A

SUMMER TRAINING REPORT

ON
CREDIT APPRAISAL
UNDERTAKEN AT

SUBMITTED BY
TAILOR MAYANKKUMAR DINESHBHAI
MBA (Semester - II) 2010-2011
Enrollment No: 107160592050
UNDER THE GUIDANCE OF:
INTERNAL GUIDE: MRS. NUPUR ANGIRISH
EXTERNAL GUIDE: P.K.VESUNA
SUBMITTED TO
GIDC RAJJU SHROFF ROFEL INSTITUTE OF
MANAGEMENT STUDIES, VAPI
Gujarat Technological University

DECLARATION

I, Mr. MAYANK TAILOR Student of M.B.A Semester-II, GIDC RAJJU SHROFF

INSTITUTE OF MANAGEMENT STUDIES VAPI. hereby declare that the Report on
Summer Training & project work entitled CREDIT APPRAISAL SURAT, GUJARAT is
been result of my own work and has been carried out under supervision of PROF. NUPUR
ANGIRISH.
I declare that this submitted work is done solely by me and to the best of my knowledge; no
such work has been submitted by any other person for the award of post graduation degree or
diploma.

I also declare that all the information collected from various secondary sources has been duly
acknowledged in this project report.

PLACE:
DATE:

Mayank Tailor

CERTIFICATE
This is to certify that Mr. MAYANK TAILOR has satisfactory completed the project work
entitled, CREDIT APPRAISAL IN SURAT, GUJARAT. Based on the declaration made by
the candidate and me association as a guide for carrying out this project work, I
recommended this project for evaluation as a part of the MBA programme of Gujarat
Technological University.

Place: VAPI
Date:

PROF: NUPUR ANGIRISH

Place: VAPI
Date:

Dr D.S.Sarupria
Director

ACKNOWLEDGEMENT
My debts are many and I acknowledge them with much pride and delight. This summer
project was undertaken as a part of MBA Programme pursuing at GIDC RAJJU SHROFF
Rofel Institute of Management Studies, Vapi. (GRIMS). I would like to thank my institute
and Central Bank of India which has provided me with the infrastructure and opportunity for
doing this project work.
I am very great full to Mr. P.K.VESUNA (Loan/Advances), who has given me the permission
to carry out this project work at their esteemed organization.
I am extremely great full to Dr. Dalpat Sarupria, Director of GIDC RAJJU SHROFF Rofel
Institute of Management Studies, Vapi. (GRIMS), for his invaluable help and guidance
throughout my work. He kindly evinced keen interest in my work and furnished some useful
comments, which could enrich the work substantially.
I am very much thankful to my internal guide Prof. NUPUR ANGIRISH for her keen
guidance and support.
In fact it is very difficult to acknowledge all the names and nature of help and encouragement
provided by them. I would never forget the help and support extended directly or indirectly
to me by all.

TABLE OF CONTENTS
PARTICULARS

PAGE NO.

RESEARCH METHODOLOGY

INTRODUCTION TO BANKING SECTOR

GLOBAL AND LOCAL SCENARIO OF BANKING

SECTOR

INDUSTRY ANALYSIS

22

INTRODUCTION TO CENTRAL BANK OF INDIA

28

INTRODUCTION TO SME

30

OVERVIEW OF CREDIT APPRAISAL

34

CREDIT APPRAISAL MODEL

58

CASE STUDY

70

10

OTHER DEPARTMENT OF BANKS

80

11

FINDING

83

12

CONCLUSION

85

13

BIBLIOGRAPHY

86

EXECUTIVE SUMMARY

I had a valuable experience doing my summer internship at Central Bank of India in Surat.
The duration for my internship was 23 days, starting from 7 th july 2011 to 29th july 2011 in
Surat Main branch and, I was working on the CREDIT APPRISAL

My Project Guide was Mr.P.K.VESUNA for SURAT branch, respectively of his department.
This was my First exposure to the corporate world and had an experience of working in a
banking. I was directly working under loan/advances : I was working on the credit appraisal,
which I feel is the basic requirement of any bank. While working I observed the significance
of the loan/advances in a bank, its working. I also got to observe various functions of the
bank department.
The project, which was given to me in this period of my summer internship, project was to
know the credit appraisal. For that, I have to talk to manager and try to understand concept of
credit in the bank.

Thus during this internship-period working on project and simultaneously observing has
proved to be a great experience in all as I have got to see and understand various situations of
the employees. I would like to conclude by saying that it is been a great learning for me
through this internship. I understand some realities of the bank , as, I was part of the everyday
activities of the organization. I also learned the fact that no department can work on its own
each department have to depend on other in one-way or the other.

RESEARCH METHODOLOGY

 INTRODUCTION:
Credit appraisal means investigation/assessment done by the bank before
providing any loans and advances/project finance and also checks the
commercial, financial &industrial viability of the project proposed its funding
pattern and 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 Central bank of India.

OBJECTIVES:
To study the credit appraisal methods.
To understand the commercial, financial & technical viability of the proposal
proposed and its finding pattern.

DATA COLLECTION:

Primary data:
Informal interview with manager and other staff members at Central bank of India

Secondary data:
Books
websites
database at Central bank of India
library research

BENEFICIARIES:
Researchers:

This report will help researchers improving knowledge about the credit appraisal
system and to have practical exposure of the credit appraisal system at Central
bank of India.

Management Students:
The project will help the management student to know the patterns of credit
appraisal in Central bank of India.

LIMITATION OF THE STUDY

As the credit appraisal is one of the crucial areas for any bank, some of the
technicalities are not revealed.
Credit appraisal system includes various types of detail studies for different areas of
analysis, but due to time constraint, our analysis was of limited areas only.

INTRODUCTION TO BANKING SECTOR

A SNAPSHOT OF THE BANKING INDUSTRY

The Reserve Bank of India (RBI), as the central bank of the country, closely
monitors developments in the whole financial sector.

DEFINITION/MEANING OF A BANK
The word bank has originated from English word Banco, Bancus or Banque. Its
meaning is bench or table. In Europe in the middle age, the money transactions
were undertaken sitting on a bench.

As per Indian Banking Act, A service to accept deposits from people with the
intention to invest or lend with the condition of returning it immediately
whenever demanded at any predetermined time. An institute this service is
Bank

Banking is a service helpful to the business, its function is to borrow money from
people and further lend the same.

While analyzing definition of bank as per Indian Banking Act, below mentioned
matters are clarified:

(1) Bank accepts monetary deposits from people.

(2) The intention behind accepting these deposits is to invest or lend the respective fund.

(3) The function of accepting deposit or lending money is made under the condition that
on demand or as predetermined otherwise the same amount has to be refunded
immediately.
(4) The institution doing this type of business is called bank.
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 cooperative 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.

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.

REFORMS IN THE BANKING SECTOR

The first phase of financial reforms resulted in the nationalization of 14 major

banks in 1969 and resulted in a shift from Class banking to Mass banking. This in
turn resulted in a significant growth in the geographical coverage of banks. Every
bank has to earmark a minimum percentage of their Loan portfolio to sectors
identified as priority sectors. The manufacturing sector also grew during the
1970s in protected environs and the banking sector was a critical source. The
next wave of reforms saw the nationalization of 6 more commercial banks in
1980. Since then the number scheduled commercial banks increased four-fold
and the number of banks branches increased eight-fold.

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-of-the-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, nonscheduled

banks

and scheduled

banks.

Scheduled banks comprise

commercial banks and the co-operative banks. In Terms of

ownership,

commercial banks can be further grouped into nationalized banks, the State
Bank of India and its group banks, regional rural banks and private sector banks
(the old / new domestic and foreign). These banks have over 67,000
branches spread across the country. The Indian banking industry is a mix of
the public sector, private sector and foreign banks. The private sector banks
are again spilt into old banks and new banks.

Banking System in India

Reserve bank of India (Controlling Authority)

Development Financial institutions

IFCI

IDBI ICICI NABARD NHB

Commercial

Regional Rural

Banks

Banks

Public Sector Banks

SBI Groups

Bank

IRBI

EXIM Bank

SIDBI

Land Develop ment

Banks

Cooperative
Banks

Private Sector Banks

Nationalized Banks Indian Banks

Foreign Bank

GLOBAL AND LOCAL SCENARIO OF BANKING SECTOR

INDIAN BANKING SYSTEM: THE CURRENT STATE & ROAD AHEAD

INTRODUCTION:

Recent time has witnessed the world economy develop serious difficulties in
terms of lapse of banking & financial institutions and plunging demand.
Prospects became very uncertain causing recession in major economies.
However, amidst all this chaos Indias banking sector has been amongst the few
to maintain resilience.

A progressively growing balance sheet, higher pace of credit expansion,

expanding profitability and productivity akin to banks in developed markets,
lower incidence of nonperforming assets and focus on financial inclusion have
contributed to making Indian banking vibrant and strong. Indian banks have
begun to revise their growth approach and re-evaluate the prospects on hand to
keep the economy rolling. The way forward for the Indian banks is to innovate to
take advantage of the new business opportunities and at the same time ensure
continuous assessment of risks.

A rigorous evaluation of the health of commercial banks, recently undertaken by

the Committee on Financial Sector Assessment (CFSA) also shows that the
commercial banks are robust and versatile. The single-factor stress tests
undertaken by the CFSA divulge that the banking system can endure
considerable shocks arising from large possible changes in credit quality, interest
rate and liquidity conditions. These stress tests for credit, market and liquidity
risk show that Indian banks are by and large resilient.

Thus, it has become far more imperative to contemplate the role of the Banking
Industry in fostering the long term growth of the economy. With the purview of
economic stability and growth, greater attention is required on both political and
regulatory commitment to long term development programmed. FICCI conducted
a survey on the Indian Banking Industry to assess the competitive advantage
offered by the banking sector, as well as the policies and structures that are
required to further the pace of growth. The results of our survey are given in the
following sections.

GENERAL BANKING SCENARIO:

The pace of development for the Indian banking industry has been tremendous
over the past decade. As the world reels from the global financial meltdown,
Indias banking sector has been one of the very few to actually maintain
resilience while continuing to provide growth opportunities, a feat unlikely to be
matched by other developed markets around the world. FICCI conducted a
survey on the Indian Banking Industry to assess the competitive advantage
offered by the banking sector, as well as the policies and structures required to
further stimulate the pace of growth.

