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 AXIS Bank Ahmadabad. OBJECTIVES: To study the credit appraisal methods. To understand the commercial, financial & technical viability of the proposal proposed and it’s finding pattern. RESEARCH DESIGN: Analytical in nature. DATA COLLECTION : Primary data: 1
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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 AXIS Bank Ahmadabad.
OBJECTIVES:
To study the credit appraisal methods.
To understand the commercial, financial & technical viability of the proposal
proposed and it’s finding pattern.
RESEARCH DESIGN:
Analytical in nature.
DATA COLLECTION :
Primary data:
Informal interview with manager and other staff members at Axis Bank.
Secondary data:
Books
websites
database at Axis Bank
library research
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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 AXIS Bank.
Management Students:
The project will help the management student to know the patterns of credit appraisal in
Axis bank.
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.
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CHAPTER 1
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.
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.
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Net banking, phone banking, mobile banking, ATMs and bill payments are the new buzz
words that banks are using to lure customers.
With a view to provide an institutional mechanism for sharing of information on borrowers /
potential borrowers by banks and Financial Institutions, the Credit Information Bureau
(India) Ltd. (CIBIL) was set up in August 2000. The Bureau provides a framework for
collecting, processing and sharing credit information on borrowers of credit institutions. SBI
and HDFC are the promoters of the CIBIL.
The RBI is now planning to transfer of its stakes in the SBI, NHB and National bank for
Agricultural and Rural Development to the private players. Also, the Government has sought
to lower its holding in PSBs to a minimum of 33% of total capital by allowing them to raise
capital from the market. Banks are free to acquire shares, convertible debentures of corporate
and units of equity oriented mutual funds, subject to a ceiling of 5% of the total outstanding
advances (including commercial paper) as on March 31 of the previous year.
The finance ministry spelt out structure of the government-sponsored ARC called the Asset
Reconstruction Company (India) Limited (ARCIL), this pilot project of the ministry would
pave way for smoother functioning of the credit market in the country. The government will
hold 49% stake and private players will hold the rest 51%- the majority being held by ICICI
Bank (24.5%).
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.
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After the second phase of financial sector reforms and liberalization of the sector in the early
nineties, the Public Sector Banks (PSB) s found it extremely difficult to complete with the
new private sector banks and the foreign banks. The new private sector banks first made their
appearance after the guidelines permitting them were issued in January 1993. Eight new
private sector banks are presently in operation. This 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
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Classification of Banks:
The Indian banking industry, which is governed by the Banking Regulation Act of India
1949 can be broadly classified into two major categories, non-scheduled banks and
scheduled banks. 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 Banks
IFCI IDBI ICICI NABARD NHB IRBI EXIM Bank SIDBI
Commercial Regional Rural Land Development Cooperative
Banks Banks Banks Banks
Public Sector Banks Private Sector Banks
SBI Groups Nationalized Banks Indian Banks Foreign Banks
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CHAPTER 2
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 India’s 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
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term development programme. 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, India’s 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.
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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,
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.
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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)
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CHAPTER 3
INDUSTRY ANALYSIS
Competitive Forces Model
(Porter’s Five Force Model)
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(2)
Potential Entrants is high as development financial institutions as well as private and Foreign Banks have entered in a big way
(1)
Rivalry among existing firms has increased with liberalization. New products and improved customer services is the focus.
(4)
Bargaining power of buyers is high as corporate can raise funds easily due to highCompetition.
(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, debentures, gold, real estate etc.
(5)
Organizing power of the supplier is high. With the new financial instruments they are asking higher return on the investments
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.
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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 RBI’s 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 ruralareas 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.
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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 standardsof 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.
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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.
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CHAPTER 4
INTRODUCTION TO AXIS BANK
Axis Bank was the first of the new private banks to have begun operations in 1994, after the
Government of India allowed new private banks to be established. The Bank was promoted
jointly by the Administrator of the specified undertaking of the Unit Trust of India (UTI - I),
Life Insurance Corporation of India (LIC) and General Insurance Corporation of India (GIC)
and other four PSU insurance companies, i.e. National Insurance Company Ltd., The New
India Assurance Company Ltd., The Oriental Insurance Company Ltd. and United India
Insurance Company Ltd.
The Bank today is capitalized to the extent of Rs. 403.63 crores with the public holding (other
than promoters and GDRs) at 53.72%.
