PROJECT REPORT

ON

{Commercial Credit Appraisals}

“It Revolves around Character, Collateral & Capacity”

FOR

{HDFC Bank}

BY

()

Submitted in partial fulfillment of requirements for award of

Post Graduate Diploma in Management

ATHARVA SCHOOL OF BUSINESS

Marve Road, Charkop Naka, Malad (W), Mumbai 400 095

DECLARATION

I hereby declare that the Project titled "{Commercial Credit Appraisals With HDFC Bank Ltd}" submitted as a part of the study of Post Graduate Diploma in Management (PGDM) is my original work. The Project has not formed the basis for the award of any other degree, diploma, associate ship, fellowship or any other similar titles.

Place: Mumbai

Date:

CERTIFICATE

This is to certify that () has completed the Project "{Commercial Credit Appraisals}" under the guidance of Prof. in partial fulfillment of the requirements for the award of Post Graduate Diploma in Management for the academic period 2009-11.

Signature of the Guide Signature of the Director

Place: Mumbai

Date:

ACKNOWLEDGEMENTS

I take this opportunity to express my gratitude and extend my thanks to all those whose help and guidance made this endeavor successful.

I extend my sincere thank to Shri Sunil Rane, Executive President, Atharva Education Trust; Shri N. S. Rajan, Dean, and Dr. S. K. Bhattacharya, Director, Atharva School of Business, for providing me the opportunity to work on this Project. I also thank my Project Guide, Prof. Manisha Sanghvi, for giving her support and guidance in successful completion of the Project.

I cannot end this page without thanking my family for their encouragement and support while undertaking this Project.

EXECUTIVE SUMMARY

< This page is to be written at the end of completion of the Project, giving an overview and summary of the Project>

TABLE OF CONTENTS

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List of Annexure

List of Tables

List of Figures

AN OVERVIEW

Banking Sector

There have been major structural changes in the financial sector since banking sector reforms were introduced in India in 1992. Since then Banks have been lending aggressively providing funds towards infrastructure sector. Major policy measures include phased reductions in statutory pre-emption like cash reserve and statutory liquidity requirements and deregulation of interest rates on deposits and lending, except for a select segment. The diversification of ownership of banking institutions is yet another feature which has enabled private shareholding in the public sector banks, through listing on the stock exchanges, arising from dilution of the Government ownership. Foreign direct investment in the private sector banks is now allowed up to 74 per cent.
The co-existence of the public sector, private sector and the foreign banks has generated competition in the banking sector leading to a significant improvement in efficiency and customer service.

The rapid turnaround, after the global financial crisis induced slowdown, evidences the resilience of the Indian economy as well as Indian banking system. The monetary and fiscal stimulus measures initiated in the wake of the global financial crisis, which included appropriate steps taken by the Government as well as RBI, in mitigating the adverse impact from contagion and ensuring that the financial sector in general and banking sector in particular tide over the global financial crisis. Over the last several years, RBI has undertaken wide ranging financial sector reforms which ensured stability of the Indian banking system in times of global crisis which underlines the significance of the regulatory regime in India. The banking industry recorded deposit growth of 17%. The subdued growth in deposits of the banking industry reflected the higher growth in currency demand during the year. The disparity between the growth rate of credit and aggregate deposits of banking industry widened during the year. With economic growth consolidating around the pre-crisis levels, credit growth continued at an accelerated pace. On account of rise in bank credit and correspondingly lower deposit growth, banks investments in Government bonds and other approved securities was relatively lower.

MONETARY POLICY HIGHLIGHTS (update the data as per date)

In the RBI Monetary Policy issued, RBI strongly expressed its view that controlling inflation is imperative to sustaining growth over the medium-term. As such, RBI signaled that the conduct of monetary policy will continue to condition and contain perceptions of inflation in the range of 4.0-4.5% to be in line with the medium-term objective of 3.0% inflation consistent with India’s broader integration into the global economy. Instead of its earlier calibrated approach to fighting inflation, RBI took a large step hiking key policy rates by 50 basis points. Accordingly, the Repo and Reverse Repo rates have moved up to 7.50% and 6.50% respectively. RBI has moderated its GDP growth projection around 8% for F.Y. 2011-12 from the 8.6% last year. Money supply (M3 growth) has been estimated at 16%. Aggregate bank deposit growth is projected at 17% and bank credit growth at 19%. WPI Inflation has been estimated at 6% with an upward bias for end March 2012.

Objective of Study

Offering credit is an operation fraught with risk. Before offering credit to an organization, its financial health, justified end use, financial need, customer asset quality if offered as collateral 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 The Shamrao- Vithal Co-Op Bank Ltd for credit facilities. 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.

