Shikha Project

LOAN APPRAISAL
SUMMER INTERNSHIP PROJECT REPORT ON
LOAN APPRAISAL OF SMALL AND MEDIUM ENTERPRISES
UNDERTAKEN AT
SUBMITTED TO
JAGAN INSTITUTE OF MANAGEMENT STUDIES

TOWARDS THE PARTIAL FULFILMENT OF TWO YEAR, FULL TIME POST GRADUATE DIPLOMA IN MANAGEMENT.
PROJECT MENTORS: V.K.SRIVASTAVA (SENIOR MANAGER: IOB) SHEENA MANCHANDA (FACULTY MENTOR: JIMS) ARNAB (CRMC MENTOR: JIMS) Jagan Institute of Management studies
SUBMITTED BY: SHIKHA GOYAL PGDM, BATCH 2009-11
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CERTIFICATE
This is to certify that the project work done on (Title) is an original work carried out by Ms. Shikha Goyal under my supervision and guidance. The project report is submitted towards the partial fulfilment of two year, full time Post Graduate Diploma in Management.
This work has not been submitted anywhere else for any other degree/diploma. The work was carried out from May 1, 2010 to June 30, 2010 in Indian Overseas Bank.
Mr. ARNAB GHOSH (CRMC MENTOR: JIMS)
SHIKHA GOYAL PGDM, BATCH 2009-11
SHEENA MANCHANDA (FACULTY MENTOR: JIMS)
Jagan Institute of Management studies
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ACKNOWLEDGEMENT
I thank Jagan Institute of Management Studies for giving me an opportunity to undertake my project work & for giving me knowledge in field of finance during my two months Summer Internship.
I express my sincere and humble gratitude to MS SHEENA MANCHANDA, for his valuable guidance and support in completion of my project. I would also like to thank other staff members at INDIAN OVERSEAS BANK, without their support, this project would not have been success.
Last but not the least I would like to thank those person whose encouragement and ideas enriched my project.
SHIKHA GOYAL.
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PREFACE
The M.B.A curriculum is designed in such a way that student can grasp maximum knowledge and can get practical exposure to the corporate world in minimum possible time. Business schools of today realize the importance of practical knowledge over the theoretical base.
The research report is necessary for the partial fulfilment of M.B.A. curriculum and it provides an opportunity to the researcher in understanding the industry with special emphasis on the development of skills in analyzing and interpreting practical problems through the application of management theories and techniques. It is a new platform of learning through practical experience, which incorporates survey and comparative analysis. It gives the learner an opportunity to relate the theory with the practice, to test the validity and applicability of his classroom learning against real life business situations.
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EXECUTIVE SUMMARY
Credit Risk is the risk associated with the possibility that the borrower might default on a certain amount that is owned to the lending institution. With the removal of quantitative restriction on the import of several items and decrease in import duties in recent years, challenges before SME sector have emerged which need to be immediately addressed. Hence they must be competitive and efficient in accordance with the international standards. Also the qualitative existence of large corporations has a direct bearing on the performance and business volume of SMES .So financing of SMES has become crucial and hence lending institutions must determine as to how they will process the credit evaluations of the SMES and ensure adequate and ready credit availability to them . In this report you will understand all about Credit Appraisal and method of doing it. I have explained it with help of a live case study. This project ventures into the various problems both internally and externally, faced by these SMES. The probable pro-active steps the banking sector and the various financial institutions alongside the government can take to develop the full potential of the SMES.
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LOAN APPRAISAL
TABLE OF CONTENT
TOPIC
PAGE NO
1. CERTIFICATE 2. ACKNOWLEDGEMENT 3. PREFACE 4. EXECUTIVE SUMMARY 5. OBJECTIVES OF PROJECT 6. CHAPTER 1 -OVERVIEW OF BANKING INDUSTRY -HISTORY -BANKING STRUCTURE 5. CHAPTER 2 -SMEs IN INDIA 6. CHAPTER 3 -OVERVIEW OF IOB -PRODUCTS AND SERVICES 7. CHAPTER 4 -TYPES OF ADVANCES -WORKING CAPITAL FINANCE -LETTER OF CREDIT 8. CHAPTER 5 9. CASE STUDY 10. PROBLEMS FACED BY SMES 11. SUGGESTIONS AND RECOMMENDATIONS 12. BIBLIOGRAPHY 13. APPENDICES -CREDIT APPRAISAL AT IOB
02 03 04 05 07 08 10 14 18 20 23
29 31 45 53 75 76 77 78
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OBJECTIVE OF UNDERTAKING THE PROJECT
The project has been carried out with an objective to study the Small and Medium Enterprise sector in India & how SMES being financed by the banks, financial institutions and government can take to achieve this target
There are certain objectives of my project as follows
1) To study in depth the loan policy sanctioning and analysis of a working capital loan for corporate to ensure effective and efficient utilization of available resources. 2) To study how to analyse the different aspects of a project together with the terms and conditions of loans and advances of Indian overseas bank. 3) Make a recommendation whether to sanction or reject the loan proposal.
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LOAN APPRAISAL
CHAPTER 1
BANKING INDUSTRY AN OVERVIEW
Without a sound and effective banking system in India it cannot have a healthy economy. The banking system of India should not only be hassle free but it should be able to meet new challenges posed by the technology and any other external and internal factors. Section 5(b) of the BR Act defines banking as, 'accepting, for the purpose of lending or investment, of deposits of money from the public, repayable on demand or otherwise, and withdraw able, by cheque, draft, order or otherwise.' This definition points to the three primary activities of a commercial bank which distinguish it from the other financial institutions. These are: (i) (ii) (iii) maintaining deposit accounts including current accounts, issue and pay cheques, and Collect cheques for the bank's customers.
For the past three decades India's banking system has several outstanding achievements to its credit. The most striking is its extensive reach. It is no longer confined to only metropolitans or cosmopolitans in India. In fact, Indian banking system has reached even to the remote corners of the country. This is one of the main reasons of India's growth process. The government's regular policy for Indian bank since 1969 has paid rich dividends with the nationalisation of 14 major private banks of India.
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LOAN APPRAISAL Not long ago, an account holder had to wait for hours at the bank counters for getting a draft or for withdrawing his own money. Today, he has a choice. Gone are days when the most efficient bank transferred money from one branch to other in two days. Now it is simple as instant messaging or dial a pizza. Money has become the order of the day. In emerging economies, banks are special for three important reasons. They take a leading role in developing other financial intermediaries and markets. Second, due to the absence of well-developed equity and bond markets, the corporate sector depends heavily on banks to meet its financing needs. Finally, in emerging markets such as India, banks cater to the needs of a vast number of savers from the household sector, who prefer assured income and liquidity and safety of funds, because of their inadequate capacity to manage financial risks.
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HISTORY
The first bank in India, though conservative, was established in 1786. From 1786 till today, the journey of Indian Banking System can be segregated into three distinct phases. They are as mentioned below:

Early phase from 1786 to 1969 of Indian Banks Nationalisation of Indian Banks and up to 1991 prior to Indian banking sector Reforms.
New phase of Indian Banking System with the advent of Indian Financial & Banking Sector Reforms after 1991.
To make this write-up more explanatory, I prefix the scenario as Phase I, Phase II and Phase III.
Phase I
The General Bank of India was set up in the year 1786. Next came Bank of Hindustan and Bengal Bank. The East India Company established Bank of Bengal (1809), Bank of Bombay (1840) and Bank of Madras (1843) as independent units and called it Presidency Banks. These three banks were amalgamated in 1920 and Imperial Bank of India was established which started as private shareholders banks, mostly Europeans shareholders.
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In 1865 Allahabad Bank was established and first time exclusively by Indians, Punjab National Bank Ltd. was set up in 1894 with headquarters at Lahore. Between 1906 and 1913, Bank of India, Central Bank of India, Bank of Baroda, Canara Bank, Indian Bank, and Bank of Mysore were set up. Reserve Bank of India came in 1935. During the first phase the growth was very slow and banks also experienced periodic failures between 1913 and 1948. There were approximately 1100 banks, mostly small. To streamline the functioning and activities of commercial banks, the Government of India came up with The Banking Companies Act, 1949 which was later changed to Banking Regulation Act 1949 as per amending Act of 1965 (Act No. 23 of 1965). Reserve Bank of India was vested with extensive powers for the supervision of banking in india as the Central Banking Authority. During those days public has lesser confidence in the banks. As an aftermath deposit mobilisation was slow. Abreast of it the savings bank facility provided by the Postal department was comparatively safer. Moreover, funds were largely given to traders.
Phase II
Government took major steps in this Indian Banking Sector Reform after independence. In 1955, it nationalised Imperial Bank of India with extensive banking facilities on a large scale specially in rural and semi-urban areas. It formed State Bank of India to act as the principal agent of RBI and to handle banking transactions of the Union and State Governments all over the country.
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Seven banks forming subsidiary of State Bank of India was nationalised in 1960 on 19th July, 1969, major process of nationalisation was carried out. It was the effort of the then Prime Minister of India, Mrs. Indira Gandhi. 14 major commercial banks in the country was nationalised. Second phase of nationalisation Indian Banking Sector Reform was carried out in 1980 with seven more banks. This step brought 80% of the banking segment in India under Government ownership. The following are the steps taken by the Government of India to Regulate Banking Institutions in the Country:

