
Share capital and the Reserve and surplus excluding the intangible assets (like
goodwill etc.).
I had to see the promoter’s contribution is up to the desired level of the Bank or
not. Generally 3:1 is the Debt: Equity ratio that is encouraged by the bank in
case of industrial project.

After the Balance sheet analysis the Ratios that I had to check thoroughly were :
1. Current Ratio- This gives the liquidity position of the Company.
2. TOL/TNW Ratio- This gives the leverage position of the Company.
3. DSCR (Debt Service Coverage Ratio) - It is the measure of the capacity of the
company to repay the debt service. By debt service I mean the repaying of the
installment along with the interest from the cash flows generated by the project
undertaken by the company.
4. FACR (Fixed Asset Coverage Ratio) - It is the measure of asset coverage of a
company against the Term Loan to be sanctioned.
5. ACR (Asset Coverage Ratio)- It is the measure of asset coverage of a
company against the overall limit to be approved , including the Term Loan and
the Working Capital Loan.

There have been interim sessions where I have been working with ratios and
balance sheet analysis of Working Capital project.
Here too I considered the parameters laid down on verification by the Bank.

55
Again I have to consider facts like the Bank’s exposure ceiling in the particular
sector in this case which is the Vehicles, Vehicles Parts and Transport
Equipments sector.

PROJECTED FINANCIALS :

Projected Balance Sheet

Balance Sheet (As on 31st March)

2010 2011 2012 2013 2014 2015 2016 2017 2018
Share Capital 4.65 4.65 4.65 4.65 4.65 4.65 4.65 4.65 4.65
Reserves & Surplus 0.23 0.62 2.35 5.67 9.06 12.51 16.03 19.61 23.22
Bank Borrowing 5.71 5.58 8.35 11.08 11.08 11.08 11.08 11.08 11.08
Long Term Loan 10.86 10.08 8.53 6.98 5.43 3.88 2.33 0.78 0.00
Short Term Loan 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Current Liabilities 0.54 0.53 0.80 1.06 1.06 1.06 1.06 1.06 1.06
Total Liabilities 21.99 21.47 24.68 29.44 31.29 33.19 35.16 37.18 40.02

Fixed Assets 12.97 11.60 10.24 8.87 7.51 6.14 4.78 3.41 2.05
Current Assets 8.15 7.97 11.93 15.84 15.84 15.84 15.84 15.84 15.84
Pre-operative expenses to be 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
written off
Cash & Bank Balance 0.87 1.90 2.51 4073 7.94 11.21 14.54 17.93 22.13
Total Assets 21.99 21.47 24.68 29.44 31.29 33.19 35.16 37.18 40.02

Current Ratio 1.44 1.62 1.58 1.69 1.96 2.23 2.50 2.78 3.13
Gearing
FACR 1.19 1.15 1.58 1.69 1.96 2.23 2.50 2.78 3.13
ACR 1.33 1.37 1.46 1.63 1.90 2.22 2.62 3.13 3.61
Avg ACR 2.14
TNW 4.88 5.27 7.00 10.32 13.71 17.16 20.68 24.26 27.87
TOL/TNW 3.51 3.07 2.53 1.85 1.28 0.93 0.70 0.53 0.44