The predicament of the banks in the developed countries owing to excessive

leverage and lax regulatory system has time and again been compared with
somewhat unscathed Indian Banking Sector. An attempt has been made to
understand the general sentiment with regards to the performance, the
challenges and the opportunities ahead for the Indian Banking Sector.

A majority of the respondents, almost 69% of them, felt that the Indian banking
Industry was in a very good to excellent shape, with a further 25% feeling it was
in good shape and only 6% of the respondents feeling that the performance of
the industry was just average. In fact, an overwhelming majority (93.33%) of the

respondents felt that the banking industry compared with the best of the sectors
of the economy, including pharmaceuticals, infrastructure, etc.

Most of the respondents were positive with regard to the growth rate attainable
by the Indian banking industry for the year 2009-10 and 2014-15, with 53.33% of
the view that growth would be between 15-20% for the year 2009-10 and greater
than 20% for 2014-15.

On being asked what is the major strength of the Indian banking industry, which
makes it resilient in the current economic climate; 93.75% respondents feel the
regulatory system to be the major strength, 75% economic growth, 68.75%
relative

insulation

from

external

market,

56.25%

credit

quality,

technological advancement and 43.75% our risk assessment systems.

25%

Change is the only constant feature in this dynamic world and banking is not an
exception. The changes staring in the face of bankers relates to the fundamental
way of banking-which is going through rapid transformation in the world of today.
Adjust, adapt and change should be the key mantra. The major challenge faced
by banks today is the ever rising customer expectation as well as risk
management and maintaining growth rate. Following are the results of the
biggest challenge faced by the banking industry as declared by our respondents
(on a mode scale of 1 to 7 with 1 being the biggest challenge):

They also asked their respondents to rate India on certain essential banking
parameters (Regulatory Systems, Risk Assessment Systems, Technological
System and Credit Quality) in comparison with other countries i.e. China, Japan,
Brazil, Russia, Hong Kong, Singapore, UK and USA.

The recent financial crisis has drawn attention to under-regulation of banks

(mainly investment banks) in the US. Though, the Indian story is quite different.
Regulatory systems of Indian banks were rated better than China, Brazil, Russia,
and UK; at par with Japan, Singapore and Hong Kong where as all our
respondents feel that we are above par or at par with USA. On comparing the
results with their previous survey where the respondents had rated Indian
Regulatory system below par the US and UK system, they see that post the
financial crisis Indian Banks are more confident on the Indian Regulatory
Framework.

The global meltdown started as a banking crisis triggered by the credit quality.
Indian banks seem to have paced up in terms of Credit Quality. Credit quality of

banks has been rated above par than China, Brazil, Russia, UK and USA but at
par with Hong Kong and Singapore and 85.72% of the respondents feel that we
are at least at par with Japan. Thus, they see that the resilience the Indian Banks
showed at the time of financial crisis has led to an attitudinal shift of our
respondents with the past survey indicating Credit quality of Indian banks being
below par than that of US and UK.

As technology ingrains itself in all aspects of a banks functioning, the challenge

lies in exploiting the potential for profiting from investments made in technology.
A lot needs to be done on the technological front to keep in pace with the global
economies, as is evident from the survey results. Technology systems of Indian
banks have been rated more advanced than Brazil and Russia but below par with
China, Japan, Hong Kong, Singapore, UK and USA. They find no change on
introspection of their past surveys which also highlighted the need for Indian
banks to pace up in adoption of advanced technology.

GLOBAL EXPANSION OF INDIAN BANKING

The idea of creating bigger banks to take on competition sounds attractive but
one must realize even the biggest among Indian banks are small by global
standards. The lack of global scale for Indian banks came into sharp focus during
the recent financial crisis which saw several international banks reneging on their
funding commitments to Indian companies, but local banks could not step into
the breach because of balance sheet limitations.

In this light, 93.75% of all respondents to their survey are considering expanding
their operations in the future. They further asked participants on the methods
that they consider suitable to meet their expansion needs. They divide them into
organic means of growth that comes out of an increase in the banks own
business activity, and inorganic means that includes mergers or takeovers.

We see from the above graph that amongst organic means of expansion, branch
expansion finds favor with banks while strategic alliances is the most popular
inorganic method for banks considering scaling up their operations. On the other
hand, new ventures and buyout portfolios are the least popular methods for bank
expansion.

SCOPE FOR NEW ENTRANTS:

81.25% also felt that there was further scope for new entrants in the market, in
spite of capital management and human resource constraints, as there continue
to remain opportunities in unbanked areas. With only 30-35% of the population
financially included, and the Indian banking industry unsaturated with CAGR of
well above 20%, participants in their survey felt that the market definitely has
scope to accommodate new players.

While there has been prior debate, they questioned banks on NBFCs and
Industrial houses being established as banking institutions and find opinion to be
marginally against the notion, with 35.71% in favour while 42.86% were against
them being established as banks.

However, on further questioning, 57.14% of respondents feel that the above may
be allowed but only if it is along with specific regulatory limitations. Banks felt
that limitations regarding track record, ensuring adequate capitalization levels, a
tiered license that enables new entrants to enter into specific areas of the
business only after satisfactorily achieving set milestones for the prior stages,
cap on promoter's holdings and wider public holding in addition to a common
banking regulator on a level playing field are essential before they may set
themselves up as banks.

BANKING ACTIVITIES:

Over the last three decades, there has been a remarkable increase in the size,
spread and scope of activities of banks in India. The business profile of banks has
transformed dramatically to include non-traditional activities like merchant
banking, mutual funds, new financial services and products and the human
resource development.

Their survey finds that within retail operations, banks rate product development
and differentiation; innovation and customization; cost reduction; cross selling
and technological up gradation as equally important to the growth of their retail
operations. Additionally a few respondents also find pro-active financial inclusion,
credit discipline and income growth of individuals and customer orientation to be
significant factors for their retail growth.

There is, at the same time, an urgent need for Indian banks to move beyond
retail banking, and further grow and expand their fee- based operations, which
has globally remained one of the key drivers of growth and profitability. In fact,
over 80% of banks in their survey have only up to 15% of their total incomes
constituted by fee- based income; and barely 13% have 20-30% of their total
income constituted by fee-based income.

Out of avenues for non-interest income, we see that Banc assurance (85.71%)
and FOREX Management (71.43%) remain most profitable for banks. Derivatives,
understandably, remains the least profitable business opportunity for banks as
the market for derivatives is still in its nascent stage in India.

There is nevertheless a visibly increased focus on fee based sources of income.

71% of banks in their survey saw an increase in their fee based income as a
percentage of their total income for the FY 2008-09 as compared to FY 2007-08.
Indian banks are fast realizing that fee-based sources of income have to be
actively looked at as a basis for future growth, if the industry is to become a
global force to reckon with.

FINANCIAL INCLUSION AND EXPANSION OF BANKING SERVICES:

Transition from class banking to mass banking and increased customer focus is
drastically changing the landscape of Indian banking. Expansion of retail banking
has a lot of potential as retail assets are just 22% of the total banking assets and
contribution of retail loans to GDP stands merely at 6% in India vis--vis 15% in
China and 24% in Thailand. All banks in their survey weigh Cost effective credit
delivery mechanisms (100%) as most important to the promotion of financial
inclusion. This was followed by factors such as identifying needs and developing
relevant financial products (75%), demographic knowledge and strong local
relations (62.5%) and ensuring productive use and adequate returns on credit
employed (43.75%) in decreasing levels of importance. In fact, India has an
expanding middle class of 250 to 300 million people in need of varied banking
services. While 60% of our population has access to banks, only 15% of them
have loan accounts and an overwhelming 70% of farmers have no access to
formal sources of credit, reflective of immense potential for the banking system
This is mirrored in the fact that while our survey finds no discernible shift in the
lending pattern of banks across Tier 1, Tier 2 and Tier 3 cities over the last two
years, 93% Indian Banking System: The Current State & Road Ahead Page | 20
participants still find rural markets to be to be a profitable avenue, with 53% of

respondents finding it lucrative in spite of it being a difficult market. Cost of

accessing markets has been the only sour note in the overall experience of our
respondents in rural markets At the same time, more than 81.25% of our
respondents have a strategy in place to tap rural markets, with the remainder as
yet undecided on their plan of action. Tie ups with micro finance institutions
(MFIs)/SHG and introduction of innovative and customized products are
considered

most

important

to

approaching

rural

markets

according

to

respondents, more so as compared to internet kiosks, post offices and supply

chain management techniques

Additionally, 81.25% of respondents found branchless banking to be an effective

and secure way of reaching out to rural markets, with mobile, biometric and
handheld devices, equally popular amongst banks. Some respondents also found
the Business Correspondents model to be an untapped model for financial
inclusion.
As Indian financial markets mature over time, there is also a need for innovative
instruments to deepen the market further. Suggestions ranged from micro saving
and micro insurance initiatives, Cash deposit machines, warehouse receipts, to

prepaid cash cards, derivatives, interest rate futures and credit default swaps as
a means to further the financial inclusion and expansionary process.

CREDIT FLOW AND INDUSTRY:

India Inc is completely dependent on the Banking System for meeting its funding
requirement. One of the major complaints from the industry has in fact been high
lending rates in spite of massive cuts in policy rates by the RBI. We asked the
banks what they felt were major factors responsible for rigid prime lending rates.

None of the banks in their survey considered the cap on bank deposit rates to be
one of the causes of inflexible lending rates. Due to long-term maturity, the trend
seems to be changing. However, there are other factors which have led to the
stickiness of lending rates such as wariness of corporate credit risk (33.33%),
competition from government small savings schemes (26.67%). Benchmarking of
SME and export loans against PLR (20.00%) on the other hand, do not seem to
have as significant an influence over lending rates according to banks

The great Indian industrial engine has nevertheless continued to hum its way
through most of the year long crisis. We asked banks about the sectors that they
consider to be most profitable in the coming years (Fig. 12). All respondents were
confident in the infrastructure sector leading the profitability for the industry,
followed by retail loans (73.33%) and others

(Source: Annual survey, February 2010)

(FEDERATION OF INDIAN CHAMBERS OF COMMERCE & INDUSTRY)

INDUSTRY ANALYSIS
Competitive Forces Model:
(Porters Five Force Model):

(2)

Potential Entrants is
high as development
financial institutions as
well as private and
Foreign Banks have

(5)

(1)

(4)

Organizing power of
the supplier is high.
With the new financial
instruments they are
asking higher return on
the investments

Rivalry among existing

firms has increased with
liberalization. New
products and improved
customer services is the
focus.

