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The Reserve Bank of India (RBI), as the central bank of the country, closely monitors developments in the whole financial sector.
The banking sector is dominated by Scheduled Commercial Banks (SBCs). As at end-March 2002, there were 296 Commercial banks operating in India. This included 27 Public Sector Banks (PSBs), 31 Private, 42 Foreign and 196 Regional Rural Banks. Also, there were 67 scheduled co-operative banks consisting of 51 scheduled urban co-operative banks and 16 scheduled state co-operative banks.
Scheduled commercial banks touched, on the deposit front, a growth of 14% as against 18% registered in the previous year. And on advances, the growth was 14.5% against 17.3% of the earlier year.
State Bank of India is still the largest bank in India with the market share of 20% ICICI and its two subsidiaries merged with ICICI Bank, leading creating the second largest bank in India with a balance sheet size of Rs. 1040bn.
Higher provisioning norms, tighter asset classification norms, dispensing with the concept of past due for recognition of NPAs, lowering of ceiling on exposure to a single borrower and group exposure etc., are among the measures in order to improve the banking sector.
A minimum stipulated Capital Adequacy Ratio (CAR) was introduced to strengthen the ability of banks to absorb losses and the ratio has subsequently been raised from 8% to 9%. It is proposed to hike the CAR to 12% by 2004 based on the Basle Committee recommendations.
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Retail Banking is the new mantra in the banking sector. The home loans alone account for nearly two-third of the total retail portfolio of the bank. According to one estimate, the retail segment is expected to grow at 30-40% in the coming years.
Net banking, phone banking, mobile banking, ATMs and bill payments are the new buzz words that banks are using to lure customers.
With a view to provide an institutional mechanism for sharing of information on borrowers / potential borrowers by banks and Financial Institutions, the Credit Information Bureau (India) Ltd. (CIBIL) was set up in August 2000. The Bureau provides a framework for collecting, processing and sharing credit information on borrowers of credit institutions. SBI and HDFC are the promoters of the CIBIL. The RBI is now planning to transfer of its stakes in the SBI, NHB and National bank for Agricultural and Rural Development to the private players. Also, the Government has sought to lower its holding in PSBs to a minimum of 33% of total capital by allowing them to raise capital from the market.
Banks are free to acquire shares, convertible debentures of corporate and units of equity-oriented mutual funds, subject to a ceiling of 5% of the total outstanding advances (including commercial paper) as on March 31 of the previous year.
The finance ministry spelt out structure of the government-sponsored ARC called the Asset Reconstruction Company (India) Limited (ARCIL), this pilot project of the ministry would pave way for smoother functioning of the credit market in the country. The government will hold 49% stake and private players will hold the rest 51%- the majority being held by ICICI Bank (24.5%).
The first phase of financial reforms resulted in the nationalization of 14 major banks in 1969 and
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After the second phase of financial sector reforms and liberalization of the sector in the early nineties, the Public Sector Banks (PSB) s found it extremely difficult to complete with the new private sector banks and the foreign banks. The new private sector banks first made their appearance after the guidelines permitting them were issued in January 1993. Eight new private sector banks are presently in operation. These banks due to their late start have access to state-ofthe-art technology, which in turn helps them to save on manpower costs and provide better services.
During the year 2000, the State Bank of India (SBI) and its 7 associates accounted for a 25% share in deposits and 28.1% share in credit. The 20 nationalized banks accounted for 53.5% of the deposits and 47.5% of credit during the same period. The share of foreign banks ( numbering 42 ), regional rural banks and other scheduled commercial banks accounted for 5.7%, 3.9% and 12.2% respectively in deposits and 8.41%, 3.14% and 12.85% respectively in credit during the year 2000.
CLASSIFICATION OF BANKS:
The Indian banking industry, which is governed by the Banking Regulation Act of India, 1949 can be broadly classified into two major categories, non-scheduled banks and scheduled banks.
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Banks
NABARD NHB
IRBI
EXIM Bank
SBI Groups
Nationalized Banks
Indian Banks
Foreign Banks
ABOUT SBI:
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The State Bank of India, the countrys oldest Bank and a premier in terms of balance sheet size, number of branches, market capitalization and profits is today going through a momentous phase of Change and Transformation the two hundred year old Public sector behemoth is today stirring out of its Public Sector legacy and moving with an agility to give the Private and Foreign Banks a run for their money.
The bank is entering into many new businesses with strategic tie ups Pension Funds, General Insurance, Custodial Services, Private Equity, Mobile Banking, Point of Sale Merchant Acquisition, Advisory Services, structured products etc each one of these initiatives having a huge potential for growth.
The Bank is forging ahead with cutting edge technology and innovative new banking models, to expand its Rural Banking base, looking at the vast untapped potential in the hinterland and proposes to cover 100,000 villages in the next two years.
It is also focusing at the top end of the market, on whole sale banking capabilities to provide Indias growing mid / large Corporate with a complete array of products and services. It is consolidating its global treasury operations and entering into structured products and derivative instruments. Today, the Bank is the largest provider of infrastructure debt and the largest arranger of external commercial borrowings in the country. It is the only Indian bank to feature in the Fortune 500 list. The Bank is changing outdated front and back end processes to modern customer friendly processes to help improve the total customer experience. With about 8500 of its own 10000 branches and another 5100 branches of its Associate Banks already networked, today it offers the largest banking network to the Indian customer. The Bank is also in the process of providing complete payment solution to its clientele with its over 8500 ATMs, and other electronic channels such as Internet banking, debit cards, mobile banking, etc.
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With four national level Apex Training Colleges and 54 learning Centres spread all over the country the Bank is continuously engaged in skill enhancement of its employees. Some of the training programes are attended by bankers from banks in other countries.
The bank is also looking at opportunities to grow in size in India as well as internationally. It presently has 82 foreign offices in 32 countries across the globe. It has also 7 Subsidiaries in India SBI Capital Markets, SBICAP Securities, SBI DFHI, SBI Factors, SBI Life and SBI Cards - forming a formidable group in the Indian Banking scenario. It is in the process of raising capital for its growth and also consolidating its various holdings.
Throughout all this change, the Bank is also attempting to change old mindsets, attitudes and take all employees together on this exciting road to Transformation. In a recently concluded mass internal communication programme termed Parivartan the Bank rolled out over 3300 two day workshops across the country and covered over 130,000 employees in a period of 100 days using about 400 Trainers, to drive home the message of Change and inclusiveness. The workshops fired the imagination of the employees with some other banks in India as well as other Public Sector Organizations seeking to emulate the programme.The Bank is actively involved since 1973 in non-profit activity called Community Services Banking. All their branches and administrative offices throughout the country sponsor and participate in large number of welfare activities and social causes.
Their business is more than banking because they touch the lives of people anywhere in many ways. Their commitment to nation-building is complete & comprehensive.
The State Bank of India, the countrys oldest Bank and a premier in terms of balance sheet size, number of branches, market capitalization and profits is today going through a momentous phase of Change and Transformation the two hundred year old Public sector behemoth is today stirring out of its Public Sector legacy and moving with an agility to give the Private and Foreign Banks a run for their money.
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The bank is entering into many new businesses with strategic tie ups Pension Funds, General Insurance, Custodial Services, Private Equity, Mobile Banking, Point of Sale Merchant Acquisition, Advisory Services, structured products etc each one of these initiatives having a huge potential for growth.
It is also focusing at the top end of the market, on whole sale banking capabilities to provide Indias growing mid / large Corporate with a complete array of products and services. It is consolidating its global treasury operations and entering into structured products and derivative instruments. Today, the Bank is the largest provider of infrastructure debt and the largest arranger of external commercial borrowings in the country. It is the only Indian bank to feature in the Fortune 500 list.
The Bank is changing outdated front and back end processes to modern customer friendly processes to help improve the total customer experience. With about 8500 of its own 10000 branches and another 5100 branches of its Associate Banks already networked, today it offers the largest banking network to the Indian customer. The Bank is also in the process of providing complete payment solution to its clientele with its over 8500 ATMs, and other electronic channels such as Internet banking, debit cards, mobile banking, etc.
With four national level Apex Training Colleges and 54 learning Centers spread all over the country the Bank is continuously engaged in skill enhancement of its employees. Some of the training programmes are attended by bankers from banks in other countries.
The bank is also looking at opportunities to grow in size in India as well as internationally. It presently has 82 foreign offices in 32 countries across the globe. It has also 7 Subsidiaries in India SBI Capital Markets, SBICAP Securities, SBI DFHI, SBI Factors, SBI Life and SBI Cards - forming a formidable group in the Indian Banking scenario. It is in the process of raising capital for its growth and also consolidating its various holdings.
Throughout all this change, the Bank is also attempting to change old mindsets, attitudes and take all employees together on this exciting road to Transformation. In a recently concluded mass internal communication programme termed Parivartan the Bank rolled out over 3300 two
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The CNN IBN, Network 18 recognized this momentous transformation journey, the State Bank of India is undertaking, and has awarded the prestigious Indian of the Year Business, to its Chairman, Mr. O. P. Bhatt in January 2008.
State Bank of India (SBI) has history of more than 200 years of existence. SBI is the largest commercial bank in India and accounts for approximately 18% of the total Indian banking business and the group account for 25% of the total Indian banking business.
The central bank, Reserve Bank of India (RBI) is the largest shareholder in the bank with59.7% stake followed by overseas investors including GDRs with 19.78% shareholdingas on September 06. RBIs stake in the bank is likely to be transferred to the Governmentof India (GOI).
SBI has the largest distribution network in India spread across every nook and corner of India. As on September 06, the bank has 14,061 branches which include 4,755 branches of its associated banks. The bank also has the largest network of 5,624 ATMs.
Background:
State Bank of India is the largest and one of the oldest commercial bank in India, in existence for more than 200 years. The bank provides a full range of corporate, commercial and retail banking services in India. Indian central bank namely Reserve Bank of India (RBI) is the major share holder of the bank with 59.7% stake. The bank is capitalized to the extent of Rs.646bn with the public holding (other than promoters) at 40.3%.
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SBI group accounts for around 25% of the total business of the banking industry while itaccounts for 35% of the total foreign exchange in India. With this type of strong base, SBI has displayed a continued performance in the last few years in scaling up its efficiency levels. Net Interest Income of the bank has witnessed a CAGR of 13.3% during the last five years. During the same period, net interest margin (NIM) of the bank has gone up from as low as 2.9% in FY02 to 3.40% in FY06 and currently is at 3.32%.
EVOLUTION OF SBI:
The origin of the State Bank of India goes back to the first decade of the nineteenth century with the establishment of the Bank of Calcutta in Calcutta on 2 June 1806. Three years later the bank received its charter and was re-designed as the Bank of Bengal (2 January 1809). A unique institution, it was the first joint-stock bank of British India sponsored by the Government of Bengal. The Bank of Bombay (15 April 1840) and the Bank of Madras (1 July 1843) followed the Bank of Bengal. These three banks remained at the apex of modern banking in India till their amalgamation as the Imperial Bank of India on 27 January 1921.