1949 : Enactment of Banking Regulation Act. 1955 : Nationalisation of State Bank of India. 1959 : Nationalisation of SBI subsidiaries. 1961 : Insurance cover extended to deposits. 1969 : Nationalisation of 14 major banks. 1971 : Creation of credit guarantee corporation. 1975 : Creation of regional rural banks. 1980 : Nationalisation of seven banks with deposits over 200 crore.
After the nationalisation of banks, the branches of the public sector bank India rose to approximately 800% in deposits and advances took a huge jump by 11,000%.
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Phase III This phase has introduced many more products and facilities in the banking sector in its reforms measure. In 1991, under the chairmanship of M Narasimham, a committee was set up by his name which worked for the liberalisation of banking practices.
The country is flooded with foreign banks and their ATM stations. Phone banking and net banking is introduced. The entire system became more convenient and swift. Time is given more importance than money.
The financial system of India is sheltered from any crisis triggered by any external macroeconomics shock as other East Asian Countries suffered. This is all due to a flexible exchange rate regime, the foreign reserves are high, the capital account is not yet fully convertible, and banks and their customers have limited foreign exchange exposure.
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BANKING STRUCTURE IN INDIA
Banking Regulator
The Reserve Bank of India (RBI) is the central banking and monetary authority of India, and also acts as the regulator and supervisor of commercial banks.
Scheduled Banks in India

Scheduled banks comprise scheduled commercial banks and scheduled co-operative banks. Scheduled commercial banks form the bedrock of the Indian financial system, currently accounting for more than three-fourths of all financial institutions' assets. SCBs are present throughout India, and their branches, having grown more than fourfold in the last 40 years now number more than 80,500 across the country
Public Sector Banks

Public sector banks are those in which the majority stake is held by the Government of India (GOI). Public sector banks together make up the largest category in the Indian banking system. There are currently 27 public sector banks in India. They include the SBI and its 6 associate banks (such as State Bank of Indore, State Bank of Bikaner and Jaipur etc), 19 nationalised banks (such as Allahabad Bank, Canara Bank etc) and IDBI Bank Ltd. Public sector banks have taken the lead role in branch expansion, particularly in the rural areas.
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LOAN APPRAISAL Public sector banks account for bulk of the branches in India (88 percent in 2009). In the rural areas, the presence of the public sector banks is overwhelming; in 2009, 96 percent of the rural bank branches belonged to the public sector. The private sector banks and foreign banks have limited presence in the rural areas.
Regional Rural Banks

Regional Rural Banks (RRBs) were established during 1976-1987 with a view to develop the rural economy. Each RRB is owned jointly by the Central Government, concerned State Government and a sponsoring public sector commercial bank. RRBs provide credit to small farmers, artisans, small entrepreneurs and agricultural labourers. Over the years, the Government has introduced a number of measures of improve viability and profitability of RRBs, one of them being the amalgamation of the RRBs of the same sponsored bank within a State. This process of consolidation has resulted in a steep decline in the total number of RRBs to 86 as on March 31, 2009, as compared to 196 at the end of March 2005.
Private Sector Banks

In this type of banks, the majority of share capital is held by private individuals and corporates. Not all private sector banks were nationalized in in 1969, and 1980. The private banks which were not nationalized are collectively known as the old private sector banks and include banks such as The Jammu and Kashmir Bank Ltd., Lord Krishna Bank Ltd etc. Entry of private sector banks was however prohibited during the post-nationalisation period. In July 1993, as part of the banking reform process and as a measure to induce competition in the banking sector, RBI permitted the
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LOAN APPRAISAL private sector to enter into the banking system. This resulted in the creation of a new set of private sector banks, which are collectively known as the new private sector banks. As at end March, 2009 there were 7 new private sector banks and 15 old private sector banks operating in India.
Foreign Banks
Foreign banks have their registered and head offices in a foreign country but operate their branches in India. The RBI permits these banks to pirate either through branches; or through wholly-owned subsidiaries. The primary activity of most foreign banks in India has been in the corporate segment. However, some of the larger foreign banks have also made consumer financing a significant part of their portfolios. These banks offer products such as automobile finance, home loans, credit cards, household consumer finance etc. Foreign banks in India are required to adhere to all banking regulations, including priority-sector lending norms as applicable to domestic banks. In addition to the entry of the new private banks in the mid- 90s, the increased presence of foreign banks in India has also contributed to boosting competition in the banking sector.
Co-operative Banks
Co-operative banks cater to the financing needs of agriculture, retail trade, small industry and self-employed businessmen in urban, semi-urban and rural areas of India. A distinctive feature of the co-operative credit structure in India is its heterogeneity. The structure differs across urban and rural areas, across states and loan maturities. Urban areas are served by urban cooperative banks (UCBs), whose operations are
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LOAN APPRAISAL either limited to one state or stretch across states. The rural co-operative banks comprise State co-operative banks, district central cooperative banks, SCARDBs and PCARDBs. The co-operative banking sector is the oldest segment of the Indian banking system. The network of UCBs in India consisted of 1721 banks as at end-March 2009, while the number of rural co-operative banks was 1119 as at end-March 2008. Owing to their widespread geographical penetration, cooperative banks have the potential to become an important instrument for large-scale financial inclusion, provided they are financially strengthened. The RBI and the National Agriculture and Rural Development Bank (NABARD) have taken a number of measures in recent years to improve financial soundness of co-operative banks.
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CHAPTER 2
SMES IN INDIA
The SME sector is growing at a huge pace in India and its growth has been propelled by the fresh investments in heavy and basic industries. The contribution of the SMEs has been very significant in the wake of increased manufacturing activity and the increasing prominence of service sector companies. The major increase as far as SME growth is concerned is in metals, garments, juices, nectars and spices. From the period of liberalization and globalization, the growth in SME sector was tremendous and its relationship with industrial output and GDP growth can be justified by the following figure
In% g ae G P Go t D r wh In u t ia Go t d s r l r wh S E Go t M r wh
12.5
Mc oE o o i V ra l s a r c n m ai be c F9 Y7 F9 Y8 F9 Y9 7 .8 4 .8 6 .6 6 .1 6 .6 4 .1 1 .3 1 8 .4 7 .7
F0 Y0 6 .4 6 .7 8 3 .2
F0 Y1 5 .2 5 .1 7 .6
11.3
10
7.5
7.8
8.4 7.7 6.6
8.23 6.4
7.6
6.1
6.6
4.8
6.7 4.1
5.2
5.1
FY00 FY01
2.5
FY97
FY98
FY99
GDP Growth
Industrial Growth
SME Growth Page 18
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Moreover in the developing country like India, SMEs are playing a very important role for the development of the country. And some of the importances of this sector on Indian economy are highlighted below 1. SMEs are turn out to be the largest employment provider (direct/ indirect). 2. They are the fastest to adopt changes/ innovations. 3. SMEs are continuously making the use of the domestic resources for global benefits. 4. They contribute to more than 1/3 of exports. 5. The micro and small enterprises haven also contributed to more than 1/3 of industrial output. The expected growth on the SME sector in the coming years is also very substantial which automatically make this segment as one of the most important segments of our country. And it can be easily justified by the data below
Outstanding Rs, crore 1,024,000 +12% 504,000 581,000 Deposits 286,000 520,000 Advances 295,000 2006 2011E
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CHAPTER 3
ABOUT INDIAN OVERSEAS BANK AN OVERVIEW
Indian Overseas Bank boasts of a large network of more than 598 ATMs. In the areas of Banking and Insurance industry, Indian Overseas Bank has created a niche for itself in forex business and overseas banking. The retail customers of the bank are hugely benefited by its ATM Banking, Any Branch Banking (ABB) and IOB STARS (Indian Overseas Bank - Speedy Transfer and Realization Service). Its 8% saving (Taxable) Bond Scheme is also very popular with the customers.
BACKGROUND
Established on 10th February 1937 by Mr M. Ct. M. Chidambaram Chettyar, leader in banking, insurance and industry areas, Indian Overseas Bank (IOB) had the twin aims of attaining specialization in overseas banking as well as foreign exchange business. IOB has always been talked about for its excellent presence and services. At the time of inauguration, IOB started its business in three branches at the same time. The branches were located at Karaikudi and Chennai in India and Rangoon in Myanmar, erstwhile Burma. It had a branch in Penang also. During the time when India became an independent nation, Indian Overseas Bank was running 38 branches in India and 7 overseas branches. At that point of time, the Deposits of the bank was Rs.6.64 crore and Advances was Rs.3.23 crore. IOB received the status of nationalized bank in the year 1969 along with other 13 major banks. By this time, it had 195 branches. Gradually between the periods 1969 Jagan Institute of Management studies Page 20
LOAN APPRAISAL and 1992, IOB started spreading its wings in foreign destinations like Colombo and Seoul. IOB was the first bank to receive ISO 9001 Certification from Det Norske Veritas (DNV), Netherlands in the month of September 1999 for its Computer Policy and Planning Department. Besides, in its journey, it has won many awards and accolades too. These include: NABARD's award 2000-2001 for creating maximum number of credit links of Self Help Groups in comparison to all the other Banks in Tamil Nadu Best Award under the category of Banking Technology in the year 2001
INTERNATIONAL EXPANSION
1937-38: As mentioned above, IOB was international from its inception with branches in Rangoon, Penang, and Singapore.
1941: IOB opened a branch in Malaya that presumably closed almost immediately because of the war.
1946: IOB opened a branch in Ceylon. 1947: IOB opened a branch in Bangkok and re-opened others. 1948: United Commercial Bank (see below) opened a branch in Malaya. 1949: IOB opened a branch in Bangkok. 1963: The Burmese government nationalized IOBs branch in Rangoon. 1973: IOB, Indian Bank and United Commercial Bank established United Asian Bank Berhad in Malaysia. (Indian Bank had been operating in Malaysia since 1941 and United Commercial Bank Limited had been operating there
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LOAN APPRAISAL since 1948.) The banks set up United Asian to comply with the Banking Law in Malaysia, which prohibited foreign government banks from operating in the country. Also, IOB and six Indian private banks established Bharat Overseas Bank as a Chennai-based private bank to take over IOB's Bangkok branch.