The Bank's Registered Office is at Ahmedabad and its Central Office is located at Mumbai.
The Bank has a very wide network of more than 896 branches and Extension Counters (as on
31st December 2009). The Bank has a network of over 4055 ATMs (as on 31st December
2009) providing 24 hrs a day banking convenience to its customers. This is one of the largest
ATM networks in the country.
The Bank has strengths in both retail and corporate banking and is committed to adopting the
best industry practices internationally in order to achieve excellence.
Mission
Customer service and product innovation tuned to diverse needs of individual and
corporate clientele.
Continuous technology up gradation while maintaining human values.
Progressive globalization and achieving international standards.
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Core values
Customer satisfaction through
Providing quality service effectively and efficiently
“smile, it enhances your face value” a service quality stressed on
Periodic customers service audits
Maximization of stakeholder value
Business divisions
Treasury management
Treasury is responsible for the maintenance of the statutory requirements such as the cash
reserve ratio (CRR), statutory liquidity ratio (SLR) and the investment of such funds. It also
manages the assets and liabilities of the bank. Primary dealing activities can be classified into
Money market operations
Foreign exchange operations
Derivatives
Merchant Banking and capital markets
Axis Bank is a registered merchant Banker. The services offered are:
Private placement/syndication
Issue management
Debenture trustees
Depository services
Project advisory services, capital market services, advisory on Mergers & Acquisition
Retail financial services
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All branches have a dedicated financial advisory desk, wherein the mutual fund schemes are
marketed. The objective is to provide customers with a larger portfolio of investment avenues
thereby enhancing customer relationship. Other products handled by the department include
sale of Gold Coins as well as marketing of Depository services.
Corporate and institutional banking
Cash management Services
Business current Accounts
Correspondent Banking
Government Business
Retail Banking
Retail banking is one of the key departments in the bank. It has the largest variety in its
portfolio which consists of retail asset and retail liability products. Retail Banking by
definition implies banking services which are offered to individual customers as opposed to
corporate banking which is meant for companies.
International banking
Major functions include
Handling regulatory issues which include compliance with regulations of
various authorities such as RBI regulatios, FEMA etc
Keeping a track of the business volumes being generated by the branches and
controlling the margins
Maintaining relationship with correspondent Banks outside India
Advances
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The function involves extending fund and non-fund based credit facilities to different clients
in the country, the department aims to maximize the interest spread earned on funds available
with the bank while keeping the risk on the credit portfolio at acceptable limits. The
department also tries to maximize fee-based income from both fund based and non-fund
based activities.
Board of Directors:
Shri N.C. Singhal
Shri J.R. Varma
Dr. R.H. Patil
Smt. Rama Bijapurkar
Shri R.B. L. Vaish
Shri M.V. Subbiah
Shri Ramesh Ramanathan
Shri K.N. Prithviraj
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CHAPTER 5
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 upto Rs 10
million, can be considered as an SSI unit and any investment of upto 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
& 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.
Term Loan
A Term Loan is granted for a fixed Term of not less than 3 years intended normally for
financing fixed assets acquired with a repayment schedule normally not exceeding 8 years.
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:
o The purpose of the Term Loan is for acquisition of capital assets.
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o The Term Loan is an advance not repayable on demand but only in installments
ranging over a period of years.
o 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.
o 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 Bank’s 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 programme unlike short Term Loans
for working capital (especially the cash credits) which are being renewed year after year.
Term Loans would be repaid in a regular way from the anticipated income of the industry/
trade.
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.
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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,
o 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
o Authorizes another bank to effect such payment, or to accept & pay such bills of
exchanges (drafts); or
o 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.
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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.
Bill discounting:
Definition:
As per Negotiable Instrument Act, “The bill of exchange is an instrument in writing
containing an unconditional order, signed by the maker, directing a certain person to pay a
certain sum of money only to, or to the order of, a certain person, or to the bearer of that
instrument.”
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Discounting of bill of exchange:
A seller (Drawer) if need cash, may handover the B/E to the Bank, NBFC, a company or a
high Net worth Individual and obtain ready cash this is known as discounting of bill. the
practice in India is that, the financing organization holds the original B/E till the drawee pays
on maturity. For discounting the bill, financiers charge an interest on the bill amount for the
duration of the bill which is called discount charges.normal maturity periods are 30, 60, 90,
120 days.