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The Imperial Bank during the three and a half decades of its existence recorded an impressive growth in terms of offices, reserves, deposits, investments and advances, the increases in some cases amounting to more than six-fold. The financial status and security inherited from its forerunners no doubt provided a firm and durable platform. But the lofty traditions of banking which the Imperial Bank consistently maintained and the high standard of integrity it observed in its operations inspired confidence in its depositors that no other bank in India could perhaps then equal. All these enabled the Imperial Bank to acquire a pre-eminent position in the Indian banking industry and also secure a vital place in the country's economic life.
When India attained freedom, the Imperial Bank had a capital base (including reserves) of Rs.11.85 crores, deposits and advances of Rs.275.14 crores and Rs.72.94 crores respectively and a network of 172 branches and more than 200 sub offices extending all over the country. Key Areas of Operations:
The business operations of SBI can be broadly classified into the key income generating areas such as National Banking, International Banking, Corporate Banking, & Treasury operations. The functioning of some of the key divisions is enumerated below:
a) CORPORATE BANKING The corporate banking segment of the bank has total business of around Rs1,193bn. SBI has created various Strategic Business Units (SBU) in order to streamline its operations. These SBUs are as follows:
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1) Corporate Accounts
This SBU is important for the bank as its loan portfolio constituted about 27.05% of thebanks commercial and institutional non-food credit and 12.85% of the total domestic credit portfolio as on 31st March 2006. Some of the products under corporate accounts SBU are as follows:
SBI-FAST, which is the cash management product offered by this SBU, had a turnover of Rs.4,705.75bn as of 31st March 2006. This product is now comprehensive cash management solution, offering payments in addition to collections.
Vendor financing activity is being integrated with core banking through the internet platform. This is identified as a focus area to capture the credit portfolio of vendors.
The foreign exchange business grew by around 55% y-o-y and reached Rs.1,747.70bn as of 31st March 2006. This SBU now handles nearly 12% of the countrys visible trade and about 43% of banks forex business. 2) Leasing
This SBU is not writing any leases since the past few years as unfavorable business climate and availability of alternative funding options at cheaper cost. As at the end March 2006, the disbursements and capitalization were zero and profit amounted to Rs.245.9mn.
3) Project Finance
This SBU focuses on funding core projects like power, telecom, roads, ports, airports, special economic zones and others. During FY06, total sanctions for 18 projects involving a total State Bank of India, Corporate Banking, National Banking, International Banking, Treasury
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The Mid Corporate Group (MCG) created in June 2004 has 7 MCG Regional Officescontrolling 28 large branches with high concentration of Mid Corporate (MC) business.The entire Off-Site MC business of all branches at 31 identified centres has been broughtunder the fold of MCG. The average processing time of credit proposals is about 15 daysand quicker decision making on credit proposals of the Mid Corporate units has resulted in greater customer satisfaction. As of March 2006, 21 MCG branches have been migrated to core banking platform. New technology products like RTGS, CINB, Multi-City cheque facility and Core Power have been introduced in all these branches. These technology products coupled with quick Turn Around Time (TAT) have enabled Mid-Corporate Group to increase its business substantially and generate higher income, both interest and fee based. 5) Stressed Assets Management
During FY06, the banking industry witnessed a major policy initiative by Reserve Bank of India with the opening up of sale / purchase of non performing assets to banks, FIs and non-banking finance companies (NBFCs). During FY06, the bank sold NPAs to the tune of Rs.8.9bn against security receipts and Rs.11.41bn on cash basis to Asset Reconstruction Company (ARCIL). The progress in enforcing the security interest has somewhat slowed down due to the requirement of withdrawing suits pending before the tribunal prior to action being initiated against the defaulting borrowers under the SARFAESI Act.
b) NATIONAL BANKING
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This SBU is mainly responsible for retail business. During FY06, personal banking advances increased from Rs.464.51bn to Rs.610.67bn, showing a growth of Rs.146.16bn at the rate of 31.47 % against a growth rate of 40.12% in the previous year.
On the home loan front, several new products were introduced, tailored to fit the needs of specific customer segments, such as SBIMaxgain (minimize interest burden, earn on savings, at no extra cost), SBI NRI-Home Loans, SBI Freedom Home Loans (Loans given without mortgage of property, but against alternate securities, instead), SBI Tribal Plus Home Loans. The auto loans portfolio has shown a growth of Rs.17.74bn in absolute terms and 65% which is considerably higher than last years growth, mainly due to implementation of well planned strategies. 2) Small & Medium Enterprises
The SME Business Unit implemented comprehensive strategies, revamped business processes and with its focus on market dynamics and customer preferences, achieved commendable business growth. The initiative was implemented by focusing on specific industry segments, and concentrating on various players in the value chain. Debt restructuring mechanism for units in SME sector has been devised to ensure restructuring of debt of all eligible Small and Medium Enterprises (SMEs) on favorable terms.
Focused on the SME sector, projects under Uptech are taken up in location specific and activity specific industry clusters. So far the bank has taken 28 projects for modernization under the Project Uptech covering industries like foundry, pumps, glass, auto components, and knitwear, etc. The bank has also covered agro based industries like rice mills, sago and starch and horticulture activities like Apple Orchards and grape farming under the scheme. The deposits of
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3) Agricultural Banking
This SBU is accountable for agricultural credit both traditional and new thrust areas like contract farming, farmers financed through Agri Export Zones (AEZs) and value chain financing. Increase in disbursements during FY06 was 83% against the Govt. of India target of 30%. Agricultural advances grew from a level of Rs.205.26bn in FY05 to Rs.305.16bn as at the end of March 06. As on November 2006, agriculture loans contribute 11% of the total loan book.
4) Government Banking
With the establishment of the government business unit and the consequent focus on marketing, business turnover of this segment has grown substantially over the years. Banks business turnover from the government business segment during 2004-05 was Rs.8,843.81bn. The turnover increased by 10.52 % to Rs.9,773.90bn during FY06. c) INTERNATIONAL BANKING
SBI has a network of 73 overseas offices in 30 countries in all time zones and correspondent relationship with 520 international banks in 123 countries. The bank is keen to implement core banking solution to its international branches also. During FY06, 25 foreign offices were successfully switched over to Finacle software. SBI has installed ATMs at Male, Muscat and Colombo Offices. In recent years, SBI acquired 76% shareholding in Giro Commercial Bank Limited in Kenya and PT Indomonex Bank Ltd. in Indonesia. The bank incorporated a company
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d) TREASURY
The bank manages an integrated treasury covering both domestic and foreign exchange markets. In recent years, the treasury operation of the bank has become more active amidst rising interest rate scenario, robust credit growth and liquidity constraints. The bank diversified its operations more actively into alternative assets classes with a view to diversify the portfolio and build alternative revenue streams in order to offset the losses in fixed income portfolio. Reorganization of the treasury processes at domestic and global levels is also being undertaken to leverage on the operational synergy between business units and network. The reorganization seeks to enhance the efficiencies in use of manpower resources and increase maneuverability of banks operations in the markets both domestic as well as international
The State Bank Group with a network of 14,061 branches including 4,755 branches of its seven Associate Banks dominates the banking industry in India. In addition to banking, the Group, through its various subsidiaries, provides a whole range of financial services which includes Life Insurance, Merchant Banking, Mutual Funds, Credit Card, Factoring, Security trading and primary dealership in the Money Market.
1) Associates Banks:
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All associate banks have migrated to Core Banking (CBS) platform. Single window delivery system has been introduced in all associate banks. SBIs seven associate banks are the first amongst the public sector banks in India to get fully networked through CBS, providing anytimeanywhere banking to its customers to facilitate a bouquet of innovative customer offerings.
i) SBI Life: SBI Life is the third largest private insure with the market share of 10.21% among the private players and number one in terms of number of lives insured amongst private players (no. of lives insured and policies is 25mn). In H1FY07 gross premium was Rs.7.68bn.
ii) SBI Capital Markets Limited (SBICAP) SBI Caps forged ahead in issue management, project advisory and structured finance, sales and distribution. To capitalize on the emerging opportunities, SBI Caps has promoted four wholly owned subsidiaries viz. SBICAP Securities Ltd. for undertaking stock broking activities, SBICAPS Ventures Limited, SBICAP Trustee Company Limited for undertaking venture capital business and SBI CAP (UK) LTD., for carrying on the Financial Services Authority (FSA) regulated activities. On the international front, the expertise of SBI Caps in the infrastructure and
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iii) SBI DFHI LTD SBI group holds 67.01% of the companys paid up capital, while other nationalized banks hold 22.46%. All India financial institutions and private sector banks hold 5.84% and the Asian Development Bank holds 4.69% as on March 31, 2006. For the year ended 31st March, 2006, the company has earned a PAT of Rs.24.4mn. Total secondary market turnover of the company was Rs.285.39bn which amounted to a market share of 12.89% among all primary dealers.
iv) SBI Cards & Payments Services Pvt. Ltd. (SBICSPL) SBICSPL is ranked 2nd in industry with cards in force over 3mn as on September 06. During FY06, the aggregate revenue generated by the SBICSPL was Rs.5.27bn while pre-tax profit was Rs.558.6mn.
v) SBI Funds Management (P) Ltd. (SBIFMPL) SBI Mutual Fund is the mutual funds arm of the bank. SBIFMPL reported a total inflow of Rs.481.67bn in the various schemes during the year. The total assets under management are Rs.132.49bn. The company reported a net profit of Rs.186.4mn as at the end of March, 2006.
f) Human Resources The bank had total staff strength of 198,774 on the 31st March, 2006. Of this, 29.51% are officers, 45.19% clerical staff and the remaining 25.30% were sub-staff. SBI had launched VRS
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NON BANKING SUBSIDIARIES: The Bank has the following Non-Banking Subsidiaries in India : SBI Capital Markets Ltd SBI Funds Management Pvt Ltd SBI Factors & Commercial Services Pvt Ltd SBI DFHI Ltd State Bank of Travancore (SBT)
INVESTOR RELATIONS:
State Bank of India, the countrys largest commercial Bank in terms of profits, assets, deposits, branches and employees, welcomes you to its Investors Relations Section. SBI, with its heritage dating back to the year 1806, strives to continuously provide latest and upto date information on its financial performance. It is our endeavor to walk on the path of transparency and allow complete access to all the stakeholders enabling total awareness about the Bank. The Bank communicates with the stakeholders through a variety of channels, such as through e-mail, website, conference call, one-on-one meeting, analysts meet and attendance at Investor Conference throughout the world.
Please find below Banks financial results, analysis of performance and other highlights which will be of interest to Investors, Fund Managers and Analysts. SBI has always been fundamentally strong in its core business which is mirrored in its results year after year.
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The Corporate Accounts Group is a Strategic Business Unit of the Bank set up exclusively to fulfil the specialised banking needs of top corporates in the country.
State Bank of India has 52 foreign offices in 34 countries across the globe. State Bank of India invites you to take a journey to understand the potential of not just a large but truly global organisation.