Bargaining power
of buyers is high as
corporate can raise
funds easily due to
high Competition.

(3)
The
threat
of
substitute product is
very high like credit
unions and investment
houses. There are other
substitutes as well banks
like mutual funds, stocks,
government
securities,

1.

Rivalry among existing firms

With the process of liberalization, competition among the existing banks has
increased. Each bank is coming up with new products to attract the customers
and tailor made Loans are provided. The quality of services provided by banks
has improved drastically.

2.

Potential Entrants

Previously the development financial Institutions

mainly

provided

project

finance and development activities. But they now entered into retail banking
which has resulted into stiff competition among the exiting players.

3.

Threats from Substitutes

Competition from the non-banking financial sector is increasing rapidly. The

threat of substitute product is very high like credit unions and in investment
houses. There are other substitutes as well banks like mutual funds, stocks,
government securities, debentures, gold, real estate etc.

4.

Bargaining Power of Buyers

Corporate can raise their funds through primary market or by issue of GDRs,
FCCBs. As a result they have a higher bargaining power. Even in the case of
personal finance, the buyers have a high bargaining power. This is mainly
because of competition.

5.

Bargaining Power of Suppliers

With the advent of new financial instruments providing a higher rate of

returns

to

the investors, the investments in deposits is not growing in a

phased manner. The suppliers demand a higher return for the investments.

6.

Overall Analysis

The key issue is how banks can leverage their strengths to have a better
future. Since the availability of funds is more and deployment of funds is less,
banks should evolve new products and services to the customers. There should
be a rational thinking in sanctioning Loans, which will bring down the NPAs. As
there is a expected revival in the Indian economy Banks have a major role
to play.

SWOT ANALYSIS:

The banking sector is also taken as a proxy for the economy as a whole. The
performance of bank should therefore, reflect Trends in the Indian Economy.
Due to the reforms in the financial sector, banking industry has changed
drastically with the opportunities to the work with, new accounting standards
new entrants and information technology. The deregulation of the interest rate,
participation of banks in project financing has changed in the environment of
banks.

The performance of banking industry is done through SWOT Analysis. It mainly

helps to know the strengths and Weakness of the industry and to improve will be
known through converting the opportunities into strengths. It also helps for the
competitive environment among the banks.

a) STRENGTHS

1. Greater securities of Funds

Compared to other investment options banks since its inception has been a
better avenue in terms of securities. Due to satisfactory implementation of RBIs
prudential norms banks have won public confidence over several years.

2. Banking network

After nationalization, banks have expanded their branches in the country, which
has helped banks build large networks in the rural and urban areas. Private
banks allowed to operate but they mainly concentrate in metropolis.

3. Large Customer Base

This is mainly attributed to the large network of the banking sector. Depositors in
rural areas prefer banks because of the failure of the NBFCs.

4. Low Cost of Capital

Corporate prefers borrowing money from banks because of low cost of capital.
Middle income people who want money for personal financing can look to banks
as they offer at very low rates of interests. Consumer credit forms the major
source of financing by banks.

b) WEAKNESS

1. Basel Committee

The banks need to comply with the norms of Basel committee but before that it
is challenge for banks to implement the Basel committee standard, which are of
international standard.

2. Powerful Unions

Nationalization of banks had a positive outcome in helping the Indian Economy

as a whole. But this had also proved detrimental in the form of strong unions,
which have a major influence in decision-making. They are against automation.

3. Priority Sector Lending

To uplift the society, priority sector lending was brought in during nationalization.
This is good for the economy but banks have failed to manage the asset quality
and their intensions were more towards fulfilling government norms. As a result
lending was done for non-productive purposes.

4. High Non-Performing Assets

Non-Performing Assets (NPAs) have become a matter of concern in the banking

industry. This is because reduced to meet the international standards of change
in the total outstanding advances, which has to be reduced to meet the
international standards.

c) OPPORTUNITIES

1. Universal Banking

Banks have moved along the value chain to provide their customers more
products and services. like home finance, Capital Markets, Bonds etc.

Every

Indian bank has an opportunity to become universal bank, which provides every
financial service under one roof.

2. Differential Interest Rates

As RBI control over bank reduces, they will have greater flexibility to fix their own
interest rates which depends on the profitability of the banks.

3. High Household Savings

Household savings has been increasing drastically. Investment in financial assets

has also increased. Banks should use this opportunity for raising funds.

4. Untapped Foreign Markets

Many Indian banks have not sufficiently penetrated in foreign markets to

generate satisfactory business therefore, it can be concluded clear opportunity
exists in such markets.

5. Interest Banking

The advance in information technology has made banking easier. Business can
Effectively carried out through internet banking.

d) THREATS

1. NBFCs, Capital Markets and Mutual funds

There is a huge investment of household savings. The investments in NBFCs

deposits, Capital Market Instruments and Mutual Funds are increasing. Normally
these instruments offer better return to investors.

2. Changes in the Government Policy

The change in the government policy has proved to be a threat to the banking
sector. Due to some major changes in policies related to deposits mobilization
credit deployment, interest rates- the whole scenario of banking industry may
change.

3. Inflation

The interest rates go down with a fall in inflation. Thus, the investors will shift his
investments to the other profitable sectors.

4. Recession

Due to the recession in the business cycle the economy functions poorly and this
has proved to be a threat to the banking sector. The market oriented economy
and globalization has resulted into competition for market share. The spread in
the banking sector is very narrow. To meet the competition the banks has to grow
at a faster rates and reduce the overheads. They can introduce the new products
and develop the existing services.

INTRODUCTION TO CENTRAL BANK OF INDIA

Build a better life around us.

Establish in 1911, Central Bank of India was the first Indian commercial bank
which was wholly owned and managed by Indians. The establishment of the
Bank was the ultimate realization of the dream of Sir Sorabji Pochkhanawala,
founder of the Bank. Sir Pherozesha Mehta was the first Chairman of a truly
'Swadeshi Bank'. In fact, such was the extent of pride felt by Sir Sorabji
Pochkhanawala that he proclaimed Central Bank of India as the 'property of
the nation and the country's asset'. He also added that 'Central Bank of India
lives on people's faith and regards itself as the people's own bank'.
During the past 99 years of history the Bank has weathered many storms and
faced many challenges. The Bank could successfully transform every threat
into business opportunity and excelled over its peers in the Banking industry.
A number of innovative and unique banking activities have been launched by
Central Bank of India and a brief mention of some of its pioneering services
are as under:
192 Introduction to the Home Savings Safe Deposit Scheme to build
1

saving/thrift habits in all sections of the society.

192 An Exclusive Ladies Department to cater to the Bank's women clientele.

4
192 Safe Deposit Locker facility and Rupee Travellers' Cheques.
6
192 Setting up of the Executor and Trustee Department.
9
193 Deposit Insurance Benefit Scheme.
2
196 Recurring Deposit Scheme.
2

Subsequently, even after the nationalisation of the Bank in the year 1969,
Central Bank continued to introduce a number of innovative banking services
as under:
1976 The Merchant Banking Cell was established.
1980 Centralcard, the credit card of the Bank was introduced.
1986 'Platinum Jubilee Money Back Deposit Scheme' was launched.
1989 The housing subsidiary Cent Bank Home Finance Ltd. was started with
its headquarters at Bhopal in Madhya Pradesh.
1994 Quick Cheque Collection Service (QCC) & Express Service was set up to
enable speedy collection of outstation cheques.

Further in line with the guidelines from Reserve Bank of India as also the
Government of India, Central Bank has been playing an increasingly active role
in promoting the key thrust areas of agriculture, small scale industries as also
medium and large industries. The Bank also introduced a number of Self
Employment Schemes to promote employment among the educated youth.
Among the Public Sector Banks, Central Bank of India can be truly described as

an All India Bank, due to distribution of its large network in 27 out of 29 States
as also in 3 out of 7 Union Territories in India. Central Bank of India holds a
very prominent place among the Public Sector Banks on account of its network
of 3656 branches and 178 extension counters at various centres
throughout the length and breadth of the country.
Customers' confidence in Central Bank of India's wide ranging services can
very well be judged from the list of major corporate clients such as ICICI, IDBI,
UTI, LIC, HDFC as also almost all major corporate houses in the country.In surat
central bank have total 11 branches are works.

INTRODUCTION TO SME
In the Indian context, the small and medium enterprises (SME) sector is broadly
a Term used for small scale industrial (SSI) units and medium-scale industrial
units. Any industrial unit with a total investment in its fixed assets or leased
assets or hire-purchase asset of up to Rs 10 million, can be considered as an SSI
unit and any investment of up to Rs 100 million can be Termed as a medium unit.
An SSI unit should neither be a subsidiary of any other industrial unit nor be
owned or controlled by any other industrial unit.
An SME is known by different ways across the world. In India, a standard
definition surfaced only in October 2, 2006, when the Ministry of Micro, Small and
Medium Enterprises, Government of India, imposed the Micro, Small and Medium
enterprises Development (MSMED) Act,2006.
This definition, however was changed according to the changing economic
scenario and thus has separate definitions to it. For instance, an SME definition
for manufacturing enterprises is different from what an SME definition for service
enterprises has to say.
HISTORY:
Small and Medium Enterprises or SMEs are vital for the growth and well being of

the country. This sector was recognized and given importance right from
independence and is being encouraged ever since then.
Though, it commenced on a small scale, it gradually gained significance,
because it employed a considerable number of people.
When it started gaining momentum, this sector was defined as an enterprise
with investment in plant and machinery of up to Rs 1 lakh and situated in towns
and villages with strength of less than 50,000 people. The policy statement put
in place special legislation to recognize and protect self employed people in
cottage and home industries. District industries canters (DICs) were set up and
made the focal point of SSI development, bypassing large cities and state
capitals. Also, the government started providing special services akin to product
standardization, quality control and marketing surveys in order to assist the SSIs
in enabling them to market their products in an underdeveloped market.
The scenario for the small-scale sector changed with the Industrial Policy of July
1991, which, for the first time in Indias development history spoke of
liberalization. What this meant was that medium and large enterprises would no
longer need licenses to run. Export-oriented enterprises could be wholly foreign
owned and foreign equity participation was selectively allowed. Industries could
import capital goods with much fewer restrictions.
1996 saw the government involved in the setting up of a higher level committee,
known as the Abid Hussain Committee, to review policies for small industries and
recommend measures to help formulate a strong and innovative policy package
for the rapid development of SMEs. With liberalization, rapid changes were seen
in the Indian economy. Indian companies were no longer insulated from the
global economy. In fact, there was an urgent need to make them, especially
SMEs, more competitive and resilient.
In 1991, the growth rate of SSIs was almost three times that of the total
industrial sector at 3.1 percent. From 1991 to 1995, the growth rate of SSIs
exceeded that of the total industrial sector. Yet, in 1995-96, the growth rate of
SSIs was slightly lower than the total industrial sector, however it increased
again in 1996 and continued to be higher than the total industrial growth rate till
1999. till 2006, the SME segment saw a lot more development and support from
the government.