Types of Bills
1. Demand Bill
2. Usance Bill
3. Documentary Bills
a. Documents against acceptance (D/A) bills
b. Documents against payment (D/P) bills
4. Clean Bills
Advantages
o To Investors
1. Short Term source of finance
2. Outside the purview of Section 370 of Indian Companies Act 1956
3. No tax deducted at source
4. Flexibility
o To Banks
1. Safety of funds
2. Certainty of payment
3. Profitability
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Credit Appraisal Process
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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 empanelledAdvocates
Proposal preparation
Valuation reports of the properties to be obtained from empanelled valuer/engineers
Preparation of financial data
Assessment of proposal
Sanction/approval of proposal by appropriate sanctioning authority
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Documentations, agreements, mortgages
Disbursement of Loan
Post sanction activities such as receiving stock statements, review of accounts, renew of accounts, etc
(On regular basis)
Loan administration pre- sanction process
Appraisal, Assessment and Sanction functions
1. Appraisal
A. Preliminary appraisal
Sound credit appraisal involves analysis of the viability of operations of a business and
the capacity of the promoters to run it profitably and repay the bank the dues as and when
they fall
Towards this end the preliminary appraisal will examine the following aspects of a
proposal.
Bank’s 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;
Applicant’s status vis-à-vis other units in the industry,
Financial status in broad Terms and whether it is acceptable The Company’s
Memorandum and Articles of Association should be scrutinized carefully to ensure (i)
that there are no clauses prejudicial to the Bank’s interests, (ii) no limitations have
43
been placed on the Company’s borrowing powers and operations and (iii) the scope of
activity of the company.
Further, if the proposal is to finance a project, the following aspects have to be examined:
Whether project cost is prima facie acceptable
Debt/equity gearing proposed and whether acceptable
Promoters’ ability to access capital market for debt/equity support
Whether critical aspects of project - demand, cost of production, profitability, etc. are
prima facie in order
Required Documents for Process of Loan
a) Application for requirement of loan
b) Copy of Memorandum & Article of Association
c) Copy of incorporation of business
d) Copy of commencement of business
e) Copy of resolution regarding the requirement of credit facilities
f) Brief history of company, its customers & supplies, previous track records, orders In
hand. Also provide some information about the directors of the company
g) Financial statements of last 3 years including the provisional financial statement for
the year 2007-08
h) Copy of PAN/TAN number of company
i) Copy of last Electricity bill of company
j) Copy of GST/CST number
k) Copy of Excise number
l) Photo I.D. of all the directors
m) Address proof of all the directors
n) Copies related to the property such as 7/12 & 8A utara, lease/ sales deed, 2R
Permission, Allotment letter, Possession
o) Bio-data form of all the directors duly filled & notarized
p) 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
44
branch includes a reference to SECC/CPC etc. as the case may be) finds the proposal
acceptable, it will call for from the applicant(s), a comprehensive application in the
prescribed proforma, along with a copy of the proposal/project report, covering specific
credit requirement of the company and other essential data/ information. The information,
among other things, should include:
Organizational set up with a list of Board of Directors and indicating the
qualifications, experience and competence of the key personnel in charge of the main
functional areas
e.g., purchase, production, marketing and finance; in other words a brief on the
managerial resources and whether these are compatible with the size and scope of the
proposed activity.
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
a) Appraisal report from any other bank/financial institution in case appraisal has been
done by them.
b) ‘No Objection Certificate’ from Term lenders if already financed by them and
c) 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:
45
a) Audited profit loss account and balance sheet for the past three years (if the latest
audited balance sheet is more than 6 months old, a pro-forma balance sheet as on a
recent date should be obtained and analysed). For non-corporate borrowers,
irrespective of market segment, enjoying credit limits of Rs.10 lacs and above from
the banking system, audited balance sheet in the IBA approved formats should be
submitted by the borrowers.
b) Details of existing borrowing arrangements, if any,
c) Credit information reports from the existing bankers on the applicant Company, and
d) 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 company’s 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,
If any;
46
The position regarding the company’s tax assessment - whether the provisions made
in the balance sheets are adequate to take care of the company’s 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
company’s 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
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
47
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
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
Company’s structure & systems
Applicant’s 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:
o Market share of the units under comparison
o Unique features
o Profitability factors
o Financing pattern of the business
o Inventory/Receivable levels
o Capacity utilization
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o Production efficiency and costs
o Bank borrowings patterns
o Financial ratios & other relevant ratios
o Capital Market Perceptions
o Current price
o 52week high and low of the share price
o P/E ratio or P/E Multiple
o 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 pre-sanction inspection of the
project site or the factory should be carried out in the case of existing units. To ensure a
higher degree of commitment from the promoters, the portion of the equity / Loans which is
proposed to be brought in by the promoters, their family members, friends and relatives will
have to be brought up-front. 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
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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:
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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 borrower’s
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.