About the Company

Founded in 1906, this unique financial institution rests on the pillars of thrift, fellowship, character, accommodation and the selfless service of all individuals and organizations who wish to help themselves progress. Company sees itself as a family of honest, loyal and committed professionals, harmoniously employing technology, innovation and the human touch to achieve customer satisfaction and goodwill-the corner- stones of our success and the focus of all their efforts.

The prosperity of their customers is the engine of their success and customers will find in them a fast, timely, flexible, co-operative and competitive partner in their progress. Bank shall reach out to their customers anywhere and at any time to make their dealings with company a pleasure. Company warmly welcomes them into their aesthetic surroundings or takes banking services to their doorsteps. At SVC the staff is committed to approachability, simplicity and transparency in their dealings with all their stake holders and shall be a temple of their trust.

They use their employee involvement and sense of togetherness to generate high levels of teamwork, efficiency, excellence and profits. They mobilize aggressively, invest wisely, disburse prudently, recover assiduously, reduce costs and create a learning organisation that offers products and services in tune with and ahead of the times.

Exponential Growth

The Bank has an avowed mission to provide highly advanced banking and allied services to customers in the most beneficial manner – and in an environment of business focused friendliness. The Bank’s perspective has always been global. As the decades unfolded, varied services were introduced to address an ever-widening spectrum of retail, corporate and institutional clients. Stupendous growth followed – most evident since the turn of the millennium.

Innovation- the ripple effect

Innovation has been in evidence in every aspect of the Bank’s operations. Administratively, in nurturing human resources and a positive work environment. Operationally, by enhancing security exponentially at various levels. Managerially, through astute goal-definition and an emphasis on transparency. And at corporate level, through network expansion and mergers and acquisitions. Yet, perhaps, the most significant aspect of innovation has been the development and roll-out of Genius – internally constructed banking software that has increased operational efficiency across our entire branch network manifold.

CORPORATE GOVERNANCE

The Bank has a sound corporate governance mechanism in place. Professionalism at all levels ensures high level of skills and standards in performing entrusted tasks. The Bank ensures appropriate internal control systems and devotes adequate attention to maximizing returns on every unit of resources through an effective funds management strategy and mechanism. Management is well-versed with all aspects of the guidelines issued by the Reserve Bank of India and ensures that, the Profit & Loss Account and Balance Sheet are prepared in a transparent manner and reflect the true state of affairs. It is ensured that necessary statutory provisions and appropriations out of profits are made as required in terms of Multi-State Act/Rules and the Bye-laws of the Bank. With elements of good corporate governance, sound investment policy, appropriate internal control systems, better credit risk management, focus on newly-emerging business areas, commitment to better customer service, adequate mechanization and proactive policies on house-keeping issues, the Bank has internally strengthened its whole structure.

What does credit mean?

1. A contractual agreement in which a borrower receives something of value now and agrees to repay the lender at some date in the future, generally with interest. The term also refers to the borrowing capacity of an individual or company.

2. An accounting entry that either decreases assets or increases liabilities and equity on the company's balance sheet. On the company's income statement, a debit will reduce net income, while a credit will increase net income.

3. The amount of money available to be borrowed by an individual or a company is referred to as credit because it must be paid back to the lender at some point in the future. For example, when you make a purchase at your local mall with your VISA card it is considered a form of credit because you are buying goods with the understanding that you'll need to pay for them later. For example, on a company's balance sheet, a debit will increase the inventory account (an asset) if the company buys merchandise for resale on credit. On the other hand, a credit will increase the company's accounts payable (a liability).

The Credit Appraisals

Credit appraisal is the assessment of risk that can impact on the repayment of loan. In short it is to determine, whether we will get our money back?
Depending on the purpose of the loan & the quantum, the appraisal process may be simple or elaborate.
For small personal loans credit scoring based on income, life style, existing liabilities may suffice.
For project financing, the project comprises technical, commercial, marketing, financial, managerial appraisals, etc
It is the process by which the lender assesses the credit worthiness of borrower. It revolves around character, collateral and capacity.
Credit Appraisal is the process by which a lender appraises the technical feasibility, economic viability and bankability including creditworthiness of the prospective borrower. Credit appraisal process of a customer lies in assessing if that customer is liable to repay the loan amount in the stipulated time, or not. Here bank has their own methodology to determine if a borrower is creditworthy or not. It is determined in terms of the norms and standards set by the banks. Being a very crucial step in the sanctioning of a loan, the borrower needs to be very careful in planning his financing modes. However, the borrower alone doesn’t have to do all the hard work. The banks need to be cautious, lest they end up increasing their risk exposure. All banks employ their own unique objective, subjective, financial and non-financial techniques to evaluate the creditworthiness of their customers.