DESCRIPTION OF SME IN THE MANUFACTURING SECTOR:

The Term enterprise in the manufacturing context stands for an industrial
undertaking or a business concern involved in the production, processing or
preservation of goods for the list of eligible industries in the First Schedule to the
Industries (Development and Regulation Act), 1951.
For the Manufacturing Sector, the MSMED Act 2006 defines micro, small and
medium enterprises (MSMEs) as mentioned below:

A micro enterprise is an enterprise where investment in plant and machinery does not
exceed Rs 25 lakh.
The investment in plant and machinery in a small enterprise is more than Rs 25 lakh,
but does not exceed Rs 5 crore.
A medium enterprise is one where the investment in plant and machinery is more than
Rs 5 crore, but does not exceed Rs 10 crore.
In all these, the cost excludes that of land, building and the items specified by
the Ministry of Small Scale Industries with its notification No SO 1722 (E) dated
October 5, 2006.
SME DEFINITION FOR SERVICE ENTERPRISES:
A service sector enterprise is defined as one involved in providing services. The
following points will explain how.

Small road and water transport operators that can now own a fleet of vehicles not
exceeding ten in number.
Small business, whose original cost price of equipment used for business, does not
exceed Rs 20 lakh.
Professional and self-employed persons, whose borrowing limits do not exceed Rs 10
lakh of which not more than Rs 2 lakh should be for working capital requirements
Professionally qualified medical practitioners setting up a practice in semi urban and
rural areas, whose borrowing limits should not be less than Rs 15 lakh with a subceiling of Rs 3 lakh for working capital requirements.

CHALLENGES FACED BY SME:

The challenges being faced by the small and medium sector may be briefly set
out as
Follows-

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.
SMEs face fragmented markets in respect of their inputs as well as products and are
vulnerable to market fluctuations.
SMEs lack easy access to inter-state and international markets.
The access of SMEs to technology and product innovations is also limited. There is
lack of awareness of global best practices.
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 processes and available security. There is an
immediate need for the banking sector to focus on credit and SMEs

OVERVIEW OF CREDIT APPRAISAL

Credit appraisal means an investigation/assessment done by the banks 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.

BRIEF OVERVIEW OF CREDIT:

Credit Appraisal is a process to ascertain the risks associated with the extension
of the credit facility. It is generally carried by the financial institutions, which are
involved in providing financial funding to its customers. Credit risk is a risk
related to non-repayment of the credit obtained by the customer of a bank. Thus
it is necessary to appraise the credibility of the customer in order to mitigate the
credit risk. Proper evaluation of the customer is performed this measures the
financial condition and the ability of the customer to repay back the Loan in
future. Generally the credits facilities are extended against the security know as
collateral. But even though the Loans are backed by the collateral, banks are
normally interested in the actual Loan amount to be repaid along with the
interest. Thus, the customer's cash flows are ascertained to ensure the timely
payment of principal and the interest.

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 is 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.

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.

BASIC TYPES OF CREDIT:

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- end of each month.-if
you pay for the use.

BRIEF OVERVIEW OF LOANS:

Loans can be of two types fund base & non-fund base:
Fund Base includes:
Working Capital
Term Loan

 Non-fund Base includes:

Letter of Credit
Bank Guarantee

Fund Base:
Working capital
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.

Funds required for day to-day working will be to finance production & sales. For
production, funds are needed for purchase of raw materials/ stores/ fuel, for
employment of labor, for power charges etc. financing the sales by way of
sundry debtors/ receivables.

Capital or funds required for an industry can therefore be bifurcated as fixed

capital & working capital. Working capital in this context is the excess of current
assets over current liabilities. The excess of current assets over current liabilities
is treated as net, for storing finishing goods till they are sold out & for working
capital or liquid surplus & represents that portion of the working capital, which
has been provided from the long-Term source.

Assessment of Working Capital in Central bank of India

Particulars

Amount

25% of estimated sales

Less

5%

of

*****
estimated

sales(A)

*****
OR
Net

working

capital(B)

*****
Which is higher

*****

( A or B)
MPBF

*****

(Maximum Permissible Bank Finance)

Term Loan

A Term Loan is granted for a fixed Term of 3 years to 7 years intended normally
for financing fixed assets acquired with a repayment schedule normally not
exceeding 8 years.

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 rationalization of plant, & repayable from out of the

future earning of the enterprise, in installments, as per a prearranged schedule.
From the above definition, the following differences between a Term Loan & the
working capital credit afforded by the Bank are apparent:

The purpose of the Term Loan is for acquisition of capital assets.

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.

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.

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 programmed
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.

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.

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 capital assets. Financial aspects, economic aspects, technical
aspects, a projection of future trends of outputs & sales & estimates of cost,
returns, flow of funds & profits.

Eligibility of term loan

Particulars

Amount

Cost of machineries

*****

Cost of accessories/equipment

*****
Total cost of machines

Less : 25% of margin

*****
*****

Eligible amount of term

*****

loan

Non-fund Base:

Letter of credit

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,
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 the Terms & conditions of the credit
are complied with. against stipulated document(s), provided that

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 co applicant &

the beneficiary.

Purpose of Bank Guarantees

Bank Guarantees are used to for both preventive & remedial purposes. The
guarantees executed by banks comprise 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;
b)

Mobilization advance or advance money before commencement of the

project by the contractor & for money to be received in various stages like
plant layout, design/drawings in project finance;

c) In respect of raw materials supplies or for advances by the buyers;

d) In respect of due performance of specific contracts by the borrowers & for
obtaining full payment of the bills;
e) Performance guarantee for warranty period on completion of contract
which would enable the suppliers to period to be over; realize the
proceeds without waiting for warranty) To allow units to draw funds from
time to time from the concerned indenters against part execution of
contracts, etc.

f) Bid bonds on behalf of exporters

g) Export performance guarantees on behalf of exporters favoring the
Customs Department under EPCG scheme.
CREDIT APPRAISAL PROCESS:

Receipt of application from applicant

Receipt of documents
(Balance sheet, KYC papers, Different govt. registration no., MOA, AOA,
and properties documents
Pre-sanction visit by bank officers

Check for RBI defaulters list, willful defaulters list, CIBIL data, ECGC,
Caution list etc
Title clearance reports of the properties to be obtained from
empanelled

Valuation reports of the properties to be obtained from empanelled

valuer/engineers

Preparation of financial data

LOAN ADMINISTRATION PRE- SANCTION PROCESS:

Proposal preparation
Appraisal, Assessment and Sanction functions
Assessment of proposal
1. Appraisal
Sanction/approval
of proposal by appropriate sanctioning authority
A.
Preliminary appraisal
Sound credit appraisal involves analysis of the viability of operations of a
business and Documentations,
the capacity of the
promoters mortgages
to run it profitably and repay the
agreements,
bank the dues as and when they fall
Disbursement of Loan

Towards this end the preliminary appraisal will examine the following aspects
of a proposal.

Post sanction activities

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,
Acceptability of the promoters,
Compliance regarding transfer of borrower accounts from one bank to
another, if applicable;
Government regulations/legislation impacting on the industry; e.g., ban on
financing of industries producing/ consuming Ozone depleting substances;
Applicants status vis--vis other units in the industry,
Financial status in broad Terms and whether it is acceptable 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.
Required Documents for Process of Loan
Application for requirement of loan
Copy of Memorandum & Article of Association
Copy of incorporation of business
Copy of commencement of business
Copy of resolution regarding the requirement of credit facilities
Brief history of company, its customers & supplies, previous track records,
orders In hand. Also provide some information about the directors of the
company
Financial statements of last 3 years including the provisional financial
statement for the year 2010-11
Copy of PAN/TAN number of company
Copy of last Electricity bill of company
Copy of GST/CST number
Copy of Excise number
Photo I.D. of all the directors
Address proof of all the directors
Copies related to the property such as 7/12 & 8A utara, lease/ sales deed,
2R Permission, Allotment letter, Possession
Bio-data form of all the directors duly filled & notarized
Financial statements of associate concern for the last 3 years

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

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.
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.
If request includes financing of project(s), branch should obtain
additionally

Appraisal report from any other bank/financial institution in case

appraisal has been done by them.

No Objection Certificate from Term lenders if already financed by

them and

Report from Merchant bankers in case the company plans to access

capital market, wherever necessary.

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:
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 analyzed). 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.
Details of existing borrowing arrangements, if any,
Credit information reports from the existing bankers on the applicant
Company, and
Financial statements and borrowing relationship of Associate firms/Group
Companies.

B. Detailed Appraisal

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.

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.