Credit Appraisal is a process to ascertain the risks associated with the extension of the credit facility. It is generally carried by the financial institutions which are involved in providing
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It is the process of appraising the credit worthiness of a loan applicant. Factors like age, income, number of dependents, nature of employment, continuity of employment, repayment capacity, previous loans, credit cards, etc. are taken into account while appraising the credit worthiness of a person. Every bank or lending institution has its own panel of officials for this purpose.
However the 3 C of credit are crucial & relevant to all borrowers/ lending which must be kept in mind at all times. Character Capacity Collateral
If any one of these are missing in the equation then the lending officer must question the viability of credit.
There is no guarantee to ensure a loan does not run into problems; however if proper credit evaluation techniques and monitoring are implemented then naturally the loan loss probability / problems will be minimized, which should be the objective of every lending officer.
Credit is the provision of resources (such as granting a loan) by one party to another party where that second party does not reimburse the first party immediately, thereby generating a debt, and instead arranges either to repay or return those resources (or material(s) of equal value) at a later date. The first party is called a creditor, also known as a lender, while the second party is called a debtor, also known as a borrower.
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Credit allows you to buy goods or commodities now, and pay for them later. We use credit to buy things
with an agreement to repay the loans over a period of time. The most common way to avail credit is by the use of credit cards. Other credit plans include personal loans, home loans, vehicle loans, student loans, small business loans, trade.
A credit is a legal contract where one party receives resource or wealth from another party and promises to repay him on a future date along with interest. In simple terms, a credit is an agreement of postponed payments of goods bought or loan. With the issuance of a credit, a debt is formed.
There are four basic types of credit. By understanding how each works, you will be able to get the most for your money and avoid paying unnecessary charges. Service credit is monthly payments for utilities such as telephone, gas, electricity, and water. You often have to pay a deposit, and you may pay a late charge if your payment is not on time. Loans let you borrow cash. Loans can be for small or large amounts and for a few days or several years. Money can be repaid in one lump sum or in several regular payments until the amount you borrowed and the finance charges are paid in full. Loans can be secured or unsecured. Installment credit may be described as buying on time, financing through the store or the easy payment plan. The borrower takes the goods home in exchange for a promise to pay later. Cars, major appliances, and furniture are often purchased this way. You usually sign a contract, make a down payment, and agree to pay the balance with a specified number of equal payments called installments. The finance charges are included in the payments. The item you purchase may be used as security for the loan. Credit cards are issued by individual retail stores, banks, or businesses. Using a credit card can be the equivalent of an interest-free loan--if you pay for the use of it in full at the end of each month.
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BRIEF OVERVIEW OF LOANS Credit can be of two types fund base & non-fund base: FUND BASED includes: Working Capital Term Loan
FUND BASED:WORKING CAPITAL:1. GENERAL The objective of running any industry is earning profits. An industry will require funds to acquire Fixed assets like land, building, plant, machinery, equipments, vehicles, tools etc., & also to run the business i.e. its day to day operations.
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Thus Working Capital Required is dependent on (a) The volume of activity (viz. level of operations i.e. Production & sales) (b) The activity carried on viz. mfg process, product, production programme, the materials & marketing mix. 3. METHODS & APPLICATION SEGMENT SSI SBF C&I Trade Services LIMITS Upto Rs 5 cr Above Rs 5 cr All loans & Upto Rs 1 cr METHOD Traditional Method & Nayak Committee method Projected Balance Sheet Method Traditional / Turnover Method Traditional Method for Trade & Projected Turnover Method Projected Balance Sheet Method & Projected Turnover Method Projected Balance Sheet Method Traditional Method Projected Balance Sheet Method & Projected Turnover Method
Above Rs 1 cr & upto Rs 5 cr Above Rs 5 cr C&I Industrial Below Units Rs 25 lacs Rs 25 lacs & Over but upto Rs 5 cr
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4. OPERATING CYCLE METHOD a) Any manufacturing activity is characterized by a cycle of operations consisting of purchase of purchase of raw materials for cash, converting these into finished goods & realizing cash by sale of these finished goods.
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Raw Materials
Stock in Process
Cash
Finished Goods
Bills
c) The time that lapses between cash outlay & cash realization by sale of finished goods & realization of sundry debtors is known as the length of the operating cycle. d) That is, the operating cycle consists of: Time taken to acquire raw materials & average period for which they are in store.
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Operating cycle is also called the cash-to-cash cycle & indicates how cash is converted into raw material, stocks in process, finished goods, bills (receivables) & finally back to cash. Working capital is the total cash that is circulating in this cycle. Therefore, working capital can be turned over or redeployed after completing the cycle. e) The length of the operating cycle = a+b+c+d (as in 4.4) If a = 60 days b = 10 days c = 20 days d = 30 days The operating cycle is 120 days (nearly 4 months). This means there are 365/120 = 3 cycles of operations in a year. Sales Operating expenses = = Rs. 1,00,000 per annum Rs. 72,000 per annum
But the working capital requirement, as you know, is not Rs. 72,000. In these cases, there are 3 operating cycles in a year. That means each rupee of working deployed in the unit is turned over 3 times in a year. (This is also known as working capital turnover ratio). Therefore WCR = Operating Expenses No. of cycles per annum = Rs. 72,000/- = Rs. 24,000/3
Assessment of Working Capital Requirement & Permissible Bank Finance using Operating Cycle Concept Let us consider a case of a unit where: Sales = Rs. 20,000 p.m. (A)
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WCR = B * D = 19,000 * 35 = Rs. 22,167/- (approx.) 30 30 Where B = Operating Expenses; & D = Length of Operating cycle
TERM LOAN
1. A term loan is granted for a fixed term of not less than 3 years intended normally for financing fixed assets acquired with a repayment schedule normally not exceeding 8 years. 2. A term loan is a loan granted for the purpose of capital assets, such as purchase of land, construction of, buildings, purchase of machinery, modernization, renovation or
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The term loan is an advance not repayable on demand but only in installments ranging over a period of years. The repayment of term loan is not out of sale proceeds of the goods & commodities per se, whether given as security or not. The repayment should come out of the future cash accruals from the activity of the unit. The security is not the readily saleable goods & commodities but the fixed assets of the units.
3. It may thus be observed that the scope & operation of the term loans are entirely different from those of the conventional working capital advances. The Banks commitment is for a long period & the risk involved is greater. An element of risk is inherent in any type of loan because of the uncertainty of the repayment. Longer the duration of the credit, greater is the attendant uncertainty of repayment & consequently the risk involved also becomes greater. 4. However, it may be observed that term loans are not so lacking in liquidity as they appear to be. These loans are subject to a definite repayment programme unlike short term loans for working capital (especially the cash credits) which are being renewed year after year. Term loans would be repaid in a regular way from the anticipated income of the industry/ trade.
5. These distinctive characteristics of term loans distinguish them from the short term credit granted by the banks & it becomes necessary therefore, to adopt a different approach in examining the applications of borrowers for such credit & for appraising such proposals. 6. The repayment of a term loan depends on the future income of the borrowing unit. Hence, the primary task of the bank before granting term loans is to assure itself that the anticipated income from the unit would provide the necessary amount for the repayment of the loan. This will involve a detailed scrutiny of the scheme, its financial aspects, economic aspects, technical aspects, a projection of future trends of outputs & sales & estimates of cost, returns, flow of funds & profits. 7. Appraisal of Term Loans
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Appraisal of term loan for, say, an industrial unit is a process comprising several steps. There are four broad aspects of appraisal, namely Technical Feasibility - To determine the suitability of the technology selected & the adequacy of the technical investigation & design; Economic Feasibility - To ascertain the extent of profitability of the project & its sufficiency in relation to the repayment obligations pertaining to term assistance; Financial Feasibility - To determine the accuracy of cost estimates, suitability of the envisaged pattern of financing & general soundness of the capital structure; & Managerial Competency To ascertain that competent men are behind the project to ensure its successful implementation & efficient management after commencement of commercial production.
7.1 Technical Feasibility The examination of this item consists of an assessment of the various requirement of the actual production process. It is in short a study of the availability, costs, quality & accessibility of all the goods & services needed.
a) The location of the project is highly relevant to its technical feasibility & hence special attention will have to be paid to this feature. Projects whose technical requirements could have been taken care of in one location sometimes fail because they are established in another place where conditions are less favorable. One project was located near a river to facilitate easy transportation by barge but lower water level in certain seasons made essential transportation almost impossible. Too many projects have become uneconomical because sufficient care has not been taken in the location of the project, e.g. a woolen scouring & spinning mill needed large quantities of good water but was located in a place which lacked ordinary supply of water & the limited water supply available also required efficient softening treatment. The accessibility to the various resources has meaning only with reference to location. Inadequate transport facilities or lack of sufficient power or water for instance, can adversely affect an otherwise sound industrial project. b) Size of the plant One of the most important considerations affecting the feasibility of a new industrial enterprise is the right size of the plant. The size of the plant will be
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7.2 Economic Feasibility An economic feasibility appraisal has reference to the earning capacity of the project. Since earnings depend on the volume of sales, it is necessary to determine how much output or the additional production from an established unit the market is likely to absorb at given prices. a) A thorough market analysis is one of the most essential parts of project investigation. This involves getting answers to three questions. a) How big is the market? b) How much it is likely to grow? c) How much of it can the project capture?
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7.3 Financial Feasibility The basis data required for the financial feasibility appraisal can be broadly grouped under the following heads i) ii) iii) Cost of the project including working capital Cost of production & estimates of profitability Cash flow estimates & sources of finance.
The cash flow estimates will help to decide the disbursal of the term loan. The estimate of profitability & the breakeven point will enable the banker to draw up the repayment programme, start-up time etc. The profitability estimates will also give the estimate of the Debt Service Coverage which is the most important single factor in all the term credit analysis. A study of the projected balance sheet of the concern is essential as it is necessary for the appraisal of a term loan to ensure that the implementation of the proposed scheme.
Break-even point:
In a manufacturing unit, if at a particular level of production, the total manufacturing cost equals the sales revenue, this point of no profit/ no loss is known as the break-even point. Break-even point is expressed as a percentage of full capacity. A good project will have reasonably low
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This ratio is valuable, in that it serves as a measure of the repayment capacity of the project/ unit & is, therefore, appropriately included in the cash flow statements. The ratio may vary from industry to industry but one has to view it with circumspection when it is lower than the benchmark of 1.75. The repayment programme should be so stipulated that the ratio is comfortable.
7.4 Managerial Competence In a dynamic environment, the capacity of an enterprise to forge ahead of its competitors depends to a large extent, on the relative strength of its management. Hence, an appraisal of management is the touchstone of term credit analysis. If there is a change in the administration & managerial set up, the success of the project may be put to test. The integrity & credit worthiness of the personnel in charge of the management of the industry as well as their experience in management of industrial concerns should be examined. In high cost schemes, an idea of the units key personnel may also be necessary.