56
Projected Income Statemaent
( Rs. In Crores )
st
Income Statement- For the Year ended 31 March
2010 2011 2012 2013 2014 2015 2016 2017 2018
Total Sales Revenue 7.25 14.50 21.75 29.00 29.00 29.00 29.00 29.00 29.00
Total Revenue 7.25 14.50 21.75 29.00 29.00 29.00 29.00 29.00 29.00
Expenditure
Raw Material Cost 3.12 6.25 9.37 12.50 12.50 12.50 12.50 12.50 12.50
Contractual Labour 1.32 2.64 3.96 5.28 5.28 5.28 5.28 5.28 5.28
Power & Fuel Variable 0.25 0.42 0.59 0.67 0.67 0.67 0.67 0.67 0.67
Total Water Charges 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Design & Drawing Fees 0.10 0.06 0.09 0.12 0.12 0.12 0.12 0.12 0.12
IRS Fees 0.06 0.04 0.06 0.08 0.08 0.08 0.08 0.08 0.08
Statutory Fees 0.01 0.01 0.01 0.01 0.01 0.01 0.01 0.01 0.01
Insurance 0.08 0.16 0.24 0.32 0.32 0.32 0.32 0.32 0.32
Administrative & other exp.
Salaries & Wages
-Operational Salary & 0.24 0.48 0.79 0.83 0.87 0.91 0.96 1.01 1.06
Wages
-Administration Salary & 0.08 0.17 0.17 0.18 0.19 0.20 0.21 0.22 0.23
Wages
Power & Fuel – Fixed 0.05 0.05 0.05 0.05 0.05 0.05 0.05 0.05 0.05
Establishment expenses 0.03 0.06 0.06 0.07 0.07 0.07 0.08 0.08 0.08
Vehicle Running & 0.04 0.08 0.08 0.09 0.09 0.10 0.10 0.11 0.11
Maintenance
Local Conveyance & 0.03 0.06 0.06 0.07 0.07 0.07 0.08 0.08 0.08
Travelling
Postage & Telephones 0.02 0.03 0.03 0.03 0.03 0.04 0.04 0.04 0.04
Printing & Stationery 0.02 0.03 0.03 0.03 0.03 0.04 0.04 0.04 0.04
Selling & Marketing 0.03 0.06 0.06 0.07 0.07 0.07 0.08 0.08 0.08
Expenses
Staff Welfare 0.02 0.03 0.05 0.06 0.06 0.06 0.06 0.07 0.07
Legal & Professional 0.01 0.01 0.01 0.01 0.01 0.01 0.02 0.02 0.02
Insurance Premium 0.06 0.06 0.05 0.04 0.04 0.03 0.02 0.02 0.01
Rent, Rates & Taxes 0.03 0.06 0.06 0.07 0.07 0.07 0.08 0.08 0.08
Professional Fee 0.02 0.03 0.03 0.03 0.03 0.04 0.04 0.04 0.04
Total Operating Expenses 5.61 10.78 15.87 20.61 20.68 20.75 20.82 20.90 20.98

EBITDA 1.64 3.72 5.88 8.39 8.32 8.25 8.18 8.10 8.02
23% 26% 27% 29% 29% 28% 28% 28% 28%

57
 2010 2011 2012 2013 2014 2015 2016 2017 2018
Finance Charges
-Interest on LT Loan 0.30 1.15 1.02 0.85 0.68 0.51 0.34 0.17 0.04
-Interest on Bank 0.31 0.61 0.92 1.22 1.22 1.22 1.22 1.22 1.22
Borrowing
-Interest on Short term 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
funding
Depreciation 0.68 1.37 1.37 1.37 1.37 1.37 1.37 1.37 1.37

EBTA 0.34 0.59 2.57 4.96 5.06 5.16 5.25 5.34 5.39
Tax Provision 0.11 0.19 0.85 1.64 1.67 1.70 1.73 1.76 1.78
PAT 0.23 0.39 1.72 3.32 3.39 3.46 3.52 3.58 3.61
Cash Profit 0.91 1.76 3.09 4.68 4.75 4.82 4.88 4.95 4.98
NP margin 3% 3% 8% 11% 12% 12% 12% 12% 12%

The Income statement has been prepared without considering the effect of
opening & closing (raw materials, wip and finished goods) as the raw material,
salary &wages and other mfg. exp considered in the Income statement relates to
full completed barge. Hence for calculation of holding levels cost of production
and cost of sales taken are without considering the effect of opening and closing
stock of raw materials, wip & finished goods.