While assessing a customer, the bank needs to know the following information: Incomes of applicants and co-applicants, age of applicants, educational qualifications, profession, experience, additional sources of income, past loan record, family history, employer/business, security of tenure, tax history, assets of applicants and their financing pattern, recurring liabilities, other present and future liabilities and investments (if any). Out of these, the incomes of applicants are the most important criteria to understand and calculate the credit worthiness of the applicants. As stated earlier, the actual norms decided by banks differ greatly. Each has certain norms within which the customer needs to fit in to be eligible for a loan. Based on these parameters, the maximum amount of loan that the bank can sanction and the customer is eligible for is worked out. The broad tools to determine eligibility remain the same for all banks.

Key points from Credit Policy of the company.
(Maximum exposure for Individuals 15% of Capital funds i.e. Rs. 72.72 cr (2010)
(Maximum exposure for Group 40% of Capital funds i.e. Rs. 193.93 cr (2011)
(Group to be defined at the perception of bank)
1) Prohibited to advance against banks own shares.
2) Prohibited to advance to directors and their relatives.
3) Maximum ceiling on advance to nominal member is 1 lakhs.
4) Desist from advance against FD by other banks.
5) Prohibition on bridge loan/ interim finance.
6) Loans & Advances permitted on securities, except to stock- brokers,
- 5 Lakhs in physical form.
- 10 Lakhs in Demat form.
- Margin of 50% to be maintained.
7) Prohibition to finance Non- Banking Financial/ Micro Financial Company except when engaged in hire purchase/ leasing activities.
8) Financing for Agricultural Activities:
- Direct finance to be provided & not through any agencies like credit societies, land development banks, etc.
- Credit to be extended only after obtaining ‘no due’ certificate from existing credit agencies in area.
- To follow the scale of finance & security as per guidance from RBI/ NABARD.
9) Restrictions on Advances to defaulters of statutory dues.
10) Maximum limit of Unsecured advances.
- Rs. 2lakhs for single party/ group.
- Bank should ensure that aggregate outstanding should not exceed 15% of its time & demand deposits (liabilities).
- No bank to finance a borrower who is enjoying credit facilities from other institutions, without obtaining NOC from such institutions. (Exceptions included).

The central bank of India has listed out priority sectors in which they have lend:
Agriculture & Allied activities, Small Scale Industries, Small Business, Small road transport operators, Professional & self employed, Housing, Others
The Central bank had given the target of 40% to be achieved for the priority sector, The Shamrao – Vithal Co- Op Bank achieved 40.86% (2011).

Various Credit facilities offered by SVC

Credit disbursement at SVC
(Commercial Credit, Term Loan undertaken for study)
[pic]

Retail Credit

A financing method which provides loan services to retail consumers for goods and services. Retail credit facilities lend funds to consumers wishing to purchase high ticket items but are short on capital. Thus, retail credit facilities may enable a greater number of consumers access to a retailer's goods. Retail credit facilities can take the form of point of sale finance options in retail outlets. For example a $10,000 motorcycle might be a lot for a consumer to pay up front. Retail credit facilities will loan the $10,000 to the consumer, who will then pay it back with interest in monthly installments over several years. Some offer low or even no payments over an initial time period, but then charge above average interest.

Retail credit facilities give the option of consuming now or consuming in the future. Higher interest rates may be acceptable to some consumers, depending on the consumers' unique consumption utilities. The risk of default is a factor that determines the interest rate that retail credit facilities charge.

Housing Loan

The Shamrao Vithal Co- Op Bank at present gives home loans to its customers under the name, “GOOD HOMZ”. An individual can borrow either singly or jointly, for a maximum of Rs. 50 Lacs subject to;
For salaried applicants: Total deductions including installments of proposed loan not exceed 60 % of gross salary.
For applicants having Business: Minimum debt service ratio should be 1.5:1
The rate of interest to be charged will be based on the rate chart, exceptions to be made strictly by the corporate office. The funds could be borrowed to purchase flat, construction of new house, bungalows on ownership basis. The borrower has to repay the amount in maximum of 180 months, i.e. 15 years.
An individual to be eligible for the loan has to atleast of 21 years of age & an Indian resident, should be an income tax assessee, need to be employed or engaged on in lawful activity, and should have a savings account with bank for atleast past 6 months.