NON-FUND BASED:-
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LETTER OF CREDIT
Introduction The expectation of the seller of any goods or services is that he should get the payment immediately on delivery of the same. This may not materialize if the seller & the buyer are at different places (either within the same country or in different countries). The seller desires to have an assurance for payment by the purchaser. At the same time the purchaser desires that the amount should be paid only when the goods are actually received. Here arises the need of Letter of Credit (LCs). The objective of LC is to provide a means of payment to the seller & the delivery of goods & services to the buyer at the same time. Definition A Letter of Credit (LC) is an arrangement whereby a bank (the issuing bank) acting at the request & on the instructions of the customer (the applicant) or on its own behalf, i. ii. iii. is to make a payment to or to the order of a third party (the beneficiary), or is to accept & pay bills of exchange (drafts drawn by the beneficiary); or authorizes another bank to effect such payment, or to accept & pay such bills of exchanges (drafts); or authorizes another bank to negotiate against stipulated document(s), provided that the terms & conditions of the credit are complied with.
Basic Principle: The basic principle behind an LC is to facilitate orderly movement of trade; it is therefore necessary that the evidence of movement of goods is present. Hence documentary LCs is those which contains documents of title to goods as part of the LC documents. Clean bills which do not have document of title to goods are not normally established by banks. Bankers and all concerned deal only in documents & not in goods. If documents are in order issuing bank will pay irrespective of whether the goods are of expected quality or not. Banks are also not responsible for the genuineness of the documents & quantity/quality of goods. If importer is your borrower, the bank has to advice him to convert all his requirements in the form of documents to ensure quantity & quality of goods. Parties to the LC 1) 2) Applicant The buyer who applies for opening LC Beneficiary The seller who supplies goods
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Confirming bank may not be there in a transaction unless the beneficiary demand confirmation by his own bankers & such a request is made part of LC terms. A bank will confirm an LC for his beneficiary if opening bank requests this as part of LC terms. Reimbursing bank is used in an LC transaction by an opening bank when the bank does not have a direct correspondent/branch through whom the negotiating bank can be reimbursed. Here, the opening bank will direct the reimbursing bank to reimburse the negotiating bank with the payment made to the beneficiary. In the case of transferable LC, the LC may be transferred to the second beneficiary & if provided in the LC it can be transferred even more than once.
Types of Letter of Credit:a) Revocable & Irrevocable: As the name suggests, revocable LCs are those that can be revoked by the issuing bank & hence are not in commercial use. Irrevocable LCs cannot be revoked/ cancelled/ amended without the prior concern of all the parties to the LC. b) Confirmed LC: The seller may ask for the confirmation of the LC by a bank in his own country if he is not satisfied about the issuing banks credentials. c) Sight/ Usance LCs: In case of the sight LCs beneficiary gets immediate payment upon presentation of the documents while in the case of usance, the payment is made after a certain period as per the LC terms. Sight LCs have to be paid by the drawee (buyer) immediately whereas he gets credit as per LC terms under Usance LCs.
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Illustration for computation of LC limit M/S XYZ Co Ltd Letter of credit limit of Rs. 20 crore (Rs. in crores) Total purchase of raw material Purchase of raw materials under LC Average monthly purchase of raw material under LC Average holding of imported raw materials (2.2 months consumption) Average usance period Lead time & transit period Total of (B) & (C) The requirement of LC limit (A) * (D) Limit recommended say Explanatory notes: 1) While calculating the amount of raw materials purchases on LC basis, the following points need to be noted. (Amount in rupees) (A) (B) (C) (D)
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BANK GUARANTEES
A contract of guarantee is defined as a contract to perform the promise or discharge the liability of the third person in case of the default. The parties to the contract of guarantees are: a) Applicant: The principal debtor person at whose request the guarantee is executed b) Beneficiary: Person to whom the guarantee is given & who can enforce it in case of default. c) Guarantee: The person who undertakes to discharge the obligations of the applicant in case of his default. Thus, guarantee is a collateral contract, consequential to a main contract between the applicant & the beneficiary. Purpose of Bank Guarantees Bank Guarantees are used to for both both preventive & remedial purposes. The guarantees executed by banks comprises both performance guarantees & financial guarantees. The guarantees are structured according to the terms of agreement, viz., security, maturity & purpose. Branches may issue guarantees generally for the following purposes: a) In lieu of security deposit/earnest money deposit for participating in tenders;
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Appraisal of Bank Guarantee Limit Proposals for guarantees shall be appraised with the same diligence as in the case of fund-base limits. Branches may obtain adequate cover by way of margin & security so as to prevent default on payments when guarantees are invoked. Whenever an application for the issue of bank guarantee is received, branches should examine & satisfy themselves about the following aspects: a) The need of the bank guarantee & whether it is related to the applicants normal trade/business. b) Whether the requirement is one time or on the regular basis c) The nature of bank guarantee i.e., financial or performance d) Applicants financial strength/ capacity to meet the liability/ obligation under the bank guarantee in case of invocation. e) Past record of the applicant in respect of bank guarantees issued earlier; e.g., instances of invocation of bank guarantees, the reasons thereof, the customers response to the invocation, etc. f) Present o/s on account of bank guarantees already issued g) Margin h) Collateral security offered Format of Bank Guarantees Bank guarantees should normally be issued on the format standardized by Indian Banks
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CREDIT APPRAISAL IN BANKING SECTOR | Disbursement of loan | Post sanction activities such as receiving stock statements, review of accounts, renew of accounts, etc (on regular basis)
Credit appraisal means an investigation/assessment done by the bank prior before providing any loans & advances/project finance & also checks the commercial, financial & technical viability of the project proposed its funding pattern & further checks the primary & collateral security cover available for recovery of such funds.
PROBLEM STATEMENT:
To study the Credit Appraisal System in SME sector, at State Bank of India (SBI), Ahmedabad.
OBJECTIVES
To study the Credit Risk Assessment Models. To observe the movements to reduce various risk parameters which are broadly
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RESEARCH DESIGN
Analytical in nature
COVERAGE
Study of credit appraisal in banking sector at State Bank of India, Ahmedabad
LIMITATION OF STUDY
Due to the constraint limited study on the project has been done Access to data ( Credit Appraisal data in detail is not available)
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This study will help in understanding the credit appraisal system in banks & to reduce various risk parameters, which are broadly categorized into financial risk, business risk, industrial risk & management risk associated in providing any loans or advances or project finance.
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4.1 Concept:
The small-scale industries (SSI) produce about 8000 products, contribute 40% of the industrial output and offer the largest employment after agriculture. The sector, therefore, presents an opportunity to the nation to harness local competitive advantages for achieving global dominance.
4.3 Definition of SMEs At present, a small scale industrial unit is an undertaking in which investment in plant and machinery, does not exceed Rs.1 crore, except in respect of certain specified items under hosiery,
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SME: At present, a small scale industrial unit is an industrial undertaking in which investment in plant and machinery, does not exceed Rs.1 crore except in respect of certain specified items under hosiery, hand tools, drugs and pharmaceuticals, stationery items and sports goods where this investment limit has been enhanced to Rs.5 crore. A comprehensive legislation which would enable the paradigm shift from small scale industry to small and medium enterprises is under consideration of Parliament. Pending enactment of the above legislation, current SSI/tiny industries definition may continue. Units with investment in plant and machinery in excess of SSI limit and up to Rs.10 crore may be treated as Medium Enterprises (ME). Only SSI financing will be included in Priority Sector.
All banks may fix self-targets for financing to SME sector so as to reflect a higher disbursement
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Banks may initiate necessary steps to rationalize the cost of loans to SME sector by adopting a transparent rating system with cost of credit being linked to the credit rating of enterprise. SIDBI has developed a Credit Appraisal & Rating Tool (CART) as well as a Risk Assessment Model (RAM) and a comprehensive rating model for risk assessment of proposals for SMEs. The banks may consider to take advantage of these models as appropriate and reduce their transaction costs. In order to increase the outreach of formal credit to the SME sector, all banks, including Regional Rural Banks may make concerted efforts to provide credit cover on an average to at least 5 new small/medium enterprises at each of their semi urban/urban branches per year. A debt restructuring mechanism for nursing of sick units in SME sector and a One Time Settlement (OTS) Scheme for small scale NPA accounts in the books of the banks as on March 31, 2004 are being introduced.
4.5 CHALLENGES FACED BY SME: The challenges being faced by the small and medium sector may be briefly set out as followsa) Small and Medium Enterprises (SME), particularly the tiny segment of the small enterprises have inadequate access to finance due to lack of financial information and non-formal business practices. SMEs also lack access to private equity and venture capital and have a very limited access to secondary market instruments. b) SMEs face fragmented markets in respect of their inputs as well as products and are vulnerable to market fluctuations. c) SMEs lack easy access to inter-state and international markets. d) The access of SMEs to technology and product innovations is also limited. There is lack of awareness of global best practices. e) SMEs face considerable delays in the settlement of dues/payment of bills by the large scale buyers. With the deregulation of the financial sector, the ability of the banks to service the credit requirements of the SME sector depends on the underlying transaction costs, efficient recovery
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LENDER TASK Identify the risk factors, and Mitigate the risk
HOW DOES RISK ARISE IN CREDIT? In the business world, Risk arises out of Deficiencies / lapses on the part of the management (Internal factor) Uncertainties in the business environment (External factor) Uncertainties in the industrial environment (External factor) Weakness in the financial position (Internal factor)
To put in another way, success factors behind a business are: Managerial ability Favorable business environment Favorable industrial environment
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As such, these are the broad risk categories or risk factors built into our CRA models. CRA takes into account the above types of risks associated with the borrowal unit. The eventual CRA rating awarded to a unit (based on a score of 100) is a single-point risk indicator of an individual credit exposure, & is used to indentify, to measure & to monitor the credit risk of an individual proposal. At the corporate level, CRA is also used to track the quality of Banks credit portfolio. CREDIT & RISK Go hand in hand. They are like twin brothers. They can be compared to two sides of the same coin. All credit proposals have some inherent risks, excepting the almost negligible volume of lending against liquid collaterals with adequate margin.
LENDING DESPITE RISKS: So, risk should not deter a Banker from lending. A bankers task is to identify/ assess the risk factors/ parameters & manage / mitigate them on a continuous basis. But its always prudent to have some idea about the degree of risk associated with any credit proposal. The banker has to take a calculated risk, based on risk-absorption/ risk-hedging capacity & risk-mitigation techniques of the Bank.
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IMPORTANCE OF CREDIT RISK ASSESSMENT Credit is a core activity of banks & an important source of their earnings, which go to pay interest to depositors, salaries to employees & dividend to shareholders In credit, it is not enough that we have sizable growth in quantity/ volume, it is also necessary to ensure that we have only good quality growth. To ensure asset quality, proper risk assessment right at the beginning, that is, at the time of taking an exposure, is extremely important. Moreover, with the implementation of Basle-II accord4, capital has to be allocated for loan assets depending on the risk perception/ rating of respective assets. It is, therefore, extremely important for every bank to have a clear assessment of risks of the loan assets it creates, to become Basle-II compliant. That is why Credit Risk Assessment (CRA) system is an essential ingredient of the Credit Appraisal exercise. INDIAN SCENARIO: In Indian banks, there was no systematic method of Credit Risk Assessment till late 1980s/ early 1990s. Health Code System (1985) / IRAC norms (1993) are Asset (loan) classification systems, not CRA systems. RBI came out with its guidelines on Risk Management Systems in Banks in 1999 & Guidance Note on Management of Credit in October, 2002.