1977: IOB opened a branch in Seoul. 1979: IOB opened a Foreign Currency Banking Unit in Colombo, Sri Lanka. 1992: Bank of Commerce (BOC), a Malaysian bank, acquired United Asian Bank (UAB).
2007: IOB took over Bharat Overseas Bank.
PRODUCTS AND SERVICES OF INDIAN OVERSEAS BANK
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LOAN APPRAISAL The thoughtfully designed products and services of the Indian Overseas Bank can be listed as given below:
Personal Banking

Saving bank Current account Term deposit Retail loans Home loans and mortgages Depository services IOB Fine Gold International VISA Cards Any Branch Banking Multi city cheque facility Insurance and mutual fund
Corporate Banking

Micro Small and Medium Enterprises (MSME) IT & ITes BPO Cash management services -IOB STARS
Rural
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Agricultural short time loans Financial inclusion Agri business consultancy
NRI Accounts

Non-Resident Ordinary (NRO) Resident Foreign Currency Account (RFC) Foreign Currency Non-Resident Accounts (Banks) NRI home loan scheme NRI remittances Remittances procedures Tracking cell Forward cover IOB NRI shield IOB Expo Gold Card
Forex

SWIFT centres Authorized dealer branches Forex collection services Overseas cash
Government Business
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E-Payment of direct taxes E-Payment of indirect taxes Pension payment scheme Sales tax collections Provident Fund Scheme 1968 8 percent savings taxable bond scheme Senior citizen scheme 2004
CREDIT FACILITIES PROVIDED IN IOB

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1) FUND BASED. Working Capital
- Cash Credit. - Bill Purchasing & Discounting
Term Loan - Against Fixed Assets.
2) NON FUND BASED. Bank Guarantee Financial Guarantee. Performance Guarantee. Deferred Payment Guarantee.
Letter of Credit
3) Working Capital Requirement
4) Term Loans
5) Security ( in form of) Pledge.
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LOAN APPRAISAL Hypothecation. Mortgage.
Parameters of Loan Appraisal

A: Industry profile. -Background of industry/ company. -Promoters of the company.
B: Position of Unit in Industry/Market Share
- Market Share. - Position in the market. - Brand image
C: Margin Money What is the contribution of borrower in project. Min of 25 % of all fixed assets, stocks & book debts.
D: Collateral Security. - Any fixed assets, stock and book debts can be taken up as collateral security.
E: Management exp/ Past Track Record.
F: Government Policy
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LOAN APPRAISAL Whether it is favourable for business in current market and what changes in government policy affect the business future.
G: SWOT Analysis.
H: Return on Capital & Assets.
I: Projections / Estimates whether achievable or not.
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Types of Advances Advances can be broadly classified into: fund-based lending and non-fund based lending.
Fund based lending:

This is a direct form of lending in which a loan with an actual cash outflow is given to the borrower by the Bank. In most cases, such a loan is backed by primary and/or collateral security. The loan can be to provide for financing capital goods and/or working capital requirements.
Non-fund based lending:

In this type of facility, the Bank makes no funds outlay. However, such arrangements may be converted to fund-based advances if the client fails to fulfil the terms of his contract with the counterparty. Such facilities are known as contingent liabilities of the bank. Facilities such as 'letters of credit' and 'guarantees' fall under the category of nonfund based credit. Let us explain with an example how guarantees work. A company takes a term loan from Bank A and obtains a guarantee from Bank B for its loan from Bank A, for which he pays a fee. By issuing a bank guarantee, the guarantor bank (Bank B) undertakes to repay Bank A, if the company fails to meet its primary responsibility of repaying Bank A.
Types of Non-fund based lending
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1. Working Capital Finance