58
Cash Flow statement
( Rs. /crores)
st
Cash Flow Statement- For the Year ended 31 March
2010 2011 2012 2013 2014 2015 2016 2017 2018
EBITDA 1.64 3.72 5.88 8.39 8.32 8.25 8.18 8.10 8.02
Add Back Misc Expenses 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
W/off
Increase in Share Capital 4.65 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Increase in Term Loan 10.86 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Increase in Bank Borrowing 5.71 0.13 2.77 2.74 0.00 0.00 0.00 0.00 0.00
Short Term Funding for 0.00
Cash Flow sort fall
Increase in Current 0.54 0.00 0.27 0.26 0.00 0.00 0.00 0.00 0.00
Liabilities

Total Inflow 23.39 3.59 8.92 11.39 8.32 8.25 8.18 8.10 8.02

Increase in Fixed Assets 13.65 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Increase in Current Assets 8.15 0.18 3.96 3.91 0.00 0.00 0.00 0.00 0.00
Increase in Preoperative 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Expenses
Decrease in Long Term 0.00 0.78 1.55 1.55 1.55 1.55 1.55 1.55 0.78
Loans
Repayment of Short Term 0.00 0.00 0.00 0.00
Funding
Payment of Interest 0.61 1.76 1.94 2.07 1.90 1.73 1.56 1.39 1.26
Payment of Taxes 0.11 0.19 0.85 1.64 1.67 1.70 1.73 1.76 1.78

Total Outflows 22.52 2.56 8.30 9.17 5.12 4.98 4.84 4.70 3.82

Opening cash balance 0.00 0.87 1.90 2.51 4.73 7.94 11.21 14.54 17.9
3
Surplus/Deficit 0.87 1.03 0.61 2.22 3.20 3.27 3.33 3.39 4.20
Closing Cash Balance 0.87 1.90 2.51 4.73 7.94 11.21 14.54 17.93 22.1
3

59
 Computation Of DSCR :
(Rs.in Crores )
DSCR 2010 2011 2012 2013 2014 2015 2016 2017 2018

PAT 0.23 0.39 1.72 3.32 3.39 3.46 3.52 3.58 3.61
Depreciation 0.68 1.37 1.37 1.37 1.37 1.37 1.37 1.37 1.37
Misc. Expenses W/off - - - - - - - - -
Interest on Term 0.30 1.15 1.02 0.85 0.68 0.51 0.34 0.17 0.04
Loan
Repayment Of Term - 0.78 1.55 1.55 1.55 1.55 1.55 1.55 0.78
Loan

Sub Total 0.30 1.93 2.57 2.40 2.23 2.06 1.89 1.72 0.82

Avg. DSCR 2.31 0.00 1.51 1.60 2.30 2.43 2.59 2.76 2.97 6.13
Min 1.51
Max 2.97

Computation Of IRR :
( Rs. In Crores )
Particulars 2009- 2009 2010 2011 2012 2013 2014 2015- 2016 2017
10 -10 -11 -12 -13 -14 -15 16 -17 -18
Inflow of Cash
Profit After Tax 0.23 0.39 1.72 3.32 3.39 3.46 3.52 3.58 3.61
Add: Depreciation 0.68 1.37 1.37 1.37 1.37 1.37 1.37 1.37 1.37
Add: Interest on Term Loans 0.30 1.15 1.02 0.85 0.68 0.51 0.34 0.17 0.04
Add: W/Cap at end of 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 11.09
Project
Total Inflow - 1.21 2.91 4.11 5.54 5.44 5.34 5.23 5.12 16.11
Outflow of cash
Project Cost 15.51
Increase in Working 5.71 0.00 -0.13 2.77 2.74 0.00 0.00 0.00 0.00 0.00
Capital
Total Outflow 21.22 0.00 -0.13 2.77 2.74 0.00 0.00 0.00 0.00 0.00
Net Inflow -21.22 1.21 3.04 1.34 2.80 5.44 5.34 5.23 5.12 16.11

IRR* 12.92%

*THE outflow in respect of project cost of Rs. 15.51 crores & working
capital of Rs. 5.71 crores has been considered at 0 year i.e., beginning of the

60
year, however actually the project cost and working capital would be released
during the middle of the year (2009-10) and therefore the IRR would improve
further.