SBI SCENARIO: However, like in many other fields, in the field of Credit Risk Assessment too, our Bank played a proactive & pioneering role. We had our Credit Rating System (CRA) in 1988. Then, the CRA system was introduced in the Bank in 1996. The first CRA model was rolled out in 1996 to take care of exposures to the C & I (Manufacturing) segment. Thereafter, separate models for SSI & AGL segments were introduced in 1998, when the C&I (Mfg) CRA model was developed for Non Banking Finance Companies (NBFCs).
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As of now, in SBI, CRA is the most important component of the Credit Appraisal exercise for all exposures > 25 lacs & a very important tool in decision-making (a Decision Support System) as well as in pricing. The review of the existing CRA Model for NBFCs is under process. CREDIT RISK ASSESSMENT (CRA) MINIMUM SCORES / HURDLE RATES 1. The CRA models adopted by the Bank take into account all possible factors which go into appraising the risks associated with a loan. These have been categorized broadly into financial, business, industrial & management risks and are rated separately. To arrive at the overall risk rating, the factors duly weighted are aggregated & calibrated to arrive at a single point indicator of risk associated with the credit decision. 2. Financial parameters: The assessment of financial risk involves appraisal of the financial strength of the borrower based on performance & financial indicators. The overall financial risk is assessed in terms of static ratios, future prospects & risk mitigation (collateral security / financial standing). 3. Industry parameters: The following characteristics of an industry which pose varying degrees of risk are built into Banks CRA model: Competition Industry outlook Regulatory risk Contemporary issues like WTO etc.
4. Management parameters: The management of an enterprise / group is rated on the following parameters: Integrity (corporate governance) Track record Managerial competence / commitment Expertise
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5. The risk parameters as mentioned above are individually scored to arrive at an aggregate score of 100 (subject to qualitative factors negative parameters). The overall score thus obtained (out of a max. of 100) is rated on a 8 point scale from SB1/SBTL1 to SB 8 /SBTL8.
(b) Type of Ratings S. No. (i) (ii) Model Regular Model Simplified Model Type of Rating Borrower Rating Facility Rating Borrower Rating
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New Rating Scales Borrower Rating: 16 Rating Grades There are different rating given to the different banks. For example S. No. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 Borrower Rating SB1 SB2 SB3 SB4 SB5 SB6 SB7 SB8 SB9 SB10 SB11 SB12 SB13 SB14 SB15 SB16 Range of scores 94-100 90-93 86-89 81-85 76-80 70-75 64-69 57-63 50-56 45-49 40-44 35-39 30-34 25-29 <24 Risk level Virtually Zero risk Lowest Risk Lower Risk Low Risk Moderate Risk with Adequate Cushion Moderate Risk Average risk Acceptable Risk (Risk Tolerance Threshold) Borderline risk High Risk Higher risk Substantial risk Pre-Default Risk (extremely Vulnerable to default) Default Grade Comfort Level Virtually Absolute safety Highest safety Higher safety High safety Adequate safety Moderate Safety Above Safety Threshold Safety Threshold Inadequate safety Low safety Lower safety Lowest safety Nil
Bank has introduced New Rating Scales for borrower for giving loans. Rating is given on the basis of scores out of 100. Bank gives loans to the borrower as per their rating like SBI gives loans to the borrower up to SB8 rating as it has average risk till SB8 rating. From SB9 rating the risk increases. So banks does not give loans after SB8 rating.
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New Rating Scales - Facility Rating : 16 Rating Grades S NO 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 FACILITY GRADES FR1 FR2 FR3 FR4 FR5 FR6 FR7 FR8 FR9 FR10 FR11 FR12 FR13 FR14 FR15 FR16 RANGE OF SCORES 94-100 87-93 80-86 73-79 66-72 59-65 52-58 45-51 38-44 31-37 24-30 17-23 11-16 5-10 1-4 0 RISK LEVEL Virtually Zero Risk Lowest Risk Lower Risk Low Risk Moderate Risk with Adequate Cushion Moderate Risk Average Risk Acceptable Risk (Risk Tolerance Threshold) High Risk Higher Risk Substantial Risk Highest Risk NIL COMFORT LEVEL Virtually Absolute Safety Highest Safety Higher Safety High Safety Adequate Safety Moderate Safety Above Safety Threshold Safety Threshold Low Safety Lower Safety Lowest Safety
CHAPTER-6
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1.1 State Bank of Indias (SBI) Loan Policy is aimed at accomplishing its mission of retaining the banks position as a Premier Financial Services Group, with World class standards & significant global business, committed to excellence in customer, shareholder & employee satisfaction & to play a leading role in the expanding & diversifying financial services sector, while continuing emphasis on its Development Banking role.
1.2 The Loan Policy of the any bank has successfully withstood the test of time and with inbuilt flexibilities, has been able to meet the challenges in the market place. The policy exits & operates at both formal & informal levels. The formal policy is well documented in the form of circular instructions, periodic guidelines & codified instructions, apart from the Book of Instructions, where procedural aspects are highlighted.
1.3 The policy, at the holistic level, is an embodiment of the Banks approach to sanctioning, managing & monitoring credit risk & aims at making the systems & controls effective.
1.4 The Loan Policy also aims at striking a balance between underwriting assets of high quality, and customer oriented selling. The objective is to maintain Banks undisputed leadership in the Indian Banking scene. 1.5 The Policy aims at continued growth of assets while endeavoring to ensure that these
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Individuals as borrowers
Maximum aggregate credit facilities of Rs. 20 crores ( Fund based & non-fund based ) Maximum aggregate credit facilities of Rs. 80 crores ( Fund based & non-fund based )
Corporates
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1 (B) Quantitative:
(a) Working capital: The basis quantitative parameters underpinning the Banks credit appraisal are as follows:-
Sector/ Parameters Liquidity Current Ratio (min.) Financial Soundness TOL/TNW (max.) DSCR Net (min.) Gros (min.) Gearing D/E (max.) Promoters contribution (min.)
Mfg 1.33
Others 1.20 (For FBWC limits above Rs. 5 cr.) 1.00 (For FBWC limits upto Rs. 5 cr.)) 5.00 2:1 1.75:1
(i) Liquidity: Current Ratio (CR) of 1.33 will generally be considered as a benchmark level of liquidity. However the approach has to be flexible. CR of 1.33 is only indicative & may not be deemed mandatory. In cases where the CR is projected at a lower than the benchmark or a slippage in the CR is proposed, it alone will not be a reason for rejection for the loan proposal or for the sanction of the loan at a lower level. In such cases, the reason for low CR or slippage should be carefully
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(ii) Net Working Capital: Although this is a corollary of current ratio, the movements in NWC are watched to ascertain whether there is a mismatch of long term sources vis--vis long term uses for purposes which may not be readily acceptable to the Bank so that corrective measures can be suggested.
(iii)
Financial Soundness:
This will be dependent upon the owners stake or the leverage. Here again the benchmark will be different for manufacturing, trading, hire-purchase & leasing concerns. For industrial ventures a Total Outside Liability/ Tangible Net worth ratio of 3.0 is reasonable but deviations in selective cases for understandable reasons may be accepted by the sanctioning authority. (iv) Turn-Over: The trend in turnover is carefully gone into both in terms of quantity & valve as also market share wherever such data are available. What is more important to establish a steady output if not a rising trend in quantitative terms because sales realization may be varying on account of price fluctuations. (v) Profits: While net profit is ultimate yardstick, cash accruals, i.e., profit before depreciation & taxation conveys the more comparable picture in view of changes in rate of depreciation & taxation, which have taken place in the intervening years. However, for the sake of proper assessment, the non-operating income is excluded, as these are usually one time or extraordinary income. Companies incurring net losses consistently over 2 or more years will be given special attention, their accounts closely monitored, and if necessary, exit options explored.
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(vi) Credit Rating: Wherever the company has been rated by a Credit Rating Agency for any instrument such as CP / FD this will be taken into account while arriving at the final decision. However as the credit rating involves additional expenditure, we would not normally insist on this and only use this tool if such an agency had already looked into the company finances.
(i) In case of term loan & deferred payment guarantees, the project report is obtained from the customer, which may be compiled either in-house or by a firm of consultants/ merchant bankers. The technical feasibility & economic viability is vetted by the bank & wherever it is felt necessary, the Credit Officer would seek the benefit of a second opinion either from the Banks Technical Consultancy cell or from the consultants of the Bank/ SBI Capital Markets Ltd. (ii) Promoters contribution of at least 20% in the total equity is what we normally expect. But promoters contribution may vary largely in mega projects. Therefore there cannot be a definite benchmark. The sanctioning authority will have the necessary discretion to permit deviations. (iii) The other basic parameter would be the net debt service coverage ratio i.e. exclusive of interest payable, which should normally not go below 2. On a gross basis DSCR should not be below 1.75. These ratios are indicative & the sanctioning authority may permit deviations selectively.
(iv)As regards margin on security, this will depend on Debt: Equity gearing for the project, which should preferably be near about 1.5: 1 & should not in any case be above 2:1, i.e., Debt should not be more than 2 times the Equity contribution. The sanctioning authority in exceptional cases may permit deviations from the norm very selectively. (v) Other parameters governing working capital facilities would also govern Term Credit facilities to the extent applicable. (C) Lending to Non-Banking Financial Companies (NBFCs)
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REQUIREMENT OF DOCUMENTS FOR PROCESS OF LOAN 1. Application for requirement of loan 2. Copy of Memorandum & Article of Association 3. Copy of incorporation of business 4. Copy of commencement of business 5. Copy of resolution regarding the requirement of credit facilities
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6. Brief history of company, its customers & supplies, previous track records, orders in hand. Also provide some information about the directors of the company 7. Financial statements of last 3 years including the provisional financial statement for the year 2007-08 8. Copy of PAN/TAN number of company 9. Copy of last Electricity bill of company 10. Copy of GST/CST number 11. Copy of Excise number 12. Photo I.D. of all the directors 13. Address proof of all the directors 14. Copies related to the property such as 7/12 & 8A utara, lease/ sales deed, 2R permission, Allotment letter, Possession 15. Bio-data form of all the directors duly filled & notarized 16. Financial statements of associate concern for the last 3 years
1. Pricing in the Bank can be divided into interest pricing and non-interest pricing. Pricing of loans up to Rs.2 lacs will be as prescribed by RBI. In line with RBI guidelines, he Bank announces from time to time its single Benchmark Prime Lending Rate (BPLR), i.e., reference / indicative rates at which the Bank would lend to its best customers. The BPLR would be referred to as State Bank Advance Rate (SBAR) in our Bank. Interest rate without reference to SBAR could be charged in respect of certain categories of loan / credit like discounting of bills, lending to intermediary agencies etc. Interest rates below SBAR could be offered to exporters or other credit worthy borrowers including public enterprises on the lines of a transparent and objective
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2. An internal Credit Risk Rating system covering all advances of Rs.25 lacs and above in C&I, SSI and AGL segments has been put in place to facilitate structured assessment of credit risks. The system enables evaluation of the fundamental strength of the borrower so as to charge a graded rate of interest based on different ratings. However, taking into consideration the trends in movement of interest rates and market competition, the Bank has also adopted an appropriate authority structure to facilitate competitive pricing of loan products linked both to risk rating and overall business considerations.