o Bank’s lending policy and other guidelines issued by the Bank from time to time
o RBI guidelines
o Background of promoters/ senior management
o Inter-firm comparison
o Technology in use in the company
o Market conditions
o Projected performance of the borrower vis-à-vis past estimates and performance
o Viability of the project
o Strengths and Weaknesses of the borrower entity.
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o Proposed structure of facilities.
o Adequacy/ correctness of limits/ sub limits, margins, moratorium and repayment
schedule
o Adequacy of proposed security cover o Credit risk rating
o Pricing and other charges and concessions, if any, proposed for the facilities
o Risk factors of the proposal and steps proposed to mitigate the risk
o Deviations proposed from the norms of the Bank and justifications therefor
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
company’s (and the Group’s) 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:
Bank’s lending policy and other relevant guidelines
RBI guidelines
Borrower’s status in the industry
Industry prospects
Experience of the Bank with other units in similar industry
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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
o Stipulated vis-à-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.
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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.
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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 arrangement. Additionally, when units were not doing
well, consensus was rarely prevalent among the consortium members. If one bank wanted to
55
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 bank’s 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
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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 & drawals
Streamlined process of documentation with clearly laid down roles & responsibilities
Market driven pricing linked to the risk perception
Competitive pricing but scope for fee-based income is also available
Syndicated portions can be sold to another bank, if required
Fixed repayment schedule & strict monitoring of default by markets which punish
indiscipline
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CHAPTER 7
CREDIT APPRAISAL MODEL AT AXIS BANK
Credit to SME SectorAXIS bank 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:
Mpower OD and Mpower Term Loan
Business Loan for Property
Power Rent
Power Trade
Zero Collateral Loans (ZCL) to MSE under CGS
Card Power
Enterprise Power
Business Power
Mpower OD and Mpower Term Loan:
The product aims at 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. 2.50 Crs.
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.
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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 bank’s 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.
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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.
Busness Power:
Business Power is an unsecured Term Loan (Maximum loan amount under the
product is Rs. 35 lacs) to be repaid by way of EMI’s 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. Axis 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
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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 capex. 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 capex or capacity expansions or plant
modernization and so on. Keeping these requirements in mind Bank provides
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Term Loans up to acceptable tenor with suitable moratorium, if required, and
repayment options structured on the basis of customer’s 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.
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Bank Guarantee:
Bank provides Bank Guarantee on behalf of its client to various other entities
such as Government, quasi govt 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 08 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, obtention of stock statements and periodical inspection of borrowal units.
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The sanctioning powers, to be exercised by various officials would be as under.
Sanctioning Authority Exposure Limits
(in Rs. Lacs)
Interest rates
Concessions
Reviewing Authority
Manager50 NIL
AVP / VP-Advances at
the Advances Cell
AVP 250 NIL VP-Advances
VP 1000 Upto 100 bps SVP – Advances
SVP (Advances) at ZO 2000 Upto 100 bps Zonal Head
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 authorised 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 shoul be
the criterion while sanctioning the limits
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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 bank’s 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.
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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 familiarise 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 borrower’s cash flow, collateral provided, relationship with the borrower).
The rating allows the bank to ascertain a probability of the borrower’s default based on past
data.
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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
5 Nature of Business Distributorship of Pepsi products, Airtel, Levi’s Struss Signature
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Brief Background
M/S. Vishesh Distributors Pvt. Ltd. Is a private limited company, held by close family
members. The company was established in year 2001.
The group has been engaged in distribution of branded company products like Pepsico
beverage products, Airtel, Levi’s Struss Signature, Amul, TATA, fragment shop, etc.
The group was earlier distributor for companies like Himalaya, Wipro, Godrej, Parker, Parle,
Adani & Lays.
Now, due to strong marketing channel, the company is also entered in agreement with Levi’s
signature for distribution of garments to their outlets & franchises in all over the Gujarat.