Working capital finance is utilized for operating purposes, resulting in creation of current assets (such as inventories and receivables). This is in contrast to term loans which are utilized for establishing or expanding a manufacturing unit by the acquisition of fixed assets. Banks carry out a detailed analysis of borrowers' working capital requirements. Credit limits are established in accordance with the process approved by the board of directors. The limits on Working capital facilities are primarily secured by Inventories and receivables (chargeable current assets). Working capital finance consists mainly of cash credit facilities, short term loan and bill discounting. Under the cash credit facility, a line of credit is provided up to a preestablished amount based on the borrower's projected level of sales inventories, receivables and cash deficits. Up to this pre-established amount, disbursements are made based on the actual level of inventories and receivables. Here the borrower is expected to buy inventory on payments and, thereafter, seek reimbursement from the Bank. In reality, this may not happen. The facility is generally given for a period of up to 12 months and is extended after a review of the credit limit. For clients facing difficulties, the review may be made after a shorter period. One problem faced by banks while extending cash credit facilities, is that customers can draw up to a maximum level or the approved credit limit, but may decide not to. Because of this, liquidity management becomes difficult for a bank in the case of cash credit facility. RBI has been trying to mitigate this problem by encouraging the Indian corporate sector to avail of working capital finance in two ways: a short-term loan component and a cash credit component.
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LOAN APPRAISAL The loan component would be fully drawn, while the cash credit component would vary depending upon the borrower's requirements. According to RBI guidelines, in the case of borrowers enjoying working capital credit limits of Rs. 10 crores and above from the banking system, the loan component should normally be 80% and cash credit component 20 %. Banks, however, have the freedom to change the composition of working capital finance by increasing the cash credit component beyond 20% or reducing it below 20 %, as the case may be, if they so desire. Bill discounting facility involves the financing of short-term trade receivables through negotiable instruments. These negotiable instruments can then be discounted with other banks, if required, providing financing banks with liquidity.
2. Letter Of Credit
A letter from a bank guaranteeing that a buyer's payment to a seller will be received on time and for the correct amount. In the event that the buyer is unable to make payment on the purchase, the bank will be required to cover the full or remaining amount of the purchase.
Letters of credit are often used in international transactions to ensure that payment will be received. Due to the nature of international dealings including factors such as distance, differing laws in each country and difficulty in knowing each party personally, the use of letters of credit has become a very important aspect of international trade. The bank also acts on behalf of the buyer (holder of letter of credit) by ensuring that the supplier will not be paid until the bank receives a confirmation that the goods have been shipped. Jagan Institute of Management studies Page 31
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Procedures for Using the Tool
The following procedures include a flow of events that follow the decision to use a Commercial Letter of Credit. Procedures required to execute a Standby Letter of Credit are less rigorous. The standby credit is a domestic transaction. It does not require a correspondent bank (advising or confirming). The documentation requirements are also less tedious. Step-by-step process:
Buyer and seller agree to conduct business. The seller wants a letter of credit to guarantee payment.
Buyer applies to his bank for a letter of credit in favor of the seller. Buyer's bank approves the credit risk of the buyer, issues and forwards the credit to its correspondent bank (advising or confirming). The correspondent bank is usually located in the same geographical location as the seller (beneficiary).
Advising bank will authenticate the credit and forward the original credit to the seller (beneficiary).
Seller (beneficiary) ships the goods, then verifies and develops the documentary requirements to support the letter of credit. Documentary requirements may vary greatly depending on the perceived risk involved in dealing with a particular company.
Seller presents the required documents to the advising or confirming bank to be processed for payment.
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Advising or confirming bank examines the documents for compliance with the terms and conditions of the letter of credit.
If the documents are correct, the advising or confirming bank will claim the funds by:
Debiting the account of the issuing bank. Waiting until the issuing bank remits, after receiving the documents. Reimburse on another bank as required in the credit. Advising or confirming bank will forward the documents to the issuing bank. Issuing bank will examine the documents for compliance. If they are in order, the issuing bank will debit the buyer's account.
Issuing bank then forwards the documents to the buyer.
Parties to Letters of Credit
Applicant (Opener):
Applicant which is also referred to as account party is normally a buyer or customer of the goods, who has to make payment to beneficiary. LC is initiated and issued at his request and on the basis of his instructions.
Issuing Bank (Opening Bank) :
The issuing bank is the one which create a letter of credit and takes the responsibility to make the payments on receipt of the documents from the beneficiary or through their banker. The payments has to be made to the beneficiary within seven working days from the date of receipt of documents at their end, provided the documents are in Jagan Institute of Management studies Page 33
LOAN APPRAISAL accordance with the terms and conditions of the letter of credit. If the documents are discrepant one, the rejection thereof to be communicated within seven working days from the date of of receipt of documents at their end.
Beneficiary :
Beneficiary is normally stands for a seller of the goods, who has to receive payment from the applicant. A credit is issued in his favour to enable him or his agent to obtain payment on surrender of stipulated document and comply with the term and conditions of the L/c. If L/C is a transferable one and he transfers the credit to another party, then he is referred to as the first or original beneficiary.
Advising Bank :
An Advising Bank provides advice to the beneficiary and takes the responsibility for sending the documents to the issuing bank and is normally located in the country of the beneficiary.
Confirming Bank :
Confirming bank adds its guarantee to the credit opened by another bank, thereby undertaking the responsibility of payment/negotiation acceptance under the credit, in additional to that of the issuing bank. Confirming bank play an important role where the exporter is not satisfied with the undertaking of only the issuing bank. Negotiating Bank: The Negotiating Bank is the bank who negotiates the documents submitted to them by the beneficiary under the credit either advised through them or
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LOAN APPRAISAL restricted to them for negotiation. On negotiation of the documents they will claim the reimbursement under the credit and makes the payment to the beneficiary provided the documents submitted are in accordance with the terms and conditions of the letters of credit.
Reimbursing Bank :
Reimbursing Bank is the bank authorized to honor the reimbursement claim in settlement of negotiation/acceptance/payment lodged with it by the negotiating bank. It is normally the bank with which issuing bank has an account from which payment has to be made.
Second Beneficiary :
Second Beneficiary is the person who represent the first or original Beneficiary of credit in his absence. In this case, the credits belonging to the original beneficiary is transferable. The rights of the transferee are subject to terms of transfer.
TYPES OF LETTERS OF CREDIT