3. Bank has introduced fixed interest rates in respect of certain categories of loans in personal segment, e.g. housing term loans to individuals. Fixed interest rates are also extended for commercial loans, albeit highly selectively.
4. Market related charges and a discretionary structure that enables branches to effectively face competition are in place. These would be reviewed periodically based on feedback from operating units and the market. 5. Pricing of Bank's funds and services while being basically market driven is also determined by two important considerations, i.e., minimum desired profitability and risk inherent in the transaction. At the corporate level, the applicable price for a particular advance or service is fixed taking into account the marginal cost of Bank's funds and desired rate of return as calculated from indices like profitability levels and return on capital employed. In case of corporate relationship where the value of connections and overall potential for profitability from a particular account are more important than a particular transaction, the price is fine tuned even to level of no-loss-no-profit in the transaction. For long term exposures, the factors that weigh are the rate charged by the financial institutions, the period of exposure, the pattern of volatility in the interest rates and the expected movement of the rates in the long term perspective.
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1. Working capital facilities are granted by the Bank for a period of 1 year and thereafter they are required to be renewed each year, i.e., fresh sanction is accorded for the limits. Where, however, renewal is not possible for some reason, sanction for the continuance of the limits is obtained in each case by reviewing the facilities. 2. Term loans which are irregular will be reviewed once in six months. A separate authority structure, as given below, has been prescribed for above noted half-yearly review of term loans:
3. In the case of all listed companies with credit rating of SB4/SBTL4 and below, a brief review is to be put up on the basis of half-yearly working results published by them duly incorporating comments such as extent of exposure, conduct of the account etc. Such review is to be submitted to the respective GE in respect of ECCB sanctions, to the CGM (Circle) / CGM (CAG-Cen.) in respect of COCC-I&II sanctions and to the GM (Network) in all other cases.
4. There will be no CRA rating review for term loans. However, in respect of term loans, the following set of financial covenants is to be stipulated:
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(a) Any adverse deviation by more than 20% from the stipulated levels in respect of any two of the items (i) to (iii) above - penal interest to be levied for the period of non-adherence subject to a minimum period of 1 year. (b) Default in payment of interest/installments to the Bank or to other FI/Banks-penal interest to be levied for the period of such defaults. TAKE OVER OF ADVANCES
1. Bank needs to aggressively market for good quality advances. One of the strategies for increasing good quality assets in the Bank's loan portfolio, would be to take over advances from other banks/FIs. Keeping this in view and with the prime objective of adding only good quality assets, a common set of norms / guidelines for C&I, SSI and AGL segments has been laid down for take over of advances.
(i) The advance to be taken over should be rated SB3/SBTL3 or above. (ii) The unit should score the minimum scores as prescribed, under the various risk segments, in the Credit Risk Assessment.
(iii)
The account should have been a standard asset in the books of the other bank/FI during the preceding 3 years. (If this information is not forthcoming from the bank/FI, a certificate should be obtained from the borrowers Auditor that the loan has been a standard asset during the preceding 3 years in the books of the bank/FI in terms of the asset classification norms of RBI. The services of statutory auditors of our Bank may also be sought for this purpose). However, if a unit is not having a track record for 3 years, as
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Note 1 : In the case of take-over proposals involving advances up to Rs.25 lacs, the ratingshould be carried out, as per the scoring model prescribed under SME Smart Score (Refer page 170, Chapter 34, Part III, Volume III of Manual on Loans & Advances). Other factors that may be kept in view are: -
Continued viability Track record Standing in the market of the unit/ promoter.
Note 3 : In the cases of working capital finance through consortium or multiple banking, increasing our share, and joining a consortium (or when a member bank exits consortium and we join the consortium in its place), are not reckoned as take-over of advances from other banks.
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i) The current ratio and TOL/TNW ratio should be at acceptable levels, as per audited balance sheet not older than 12 months. Current ratio of not below 1 is acceptable up to FBWC limit of Rs.5 cr. For FBWC limits of above Rs.5 Cr. the current ratio of 1.33 will be indicative. It may be considered acceptable up to 1.20, depending on the activity. TOL/TNW ratio higher than 3 would be permissible depending on the type of activity.
ii) The unit should have earned post-tax profits in each of the immediately preceding 3 years. However, if the unit has been in existence for a lesser period, it should have earned net profit (post-tax) in the preceding year of operation.
C. Other Guidelines:
(i) In all cases of take-over of advances from other banks, the credit information report in the format prescribed by IBA should be obtained. The experience of the present banker (item 13 of the format) should show satisfactory dealings with the unit. Where, from the point of competition, it is necessary not to alert the bank concerned, the report may be obtained after the sanction of facilities but before release of the facilities.
(ii) In all cases of take-over, branches should ensure proper documentation and other formalities to protect the interest of our Bank.
(iii) In all cases of take-over, branches should assess the requirements of the borrower and obtain sanction for the proposed limits before actually taking over the outstanding liability of the borrower to their existing bank/ FI.
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(iv) The following aspects should invariably be examined in each case of take-over.
Reasons for take-over Market perception including the existing banks/FIs perception regarding the unit and its management. (For this, the appraising officials may record briefly on their enquiries with market sources/other bank/FI); Potential ancillary business accruing to the Bank; Terms and conditions stipulated by the existing bank and those proposed by our Bank, particularly to ensure against dilution of security cover. No takeover of advances from any Public Sector Bank will be resorted to by quoting finer rates
(v) The credit rating should be done based on the audited balance sheet which is not older than 12 months. However if the audited balance sheet is more than 12 months old and the proposal has to be considered from the business angle, then a provisional balance sheet as on a recent date may be obtained from the unit and the CRA exercise done based on these figures, additionally. Unit should clear the stipulated hurdle rate in both the exercises.
In all the cases of take-over proposals, AC is required to be obtained. For this purpose, a brief proposal containing, inter alia, the comments on compliance with the norms and the other guidelines as above should be submitted to the appropriate authority as under: (i) For take-over of units complying with all the norms prescribed:
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E. While take over of 'P' segment advances is not generally encouraged, in consideration of larger business interests / valuable connections, take over of housing loans is considered selectively after due diligence and precautions, in cases where possession of the house / flat has been taken, repayment of existing loan has already commenced and installments have been paid as per terms of sanction.
CREDIT FACILITIES TO COMPANIES WHOSE DIRECTORS ARE IN THE DEFAULTERS' LIST OF RBI: 1. The Directors of any company may be classified as promoter / elected / professional/ nominee / honorary directors. RBI has been collecting and circulating information on defaulting companies amongst banks / FIs, including names of directors of such companies. Though RBI's defaulters' list is given due cognizance in the appraisal process, a general policy on the issues relating to sanction / continuation of credit facilities to such companies whose directors are in the RBI's defaulters' list needs to be put in place.
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The above policy on defaulters will be a broad framework for sanction / continuation of credit facilities to companies whose directors are in the RBI's list of defaulting borrowers of banks / FIs with dues of Rs.1 Cr. and above. When the list of such defaulters is circulated by CIBIL instead of RBI), the same Policy would continue to apply.
2. Willful default & action there against - The penal measures would be made applicable to all borrowers identified as willful defaulters or the promoters involved in diversion / siphoning of funds with outstanding balance of Rs.25 lacs or more without any exception. Similarly, the limit of Rs.25 lacs will also be applied for the purpose of taking cognizance of instances of siphoning and diversion of funds.
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4. In cases of project financing, Bank would endeavour to ensure end-use of funds by, inter alia, obtaining certification from Chartered Accountants. In case of short term corporate/clean loans, such an approach would be supplemented by due diligence on the part of the Bank. It shall be the endeavor of the Bank to ensure that such loans are limited to borrowers whose integrity and reliability are above board. Bank will also retain the right to get investigative audit conducted whenever it is prima facie satisfied that there is a case for such investigative audit to detect siphoning/ diversion of funds or other malfeasance.
5. No additional facilities shall be granted by the Bank to the listed willful defaulters. Further, entrepreneurs / promoters of companies where the Bank has identified siphoning /diversion of funds, mis-representation, falsification of accounts and fraudulent transactions shall be debarred from Bank finance for floating new ventures for a period of 5 years from the date the name of the willful defaulter is published by RBI / CIBIL. 6. The legal process, wherever warranted, against the borrowers / guarantors and foreclosure of recovery of dues should be initiated expeditiously. The Bank may also initiate criminal action against willful defaulters, where necessary.
7. Where possible, Bank shall adopt a proactive approach for a change of management of the willfully defaulting borrowing unit.
CREDIT MONITORING & SUPERVISION 1. Broadly, the objectives of post-sanction follow up, supervision and monitoring are as under: (a) Follow up function: To ensure the end-use of funds To relate the outstandings to the assets level on a continuous basis To correlate the activity level to the projections made at the time of the sanction / renewal of the credit facilities To detect deviation from terms of sanction.
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To ensure that effective follow up of advances is in place and asset quality of good order is maintained. To look for early warning signals, identify incipient sickness and initiate proactive remedial measures.
To ensure that effective supervision is maintained on loans / advances and appropriate responses are initiated wherever early warning signals are seen. To monitor on an ongoing basis the asset portfolio by tracking changes from time to time. Chalking out and arranging for carrying out specific actions to ensure high percentage of Standard Assets.
2. Detailed operative guidelines on the following aspects of effective credit monitoring are in place: Post-sanction responsibilities of different functionaries Reporting for control Security documents, Statement of stocks and book debts Computation of drawing power (DP) on eligible current assets and maintaining of DP register Verification of assets
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1.1 Sound credit appraisal involves analysis of the viability of operations of a business and the capacity of the promoters to run it profitably and repay the bank the dues as and then they fall
1.2. Towards this end the preliminary appraisal will examine the following aspects of a proposal. Banks lending policy and other relevant guidelines/RBI guidelines, Prudential Exposure norms, Industry Exposure restrictions, Group Exposure restrictions, Industry related risk factors, Credit risk rating, Profile of the promoters/senior management personnel of the project, List of defaulters, Caution lists,
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The companys Memorandum and Articles of Association should be scrutinized carefully to ensure (i) that there are no clauses prejudicial to the Banks interests, (ii) no limitations have been placed on the Companys borrowing powers and operations and (iii) the scope of activity of the company.