Vehicle Loan

The company gives Vehicle loan to individuals, proprietary concerns, partnership firms & companies. The Bank has not specified a maximum amount of loan but it is decided on the basis of the financials of the applicant.
The rate of interest to be charged will be based on the rate chart, exceptions to be made strictly by the corporate office. The funds can be borrowed for purchase of vehicles; the bank hypothecates the same vehicle. The borrower has to repay the loan in maximum of 60 months.
As prerequisites a borrower should be banking with the company for last 6 months and should have a satisfactory track record.

Personal loan

The Shamrao Vithal Co- Op Bank gives personal loans to its customers under the name, “Lifestyle Finanz”. An individual can borrow a maximum amount as per limits laid down for single party, group and as per financials of specified party.
The rate of interest to be charged will be based on the rate chart, exceptions to be made strictly by the corporate office. The funds can be borrowed for the purpose of acquisition of Consumer durables, household articles etc. The Bank hypothecates the article financed by it.
The repayment schedule here varies from 24 months to 60 months depending on the amount sanctioned. As prerequisites the borrower should be an Indian resident with 21 complete years of age. If employed should be in 3 continuous years of service with the firm & should have fair repayment capacity. If engaged in business or profession then should have sound financials in past 3 years.

Industrial Credit

What Does Industrial Credit Mean?

A pre-approved amount of money issued by a bank to a company that can be accessed by the borrowing company at any time to help meet various financial obligations. Commercial credit is commonly used to fund common day-to-day operations and is often paid back once funds become available.
Commercial credit is often used by companies to help fund new business opportunities or to pay for unexpected charges. For example, imagine that XYZ Manufacturing Inc. has the chance to buy a piece of much needed machinery at a deep discount. Let's assume that the piece of equipment normally costs $250,000, but is being sold for $100,000 on a first-come, first-serve basis. In this example, XYZ Manufacturing could access its commercial credit agreement to get the required funds immediately. The firm would then pay the borrowed amount back at a later date.

Term loan

Term loans to industries are granted to assist industries to meet their needs of capital expenditure on land, buildings, plant and machinery required for setting up of a new industrial unit for expansion of an existing unit or modernization or renovation of existing units to augment production.

The Shamrao- Vithal Bank Ltd provides term loan to its client under the name of, “Asset Finance”, “Own Your Office”, & “Hello Doctor”

Under Asset Finance, the company lends to proprietary concerns, partnership firms, & companies up to a maximum of Rs. 10 crores. The rate of interest to be charged will be based on the rate chart, exceptions to be made strictly by the corporate office. The funds can be borrowed for the purpose of long term working capital requirement, supplementary working capital requirement, expansion of business, repayment of unsecured loans, payment to retiring directors, partners, etc, restructuring of existing borrowing, product launch or promotion, advertisement and publicity, research & development.

The borrowers need to keep the existing unencumbered assets of the borrowing unit such as plant and machinery, land and building, factory shed, etc as security. Personal guarantee of the proprietor/ partner/ or director may be required. The loan is to be repaid in maximum up to 84 months.
As a prerequisites concerns should have earned profits in during preceding three financial years, the concerns should not be in default in payment of their dues with financial institutions/ banks during the last 3 years.

Under Own Your Office, the company lends to those business units/ firms/ companies/ individuals who plan and wish to run their business from their own premises. The company lend maximum up to Rs. 50 lacs for office premises & Rs. 5 lacs for its furnishings. The rate of interest will be charged by the bank as per the norms declared by bank from time to time. There will be an equitable mortgage of office premises and hypothecation of office equipment and fixtures to be financed.
Personal guarantee of the proprietor, partners, and directors may be required. The repayment schedule may be 60 months but can be extended up to 7 years subject to strict discretion of the bank.

Under Hello Doctor, the company lends to medical professionals with/ without specialization planning to set up a new clinic/ polyclinic/ nursing home/ expand the existing premises. A medical professional planning to install latest medical/ paramedical equipments. An existing clinic/ nursing home/ hospital planning to expand/ diversify its range of medical services/ or acquire new medical equipments. Maximum loan amount depends on the regulations laid down by the RBI from time to time for individual and group and as per the financials of the applicant.
The rate of interest to be charged will be based on the rate chart, exceptions to be made strictly by the corporate office. An equitable mortgage of land & building, hypothecation of plant and machinery, furniture and fixtures, stocks and consumables may be required. The repayment schedule may be up to 60 months.

Business Money
Under Business Money the Bank lends to individuals, proprietary concerns, partnership firms, companies in form of working capital requirement and non fund based facilities such as bank guarantee, letter of credit. The maximum loan amount depends on the norms laid down by RBI and also on the financials of the company. The rate of interest depends on rate chart, exception to be made by head office. Personal guarantee of proprietor, partner, and directors may be required. An existing profit making unit is preferably SSI, A successful entrepreneur with expansion/ diversification plans preferably in SSI segment is required as a prerequisites.