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,

 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;
The nature and purpose of the contingent liabilities, together with
comments thereon;
Pending suits by or against the company and their financial implications
(e.g. cases relating to customs and excise, sales tax, etc.);
Qualifications/adverse remarks, if any, made by the statutory auditors on
the companys accounts;
Dividend policy;
Apart from financial ratios, other ratios relevant to the project;
Trends in sales and profitability, past deviations in sales and profit
projections, and estimates/projections of sales values;
Production capacity & use: past and projected;
o

Estimated requirement of working capital finance with reference to

acceptable build up of inventory/ receivables/ other current assets;

Projected levels: whether acceptable; and

Compliance with lending norms and other mandatory guidelines as
applicable

Project financing:

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
Capital

structure

(position

of

Authorized,

Issued/

Paid-up

Capital,

Redeemable
o

Preference Shares, etc.)

Debt component i.e., debentures, Term Loans, deferred payment facilities,

unsecured Loans/ deposits. All unsecured Loans/ deposits raised by the
company for financing a project should be subordinate to the Term Loans
of the banks/ financial institutions and should be permitted to be repaid
only with the prior approval of all the banks and the financial institutions
concerned. Where central or state sales tax Loan or developmental Loan is
taken as source of financing the project, furnish details of the Terms and
conditions governing the Loan like the rate of interest (if applicable), the
manner of repayment, etc.
Feasibility of arrangements to access capital market
Feasibility of the projections/ estimates of sales, cost of production and
profits covering the period of repayment
Break Even Point in Terms of sales value and percentage of installed
capacity under a
o

Normal production year

Cash flows and fund flows

Proposed amortization schedule
Whether profitability is adequate to meet stipulated repayments with
reference to Debt Service Coverage Ratio, Return on Investment
Industry profile & prospects
Critical factors of the industry and whether the assessment of these and
management plans in this regard are acceptable
Technical feasibility with reference to report of technical consultants, if
available
Management quality, competence, track record
Companys structure & systems

 Applicants strength on inter-firm comparisons

For the purpose of inter-firm comparison and other information, where necessary,
source data from Stock Exchange Directory, financial journals/ publications,
professional entities like CRIS-INFAC, CMIE, etc. with emphasis on following
aspects:

Market share of the units under comparison

Unique features
Profitability factors
Financing pattern of the business
Inventory/Receivable levels
Capacity utilization
Production efficiency and costs
Bank borrowings patterns
Financial ratios & other relevant ratios
Capital Market Perceptions
Current price
52week high and low of the share price
P/E ratio or P/E Multiple
Yield (%)- half yearly and yearly

Also examine and comment on the status of approvals from other Term lenders,
market view (if anything adverse), and project implementation schedule. A presanction 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
Utilization of limits - FB & NFB
Occurrence of irregularities, if any
Frequency of irregularity i.e., number of times and total number of days
the account was irregular during the last twelve months
Repayment of Term commitments
Compliance

with

requirements

regarding

submission

of

stock

statements, Financial
Follow-up Reports, renewal data, etc.
Stock turnover, realization of book debts
Value of account with break-up of income earned
Pro-rata share of non-fund and foreign exchange business
Concessions extended and value thereof
Compliance with other Terms and conditions
Action taken on Comments/observations contained in RBI Inspection
Reports: CO Inspection & Audit Reports

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.

G. Structure of facilities and Terms of Sanction:

Fix Terms and conditions for exposures proposed - facility wise and overall:

 Limit for each facility sub-limits

Security - Primary & Collateral, Guarantee
Margins - For each facility as applicable
Rate of interest
Rate of commission/exchange/other fees
Concessional facilities and value thereof
Repayment Terms, where applicable
ECGC cover where applicable
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
(ii) 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.

2. Assessment:
Indicative List of Activities Involved in Assessment Function is given below:

 Review the draft proposal together with the back-up details/notes, and the
borrowers application, financial statements and other reports/documents
examined by the appraiser.
Interact with the borrower and the appraiser.
Carry out pre-sanction

visit to the

applicant company and

their

project/factory site.
Peruse the financial analysis (Balance Sheet/ Operating Statement/ Ratio
Analysis/
Fund Flow Statement/ Working Capital assessment/Project cost & sources/
Break Even analysis/Debt Service/Security Cover, etc.) to see if this is
prima facie in order. If any deficiencies are seen, arrange with the
appraiser for the analysis on the correct lines.
Examine critically the following aspects of the proposed exposure.

Banks lending policy and other guidelines issued by the Bank from time to
time
RBI guidelines
Background of promoters/ senior management
Inter-firm comparison
Technology in use in the company
Market conditions
Projected performance of the borrower vis--vis past estimates and
performance
Viability of the project
Strengths and Weaknesses of the borrower entity.
Proposed structure of facilities.
Adequacy/ correctness of limits/ sub limits, margins, moratorium and
repayment schedule
Adequacy of proposed security cover o Credit risk rating
Pricing and other charges and concessions, if any, proposed for the
facilities
Risk factors of the proposal and steps proposed to mitigate the risk

 Deviations proposed from the norms of the Bank and justifications there
for

To the extent the inputs/comments are inadequate or require modification,

arrange for additional inputs/ modifications to be incorporated in the
proposal, with any required modification to the initial recommendation by
the Appraiser
Arrange with the Appraiser to draw up the proposal in the final form.
Recommendation for sanction: Recapitulate briefly the conclusions of the
appraisal and state whether the proposal is economically viable. Recount
briefly the value of the companys (and the Groups) connections. State
whether, all considered, the proposal is a fair banking risk. Finally, give
recommendations for grant of the requisite fund-based and

non-fund

based credit facilities.

3. Sanction:
Indicative list of activities involved in the sanction function is given below:

Peruse the proposal to see if the report prima facie presents the proposal
in a comprehensive manner as required. If any critical information is not
provided in the proposal, remit it back to the Assessor for supply of the
required data/clarifications.

Examine critically the following aspects of the proposed exposure in the

light of corresponding instructions in force:
Banks lending policy and other relevant guidelines
RBI guidelines
Borrowers status in the industry
Industry prospects
Experience of the Bank with other units in similar industry
Overall strength of the borrower
Projected level of operations

 Risk factors critical to the exposure and adequacy of safeguards

proposed
There against

Value of the existing connection with the borrower

Credit risk rating
Security, pricing, charges and concessions proposed for the exposure
and covenants

Stipulated vis--vis the risk perception.

Accord sanction of the proposal on the Terms proposed or by stipulating

modified or additional conditions/ safeguards, or Defer decision on the
proposal and return it for additional data/clarifications, or Reject the
proposal, if it is not acceptable, setting out the reasons.

Loan administration - Post sanction Credit process:

.
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.

Stages of post sanction process

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.

TYPES OF LENDING ARRANGEMENTS:

Introduction
Business entities can have various types of borrowing arrangements. They are
One Borrower One Bank
One Borrower Several Banks (with consortium arrangement)
One Borrower Several Banks (without consortium arrangements
Multiple Banking
One Borrower Several Banks (Loan Syndication)

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 manpower & 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.

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 recourses & 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 facilities 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.

Multiple Banking Arrangement

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 denote the existence of banking arrangement with more than one
bank. 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 arrangements. 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 outstanding with the other banks should be obtained on
the periodical basis & also verified from the Balance sheet of the unit to
avoid excess financing

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 & finalizes 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

Arranger brings together group of banks
Borrower is not required to have interface with participating banks, thus
easy & hassle fee
Large loans can be raised through syndication by accessing global markets
For the borrower, the competition among the lenders leads to finer terms
Risk is shared
Small banks can also have access to large ticket loans & top class credit
appraisal & management
Advantages
Strict, time-bound delivery schedule
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

CREDIT APPRAISAL MODEL

CREDIT TO SME SECTOR

Central bank of India provides credit to SME sector under following Schemes
SME Schematic (Fast Track)

It includes structured products basically to provide fast services to clients. It

includes various products like:

Business Loan for Property

Power Rent
Power Trade
Zero Collateral Loans (ZCL) to MSE under CGS
Card Power
Enterprise Power
Business Power .

Business Loan for Property:

The product is aimed at providing finance to business enterprises for acquition of
an immovable property. The facility is in the form of a Term Loan repayable by
EMIs. The maximum Loan amount under the product is Rs. 5 crores.

Power Rent:
The product generally known in market parlance as Lease Rental Discounting is
aimed at providing a Term Loan to owners of properties against their lease rental
receivables. The Loan amount is assessed on the basis of the net present value of
the rental receivables over the lease period (after deducting margin and taxes). The
lease rentals are hypothecated in banks favor and the Loan is further
collateralized by charge over the property. The product specifies a minimum-

security coverage of 1.5 times. Maximum Loan amount under the product is Rs.
20 crores.

Power Trade:
The product aims to provide both working capital and Term finance requirements
of a trade enterprise. The facility is in the form of a cash credit (for working
capital requirements) and Term Loan (financing capital expenditure). The facility
is secured by hypothecation of working capital assets and further collateralized by
charge over an immovable property/ financial asset. Non- fund based facilities can
also be granted under the product. The maximum Loan amount under the product
is Rs. 2.5 crores.

Zero Collateral Loans (ZCL) to MSE under CGS:

This product facilitates the MSEs and software/IT related services to avail both
working capital and term finance from bank. The facility is secured by guarantee
cover of credit guarantee fund trust for micro and small enterprises (CGTMSE)
and there is no collateral security to be taken in such cases. Maximum loan
amount under the product is Rs. 1.00 crore.

Card Power:
This is a scheme for financing credit/debit card receivables of units installing pour
EDC machines. Both demand loan & term loan facilities are offered to the
borrowers, subject to a maximum of Rs. 2.5 crores. All trading/ retailing activities
(with a few exceptions like liquor, tobacco, seasonal business etc.), where credit/
debit cards are used are eligible for the loans.

Enterprise Power:
This product has been developed to meet the credit needs of the Micro and small
enterprises covering both manufacturing and the service sectors. The facilities
offered include CC Rupee export credit; pre & post shipment credit & non-fund
based facilities like LC & BG. The maximum limit is restricted to Rs. 1.00 Crore.

Business Power:
Business Power is an unsecured Term Loan (Maximum loan amount under the
product is Rs. 35 lacs) to be repaid by way of EMIs over a maximum period of 4
years.