1.3. Further, if the proposal is to finance a project, the following aspects have to be examined:
Whether project cost is prima facie acceptable Debt/equity gearing proposed and whether acceptable Promoters ability to access capital market for debt/equity support Whether critical aspects of project - demand, cost of production, profitability, etc. are prima facie in order
1.4. After undertaking the above preliminary examination of the proposal, the branch will arrive at a decision whether to support the request or not. If the branch (a reference to the branch includes a reference to SECC/CPC etc. as the case may be) finds the proposal acceptable, it will call for from the applicant(s), a comprehensive application in the prescribed proforma, along with a copy of the proposal/project report, covering specific credit requirement of the company and other essential data/ information. The information, among other things, should include:
Organizational set up with a list of Board of Directors and indicating the qualifications, experience and competence of the key personnel in charge of the main functional areas e.g., purchase, production, marketing and finance; in other words a brief on the managerial resources and whether these are compatible with the size and scope of the proposed activity.
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Demand and supply projections based on the overall market prospects together with a copy of the market survey report. The report may comment on the geographic spread of the market where the unit proposes to operate, demand and supply gap, the competitors share, competitive advantage of the applicant, proposed marketing arrangement, etc. Current practices for the particular product/service especially relating to terms of credit sales, probability of bad debts, etc. Estimates of sales, cost of production and profitability. Projected profit and loss account and balance sheet for the operating years during the currency of the Bank assistance.
(i)appraisal report from any other bank/financial institution in case appraisal has been done by them, (ii) No Objection Certificate from term lenders if already financed by them and
(iii) Report from Merchant bankers in case the company plans to access capital market, wherever necessary.
1.5. In respect of existing concerns, in addition to the above, particulars regarding the history of the concern, its past performance, present financial position, etc. should also be called for. This data/information should be supplemented by the supporting statements such as: a) Audited profit loss account and balance sheet for the past three years (if the latest audited balance sheet is more than 6 months old, a pro-forma balance sheet as on a recent date should be obtained and analysed). For non-corporate borrowers, irrespective of market segment, enjoying credit limits of Rs.10 lacs and above from the banking system, audited balance sheet in the IBA approved formats should be submitted by the borrowers.
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c) Credit information reports from the existing bankers on the applicant Company, and
B. Detailed Appraisal
1.6 The viability of a project is examined to ascertain that the company would have the ability to service its loan and interest obligations out of cash accruals from the business. While appraising a project or a loan proposal, all the data/information furnished by the borrower should be counter checked and, wherever possible, inter-firm and inter-industry comparisons should be made to establish their veracity.
1.7 The financial analysis carried out on the basis of the companys audited balance sheets and profit and loss accounts for the last three years should help to establish the current viability. 1.8 In addition to the financials, the following aspects should also be examined: The method of depreciation followed by the company-whether the company is following straight line method or written down value method and whether the company has changed the method of depreciation in the past and, if so, the reason therefore; Whether the company has revalued any of its fixed assets any time in the past and the present status of the revaluation reserve, if any created for the purpose; Record of major defaults, if any, in repayment in the past and history of past sickness, if any; The position regarding the companys tax assessment - whether the provisions made in the balance sheets are adequate to take care of the companys tax liabilities;
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If the proposal involves financing a new project, the commercial, economic and Financial viability and other aspects are to be examined as indicated below: Statutory clearances from various Government Depts./ Agencies Licenses/permits/approvals/clearances/NOCs/Collaboration agreements, as applicable Details of sourcing of energy requirements, power, fuel etc. Pollution control clearance Cost of project and source of finance Build-up of fixed assets (requirement of funds for investments in fixed assets to be critically examined with regard to production factors, improvement in quality of products, economies of scale etc.) Arrangements proposed for raising debt and equity
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For the purpose of inter-firm comparison and other information, where necessary, source data from Stock Exchange Directory, financial journals/ publications, professional entities like CRISINFAC, CMIE, etc. with emphasis on following aspects: Market share of the units under comparison
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Also examine and comment on the status of approvals from other term lenders, market view (if anything adverse), and project implementation schedule. A pre-sanction inspection of the project site or the factory should be carried out in the case of existing units. To ensure a higher degree of commitment from the promoters, the portion of the equity / loans which is proposed to be brought in by the promoters, their family members, friends and relatives will have to be brought upfront. However, relaxation in this regard may be considered on a case to case basis for genuine and acceptable reasons. Under such circumstances, the promoter should furnish a definite plan indicating clearly the sources for meeting his contribution. The balance amount proposed to be raised from other sources, viz., debentures, public equity etc., should also be fully tied up. C. Present relationship with Bank:
Compile for existing customers, profile of present exposures: Credit facilities now granted Conduct of the existing account
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D. Credit risk rating: Draw up rating for (i) Working Capital and (ii) Term Finance.
E. Opinion Reports: Compile opinion reports on the company, partners/ promoters and the proposed guarantors.
F. Existing charges on assets of the unit: If a company, report on search of charges with ROC.
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G. Structure of facilities and Terms of Sanction: Fix terms and conditions for exposures proposed - facility wise and overall:
o Limit for each facility sub-limits o Security - Primary & Collateral, Guarantee o Margins - For each facility as applicable o Rate of interest o Rate of commission/exchange/other fees o Concessional facilities and value thereof o Repayment terms, where applicable o ECGC cover where applicable o Other standard covenants
H. Review of the proposal: Review of the proposal should be done covering (i) strengths and weaknesses of the exposure proposed (ii) risk factors and steps proposed to mitigate them (iii) deviations, if any, proposed from usual norms of the Bank and the reasons therefore.
I. Proposal for sanction: Prepare a draft proposal in prescribed format with required backup details and with recommendations for sanction.
J. Assistance to Assessment: Interact with the assessor, provide additional inputs arising from the assessment, incorporate these and required modifications in the draft proposal and generate an integrated final proposal for sanction.
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LOAN ADMINISTRATION - POST SANCTION CREDIT PROCESS GENERAL 1. NEED Lending decisions are made on sound appraisal and assessment of credit worthiness. Past record of satisfactory performance and integrity are no guarantee for future though they serve as a useful guide to project the trend in performance. Credit assessment is made based on promises and projections. A loan granted on the basis of sound appraisal may go bad because the borrower did not carry out his promises regarding performance. It is for this reason that proper follow up and supervision is essential. A banker cannot take solace in sufficiency of security for his loans. He has to a) make a proper selection of borrower b) Ensure compliance with terms and conditions c) Monitor performance to check continued viability of operations d) Ensure end use of funds. e) Ultimately ensure safety of funds lent.
The post-sanction credit process can be broadly classified into three stages viz., follow-up, supervision and monitoring, which together facilitate efficient and effective credit management and maintaining high level of standard assets. The objectives of the three stages of post sanction process are detailed below.
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A. ONE BANK The most familiar amongst the above for smaller loans is the One Borrower-One Bank arrangement where the borrower confines all his financial dealings with only one bank. Sometimes, units would prefer to have banking arrangements with more than one bank on account of the large financial requirement or the resource constraint of his own banker or due to varying terms & conditions offered by different banks or for sheer administrative convenience. The advantages to the bank in a multiple banking arrangement/ consortium arrangement are that the exposure to an individual customer is limited & risk is proportionate. The bank is also able to spread its portfolio. In the case of borrowing business entity, it is able to meet its funds requirement without being constrained by the limited resource of its own banker. Besides this, consortium arrangement enables participating banks to save man power & resources through common appraisal & inspection & sharing credit information. The various arrangements under borrowings from more than one bank will differ on account of terms & conditions, method of appraisal, coordination, documentation & supervision & control. B. CONSORTIUM LENDING When one borrower avails loans from several banks under an arrangement among all the lending bankers, this leads to a consortium lending arrangements. In consortium lending, several banks pool banking resourses & expertise in credit management together & finance a single borrower with a common appraisal, common documentation & joint supervision & follow up. The borrower enjoys the advantage similar to single window availing of credit facalities from several banks. The arrangement continues until any one of the bank moves out of the consortium. The bank taking the highest share of the credit will usually be the leader of consortium. There is no ceiling on the number of banks in a consortium.
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Multiple Banking Arrangement is one where the rules of consortium do not apply & no inter se agreement among banks exists. The borrower avails credit facility from various banks providing separate securities on different terms & conditions. There is no such arrangement called Multiple Banking Arrangement & the term is used only to donote the existence of banking arrangement with more than one bank. Multiple Banking Arrangement has come to stay as it has some advantages for the borrower & the banks have the freedom to price their credit products & non-fund based facility according to their commercial judgment. Consortium arrangement occasioned delays in credit decisions & the borrower has found his way around this difficulty by the multiple banking arrangement. Additionally, when units were not doing well, consensus was rarely prevalent among the consortium members. If one bank wanted to call up the advance & protect the security, another bank was interested in continuing the facility on account of group considerations. Points to be noted in case of multiple banking arrangements Though no formal arrangement exists among the financing banks, it is preferable to have informal exchange of information to ensure financial discipline Charges on the security given to the bank should be created with utmost care to guard against dilution in our security offered & to avoid double financing Certificates on the outstandings with the other banks should be obtained on the periodical basis & also verified from the Balance sheet of the unit to avoid excess financing
D. CREDIT SYNDICATION A syndicated credit is an agreement between two or more lending institutions to provide a borrower a credit facility using common loan documentation. It is a convenient mode of raising long-term funds. The borrower mandates a lead manager of his choice to arrange a loan for him. The mandate spells out the terms of the loan & the mandated banks rights & responsibilities. The mandated banker the lead manger prepares an information memorandum & circulates among prospective lender banks soliciting their participation in the loan. On the basis of the memorandum & on their own independent economic & financial evolution the leading banks take a view on the proposal. The mandated bank convenes the meeting to discuss the syndication strategy relating to coordination, communication & control within the syndication process & finalises deal timing, management fees, cost of credit etc. The loan agreement is signed by all the participating banks. The borrower is required to give prior notice to the lead manger about loan drawal to enable him to tie up disbursements with the other lending banks. Features of syndicated loans
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Advantages Strict, time-bound delivery schedule & drawals Streamlined process of documentation with clearly laid down roles & responsibilities Market driven pricing linked to the risk perception Competitive pricing but scope for fee-based income is also available Syndicated portions can be sold to another bank, if required Fixed repayment schedule & strict monitoring of default by markets which punish indiscipline
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Janak Transport Co. is a partnership firm established in 1982 for carrying a transport business.