Benchmark parameters as per Bank’s Lending Policy vis-

à-vis present proposal :

Parameter As per Lending Policy As per proposal Status of

(For the Cossipore compliance
Project)
1. Current Ratio 1.33 1.44 (31.03.2010) Complied
2. TOL/TNW 4:1 3.51 (31.03.2010) Complied
3. Average Av. DSCR should be at least 2.31 Complied
DSCR 1.50:1
4.Minimum Minimum DSCR in any year 1.51 Complied
DSCR should not be less than 1.20
5. Internal Rate Should not be less than the 12.92% Complied
of Return rate of intt. Chargeable on
the loan
6. Promoter’s Should be normally above 100% paid up capital Complied
contribution 20% in total equity will be contributed
by the promoter
group
7. (i) Asset Should not be below 1.33 Minimum projected Complied
Coverage Ratio ACR during the
tenure is 1.33 and
Avg. ACR is 2.14
7. (ii) Fixed Should not be below 1.20 Minimum projected Deviation.
Asset Coverage FACR during the However,
Ratio tenure is 1.15 on from the
31.03.2010 FY 2012
onwards,
FACR is
showing an
increasing
trend and is
within the
bank’s
norms.

61
8. Credit Risk Minimum UBICR3 Entry level rating Complied
Rating UBICR 3 whereas
Sponsor company’s
rating is UBICR 1

9. Repayment Term Loan tenure normally Door to door tenure Complied

period upto 15 years may be is 8 years & 2
considered in case of large months
projects
10. Techno- Should done by an Detailed project Complied
economic independent reputed agency report has been
viability ( in case prepared by the
of Term Loans) company with inputs
from the experienced
project head and the
co-operation and
assistance by M/s
Technocracy, who
are experts in the
shipbuilding
industry.
11. Overall The total fund and non fund Complied
Exposure facilities to a borrower with
credit risk rating of UBICR2
and above shall not normally
exceed 4 times the TNW of
the borrower and for a
borrower with credit risk
rating of UBICR 3 & 4 the
fund & non fund facilities
taken together should not
exceed 3 times the TNW of
the borrower

62
 Comparison of revenue items in terms of sanction with
Bank’s norms :

Particulars As per Bank’s norm Proposed rate Remarks

Rate of interest 14.50% (BPLR+2.5%) for Floating interest rate Interest rate
UBICR3 linked with BPLR agreed upon
with initial effective by the
rate @ 11.00% p.a. at Company on
the time of marketing of
documentation, the proposal.
keeping the spread
fixed throughout the
tenure.
Commission on Different rates according 50% of the normal As agreed
LC (Capex) to tenure and amount charges as per our upon by the
limit within the bank’s circular Company
term loan during
marketing.
Further LC
will be
within TL.
Commissions of Different rates according 50% of the normal As agreed
LC/BG limit to tenure and amount charges as per our upon by the
(working capital bank’s circular Company
limits) during
marketing

63
Processing For term loan For term loan As agreed
charge Rs. 10 lacs + 0.50% on 0.25% + service tax on upon by the
amount exceeding Rs. loan amount, i.e. Rs. Company
10.00 crores upto Rs. 271,500 + appreciable during
20.00 crores i.e. Rs. 10.43 service tax marketing
lacs in aggregate
For working capital limit
Rs. 250 per lacs subject to
the maximum of Rs. 10.00 For working capital
lacs limit
Normal charges as per
our bank’s circular

Penal interest For each type of default As per norm No deviation

the penalty will be 0.50%
per quarter per default
Commitment For (working capital As per norm -do-
charge fund based): 0.25% p.a.
on the undrawn part, if
average utilization during
a half year is below 60%
of the overall fund based
working capital limit.
For (working capital
Non-fund based): 0.25%
p.a. on the unavailed
portion, if average
utilization during a half
year is below 60% of the
overall non-fund based
working capital limit.
For Term Loan: 0.25%
p.a. on the balance of
Term Loan remaining
undrawn vis-à-vis the
draw down schedule for
more than 90 days.
However, if draw down
schedule is modified for
valid reasons and such
modifications are
communicated to the Bank
in writing at least 30 days

64
 prior to the scheduled date
of drawal, the commitment
charge shall not be levied
Prepayment Fee 1% of amount prepaid 0.50% on amount As agreed
prepaid, except in case upon by the
of prepayment from Company
internal accrual/equity during
infusion/GDR/FCCB marketing
with one month prior
notice
Documentation/ Rs. 15000/ As per norms No deviation
mortgage charge

65