The credit appraisals with The Shamrao- Vithal Co-Op Bank ltd.

The company before approving any credit facility to its customers does a detailed feasibility study.
Feasibility study of Industrial Credit and Retail Credit
Industrial Credit Assessment.
Retail Credit Assessment.

1) INDUSRTIAL CREDIT ASSESSMENT

- Technical Analysis

Technical analysis is essential to ensure that necessary physical facilities required for production will be available and the best possible alternatives are selected to procure them. These are to be assessed by analysis, common sense, experience and discussions with the promoters and taking expert wherever warranted.

A) Manufacturing process/ Technology:
- If a product can be manufactured by using alternative raw materials with alternative process routs, a comparative study be done to chose the most suitable process depending upon the quality of product required and its end use.
- if a product is to be manufactured by a particular process for the first time in the country, necessary study should be done about the success of the process in other countries.

B) Technical arrangements:
- Technical arrangement made to obtain technical knowhow required for the proposed project.
- Support to be provided by technical collaborators in planning and operations of the plant, training etc.
- Collaborator has agreed to provide the benefits of research and development.
- Any restriction imposed by collaborators.

C) Size of the plant:
- Size of plant depends on the manufacturing process, availability of raw material, capital investment and size of the market.

D) Product Mix:
- Product mix depends upon market requirement of certain items and may have done in different sizes and quality to suit different consumers.
- If plant may have flexibility to change product mix according to changes in the market conditions, such flexibility may need additional investment, its impact on the viability of the project be analyzed.

E) Selection of Plant and Machinery:
- Selection of plant and machinery should be done according to manufacturing process and size of the unit. Different stages of manufacturing process should have proper balance of capacity.
- Equipment for utilities should also have sufficient capacity to meet the requirements of main plant and machinery.
- Adequate provisions should be made for tools and spares.

F) Procurement of Plant and Machinery:
- The machinery suppliers should be decided keeping in view the quality of the machines, the reputation of the suppliers, delivery schedule, payment terms, performance guarantee and other relevant matters.
- It is not always necessary to procure machinery from suppliers whose quotations are the lowest.
-If promoters proposes to import second hand machinery a certificate from chartered engineer giving details of its history, present performance, valuation, economic life and suitability of second hand machinery should be obtained. -In order to have uninterrupted production, it should be ensured that satisfactory arrangement for repairs have been made and necessary spare parts will be available in time.

G) Plant Layout:
- Proper plant layout can reduce manufacturing cost by saving time and money.
- Plant layout is done in such a way that minimum time is taken in handling equipment, raw material, consumables, goods- in- process and finished goods.

H) Location of Plant:

1) Land:
-It should be sufficient for the proposed project and the future expansion plans.
- Load bearing capacity of the land should be purchased.
- Proposed land should be non agriculture and approved for industrial use.

2) Raw Material:
- The requirement of raw material at full capacity should be ascertained and it should be ensured that necessary raw material will be available at reasonable price.
- If raw material is bulky and difficult to transport, it is better to locate the plant near the source of raw material.
- Regular supply of raw material is very necessary for the successful operation of the plant.

3) Market:
- While deciding location of the project, a comparative study regarding transportation of raw material and finished products should also be done.
- If transportation of finished products is more difficult than its raw material, it may be better to set up project near to the market.

4) Labor:
- Some times skilled labor is not available at a particular place. If labor has to be obtained from outside, arrangement to provide housing facilities analyzed.

5) Utilities:
- Arrangement for utilities power, water, fuel etc to be ensured. If there is shortage of power supply alternative arrangement by way of Gen Sets etc ensured.

6) Efficient Disposal:
- The problem of effluent differs from industry to industry depending on nature and quantity of effluent.
- It should be ensured that necessary treatment is provided the effluent unit.

7) Transportation:
- If the proposed site is not connected with main road, an approach road may have to be laid from the site to the main road.
- The quality of road may be decided keeping in view the quantum of goods to be transported.
- If the unit proposes to buy their own vehicles cost benefit analysis be made, by calculating depreciation, interest and other expenses of maintaining vehicle compared to vehicles engaged on hire basis.

I) Schedule of Project Implementation:
- The Project Evaluation and Review Technique or Critical Path Method helps in proper planning, scheduling and controlling various activities essential for the execution of the project.
- All possible activities from project identification to commencement of production should be listed.
- It should be ensured that all the activities have been included and the time schedule given by the promoter is reasonable.
- Arrangement should be made to procure necessary raw material input like raw material, power, labor etc at an appropriate time so that plant does not remain idle and the implementation may commence soon as the installation of the plant is completed.