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As the company is in this business since incorporation & the unit has good contracts with ONGC since last 26 years so it has a good repo with ONGC. As the company has a good repo with ONGC, the ONGC outlook of the business is considered positive. The firm has approached for term loan of Rs. 295 lacs to finance the purchase of MahindraBolero. The total project cost is estimated to be Rs. 363.44 lacs. Brief of Contract: (1). Fixed hire charges/ taxi/ month: Rs. 29150 (with fixed 3000 Km run/ month & 12 hours duty/ day) (2). Additional/ km charges beyond 3000 km. Rs. 3.57 (3). Duration of contract = 3 Years Proposed Credit Requirement: Fund Based = Rs. 295 lacs
Performance Details
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31.03.2007 21.04
31.03.2008 22.56
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c) Movement in TNW
2007 2008 21.04 2.90 2009 22.56 22.48 2010 113.48 92.62 2011 181.10 125.47
17.63 1.20
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Add. Increase in equity / premium Add./Subtract change in intangible assets Adjust prior year expenses Deduct Dividend Payment /Withdrawals Closing TNW
8.42
10.17
68.44
6.21 21.04
25.00 181.10
50.00 256.57
60.00 340.08
65.00 427.04
Appraisal Memorandum for term loan: Circle: Ahmedabad Branch: Mehsana Company: Janak Transport Company(JTC)
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b) Project / Purpose: To purchase 59 new Mahindra Bolero under tie-up arrangement with ONGC. c) d) Appraised by: Inhouse examined by the Branch and found to be economically viable Cost of Project & Means of finance:
Cost MAHINDRA Bolero DI-2WD Insurance RTO Tax WC Margin Total 328.6 3 15.34 19.47 363.4 4 Means Equity : 68.44
Debt: Total
295.00 363.44
e)
Remarks on Cost of project & Means of finance (in brief): Each vehicle shall cost Rs. 6.16 lacs as per details given below: Basic Price: Rs. 5.57 lacs RTO : Rs. 0.33 lacs
Insurance : Rs. 0.26 lacs The cost mentioned above is as per the quotation submitted by Shrijee Motors, Mehsana. The firm is required to purchase 59 Mahindra Bolero for this purpose. Total cost of vehicle including the insurance and R.T.O. is Rs.363.44 lacs. The project is proposed to be financed by way of medium term loan of Rs.295.00 lacs and firm shall raise capital of Rs. 68.44 lacs as a margin.
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Break-even and sensitivity analysis and whether acceptable: Break even analysis Net Sales (A) Variable costs Power and Fuel Other operating Exp. Total Variable Cost(B) Fixed Costs Direct Labour Selling, Admin. & General Expenses Interest Expenses Depreciation Total Fixed Cost ( C) Contribution (D=A-B) Contribution ratio (E=D/A) BE sales (F=C/E) BE sales as % of Net Sales Fixed cost with out depriciation G Contribution (H=A-B) Contribution ratio (I=D/A) Cash BE sales (J=G/I) CASHBE sales as % of Net Sales 31/03/09 713.82 223.76 44.89 268.65 72.40 8.50 20.76 106.77 208.43 445.17 0.62 336.18 47.10 101.66 445.17 0.62 163.97 22.97 31/03/10 898.65 253.68 47.39 301.07 85.52 9.50 33.25 141.12 269.39 597.58 0.66 408.17 45.42 128.27 597.58 0.66 194.35 21.63 31/03/11 898.65 253.68 48.89 302.57 87.52 10.50 22.96 98.78 219.76 596.08 0.66 332.97 37.05 120.98 596.08 0.66 183.30 20.40 31/03/12 898.65 253.68 50.89 304.57 90.72 11.50 13.54 69.15 184.91 594.08 0.66 280.17 31.18 115.76 594.08 0.66 175.39 19.52 31/03/13 898.65 253.68 55.98 309.66 94.07 12.50 3.36 48.40 158.33 588.99 0.66 239.89 26.69 109.93 588.99 0.66 166.56 18.53
Commercial viability:
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Year ending 31st March Capacity utilisation % Sales Net Profit Depreciation Cash Accruals Interest TOTAL TL / DPG repayments Interest TOTAL Gross DSCR Net DSCR Average Gross DSCR Average Net DSCR
2009 100% 713.82 22.48 106.77 129.25 20.76 150.01 83.75 20.76 104.51 1.44 1.54 2.02 2.23
2010 100% 898.65 92.62 141.12 233.74 33.25 266.99 132.92 33.25 166.17 1.61 1.76
2011 100% 898.65 125.47 98.78 224.25 22.96 247.21 94.58 22.96 117.54 2.10 2.37
2012 100% 898.65 143.51 69.15 212.66 13.54 226.20 93.85 13.54 107.39 2.11 2.27
2013 100% 898.65 151.96 48.40 200.36 3.36 203.72 43.02 3.36 46.38 4.39 4.66
Total
Deviations in Loan Policy/ Scheme: Parameters Liquidity TOL/TNW Average gross DSCR (TL) Promoters contribution (under tieup) profits in the last two Others RATE OF INTEREST: As applicable to Transport Plus Scheme. At present 14.00 % (0.25% above SBAR-presently 13.75% wef 12/08/2008) with monthly rests. This is subject to change as per Banks Instruction. Indicative Min/Max level as per Scheme Min. 1.33 Max. 3.00 Min. 2.00 Min. 10 % Min. Rs.3.00 lacs with rising trend Nil Company's level as on 31/03/2008 1.42 12.80* 2.002 18.86% Actual profit Rs. 1.20 lacs for year 2006-07 and Rs.2.90 lacs for year 2007-08* Nil
Analysis:-
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Janak Transport Company is an existing profit making unit The main chunk behind giving loan is that Janak Transport Company is doing contract with ONGC since incorporation The promoters are having considerable experience as transport contractor with ONGC The unit has got confirm order/ tie-up with ONGC A letter of authority from ONGC was received, that if Janak Transport Company will not make the payment than ONGC will directly make the payment to the bank The promoters contribution to the project is 18.86% which is above the margin requirement The current ratio is 1.42 that is satisfactory Profits in the last two years:Min. Rs. 3 lacs with rising trend Actual profit Rs. 1.20 lacs for year 2006-07 & Rs. 2.90 lacs for the 2007-08 If the partners remuneration & interest is included, the profit for the year ended 31.03.07 & 31.03.08 is Rs. 4.81 lacs & Rs. 6.21 lacs
TOL/TNW should be max. 3 which is 12.80 here, as the co. has done multiple banking arrangement it has o/s loans with other banks also but the co. is regularly making the payment of loans of principal amount along with the interest so the loan is given. Also the contract awarded is backed by guarantee from ONGC regarding direct payment of monthly bills to SBI. Hence, surety of repayment is assured. The bank also checks commercial viability of the company & found that the DSCR for term loan is 2.02 which is considered satisfactory Despite that the bank has also done B.E. analysis & found that the B.E. sales was 47.10% of net sales for this current year The net sales & PAT of the company is increasing year after year so overall profitability is good The overall projected performance & financial of the unit are considered satisfactory
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The unit will have installed capacity of 2520 MT. The unit is expected to start commercial production from first week of September, 2008. The capacity utilization for the year 2008-09 has been projected at 70% of installed capacity in terms of the utilization of the machines. Accordingly the unit is projected to achieve a sale of Rs.9.26 crores for the year 2008-09 in the first six months of operations.
Further, the unit is projected to achieve capacity utilization of 80% during the year 2009-10 (the first full year of operations) and accordingly the sale for the year is projected at Rs.19.77 crores. The projections are considered acceptable in view of the following factors:
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ii)
iii) iv)
The firm has also started marketing activity for their products by making personnel contacts & writing introductory letters to potential customers & as the promoters are in the same line of business activity for the last 15 years they are having very good market contacts for the sales of the Finished Goods. The orders worth Rs.2.50 crores is expected to be finalized by end of Agust, 2008 and before commissioning of the plant as advised.
vi)
Proposal:
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(Rs. in Crores) 2010 2520 2016 19.77 0.00 1.18 1.17 5.92 0.78 1.10 2.04 0.95 2.01 2.51 2.50 1.80 1.52 1.71 2011 2520 2091 20.58 0.00 1.19 1.18 5.73 0.79 1.09 1.96 0.95 2.80 3.30 1.67 1.27 1.53 2.40 2012 2520 2142 21.09 0.00 1.23 1.22 5.78 0.82 1.15 1.97 0.95 3.62 4.12 1.19 0.92 1.53 2.57 2013 2520 2217 21.82 0.00 1.31 1.30 5.96 0.87 1.24 2.02 0.95 4.49 4.99 0.88 0.81 1.57 2.74 2014 2520 2268 22.34 0.00 1.33 1.32 5.91 0.88 1.32 2.05 0.95 5.38 5.88 0.66 0.62 1.81 3.28
2009 2520 1029 9.26 0.00 0.44 0.43 4.64 0.29 0.66 1.20 0.95 1.23 1.73 4.11 2.64 1.34 1.01
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Movement in TNW:Movement in TNW Opening TNW + PAT + Inc. in Equity / Premium +/- Change in Int. Assets +/- Adj. of prior year exp. - Dividend payment Closing in TNW Projected 31.03.2009 0.00 0.29 0.95 -0.01 1.23 31.03.2010 1.23 0.78 31.03.2011 2.01 0.79
2.01
2.80
(Rs. in crores)
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Defaulters List:Whether names of promoters, directors, company, group concerns figure in : RBI defaulters list dated 30.09.2007 No Wilful defaulters list dated 31.12.2007 No ECGC caution list No Warning signals / Major irregularities in Credit audit: inspection report : Not applicable new unit Other audit reports : Adverse observations in Balance sheet Not applicable new unit Adverse observations in Auditors report Any NPAs among associate concerns Nil. None
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43
Shri Dharamsingbhai Lallubhai Desai Shri Kanjibhai Malibhai Desai Shri Gunvantbhai Ambaramdas Patel
35 44 42
48
Commercial viability :
Year ending 31st March Net Sales 2008-09 9.26 2009-10 19.77 2010-11 20.58 2011-12 21.09 2012-13 21.82
(Rs.in crores)
2013-14 22.34 Total
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(Amt in Cr) Name of Company FBL NFBL Year Sales PBT / TOL / CR
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Raw material The major raw material for this plant is HDPP in the form of granules. This raw material is available locally by sales & distribution network of the major suppliers as under: Reliance Industries Limited Nand Agencies Labdhi International Hadlia petrochemicals Ltd. Sharada Polymers IPCL
The raw materials are purchased from the suppliers against the advance payment only and cash discounts are offered resulting in the increase n profitability. Any variation in the cost of raw material is proposed to be passed on to the finished products and will not affect the profitability.
Analysis: The firm is into manufacturing of HDPP woven sacks which are widely used as packaging material in cement, fertilizer, etc. As per ICRA report, grading and research services (2006) Flexible packaging sector is expected to grow at the rate of 12.40%.
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The orders worth Rs.2.50 crores is expected to be finalized by end of Agust, 2008 and before commissioning of the plant as advised. The companys borrower rating is SB-6 based on projected financials as on 31.03.2010 (the first full year of operations). Projected financials are in line with the financials of the some of the unit in similar line of activity and production level. The promoters are having experience of more than 15 years in the line of the activity. The affairs of the firm are expected to be managed on professional lines based on their past experience. The conduct of accounts of associate with the existing bankers has been satisfactory. The short and medium term outlook for the industry is stable Availability of collateral security reflected in collateral coverage of 50.566%. Gross average DSCR of 2.54. Average security margin of 48%. The company has adequate management skills and production/marketing infrastructure in place to achieve the projected trajectory. There is steady demand for the product.
Chapter-9 Findings
Credit appraisal is done to check the commercial, financial & technical viability of the
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