SME- Non Schematic (Standard)

For a business on the growth phase with a wide range of opportunities to explore, timely
availability of credit is an integral ingredient needed to scale new heights. Central Bank
understands this and endeavor to be not just a bank but also financing partner, so that focus
on business needs becomes possible whereas Bank cater to meet financing needs.
Their services ranging from Funded to Non-Funded, from Short Term to Long Term and
from Credit to Trade Services ensures to get finance the way it is best suited for business.
Services:
Cash Credit
Working Capital Demand Loan
Export Finance
Short Term Loan
Term Loan
Clean Bill Discounting
LC Backed Bill Discounting
Co-Acceptance of Bills
Credit Facilities against Guarantee or Stand By Letter of Credit issued by Foreign
Banks
Letter of Credit
Bank Guarantee
Solvency Certificates

Cash Credit:
Bank offer Cash Credit facilities to meet day-to-day working capital
needs. Cash Credit is provided against the primary security of stock,
debtors, other current assets, etc., and/or collateral security of
movable fixed assets, immovable property, personal or corporate
guarantee, etc. Interest is charged not on the sanctioned amount but
on the utilized amount

Working Capital Demand Loan:

Bank also provides working capital facilities in the form of Working
Capital Demand Loan instead of cash credit facility. The primary or
collateral security will be as mentioned in cash credit facility. Here also
interest is levied on the amount drawn rather than on the amount
utilized.

Export Finance:
Bank provides finance for export activities in the form of Pre-Shipment
Credit against firm order and or Letter of Credit and Post shipment
credit. Credit is available for procuring raw materials, manufacturing
the goods, processing and packaging the goods and shipping the
goods. Finance is provided in Indian or foreign currency depending
upon the need of the borrower.

Short Term Loan:

Bank provides Working Capital facilities to meet day-to-day working
capital needs and Term Loan for capacity. However there may be
occasions where there is need of ad hoc or short-Term finance for
general corporate purposes, meeting temporary mismatches in
working capital or for meeting contingent expenses. In such situations
it provides Short Term Loans for tenure up to a year to ensure that
business runs smoothly.

Term Loan:
When there is need of long-Term funds for capacity expansions or plant
modernization and so on. Keeping these requirements in mind Bank
provides Term Loans up to acceptable tenor with suitable moratorium,
if required, and repayment options structured on the basis of
customers estimated cash flows. These Loans are primarily secured
by a first charge on the fixed assets acquired through the Loan
amount. Suitable collateral security is also taken whenever required.

Clean Bill Discounting:

Bank provides clean bill discounting facilities to fund receivables. Bank
discount bills or receivables and provide credit against that. This
facility is provided for a period of 3-6 months depending upon the
tenor of the bill.

LC Backed Bill Discounting:

Bank discount trade bills drawn under Letters of Credit issued by
reputed banks to fund receivables. This facility is provided for a period
of 3-6 months depending upon the tenor of the bill or Letter of Credit.

Co-Acceptance of Bills:
Bank also provides co-acceptance of trade bills depending upon the
need of the borrower.

Credit Facilities against Guarantee or Stand By Letter of Credit

issued by Foreign Banks:
Various foreign companies set up subsidiary in India. Bank provides
funding to such

companies against guarantees or SBLCs of

acceptable foreign banks.

Letter of Credit:
Apart from fund based working capital facilities Bank provides a range
of Non-Fund Based facilities such as Letter of credit, Bank Guarantees,
Solvency certificates, etc. Letter of Credit is provided to meet trade
purchases. These are generally provided for 3-6 months depending
upon Trade cycle. Apart from this it provides Import Letter of Credit for
importing machinery or capital goods. Such LCs are for tenure ranging
from 1-3 years depending upon the need of the borrower.

Bank Guarantee:
Bank provides Bank Guarantee on behalf of its client to various other
entities such as Government, quasi government bodies, corporate and
so on. it provides a range of guarantee such as Performance
guarantee, financial guarantee, EPCG etc. The tenure of Bank
Guarantee range from 1 year to 10 years depending upon the purpose
of the guarantee.

Solvency Certificates:
Bank also provides solvency certificate depending upon the need of
the borrower.

Sanctioning powers for schematic Loans under MSME and Mid Corporate:

In order to have better control over the portfolio, it is felt that the budget for
schematic advances should be allotted only to select branches, where the
potential and manpower support exist for such business.
Accordingly, the budget for FY 11 has been restricted to select branches, to be
decided by Advances Cells. The Branch Heads of branches located at centers
where Advances Cells have been set up will not have any sanctioning powers.

Branch Heads of stand-alone branches where budgets have been allocated will
have sanctioning powers as per delegation of powers given below. The Branch
Heads of other stand-alone branches where budgets have not been allocated will
not have any sanctioning powers. These branches would, however, continue to
source business and such proposals would be processed / sanctioned at the
respective Advances Cells. Review / renewal of existing Loans at such branches
would also be done at the Advances Cells.
Branches would continue to be responsible for all post sanction formalities,
maintaining quality of assets held in their books, periodic updating of drawing
power, and obtention of stock statements and periodical inspection of borrowed
units.
All requests for interest rate concessions are to be forwarded to the Advances
Cells.

The proposals sanctioned at Advances Cells / Zonal Offices during a particular

month are to be submitted for review by the next higher authority through a
monthly control return, latest by the 5th of the succeeding month, in the
prescribed format and not on a case-by-case basis. Similarly, the proposals
sanctioned by the Branch Heads /Advances Cells (headed by AVPs/Managers)
during a particular month are to be submitted for review by the appropriate
authority at Zonal Office or Advances Cells as the case may be through a
monthly control return, latest by the 5th of the succeeding month, in the
prescribed format and not on a case-by-case basis. The concessions in rates of
interest / variations authorized by the VP (Advances) and SVP (Advances) during
a particular month are to be submitted for review by the SVP(Advances)/ Zonal
Head respectively through a monthly control return, in the prescribed format by
the 5th of the succeeding month.
If a combination of schematic Loan products is to be offered, the combined
exposure should be the criterion while sanctioning the limits

INTRODUCTION TO CREDIT RISK MANAGEMENT:

DEFINITION:
Of all different types of risks that a bank is subject to, credit risk can be defined
as the risk of failure on the part of the borrower to meet obligations towards the
bank in accordance with the Terms and conditions that have been agreed upon.
Inability and/or unwillingness of the borrower to repay debts may be the cause of
such default.

The bank aims at minimizing this risk that could arise from individual borrowers
or the entire portfolio. The former can be addressed by having well-developed
systems to appraise the borrowers; the latter, on the other hand, can be
minimized by avoiding concentration of credit exposure with a few borrowers
who have similar risk profiles. Credit risk management becomes even more
relevant in the light of the changes that have been brought about in the
economic environment, including increasing competition and thinning spreads on
both the sides of Balance sheet

DETERMINANTS OF CREDIT RISK:

Factors determining credit risk of a banks portfolio can be divided into external
and internal factors. The banks do not have control on external factors. These
include factors across a wide spectrum ranging from the state of the economy to
the correlation among different segments of industry. The risk arising out of
external factors can be mitigated via diversification of the credit portfolio across
industries especially in light of any expectations of adverse developments in the
existing portfolio.

Given that the banks have very little control over such external factors, the bank
can minimize the credit risk that it faces mainly by managing the internal factors.
These include the internal policies and processes of the bank like Loan policies,
appraisal processes, monitoring systems etc. These internal factors can be taken
care of, partly, via effective rating and monitoring systems, entry level criteria

etc. These processes would enable improvement in the quality of credit

decisions.
This would effectively improve the quality (and hence profitability) of the
portfolio. While monitoring systems are useful tool at post-sanction stage, rating
systems act as important aid at the pre-sanction stage.

INTRODUCTION TO CREDIT TOOLS:

The Bank has developed tools for better credit risk management. These focus on
the areas of rating of corporate (pre-sanctioning of Loans) and monitoring of
Loans (post-sanctioning). The focus of this manual is to familiarize the user with
the credit rating tool.

Credit Rating: Definition

Credit rating is the process of assigning a letter rating to borrowers indicating the
creditworthiness of the borrower. Rating is assigned based on the ability of the
borrower (company) to repay the debt and his willingness to do so. The higher
the rating of a company, the lower the probability of its default. The companies
assigned with the same credit rating have similar probability of default.

Use in decision-making
Credit rating helps the bank in making several key decisions regarding credit
including:

Whether to lend to a particular borrower or not; what price to charge

What are the products to be offered to the borrower and for what tenor?
At what level should sanctioning be done?
What should be the frequency of renewal and monitoring?

It should, however, be noted that credit rating is one of the inputs used in taking
credit decisions. There are various other factors that need to be considered in
taking the decision (e.g., adequacy of borrowers cash flow, collateral provided,
and relationship with the borrower). The rating allows the bank to ascertain a
probability of the borrowers default based on past data.

Main features of the rating tool:

i) Comprehensive coverage of parameters.
ii) Extensive data requirement.
iii) Mix of subjective and objective parameters.
iv) Includes trend analysis.
v) 13 parameters are benchmarked against other players in the segment. The
tool contains the latest available audited data/ratios of other players in the
segment. The data is updated at intervals.
vi) Captures industry outlook.
vii) Eight grade ratings broadly mapped with external credit rating agencys
ratings prevalent in India.

Special features of the web based credit rating tool

i) Centralized data base.
ii) Easy accessibility and faster computation of scores.
iii) Selective access to users based on the area of operation. Branches have
access to the data pertaining to their branch only, Zonal offices have access to
the data pertaining to all the branches under their control and the Credit
Department and Risk Department at Central Office have access to all accounts.
iv) Adequate security system and provision of audit trails for confidentiality.
v) Maintaining of past rating records in the system for collection of empirical data
on rating migrations. This will enable the bank to arrive at PDs (Probability of
Default) factor.

RATING TOOL FOR SMALL AND MEDIUM ENTERPRISES (SME):

The SME rating tool has been developed for the purpose of assigning a credit
rating to the SME borrower of the Bank. The aim of the tool is to provide a
standardized system for the bank to evaluate the credit risk of different
borrowers. It should, however, be noted that this tool is not the standalone
exercise for the purpose of sanctioning of Loan to a SME borrower. It should be
supplemented with other inputs important in the sanctioning process.

The following broad areas have been considered for determining the rating of
borrowers in the SME category:

Financial performance
Business performance
Industry outlook
Quality of management
Conduct of account (after roll out of the Monitoring tool)

Within each of these broad areas, various parameters have been used for
obtaining an overall rating of the borrower. In the following sections, we shall
discuss in greater detail the structure of the tool and the methodology of using it.