Commercial & market Analysis

|Major Headings |Information needed |
|Demand |Product, Uses, the Consumers, actual consumption, likely |
| |consumption in future and exports |
|Supply |Production Capacity, actual production, Capacity utilization, |
| |Imports and likely future capacity |
|Distribution |Channels of Distribution involved, the cost of distribution and |
| |mode of transport |
|Pricing |Domestic and international price trends, control on process. |
|External factors |Government policies regarding industrialization, exports imports,|
| |foreign collaboration, competition, plan outlay etc |

Financial Analysis

1) Capital Cost of Project:
- Land and site development.
- Buildings
- Plant and machinery
- Engineering and consultation fees
- Miscellaneous Fixed assets
- Preliminary and Pre operative Expenses
- Provisions for contingencies
- Margin Money for working capital
Estimation of capital cost of the project provides the basic information to decide its pattern of financing and viability. It cost of project is not estimated correctly, the preparation of cash flow and profitability estimated correctly, the preparation of cash flow and profitability estimates will be a futile exercise because the amount of depreciation, interest and dividend will change with the change in the capital cost of the project.

Lenders generally are taking an undertaking from the promoter to meet the cost overrun, if any, in the implementation of the project. But such an undertaking does not have much practical meaning. Many a times a promoter is not in a position to bring additional resource to finance the overrun, ultimately lenders have to provide the additional resource to safeguard the money already invested in the project.

Overestimation of the cost of the project is also equally bad as underestimation. If the cost of a project is overestimated, the financial institution may have to make unnecessarily higher commitments and the promoters may divert resources for other purposes.

Means of Finance
- Promoters Contribution:
The minimum promoter’s contribution envisaged in the project is worked out on the basis of Debt- Equity norm and the security norm applicable at the time of sanction of the loan. The Debt equity ratio is the ratio of loan component and the equity contribution of in the total project cost. The maximum amount of assistance shall be lower of the two amounts worked out on the basis of Debt- Equity norm and the security margin norm. The normal lending norm for debt- equity in 2:1. However in some specific schemes this norm may be flexible.

The entire promoter’s contribution envisaged in the project is desired to be raised by way of capital before first disbursement of the loan installment. However in case the promoters are short of own capital, some amount may be raised as unsecured loan in form of quasi- capital. The quantum is ascertained during the appraisal of loan proposal.

Debt – equity ratio is generally allowed about 2:1 depending upon nature of the project, its location, promoter’s background etc.

Higher debt equity is allowed for project promoted by Technocrats, capital intensive project, projects located in backward area etc.

Profitability Estimates

Profitability estimates are estimates of expected sales realizations and expenses to be incurred by the units. Excess of sales realization over expenses indicates the expected profit of the unit.

Items to be considered in profitability estimates are:
Sales, raw materials & Consumable Stores, Utilities, Repair and maintenance, wages and salaries, rent and insurance, depreciation, administrative expenses, selling expenses, interest on term loan, interest on bank borrowing, profit, etc

CASH FLOW ESTIMATES
Cash flow estimates are prepared to ensure that unit will have necessary cash with it and it will not face liquidity problems.
While profitability estimates are prepared only from the year in which unit is likely to commence production, Cash flow estimates are necessary for the construction period also to ensure availability of cash according to the requirement of the project.

Projected Balance sheet

Projected balance sheet is prepared on the basis of profitability estimates and cash flow estimates.
The position of share capital, term loans, sundry creditors, bank borrowings, current assets etc is ascertained at the end of each year, according to the movement shown in cash flow and profitability estimates.
Fixed assets taken after deducting depreciation provided in profitability estimates.
Preliminary expenses are taken after deducting the amount which is already written off from the expected profits of the unit.
Cumulative surplus shown in profitability estimate represents the position of reserve at the end of each year.
Closing balance shown in cash flow estimates represents the position of cash and bank balance at the end of each year.
Ratio Analysis

Debt – equity ratio: debt/ equity

Current ratio: current assets/ current liabilities

Debt service ratio: Net assets+ Depreciation + Interest on term loan/Term loan installment + interest on term loan
The ratio indicates the capacity of the unit to repay term debt and interest there on.
The ratio is calculated for the entire repayment period separately for each year and also as an average for the entire repayment period.