Further the company is also having 14 commercial vehicles for distribution activities.
.
Present Proposal
To meet the increasing business demand for the various distribution schemes, the company
has requested for the OD limit of Rs. 180.00 lacs. by takeover of existing LAP from HDFC
Bank & also requested to allow the Cash credit limit of Rs. 55.00 lacs from Vijaya Bank. The
company wants to expand their existing business activity by enhancing working capital limit
for smooth business operation.
Purpose of loan For General Business PurposeLimits Proposed
OVERDRAFT - Rs. 180.00 lacs
Rate of Interest Validity of Limits
BPLR –2.50% i.e. 12.25% p.a. with monthly rests. (Presently BPLR is at 14.75% p.a.)12 months only subject to review every year.
Security Details Primary Security: NIL
Collateral Security:Equitable Mortgage of following properties:
1. Residential flat situated at 401, Kalasagar Appartment, Opp. Star India Bazaar, Jodhpur, Satellite, Ahmedabad, belonging to Mr. Ketan P. Shah (Director). Estimated market value Rs. 80.00 lacs.
2. Shop at 101, 1st floor, Swagat Plaza I, Near Bopal Amli road, Bopal, Ahmedabad, belongs to Mrs. Dhara K. Shah (Director). Estimated market value Rs.41.00 lacs.
3. Shop at 19, 1st floor, Rudra Square, Near Bodakdev police chowki,
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Bodakdev, Ahmedabad, belongs to Mr. Ketan P. Shah (Director). Estimated market value Rs. 80.00 lacs.
4. Shop at 9-10, Ground floor, Sukriti Annexie, Near Prernatirth Bunglows-2, Satellite, Ahmedabad, belongs to Mr. Ketan P. Shah (Director). Estimated market value Rs. 100.00 lacs.
Total market value of above properties is Rs. 301.00 lacs (Approx).
Guarantee: Personal guarantee of:1. Mr. Ketan P. Shah (Director & property holder).2. Mrs. Dhara K. Shah (Director & property holder)3. Mr. Pankaj C. Shah (Director)4. Mrs. Pina P. Shah (Director)
PDC’s: Two PDC’s for the entire overdraft limit each dated 3 months and 9 months from the date of first disbursement.
Processing Fees0.75% of the limit sanctioned plus applicable taxes (Non-refundable)
DocumentationAs per bank’s extent guidelines.
Risk AssociatedThe company is facing competition from the other distributors in the market.
Risk mitigatesThe above risk factor is mitigated as below:
1. Directors of the company, are having 10 years of rich experience in the field of distributorship
2. The company is frequently offering promotional schemes to its retail distributors
3. The company is having diverse clientele base in the market.
Unit VisitThe company has been visited by Mr. N. Ramachandran (AVP-SME), Ms. Disha
Badani (Executive-SME), Mr. Nirav Ayer (Executive-SME), on 04.02.2010:
Overall visit was found satisfactory.
Login FeesRs. 5000/- plus applicable taxes (Non refundable)
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Defaulter ListWhether the names of the borrower or any of the promoters/directors appear(s) in: -
RBI defaulters List: No (The firm name and directors are not featuring in RBI
Defaulters’ List as of 31.03.2009 - Latest Available).
ECGC defaulter List: No
CIBIL:
Credit card repayment record of Director Mr. Ketan P. Shah:
In CIBIL of Mr. Ketan, it is observed that one credit card account from Standard
Chartered Bank, with overdue amount Rs. 0.43 lacs, was observed written-off.
However, Mr. Ketan has submitted that it was a due of Rs. 1100/-. Due to non -
receipt of bill on time, there was interest charge levied on the actual amount.
He, subsequently paid the actual amount, but not the interest amount, which as on date
has become overdue of Rs. 43,723/- with interest charge.
The director has also filed a case against SCB regarding the same, to the “Consumer
Education & Research Society” and it is in process till date.
The director has submitted the copy of the relevant documents to our bank.
However, considering below facts, we may consider the Credit Card written-off
status as acceptable:
1. The borrower is having satisfactory repayment track record of CC, LAP &
term loan with HDFC Bank & Vijaya bank.
2. Relevant documentary proofs available for CIBIL case.
Credit Score
(Enclosed Credit Scoring Sheet)
Parameters Present Score
(ABS – 31.03.09)Financial 36.00Non – Financial 30.00Overall 66.00Rating SME 3