Parameters used in the SME tool

Financial performance

The tool in its current form uses various parameters for rating a borrower
on its financial strength. These various sub-parameters give us an idea of
the different sources of risk being faced by a company in different areas.

Operating performance of business

Operational efficiency of a borrower is important in determining the
generation of cash for repayment of its debt obligations. The parameters
in this category assess the borrowers competence in its primary activities.

Quality of management
Quality of the management of a borrower unit has a direct impact on the
performance of the unit. Also, it would have a direct impact on the
integrity of the borrower especially in Terms of its willingness to repay its
debt.

Industry
In order to undertake the credit rating of any borrower, it is important to
assess the riskiness of the industry to which that borrower belongs.
Borrowers, which are similarly ranked in Terms of financial performance,
operating performance of business and quality of management may have
different credit ratings due to the risks inherent in their industry. The risk
assessment in industry sectors is done at the Central Office level and
appropriate score for each industry has been allocated in the tool. On
selection of the relevant industry sector, the tool will automatically reckon
the allocated score.

RATING SCALES:

The rating tool for SME has an 9-point rating scale, which ranges from A++ to
D.

Borrower Rating

Range of Scores

Risk Level

A++

Above 90

Lowest risk

A+

85-90

Lower risk

80-84

Low risk

B+

70-79

Low risk

60-69

Moderate risk

C+

56-69

Moderate risk

51-55

High risk

D+

45-50

Higher risk

Below 45

Highest risk

CASE STUDY

DETAILS OF CASE STUDY

Name

Shree rang traders

Constitution

Public Limited Company

Office Address

B- 301, city light road , athawagate

Surat-395 003, Gujarat

Line of activity

Manufacturing of Food Colour Products

Sector

Chemical and Chemical Products

Dealing with us

New Connection

Incorporation

15th june 2004

Name
Directors

of

Mr. Atulbhai Prahladbhai Patel

Mr. Rameshbhai Bhagwanbhai Patel
Mr. Hitendra Hargovinddas Patel

Group

Not a recognized group

Rating

SME 3 (ABS 31.03.2009)

Associate

Dynemic Overseas (India) Private Limit

Concern

BRIEF BACKGROUND:
The Company was incorporated on 15th june 2004 as Private Limited Company.
The Company was promoted with the objective of carrying on the business of
manufacturing S.P.C.P, the raw material for Food Color, reactive & Raazole Dyes.
In the Year 2008 the company acquired the running business of M/s Safforn Dye
Stuff Industries and started manufacturing wide range of food colors at the
premises 3709/6, GIDC Estate, Ankleshwar having plot area of admeasuring 3700
Sq.Mtr.

As the company aims to provide entire range qualitative and quantitative service
to food industry, as its Unit I. The company commenced manufacturing of food
colors namely Tratrazine in the year 2007-08. Both the units at Ankleshwar are
Ultra modern and have eco friendly plants with in house testing facilities to
control quality at every level of manufacturing. The Company gained goodwill in
the short span of time due to its quality product. The company has well equipped
state of art in house laboratory which conduct test of every parameter of food
color & Dye intermediates laid down under national and international authorities.
QUALITATIVE FACTORS:
The Company has a pro-active Management and Promoters who have
hands on experience in manufacturing of Dyes Intermediaries and Food
Colours.
Profit making Company since last 5 years.
The company has obtained certificate of approval From Bureau Verities
Quality International (BVQI) for achievement of ISO 9001: 2000 quality
standards, the Company has also received certificate of approval from
Bureau Verities Quality International (BVQI) for achievement of
14001:1996 and 14001:2004 quality standards for both its units
satiated at Ankleshwar.
The company was awarded with trophy for export performance of more
than Rs. 6.00 & 8.00 Crore for Self.

Marketing Strategy/Marketing arrangement

Strong and experience people are leading companys marketing department.
Companys total turnover is divided into:

Exports Sales

Local Sales

Exports Sales:

Companys 70% turnover is generated by way of exports sales. Company

has its own presence in all most all countries. The company is exporting
Food colors in Latin America, African countries, Middle East, Far East, US

and Europe. Almost all export customers are dealing with company for
many years.

Out of total exports turnover 60 to 70% percentage orders are repeated

orders and rest of the orders are new orders.

The Company has region wise Export Managers who can cater the need of
customers individually. Due to the quality and timely delivery of the
material the company have less competition from these countries.

Globally many countries have discontinued production of Dyes, Food

colors and Intermediates, new market has opened for Indian manufacturer
of Dyes and Intermediates. As Dynemic Products Ltd is already a well
recognized name in the field globally, it has more opportunities to grab
from growing International market.

Local Sales:

In Local Market Company is doing marketing its Dyes & Intermediates to

the end customers.

The company is the largest manufacturer of S.P.C.P in India which

generating repeated order from the local customers.

Now, company is planning to market the food colors in small packing

through its dealers and distributors which cater the local needs.

Company is also planning to arrange marketing arrangement with soft

drink manufactures and pharmaceutical manufactures for food colors.

Propos
al for

Proposal for fresh sanction of credit facilities by way of take over

(with enhancement) from HDFC Bank
a)

Sanction of Cash Credit Limit of Rs. 500.00 lacs for working

capital requirement ( take over of Rs. 500.00 lacs from HDFC
Bank).

b)

Sanction of Letter of Credit (Inland/Foreign) of Rs. 300.00 lacs

for working capital requirement as a sub-limit of cash credit limit
(take over of Rs. 300.00 lacs from HDFC Bank).

c)

Sanction of EPC/FBD/FBP/PCFC/PSCFC of Rs. 500.00 lacs

for working capital requirement as a sub -limit of cash credit limit

(take over of Rs. 500.00 lacs from HDFC Bank).
d)

Sanction of Corporate Loan of Rs. 200.00 lacs (take over of

Working Capital Term Loan of Rs. 200.00 lacs from HDFC Bank).

e)

Sanction of LER limit of Rs. 25.00 lacs (equivalent to forward

cover of Rs.500.00 lacs).

f)

Concession in processing fees at Rs. 1.00 lacs against norm of

1.00%.

g)

Permitting time of 30 days for completion of take over

formalities with HDFC and creation of mortgage by CMC.

Existin
g
&
Propos
ed
Facilitie
s

Purpose
Tenor

(Rs. in lacs)
Type of Facility

Existin
g

Propos
ed

Limits

+ Inc /

(HDFC)

Dec

Proposed
Limits
(CBI)

Cash Credit Limit Stock

cum Book Debt

500.00

--

500.00

Corporate Loan

200.00

--

200.00

EPC/FBD/FBP/PCFC/PSCFC (500.00)
As a sub limit of Cash
Credit Limit

--

(500.00)

LC(Inland /Foreign) - As a
sub limit of Cash Credit
Limit

(300.00)

--

(300.00)

LER Limit (as a sub-limit of

CC limit)

(15.00)

+25.00

+25.00

700.00

+25.00

725.00

Total
WC/LC/LER : To meet working capital requirements.
Corporate Loan : For NWC built up.
WC/LC/LER : 12 months.

Corporate Loan : 24 months from the date of first disbursement.

Repay
ment

WC/LC/LER : On Demand.
Corporate Loan : 23 monthly instalments of Rs. 834000 each and last
instalment of Rs. 818000.

Securit
y

Interest to be serviced as and when debited.

Primary
Hypothecation of entire current assets (Pari
passu) of the company (Both present &
future). (Value as on 31.03.2009 is of Rs.
1326.42 lacs).
Hypothecation over Plant and Machinery
(Pari Passu) (Both present & future).
(Value is of Rs. 1529.55 lacs as per
empanelled valuer of Citi Bank).
Pari Passu charge being shared by Citi

Collateral

Bank Limited on following properties :

i.

Factory Land and Building, Plant and

Machinery at Plot No. 6401,6415,6416,
G.I.D.C.,

Ankleshwar,

Dist.Bharuch

admeasuring 5664 sq.mts. standing in

name of M/s. Dynemic Products Limited.
ii.

Office situated at B- 301,308,309,310

Satyamev Complex-1, Opp. New Gujarat
High

Court,

S.G.Highway,

Ahmedabad-380

060,

Sola,
Gujarat

admeasuring 4272 square feets standing

in the name of M/s. Dynemic Products
Limited.
iii.

Factory Land and Building, Plant and

Machinery

at

Plot

3709/6,3710/3,3710/1,
Ankleshwar, Dist.Bharuch

No.
G.I.D.C.,

admeasuring

12290.80 sq. mts. standing in name of

M/s. Dynemic Products Limited.

Guarantee

Personal Guarantee of :

Credit

Mr. B.K.Patel having net worth of Rs.

264.88 lacs (approx.) as on 31.03.2009.
Mr. Ramesh B.Patel having net worth of Rs.
152.57 lacs (approx.) as on 31.03.2009.
Mr. Dashrath P.Patel having net worth of
Rs. 257.89 lacs (approx.) as on 31.03.2009.

Nil.

enhance
ment
Interest

BPLR - 3.50% i.e. 11.25% p.a. with monthly rests (presently BPLR @

Rate

14.75%).

LC

Banks standard schedule of charges.

Charges
Processin Rs. 1 lacs for the sanctioned facilities plus applicable taxes.
g fees
Banking

Multiple with Sutex Bank (Proposed).

Arrange
ment

Unit visit
The unit was visited Mr. Asim Bhaduri (VP SME and Center Head), Mr. P.C.Dash (AVP
and SCO SME) and Mr. Kuntal Bhatt (Manager and RM - SME) on 13th November 2009
and the overall operations of the unit were found to be satisfactory.

Operational & Financial Analysis

(Rs. in lacs)
31.03.0 31.03.0 31.03.0 31.03.1
7
Particulars

31.03.11

(Actuals (Actuals (Actuals

)

(Proj.) (Proj.)