Fixed asset ratio:..??(to be done)
Term loan are generally against the security of fixed assets. The excess of fixed assets over term loans secured by them provides margin on security. In order to find out the available security cover, Fixed asset coverage Ratio is calculated as under:

Net Fixed Assets+ Capital Work in progress / Deferred credits+ Term Loan+ Secured Debentures + other loans having first charge on fixed assets

BREAK EVEN POINT

Breakeven point is the point at which the unit is neither earns profit nor incurs losses. The cost of production is just recovered at breakeven point.

The cost of production is divided into two categories: Fixed Cost & Variable Cost.

The break up fixed cost & variable cost:
Fixed cost
Salaries and wages
Repairs and maintenance
Administration and misc expenses
Fixed portion of selling expenses
Fixed royalty and know how payments
Interest on term debt
Deprecation on straight line basis

Variable cost
Raw materials
Consumable stores and spares
Packing material
Power fuel and water
Royalty payment linked to sales
Variable selling expenses
Interest on working capital
Other variable expenses varying directly in proportion to output

Breakeven point = Fixed cost/ contribution

Contribution: difference between sale price and variable cost is called contribution. The contribution helps a unit to recover its fixed cost. The level of production at which the contribution recovers entire fixed cost is called breakeven point.

Internal rate of return

Internal rate of return (IRR) is that rate of discount which would equate the present value of investment (Cash outflow) to the present value of benefits (Cash inflows) over the life period of the project.

IRR cannot be determined by just looking at the cash flow. It is calculated by trial and error method. Various discounting rates are applied to the present cash flow until a rate is found that reduces the net present value to zero.

Management Analysis

A project which is considered technically feasible, economically viable and financially sound may run into difficulties if it is not backed by sound and efficient management. Man behind the project is very important. Experience shows that many of the projects have been rendered sick owing to inefficient or dishonest management. Therefore proper evaluation of management is a highly essential part of appraisal.

Qualities of an entrepreneur
Honesty and integrity
Involvement in the project
Financial resources
Competence
Initiative
Intelligence
Drive and energy
Self confidence
Frankness
Patience

Various Forms of organization
Proprietary concern
Partnership firm
Corporate sector

Each promoter has to come in contact with the appraising officer several times for discussion regarding the project. Appraising officer should evaluate the qualities of the promoter after interviewing him two or three times.

Credit Evaluation and Decision

Based on the results of these verifications the bankers take a credit decision of / on whether or not to sanction the loan to the applicant.

A specialized credit appraisal team manages credit evaluation within banks. Credit decisions taken by this team are governed by the detailed credit policies and operating notes issued regularly for the various product segments. The credit decision would usually ensure and address the following characteristics:
- Whether the applicant has the capacity to repay the loan?
- Whether the applicant has the required liquidity to pay the installments on the due dates?
- Whether the applicant can comfortably pay off all the obligations?
- Whether the applicant has the desired intention to repay the loan?
- Whether the asset taken as collateral, for secured loans, serves as a good security cover?
- Whether the application details of the applicant and the proposed loan are authentic?

Findings

1> Gross NPA shows a positive figure from last 3 years i.e.
For year ended 31/03/2009 = 3.94%
For year ended 31/03/2010 = 3.11%
For year ended 31/03/2011 = 2.67%

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Non-Performing Asset
(NPA): An asset becomes
NPA when it ceases to generate income for the bank. This would mean that interest, which is debited to borrower’s account, has to be realized by the bank. An account has to be classified as NPA on the basis of record of recovery rather than security charged in favor of the bank in respect of such account. Thus, an ac-count of a borrower may be-come NPA if interest charged to that particular borrower is not realized despite the ac-count being fully secured.

RBI has laid down the regulations regarding the NPA ie when the asset has not serviced its interest or principal for more than 90 days when its due then in such case it is to be recognized as NPA.

2>Now, how the company managed to reduce the Gross NPA over the period of 3 years, various steps taken by the company

The bank has managed to bring its rate of Gross NPA down through various ways of post disbursement supervision i.e.

-Ensuring compliance with terms and conditions
The bank has to first ensure that the borrower has complied with all the terms and conditions of sanction and disbursement of the loan. Most of the terms and conditions would have been stipulated to minimize the risk associated with lending; however, it’s important that none of the terms and conditions are violated.

-Statement of stock and book debts
To ensure adequate coverage of the outstanding, follow up for stocks statements is essential and should have the constant attention of the bank officials. As assessment of working capital is based on the financial statement, valuation of stocks for the stock statement should be done in the same manner and adopting the same basis as for annual financial statement.
Where cash credit has been sanctioned against book debts, a statement of book debts outstanding along with age –wise classification of the book- debts is to be obtained at stipulated intervals. Drawing powers should be allowed only on such book- debts as are within the norms accepted at the time of sanction. Normally book debts that are more than six months old should not be considered.