Revocable A revocable letter of credit is one which can be amended or cancelled by the applicant or the issuing bank at any time, without prior notice, discussion or agreement with the beneficiary. A revocable letter of credit offers no protection to the beneficiary and is seldom if ever used. That is in the relation with transferable loc.
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LOAN APPRAISAL Irrevocable An irrevocable letter of credit can not be amended or revoked without the agreement of ALL the parties to the letter of credit, so it provides the assurance that providing the beneficiary complies with the terms, he/she will be paid for the goods or services. Under UCP 500, a letter of credit is deemed irrevocable unless otherwise stated. Unconfirmed An unconfirmed irrevocable letter of credit provides a commitment by the issuing bank to pay, accept, or negotiate a letter of credit. An advising bank forwards the letter of credit to the beneficiary without responsibility or undertaking on its part except that it must use reasonable care to check the authenticity of the credit which it advised. It does not provide a commitment from the advising bank to pay, so the beneficiary is reliant upon the undertaking of the overseas bank. The beneficiary is not protected from the credit risk of the issuing bank nor the country risk. Confirmed A confirmed irrevocable letter of credit is one to which the advising bank adds its confirmation, makes its own independent undertaking to effect payment, negotiation or acceptance, providing documents are presented which comply with the terms of the letter of credit. The advising bank, which may also be the confirming bank, assumes the country (political and economic) risk of the applicants country as well as the credit risk, failure and default of the issuing bank and effects payment to the beneficiary without recourse. In order for a letter of credit to be confirmed, a bank accepting this risk would have a correspondent relationship with the issuing bank. If Jagan Institute of Management studies Page 36
LOAN APPRAISAL the advising bank does not have such a relationship, the letter of credit can be confirmed by an independent bank. The negative aspect here is the cost of adding another bank to the scenario. A seller should consider requesting a confirmed credit when The credit standing of the issuing bank is unknown to the seller or viewed by the seller as questionable. Exchange controls in the buyers country may prevent local banks from honouring certain external payments. The importing country is suffering economic difficulties: large external debt and/or high debt service ratios, a persistent negative balance of payments, or a record of being late or having defaulted on its international payments.
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LOAN APPRAISAL Transferable Credit Under a transferable letter of credit a beneficiary (the first beneficiary) can ask the issuing/advising/confirming bank to transfer the letter of credit in whole or in part to another party/ies such as supplier/s (second beneficiary/ies). A transferable letter of credit is usually used when the beneficiary is not the manufacturer/original supplier of some/all of the goods/services. This process enables the beneficiary to pay the manufacturer/original supplier by letter of credit. If the bank agrees, this bank, referred to as the transferring bank, advises the letter of credit to the second beneficiary/ies in the terms and conditions of the original letter of credit with certain constraints defined in Article 48 of UCP 500. In general, unless the letter of credit states that it is transferable, it is considered nontransferable. Assignment of Proceeds The right to the proceeds of a letter of credit can sometimes be assigned where the beneficiary of a letter of credit is not the actual supplier of all or part of the letter of credit and wants the bank to pay the supplier out of funds received from the letter of credit. The beneficiary may choose this option if he or she Does not want to request a transferable letter of credit from a buyer in order to keep the buyer from knowing who is the actual supplier of the goods. Does not have the necessary credit with the bank to issue a new letter of credit to a supplier. Jagan Institute of Management studies Page 38
LOAN APPRAISAL An assignment of proceeds takes the form of an irrevocable instruction from the beneficiary to the bank requesting that it pay the supplier out of the proceeds of the letter of credit which becomes due when documents are presented in compliance with the terms of the letter of credit. Revolving Although infrequently used today, revolving letters of credit were a tool created to allow companies conducting regular business to issue a letter of credit that could roll-over without the company having to reapply, thus enabling business flow to continue without interruption as long as the terms and conditions, quantities, and other transaction details did not change. In addition, if a letter of credit were a revolving one, there were few ways to stop it from rolling over; so, should a conflict arise between the parties while the letter of credit was in place or should the products change, there was little recourse for either party. In the business world today, the fact is that, unless required by law or because of high risk, on-going business is usually conducted without of letters of credit
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LOAN APPRAISAL Standby As is the case with the revolving letter of credit, standby letters of credit are infrequently used today. A standby letter of credit is one which is issued as a back-up or form of insurance for the seller should the buyer default on the agreed-upon payment terms. A standby letter of credit is issued in the same way a documentary credit is in that the collateral needed for issuance is required by the issuing bank and the beneficiary must comply with every detail as outlined in the letter of credit. The problem with this instrument is that the applicant has no guarantee, other than the sellers word, that the standby will not be drawn against even if payment is made as agreed. This situation is challenging, especially if the letter of credit is confirmed and the advising bank sees only documents pertaining to the shipment as outlined in the letter of credit and has no knowledge of other payments being made
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LOAN APPRAISAL
TYPES OF CHARGES
LIEN
A legal claim against an asset which is used to secure a loan and which must be paid when the property is sold. Liens can be structured in many different ways. In some cases, the creditor will have legal claim against an asset, but not actually hold it in possession, while in other cases the creditor will actually hold on to the asset until the debt is paid off. The former is a more common arrangement when the asset is productive, since the creditor would prefer that the asset be used to produce a stream of income to pay off debt rather than just held in possession and not used. A claim can hold against an asset until all the obligations to the creditor are cleared (a general lien), or just until the obligations against that particular assets are cleared (a particular lien).
PLEDGES
Sometimes called bailment, pledges are a form of security to assure that a person will repay a debt or perform an act under contract. In a pledge one person temporarily gives possession of property to another party. Pledges are typically used in securing loans, pawning property for cash, and guaranteeing that contracted work will be done. Every pledge has three parts: two separate parties, a debt or obligation, and a contract of pledge.
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LOAN APPRAISAL HYPOTHECATION
Generally, a hypothecation is a contract which pledges or creates a lien on collateral to secure a debt, where the debtor keeps possession of the collateral. The arrangement is common with modern mortgages and the financing of business equipment and some consumer goods purchases - the borrower retains legal ownership of the property but provides the lender with a lien over the property until the debt is paid off.
MORTGAGE
A debt instrument that is secured by the collateral of specified real estate property and that the borrower is obliged to pay back with a predetermined set of payments. Mortgages are used by individuals and businesses to make large purchases of real estate without paying the entire value of the purchase up front.
Mortgages are also known as "liens against property" or "claims on property".
EQUITABLE CHARGE
A fixed equitable charge confers a right on the secured party to look to (or appropriate) a particular asset in the event of the debtor's default, which is enforceable by either power of sale or appointment of a receiver. It is probably the most common form of security taken over assets. Technically, a charge (or a "mere" charge) cannot include the power to enforce without judicial intervention, as it does not include the transfer of a property proprietary interest in the charged asset. If a charge includes this right (such as private sale by a receiver), it is really an equitable mortgage (sometimes Jagan Institute of Management studies Page 42
LOAN APPRAISAL called charge by way of mortgage). Since little turns on this distinction, the term "charge" is often used to include an equitable mortgage. An equitable charge is also a non-possessory form of security, and the beneficiary of the charge (the chargee) does not need to retain possession of the charged property. Where security equivalent to a charge is given by a natural person (as opposed to a corporate entity) it is usually expressed to be a bill of sale, and is regulated under applicable bills of sale legislation. Difficulties with the Bills of Sale Acts in Ireland, England and Wales have made it virtually impossible for individuals to create floating charges.
FLOATING CHARGE
Floating charges are similar in effect to fixed equitable charges once they crystallise (usually upon the commencement of liquidation proceedings against the chargor), but prior to that they "float" and do not attach to any of the chargor's assets, and the chargor remains free to deal with or dispose of them.
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LOAN APPRAISAL
ASSIGNMENT.
Assignment occurs when someone who has written, or sold, a listed option receives a notice that the option has been exercised and he or she must fulfill the terms of the contract by buying the underlying instrument if the option was a put or selling the underlying instrument if the option was a call. Assignment also means transferring property you own, such as stock and real estate, to someone else by using the document that's appropriate to the type of property. Similarly, property of a financially troubled entity can be assigned, or transferred, to a creditor and sold to offset losses.
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LOAN APPRAISAL
CHAPTER 5
CREDIT APPRAISAL AT INDIAN OVERSEAS BANK
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LOAN APPRAISAL
Basic flow diagram

Relationship Manager Relationship Officer DGM/CGM (According to their DOP)
Credit Officer Mumbai HQs

(if DGM/CGM both doesnt have the DOP)
Loan Approved
Loan Disbursed.
Credmin Officer
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LOAN APPRAISAL
PROCESS OF APPRAISAL IN IOB:
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LOAN APPRAISAL
OVERALL PR
Page 48
Potential customers
LOAN APPRAISAL
Responsibilities and the operational accountabilities of Relationship Manager:
Identifying and establishing the business relationship for SME. Identify potential trade finance business and pass on the lead to TPG. Identify potential sale of third party products for example insurance products, mutual funds etc)
Meet overall targets for the branch and implement action plan to achieve the sales target of the branch
Coordinate to the RO (PROCESSING) for sourcing of business. Devising and implementing a customer acquisition and retention programme. Help planning a structured marketing strategy to improve and increase
presence of IDBI in SME banking segment. Deepen relationship & sell third party products. Feedback to product team for new product development.
Compliance:
Adhere to regulatory compliance and banks policies and procedures. Page 49
LOAN APPRAISAL
Operations:
Submitting to RO (PROCESSING) all papers for preparation of credit appraisal. Coordinate with RO for servicing clients. Providing inputs to RO(Processing) in preparing the credit appraisal the required documents and
Roles and Responsibilities of credit officer:
Credit officer will be based at the entire SME centre. Co would be responsible for verifying the credit appraisal and finalizing the terms and conditions before submitting to appropriate authority for sanction.
Operations
Verification of credit appraisal and rating initiated by the RO by new and existing proposals. Coordination with relationship officer-processing (Maker) and Relationship manager for matters pertaining to credit appraisal. Responsibility as checker under credit Appraisal and rating model (CART) for SME proposals. Finalization of terms and conditions in consultation with branch office,
RO/RM and customers/borrowers
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LOAN APPRAISAL Identification of credit risks and appropriate mitigants to Rating Exercising DoP (for cases within his/her DoP) and recommending the proposal to appropriate delegated authority for sanction. Conveying the credit decision to credmin for post sanction process. Submission of relaxation in key terms and conditions to the appropriate sanctioning authority.
Compliance
Adhere to regulatory compliance and banks policies and procedures related to appraising of loan prosposal and ensuring compliance with exposure norms.
People Management:
Identify and address training needs of the team members on an ongoing basis Address critical issues and potential conflicts for any proposal in a candid and timely manner.
Roles and Responsibilities of CREDMIN Officer:
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LOAN APPRAISAL Credmin will be based at all the CSCs. The Credmin officer will be ensure compliance with legal procedures, documentation, disbursement of funds into loan accounts and monitoring.
Operations :
Issue sanction letter to the borrower as per the sanctioned terms and conditions of the proposal. Coordinate with IOB approved values for carrying out valuation of security offered by the borrower. Execution of documentation and maintain the documents under joint safe custody. Responsible for all documents stored at the security locker. Ensure that the review/renewal Credit Application is forwarded to Credit Officer by the concerned Relationship Manager/Relationship officer before the due date and mentioning the operations & conduct of the account. Monitor, conduct and ensure that the inspections/plant visits are carried out as per the prescribed schedule. Ensure that adequate insurance cover is in place for all the secured advances and that the policy has the requisite endorsement in the banks favour
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LOAN APPRAISAL
LIST OF DOCUMENTS REQUIRED (PRE SANCTION)
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LOAN APPRAISAL
S NO 1 2 3 4 5
L B
S N
C to
LOAN APPRAISAL
CASE STUDY: M/S. PINAK MARKETING PVT. LTD.
Branch: Region:
Pitampura New Delhi
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LOAN APPRAISAL Account: Activity: Industrial classification: M/S. Pinak Marketing Pvt. Ltd. Trading in Iron Steel, Alloys and metals Trade credit
PURPOSE OF NOTE:
Sanction of following fresh limits. (Rs. In Crores)
Nature of Limit/ facility Cash credit NFB: LC/LG
Purpose Existing Revised (+)/ limits limits (-)
margin
Interest % Applicable rate
Interest % Proposed 13.75% p.a. Co As in Co circulars in force per
Working NIL capital Letter of NIL credit (I/F)
1.50
+1.50 25% stocks BPLR+1.75% 50% Book p.a.
(1.00)*
Debts 25%
(TR-3) As per circulars force
*Letter of credit with in CC limit Total NIL 1.50 +1.50 Sanction for (modification in sanction terms/release of security/guarantee concessions in margin, interest etc.): 25% - stocks, 50% - book debts, L/C = 25% margin.
GAURANTEE AND THEIR NET WORTH:
Name Age Mr. Jai Pansari S/O Late 41 shri Prabhu Dayal Pansari (DOB: 05.04.69)
Address A -0 13
Worth Lok 60.54
As on 11.05.10
Vihar Pitampura, Page 56
LOAN APPRAISAL (Pan No. AAHPP****L) Smt. Sarika pansari W/O 35 Shri Jai pansari (DOB: 03.11.76) New delhi - 34 -do81.37 11.05.10
Pan no. ALDPP****G) Corporate guarantee, if any (with TNW): NIL
BACKGROUND
About the company M/s X.Y.Z Enterprises is incorporated on 22.10.2008. The business of the company has started from January 2009. The registered office of the unit is situated at B-8/705, GD ITL Tower, Netaji Subhash Place, Pitampura, New Delhi-110034. The Branch Office of the unit is situated at village Tooran, Amloh Road, Mandi Gobindgarh(Punjab). The unit is engaged in trading of iron and steel business. Mainly engaged in trading of Ferro, Silicon, Slag and steel ingots. The company is purchasing stock from Jindal steel company ltd. And SAIL and selling the same to various parties in and around Punjab, Delhi and NCR regions. The company has opened Current Account No.379 on 20.11.2008 with us and banking with our Mandi Gobindgarh Branch (Br. Code: 1601), Punjab. The company is not enjoying any credit facility from any bank/FIs. The operation and conduct of account is satisfactory.
Promoters:
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LOAN APPRAISAL Mr. Jai Pansari is the key promoter, who is trhe director pf the ompany, having 41 years of age. He is a B.Com graduate, young and energetic person having 10 years of experience in the same line of activity.
Smt. Sarika Pansari is the wife of Mr. jai pansari is also the director of the company aged 35 years. She is a B.A. graduate. She is also the director of the company having 5 years of experience in the line of activity.
Banking Arrangements:
The company has opened a current account No.379 on 20.11.2008 with us and also banking with our Mandi Gobindgarh branch, Punjab. The company not enjoying any credit facility from any bank/FIs. The operation and conduct of the accoubt is satisfactory. Share Holding Patterns: Name Mr. jai pansari Mrs. Sarika pansari No. of Shares 5000 @ Rs. 10/5000 @ Rs. 10/Amount (Rs.) 50000 50000
BRIEF FINANCIAL INDICATORS OF SUBJECT COMPANY:

(Rs. In Lakhs) Period ended Net Sales Operating Profit Net Profit After Tax Cash Generation 31.03.09 Audited 00 -0.06 0.01 0.01 31.03.10 Audited 403.31 1.03 0.78 1.14 31.03.011 30.09.12
Provisional Projection 2000.00 2500.00 19.68 14.65 15.05 41.70 34.35 34.70 Page 58
LOAN APPRAISAL Net Working Capital Current Ratio TNW TOL/TNW Term Liability/TNW Gross Fixed assets Term Loan 1.81 91.50 0.81 1.26 1.23 N/a 137.15 101.85 1.65 84.61 83.78 177.32 2.09 39.65 7.62 3.53 197.27 2.20 59.35 5.31 2.36
ABRIDGED FINANCIAL POSITION
Year ending Audit Status LIABILITIES - Capital and reserves - Long Term Liabilities - Current Liabilities - TOTAL LIABILITIES ASSETS - Fixed Assets - Non Current Assets - Current Assets - Intangible Assets - Total assets
31.03.0 9 Audited 1.00 1.00 0.02 2.02 0.00 0 1.83 0.19 2.02
31.03.10 Provisional 1.79 138.24 1.36 141.39 2.74 0 138.51 0.14 141.39
31.03.11 Estimate 39.65 140.00 162.30 341.95 2.33 0 339.62 0 341.95
31.03.12 Projections 59.35 140.00 164.50 363.85 2.08 0 361.77 0 363.85
Interpretation of Key Financial Figures
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LOAN APPRAISAL Net Sales: The company is engaged in trading of Iron and Steel Business. The business of the started from January 2009. In the first full year of operation from 01.04.09 to 31.03.10 the company has achieved sales of Rs. 403.31 lacs as per provisional financials. Accordingly they have estimated sales of Rs. 2000.00 lacs as on 31.03.11 which is 395.90% increase as compared to previous year and projected sales of Rs. 2500 lacs as on 31.03.12 which os 25% increase as compared to previous year. During the current year the company has achieved the sales of Rs. 143.23 lacs upto 10.05.2010 and requested for CC limit of Rs.1.50 crore to expand their business operation. The directors are more confident to achieve the estimated as well as projected sales and hence accepted.
Net Profits: The company in their first full year of operation has earned a profit of Rs.0.78 lacs as on 31.03.10 which is 0.19% of the total sales. Accordingly they have estimated profits of Rs.14.65 lacs as on 31.03.11 which is 0.73% of the sales which are acceptable as sales are achievable.
TNW: The TNW of the company is at Rs.1.65 lacs as on 31.03.10 is estimated to be improved to Rs.39.65 lacs as on 31.03.11, due to infusion of capital to the tune of Rs.24.00 lacs and plough back of profits into the business and hence accepted.
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LOAN APPRAISAL TOL/ TNW: TOL/TNW ratio is at 84.61 as on 31.03.10 provisional financials, due to low TNW, but the company has taken unsecured loan from their associate concern to the tune of Rs.137.24 lacs which is to be pegged in the business, with the effect of USL the ratio comes to 0.01 for the same period which is accepted.
CR/NWC: The company not availed any credit facilities from any bank/FIs so far, as such the CR is at 101.85 as on 31.03.10. Now they proposed to CC limit of Rs.1.50 crore from us the same is estimated at 2.09 as on 31.03.11 and projected at 2.20 as on 31.0312 which are well above the bench mark level of 1.33 and hence accepted.
COLLATERAL SECURITY DETAILS:
1. Nature of security: Equitable mortagage of free hold entire second floor without roof rights of the property No. A-13, lok Vihar, Pitampura, delhi-34, in the name of Mr. jai pansari, mearuring 390.36 sq. yards.
2. Market value: Proposed: 3.00 lacs (as per prevailing market rates).
3.
Valuation: Page 61
LOAN APPRAISAL Valuation will be obtained before the release of limits. Legal opinion of Mr. Priya Ranjan dated 05.05.2010 has been obtained.
4. % of security cover; 200% of the security is covered.
RISK ANALYSIS
Critical risk factor: the paid up capital of the company is Rs. 1.00 lac which is very low. Mitigation: The company will infuse fresh capital of Rs. 24.00 lacs on or before
31.03.2011 to improve the paid up capital.
SWOT ANALYSIS
Strength: The Sales of the company is improving now. The promoter/directors are well experienced in this activity.
Weakness: The capital base of the company is very low. The party has been suitably advised to improve their capital.
Opportunities: With the availability of bank finance the company can expand their business operations. Can also import from overseas at competitive rates.
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LOAN APPRAISAL
Threats: Competition from similar type of businesses. Frequent fluctuations in steel prices will reduce the margin of the company. Government policy can adversely affect the companys operation.
ACCEPTABILITY OF INVENTORY HOLDING:
Holding level
31.03.10 Provisional RM/SIP/FG 1.99 Sundry debtors 0 Sundry creditors 0 Their is no past data is available for
31.03.11 31.03.12 Accepted Level Estimated Projected 1.09 0.95 1.09 0.69 0.59 0.69 0.06 0.06 0.06 comparison and the subjects has now decided to
give more credit to the party for achieving the estimated sales and hence the sundry debtors level of 0.69m is acceptable. The stocks level has been maintained at 1.09m and sundry creditors level is at 0.06m has also been accepted.
ASSESSMENT OF MPBF(maximum Permissible Bank Finance):
AS PER NAYAK COMMITTEE METHOD; Parameters a. Projected sales as on 31.03.11 b. Eligible finance 25% of (a) c. Margin Required 5% of (a) d. Available NWC as on 31.03.11 Permissible bank finance (b-c or d whichever is higher) Amount 2000.00 500.00 100.00 177.32 322.68
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LOAN APPRAISAL
AS PER SECOND METHOD OF LENDING:

Assessment of working capital (Rupees in lacs) Parameters Accepted sales for 2010-11 Current assets: Raw materials : Work in progress : Finished goods : Consumable stores : Receivables- Domestic : receivables- exports : Other current assets Total current assets (A) Current liabilities: sundry creditors : Other Current liabilities Total Current liabilities (B) Working Capital gap (A B) Less; Margin 25% on TCA (excl Export Receivables) or Projected NWC as on 31.03.11 whichever is more (D) Maximum permissible bank finance Short fall i9n NWC Limit may be considered for sanction Limit requested by the subjects Branch recommendation ===
Months 1.09 0 0 0 0.69 0 === 0.06 === ===
Amount 2000.00 175.00 0 0 0 115.00 0 49.62 339.62 10.00 2.30 12.30 327.32 25% of TCA= 84.91 NWC= 177.32 177.32 NIL 150.00 150.00 150.00
STRUCTURE OF LIMITS WITH SPECIFIS COMMENTS ON MARGIN AND SUBLIMITS;
Stocks Raw material Stock in progress Finished goods Total Stocks Less: Creditors/Stock L.C. Paid Stocks Less: margin 25% Drawing Power Months Rs. lacs 1.09 175.00 0 of 0.06 0.00 175.00 10.00 165.00 41.25 123.75
Book Debts Receivables Acceptable level Months 0.69 0.69 Rs. Lacs 115.00 115.00
Less: margin 50% Drawing power
57.50
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LOAN APPRAISAL Total drawing power comes to rs. 181.25 lacs against which we recommend for sanction of CC limit of Rs.1.50 crores with L/C limit of Rs.1.00 crore with in CC limit.
ASSESSMENT OF NON FUND BASED FACILITY;
The subjects have requested for letter of credit limit of 100 lacs for import of raw material from abroad which we recommend for sanction. Amount (Rs. In Average Purchases during the year against L/C Lead time (Days) Transit Time Usance Period Total Time of One Cycle No. Of Cycles in a year Purchases per cycle Rounded Off Lacs) 900.00 5.00 15.00 40.00 60.00 6.08 147.95 148.00
(Rs. In lacs) Purchases per cycle Less: margin 25% Permissible bank Finance 148.00 37.00 111.00
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LOAN APPRAISAL
OTHER TERMS & CONDITIONS:
The statement of book debts is to be submitted on monthly basis before 7 th of the succeeding month to which it belongs, indicating bookdebts outstanding upto 90 days and for more than 90 days and slow moving stocks.
Inspection of the stocks shall be conducted on monthly basis at various places, where the stocks are stored and the cost of such inspection shall be born by the company.
Prime as well as collateral securities to be insured for the full value with banks clause for all possible risks.
The company shall deal exclusively with us and will not open any account in any other bank without prior permission.
Processing charges of Rs.30600/- and mortgage charge of Rs.5600/- to be recovered.
Commitment charges on the unutilized portion of the working capital liomits shall be levied as per existing norms of the bank.
The company shall submit audited financial statements with in 6 months of the close of its financial year.
An undertaking letter to be submitted as per CIBIL format from the borrower/guarantor to be obtained.
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LOAN APPRAISAL During the currency of the bank credit facility, the borrowers shall not, without prior approval of the bank in writing, o Affect any change in their capital structure, which may affect bank interest adversely. o Formulates any scheme of amalgamation or reconstruction. o Undertake any new project or make any capital investment other than those projected in the CMA data, without obtaining the banks approval. o Undertake guarantee obligations on behalf of any other borrower. o Enter into any contractual obligation of a long term nature affecting the borrower financially to a significant extent o Permit any transfer of the controlling interest or make any drastic change in the managements set up. o Divert/utilize banks funds to other sister/associate/group concern. The company to infuse fresh capital of Rs.24.00 lacs before 31.03.11 and to maintain unsecured loan of Rs.140.00 lacs during the currency of the loan. All other formalities as per books of instructions/ manual on documentation/ circulars issued from time to time are to be complied with.
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LOAN APPRAISAL
CMA SHEET FOR M/S X.Y.Z ENTERPRISES

INDIAN OVERSEAS BANK BRANCH: PITAMPURA A/C: M/S PINAK MARKETING PVT LTD.
OPERATING STATEMENT
(RS. IN LACS) AUDITED PROVISIONAL ESTIMATED PROJECTED 31.03.09 31.03.10 31.03.11 31.0312 403.31 0.00 0.00 403.31 403.31 2000.00 2000.00 2000.00 2500 2500 2500
DOMESTIC SALES - GROSS LESS: EXCISE DUTY DOMESTIC SALES NET EXPORTS TOTAL SALES COST OF SALES OPENING STOCK: FINISHED GOODS : WORK IN PROGRESS SEMI FINISHED GOODS FINISHED GOODS PURCHASED RAW MATERIAL : OPENING STOCK ADD: RAW MATERIALS PURCHASES ADD: FOREIGNEXCHANGEDIFFERENCE LESS: RAW MATERIAL CLOSING STOCK RAW MATERIAL CONSUMED STORES CONSUMED MANUFACTURING EXPENSES DEPRECIATION (Machinery & Fac. Building) LESS CLOSING STOCK : FINISHED GOODS : WORK IN PROGRESS COST OF PRODUCTION COST OF SALES
0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
0.00 0.00 0.00 0.00 0.00 439.09 62.55 376.54 0.00 13.92 0.36 0.00 0.00 390.82 390.82
0.00 0.00 0.00 0.00 62.55 2038.95 175.00 1926.50 0.00 0.40 0.00 0.00 1926.90 1926.90
0.00 0.00 0.00 0.00 175.00 2422.00 190.00 2407.00 0.00 0.35 0.00 0.00 2407.35 2407.35
GROSS PROFIT (+)/ LOSS(-) SELLING & ADMINISTRATIVE EXPENSES INTEREST & OTHER FINANCIAL CHARGES - TL WC DEPRECIATION ON OTHER ASSETS SUB TOTAL OPERATING PROFIT (+)/ LOSS (-)
0.00 0.06 0.00 0.00 0.06 -0.06
12.49 7.91 3.55 0.00 11.46 1.03
73.10 23.42 30.00 0.00 53.42 19.68
92.65 15.95 35.00 0.00 50.95 41.70
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LOAN APPRAISAL
OTHER INCOME LESS: OTHER EXPENSES SUB TOTAL PROFIT BEFORE TAX (+)/ LOSS(-) INCOME TAX PROVISION NET PROFIT AFTER TAX (+)/ LOSS(-) DIVIDENDS RETAINED PROFITS CASH ACCRUAL 0.12 0.06 0.07 0.01 0.01 0.00 0.01 0.01 0.07 0.05 0.02 1.05 0.27 0.78 0.00 0.78 1.14 1.20 0.00 1.20 20.88 6.23 14.65 0.00 14.65 15.05 1.50 0.00 1.50 43.20 8.85 34.35 0.00 34.35 34.70
ANALYSIS OF BALANCE SHEET