Gross Sales

3231.12 3657.70 4911.20 6500.00 7500.00

Net Sales

3231.12 3657.70 4911.20 6500.00 7500.00

Net

Sales

Growth12.79%

13.20%

34.27%

32.35% 15.38%

Rate %
Operating Profit

227.49

313.80

261.62

621.29 729.97

Other Income

141.52

(5.36)

56.07

55.00

PBDIT

322.88

412.89

503.87

881.74 1018.09

Depreciation

47.94

50.62

96.12

110.94 107.00

Interest

47.45

48.47

146.12

149.50 181.12

PBT

369.01

308.44

317.69

676.29 794.97

PAT

266.95

184.99

190.03

446.42 524.76

Cash Profit

182.35

103.07

153.62

424.83 499.22

8.58%

5.33%

9.56%

Operating

Profit7.04%

65.00

9.73%

Margin %
PBDIT Margin %

9.99%

11.29%

10.26%

13.57% 13.57%

PAT Margin %

8.26%

5.06%

3.87%

6.87%

Paid

up

Capital

7.00%

1132.84 1132.84 1132.84 1132.84 1132.84

Equity
Unadjusted TNW

2649.73 2707.33 2764.96 3078.84 3471.06

Unadjusted TOL

1109.42 1589.26 2331.73 2890.12 3094.44

Unadjusted

TOL/0.42

0.59

0.84

0.94

0.89

TNW
Adjusted TNW

2710.84 2725.68 2828.34 3237.48 3629.70

Adjusted TOL

1048.31 1570.91 2268.35 2731.48 2935.80

Adjusted TOL/ TNW 0.39

0.58

0.80

0.84

0.81

Interest Coverage

9.82

8.44

3.84

6.27

5.98

Current Ratio

1.76

1.34

0.94

1.13

1.24

DSCR

7.67

1.83

1.21

2.35

2.20

NOCF

105.69

230.12

654.38

(269.99)149.24

Net Profit / NOCF

2.53

0.80

0.29

(1.65)

3.52

NOCF / Interest

2.23

4.75

4.48

(1.81)

0.82

Financing 0.08

0.13

0.29

(0.08)

0.04

Total Debt / NOCF 1.17

0.78

0.60

(0.45)

(0.00)

NOCF

Payments

(No. of years)

Rating

The rating of the company as per SME Rating Tool comes to SME - 3 (ABS 31.03.2009). The
segment wise scoring is as under:

Particulars

Rating

Overall Scoring

SME-3

Financial scoring

SME-4

Business scoring

SME-3

Management scoring

SME-3

Industry scoring

SME-3

Reference Check

Reference check was made through some of Banks clients in the same line of
activity financed by Axis bank and the same was reported to be satisfactory.

Analysis

a) The promoters of the company are having rich experience of more than 5
years in various Industries.

b) The proposed expansion of the company is having huge market potentials.

c) The Company is the leader in Manufacturing and export of food colours.

d) The overall credit rating of company is SME 3.

e) The business is 5 years old.

f) The sale of the company has been showing an increasing trend throughout
the years under consideration. The sale of the company was increased
from Rs. 3231.12 lacs in FY06-07 (Aud) to Rs. 3657.70 lacs (Aud) in FY0708 and further to Rs. 4911.20 lacs in FY08-09 (Aud ).

g) Since the company is into Manufacturing of Food Colours, the net margin
normally remains between 5.00% - 9.00%. The net profit of the company
was decreased from Rs. 266.95 lacs in FY06-07 (Aud) showing margin of
8.26% to Rs. 184.99 lacs in FY07-08 (Aud) showing margin of 5.06%.
However, the same was maintained at Rs. 190.03 lacs in FY08-09 (Aud)
showing margin of 3.87% due to decrease in margins in the chemical
industry on account of raw material price fluctuations worldwide. The
same was an aberration. But, now the industry is on revival and boom
path. Considering the same, the company has estimated the profit of Rs.
446.42 lacs for FY09-10 @ margin of 6.87%, which may be accepted.

h) The TOL/TNW of the company increased from 0.42 in FY06-07 (Aud) to

0.59 in FY07-08 (Aud) and to 0.84 in FY08-09 (Aud). The company has
estimated TOL/TNW at 0.94 and 0.89 for FY09-10 and FY10-11 respectively
on account of increased bank borrowings, which may be considered
comfortable.

i) The current ratio of the company was 1.76 in FY06-07 (Aud) which
decreased to 1.34 in FY07-08 (Aud) and which further plummeted to 0.94
in FY08-09 (Aud), on account of capex expansion which will be completed
in the current fiscal. The company has estimated its current ratio at 1.13
and 1.24 for FY09-10 and FY10-11, which is reasonably acceptable as
regards to the liquidity position of the company.

j) The NOCF is positive during FY 2008-09 (Aud) by Rs. 654.38 lacs. NOCF is
estimated negative in FY 2009 10 at Rs. 269.99 lacs, as per projected
financials submitted by the company on account of increase in stock and
receivables which is keeping in line with the increase in turnover and the
holding levels are as per the industry practice.

k) The overall conduct of the account, repayment status etc. at Sutex Bank
and HDFC is satisfactory.

l) The main director is dynamic and has rich experience of more than 15
years in his line of activity.

m) The company is a registered SSI unit.

n) Market reference of the company is satisfactory

.
o) The

overall

satisfactory.

projected

performance

and

financial

of

the

unit

are

OTHER DEPARTMENT OF BANKS:

SAVING DEPARTMENT
In individuals

have

create he/she open the

which

first

step

to create

relationship between bank and customers with minimum balance which is Rs.
1000/- . In saving account bank will be give interest @ 3.50% on balance
amount. Also nominee facility available for this account. There are no limits
of numbers of withdrawal/deposit money in the bank.

Document requires for opening saving account are below:

2 passport size color photo
Voting card/driving license
Pan card
Sign of recognition person (who have already account in bank)
CURRENT DEPARTMENT
Current account is useful for business. Amount can be withdrawn any number of
times from this account. Bank does not pay interest or pay at very lower rate. I
this account minimum certain amount has to be kept credit. In this account
overdraft facility can be availed. The account holder is issued with passbook,
cheque book, pay-in-slip etc. Account holder open the account in central bank of
India with minimum balance is Rs. 7500/-.

Document requires for opening current account in bank are below:

Identification of each partner
Pan card
Electricity bills of firm/business
India non-judicial stamp paper
Whom to be eligible for open this account
Proprietary firm
Partnership firm
Pvt. Ltd
Public. ltd
Trust
Club
Association

H.U.F.

Other (please specify)

FIXED DEPOSIT RECEPIT

The account; in which deposit is kept for certain fixed term, is called fixed
deposit account. Bank can utilize this deposit for fixed term. The depositor
cannot withdraw amount for specific term. On completion of term the depositor
has to discharge the receipt by signing on the back side of the receipt over the
revenue stamp and tender it to bank for payment. Then bank returns the amount
of deposit together with interest. The highest interest is earned on this deposit
account.

Demand Draft
DD stands for Demand Draft. Demand draft is a cheque written by one bank to
its representative

bank or cheque issued

by one

bank to

another on its

(issuing banks) credit. There is an order to pay the amount to the person
mentioned in the draft. It is safe

and

easy to send

money to outstation

through draft. The person who is sending money can get the draft issued from
his bank drawn in the name of receiver on the bank of the receivers
village/town. For this sender has to request the banker to issue draft by paying
draft amount and its commission. The issuing bank orders the addressed bank to
make payment of the draft amount to the person indicated in the draft. The
person making payment collects the draft issued and sends it to the person,
whom he to make payment. The respective individual can get the draft amount.
Draft can be crossed. Payment of such crossed draft is credited to the respective
account.

ATM
ATM stands for Automatic Teller Machine. If any person with his fixed
deposit/saving account/current account has given guarantee for his financial

soundness bank gives ATM card / Debit card. In certain branches of the bank the
machines are installed which can accept such cards. The card holder can
withdraw the amount greater than minimum decided and lesser than the credit
he has in his account with the help of such card. The required amount can be
received for 24 hours by operating buttons of the machines. This machine can
pay cash, accept deposit and can handle other simple banking transactions.

FINDINGS

Credit appraisal is done to check the commercial, financial & technical

viability of the project proposed its funding pattern & further checks the
primary or collateral security cover available for the recovery of such
funds

Credit is the core activity of the banks & important source of their earnings
which go to pay interest to depositors, salaries to employees & dividend to
shareholders

Credit & risk go hand in hand

In the business world risk arises out of:

Deficiencies / lapses on the part of the management

Uncertainties in the business environment

Uncertainties in the industrial environment

Weakness in the financial position

Banks main function is to lend funds/ provide finance but it appears that
norms are taken as guidelines not as a decision making

A bankers task is to indentify/assess the risk factors/parameters &

manage/mitigate them on continuous basis

The Credit Appraisal process adopted by the bank take into account all
possible factors which go into appraising the risk associated with a loan

 These have been categorized broadly into financial, business, industrial,

management risks & are rated separately

The assessment of financial risk involves appraisal of the financial strength

of the borrower based on performance & financial indicators

The norms of the bank for providing loans are not stringent, i.e. even if a particular
client is not having the favorable estimated and financial performance, based on its
past record and future growth perspective, the loan is provided.

CONCLUSION
Finance management is the backbone of any organizations and hence
yields a number of job options ranging from strategic financial planning to
sales.

From the study of Credit appraisal of SME, it can be concluded that credit
appraisal should therefore be based on the following factors, the same are
applied at Central bank of India:

Financial performance
Business performance
Industry outlook
Quality of management
Conduct of account

Central Bank of India loan policy contains various norms for sanction of
different types of loans. These all norms do not apply to each & every
case. Central bank of India norms for providing loans are flexible & it may
differ from case to case.

Usually, it is seen that credit appraisal is basically done on the basis of

fundamental soundness. But, after different types of case studies, our
conclusion was such that credit appraisal system is not only looking for
financial wealth. Other strong parameters also play an important role in
analyzing credit worthiness of the firm/company.

In all, the viability of the project from every aspect is analyzed, as well as
type of business, industry, promoters, past records, experience, projected
data and estimates, goals, long term plans also plays crucial role in
increasing chances of getting project approved for loan.

BIBLIOGRAPHY

WEB SITES:

www.rbi.org.in
www.centralbankof india.com
www.indianbankassociation.com
www.scird.com
www.project99.com

BOOKS:
Credit and banking By: K. C. Nanda