-Physical inspection
The physical inspection of the borrower unit cannot be merely checking the existence of stocks. The inspecting banker needs to look in to other aspects such as:
Existence of security cover.
Correctness of data declared in the stock statement.
Quality of goods.
Correctness of prices of purchases.
Regular update of book keeping.
Compliance with maintenance of statutory records.
Realization pattern of book debts.
Status of labor relations.
Availability of raw materials.
Changes in management set up.

-Monitoring performance
The bank has monitored the operations to ensure that the operations of the organisations are viable and profitable. For this purpose, the banker has to carefully examine the operating statement, funds flow statement, and statement of current assets and current liabilities. The bank also verifies that the performance of the borrower is in tune with the projections made at the time of sanction of limits.

-Ensuring End Use
This ensures that the finance given is used only for the purpose for which it was given and that the finance has not been diverted to any other use. Any such diversification affects the recovery of the loan.

-Follow up of the loans
As a loan is repayable out of the cash accruals generated over a period of time, it is essential that a project is monitored, supervised and followed up on an ongoing basis throughout the currency of the term loan. The bank makes follow up during implementation stage and also during commencement of commercial production.

3> Net NPA is constant at ‘Zero’ over the period of 3 years.
When a banking company has its NPA, at zero, it gets a upper rating from the Reserve bank, the prospective customers who are much risk averse check for these ratings, and net NPA before keeping deposits with any specific bank.

A bank to keep its NPA at Zero needs to be financially strong, it can provide for gross NPA, only after meeting all other statutory obligations.
As per regulations there is no specific requirement to keep the Net NPA at zero, but the company engaged in banking business should make sure that its Gross NPA is within the band of 7% - 8%, or else the Reserve Bank asks the bank to wind up its operations restricting it from accepting deposits from customers.

How the company manages to keep its NPA at Zero?
- Provisions of various Kinds: The Company out of its profits maintains various kinds of reserves, to keep its NPA at zero, and get an upper rating in the market. This method of keeping Net NPA could be understood with the help of an example, suppose the Company had a Gross NPA of Rs.20, and the net profit of 80 so here in this case the company will, reduce its profits to 60 and bring the Net NPA at Zero.

- Debt Restructuring: If in some uncertain condition a party fails to pay a installment to bank for a period of 90 days, and turns out to be a NPA in such situation when the party is genuine for the bank, the officials may restructure the debt only the failure to repay is due to, labor strike, machinery failure, shortage of raw material, or any other genuine reason due to which the business has came to a standstill. So in such conditions the debt can be restructured for the benefit of bank as well as for the party.
Debt is not restructured for the parties, who have the intentions to take the bank along with them.
For example; M/S XYZ had taken a loan for Rs. 10 lac, tenure for which was 5 years after 2 years the party turned to be NPA due to sudden shortfall in raw materials so in this case the debt could be restructured at the opinion of bank officials. Suppose in this case the party had paid nearly Rs. 2 lacs, so the party would be asked to pay the balance 8 lacs along with interest in 5 more years or the party may be asked to pay the interest part for 2 years, and then pay the regular installments when the business starts as usual.

-“SARAFEASI notice” i.e. takeover of assets by bank: When a party defaults on repayment of the debt then bank after reminders and final notice, goes ahead with legal action and takes over on the asset of the defaulter. The bank auctions the asset taken over and recovers its balance debt of the party.
For example: A party has taken a loan for Rs 30 lacs for the period of 10 years to purchase a commercial property, here in case of default by the party after 4 years the bank completes all the formalities of reminders, notice and legal action takes over the commercial property and removes it for auction.

CONCLUSIONS

•The credit appraisal process carried out at SVC Bank Ltd is sound and bank has good parameters to appraise the project.
•The credit department thoroughly analyses the credit requirement of the company and the capacity to service the debt.
•The bank has conservative norms to appraise the project.
•The credit appraisal passes through various stages and evaluations before it is appraised.

RECOMMENDATIONS

•Process should be made faster.
•All the documents required to appraise the project should be asked at the time of application only rather than later by the bank
•The bank must bring more transparency in appraisal of the project there should be explanation for a appraisal of the project that was sanctioned by higher authority.
•The bank must not rely on software or information provided by the client the bank should dig in for other sources in order to draw a real picture for the company.
•At the time of projections due to lack of documents, the projections are done
Without any basis like depreciation in the audited years is not accumulated depreciation.
•The bank already has a very trained and efficient team for the appraisals, and should take care that any new person included in the team should have quality experience and knowledge in credits sanctions as well as recovery.

Bibliography