AUDITED PROVISIONAL ESTIMATED PROJECTED 31.03.09 31.03.10 31.03.11 31.0312 ASSETS CURRENT ASSETS: STOCKS: A) R M Indigenous - Imported - Raw Material B) Stock In Progress C) Finished Goods D) Consumable Spares TRADE DEBTORSOther Than Export<6 Months - Export Receivables OTHER THAN CURRENT ASSETS TOTAL CURRENT ASSETS FIXED ASSETS A) Land And Building B) Plant & Machinery C) Capital Work In Progress D) Sundries GROSS FIXED ASSETS LESS: DEPRICIATION TO DATE NET FIXED ASSETS INTANGIBLES Pre Expense Not Written Off -P & L A/C Losses -Deffered Tax Assets -Dr Balances In Partners A/C TOTAL INTANGIBLES TOTAL ASSETS LIABILITIES CURRENT LIABILITIES Bank Borrowings IOB(Cc & Pc)
0.00 0.00 0.00 0.00 0.00 0.00 1.83 1.83
0.00 62.55 0.00 0.00 0.00 0.00 75.96 138.51
0.00 175.00 0.00 0.00 115.00 0.00 49.62 339.62
0.00 190.00 0.00 0.00 122.00 0.00 49.77 361.77
3.10
2.73
2.43
0.00 0.00 0.00 0.19
3.10 0.36 2.74 0.14
2.73 0.40 2.33 0.00
2.43 0.35 2.08 0.00
0.19 2.02
0.14 141.39
0.00 341.95
0.00 363.85
0.00
150.00
150.00
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LOAN APPRAISAL
-IOB (Bills Purchase A/C -Other Banks TOTAL BANK BORROWINGS OTHER SHORT TERM BORROWINGS SUNDRY CREDITORS FOR PURCHASE OTHER CURRENT LIABILITIES CURRENT LIABILITIES OTBB TOTAL CURRENT LIABILITIES DEFFERED LIABILITIES A) Term Loan Excl. Inst. Due With In Year B) Others USL From Friends & Relatives C) Others USL Etc From Directors TOTAL DEFFERED LIABILITIES TOTAL OUTSIDE LIABILITIES CAPITAL & SIRPLUS A) Paid up capital B) reserves & Surplus NET WORTH TOTAL LIABILITIES TATAL ASSETS ANALYTICAL &COMPARATIVE RATIOS AUDITED PROVISIONAL ESTIMATED PROJECTED 31.03.09 31.03.10 31.03.11 31.0312 A) FINANCIAL, INDICATORS TANGIBLE NET WORTH FUNDED DEBT / TNW TOTAL OUTSIDE LIABILITIES / TNW NET WORKING CAPITAL TOL/TNW+USL TOL-USL/TNW+USL CURRENT RATIO STOCK HOLDINGS RAW MATERIALS: INDEGENEOUS : IMPORTED : TOTAL MONTHS CONSUMPTION STOCK IN PROGRESS MONTHS COST OF PRODUCTION FINISHED GOODS MONTHS COST OF SALES OTHER CONSUMABLE SPARES SUNDRY DEBTORS MONTHS SALES CREDITORS FOR PURCHASES MONTHS PURCHASES TURNOVER RATIO (SALES/CA) B) PROFITABILITY RATIO: NET SALES % RISE(+) / FALL(-) OVER LAST YEAR OPERATING PROFIT / SALES (%) NET PROFIT / SALES (&) 0.61 1.23 0.26 1.81 0.56 0.01 91.50 0.00 0.00 0.00 #DIV/0! 0.00 #DIV/0! 0.00 #DIV/0! 0.00 0.00 #DIV/0! 0.00 #DIV/0! 0.00 1.65 63.78 84.61 137.15 1.00 0.01 101.85 0.00 0.00 62.55 1.99 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 2.91 39.65 3.53 7.62 177.32 1.68 0.90 2.09 0.00 0.00 175.00 1.09 0.00 0.00 0.00 0.00 0.00 115.00 0.69 10.00 0.06 5.89 59.35 2.36 5.13 197.27 1.53 0.83 2.20 0.00 0.00 190.00 0.95 0.00 0.00 0.00 0.00 0.00 122.00 0.59 12.00 0.06 0.91
0.00 0.00 0.02 0.02 0.02
0.00 0.00 1.36 1.36 1.36
150.00 10.00 2.30 12.30 162.30
150.00 12.00 2.50 14.50 164.50
II (I II)
1.00 1.00 1.02
137.24 1.00 138.24 139.60
140.00 140.00 302.30
140.00 140.00 304.50
1.00 0.00 1.00 2.02 2.02
1.00 0.79 1.79 141.39 141.39
25.00 14.65 39.65 341.95 341.95
25.00 34.35 59.35 363.85 363.85
0.00 0.00 #DIV/0! #DIV/0!
403.31 0.26 0.19
2000.00 395.90 0.98 0.73
2500.00 25.00 1.67 1.37
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LOAN APPRAISAL
NET PROFIT / TNW (&) C) BANK FINANCE: TOTAL BANK BORROWINGS % OF INCREASE OVER LAST YEAR 1.23 47.27 36.95 57.88
0.00 0.00
0.00 #DIV/0!
150.00 #DIV/0!
150.00 0.00
1FINDINGS 1: The financial performance and other ratios are appropriate and as per terms & conditions of the bank and hence this case stands sanctioned. 2: Also the company agree to all terms and conditions and have paid all preliminary
expenses eg 0.50% of processing fee, legal fee, and documentation charges.
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LOAN APPRAISAL
Problems fac
Major issues enterprise.
categories, th
LOAN APPRAISAL
SUGGESTIONS AND RECOMMENDATIONS

Government has asked to public sector to achieve a minimum 20% on year growth in funding in SMEs, which will lead to doubling of credit to the sector from Rs. 67000 crores in yr 2004-05 to Rs.13500 crores by 2009-10. To achieve this target of 20 % growth the government has to change its focus from service sector to manufacturing sector. Continuous dialogue and interaction in various trade industry and SME organizations in Japan, Korea, Taiwan, Europe, Singapore and Hong Kong. Concentrate on Exports and world market. Faster processing of Loans. Encouraging OTS (one time settlement) in case of default to reduce NPAs (non performing assets) of Bank. Thus SME financing can be promoted in a big way by creation of enabling regulatory and institutional framework, helping Banks in mitigating risks and promoting market linkage programme for SMEs. Also shifting focus from service sector to manufacturing sector help the economy to grow at a faster pace
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LOAN APPRAISAL
BIBLIOGRAPHY
- KHAN M.Y. (FINANCIAL MANAGEMENT). - PRINCIPLES OF CORPORATE FINANCE, BREALY AND MYER,7TH EDITION - PANDEY .I M . (FINANCIAL MANAGEMENT). - WWW.RBI.ORG.IN - THE ECONOMIC TIMES - THE MINT - THE HINDU, SURVEY OF INDIAN INDUSTRY 2006-07.
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LOAN APPRAISAL
APPENDICS
FORMULAS AND CALCULATIONS
1)
TOTAL OUTSIDE LIABILITIES
Total Liabilities - Owners Funds.
2)
TANGIBLE NET WORTH
Total Assets - Total outside Liabilities.
3)
NET WORKING CAPITAL
Current Assets - Current Liabilies.
4) CURRENT RATIO
Current Assets Current Liabilities.
5) INTREST COVERAGE RATIO
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LOAN APPRAISAL PBDIT / Interest & Financial Charges.
6) GROSS CASH ACCRUALS
PAT+ Depreciation +Misc Expenditure Written off + Non Cash Expenditure.
7) DSCR( DEBT SERVICE RATIO)
PBDIA Interest + Term Loan instalments
PBDIA = (PAT+ Depreciation+ Interest on Long Term Loan + Extra ordinary Expenses extra ordinary Incomes)
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LOAN APPRAISAL

SUMMER INTERNSHIP PROJECT REPORT ON

LOAN APPRAISAL OF SMALL AND MEDIUM ENTERPRISES

JAGAN INSTITUTE OF MANAGEMENT STUDIES

SUBMITTED BY: SHIKHA GOYAL PGDM, BATCH 2009-11

Mr. ARNAB GHOSH (CRMC MENTOR: JIMS)

SHIKHA GOYAL PGDM, BATCH 2009-11

SHEENA MANCHANDA (FACULTY MENTOR: JIMS)

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OBJECTIVE OF UNDERTAKING THE PROJECT

There are certain objectives of my project as follows

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BANKING STRUCTURE IN INDIA

Scheduled Banks in India

Public Sector Banks

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Regional Rural Banks

Private Sector Banks

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8.4 7.7 6.6

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SME Growth Page 18

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2007: IOB took over Bharat Overseas Bank.

PRODUCTS AND SERVICES OF INDIAN OVERSEAS BANK

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IOB's commitment for social causes Page 23

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Agricultural short time loans Financial inclusion Agri business consultancy

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CREDIT FACILITIES PROVIDED IN IOB

1) FUND BASED. Working Capital

- Cash Credit. - Bill Purchasing & Discounting

Term Loan - Against Fixed Assets.

3) Working Capital Requirement

5) Security ( in form of) Pledge.

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LOAN APPRAISAL Hypothecation. Mortgage.

Parameters of Loan Appraisal

B: Position of Unit in Industry/Market Share

- Market Share. - Position in the market. - Brand image

E: Management exp/ Past Track Record.

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H: Return on Capital & Assets.

I: Projections / Estimates whether achievable or not.

Fund based lending:

Non-fund based lending:

Types of Non-fund based lending

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1. Working Capital Finance