A Project Report HDFC BANK

On

Working Capital Management

At

Company Guide Faculty Guide

Mr. Slesh Chandra Prof. Anand Rai

Personal Banker Authorizer JRE Group of Institutions

Gomti Nagar Greator Noida

Submitted By:

Vikas Kumar Singh

Roll No. 39

2014-16

Certificate

Acknowledgement

I would like to extend my heartfelt gratitude to Mr. Gaurav Rapal Zonal HR Manager of

HDFC Bank for providing me an opportunity to undergo my Summer Internship Project in their

esteemed organization. I am extremely grateful to my company guide Mr. Slesh Chandra,

Personal Banker Authorizer, Gomti Nagar-2 Branch, Lucknow for his guidance and

cooperative nature that helped me in completing this project report. I have learned many new

things about the working capital loans provided by bank to the customers and also its appraisal

part while working at HDFC bank.

I would also like to thank Mr. Manoj Srivastava, Senior Manager who permitted me to

work on my project in his branch and for his timely support and advice that helped me in

preparation of this report.

I express my sincere gratitude towards my faculty guide Prof. Anand Rai at JRE Group

of Institutions, Greater Noida for his time to time guidance and encouragement to take up this

interesting topic.

Last but not the least I would like to thank the Placement Cell at JRE Group of

Institutions for placing me at a prestigious organization like HDFC Bank for my Summer

Internship Project.

JRE Group of Institutions Page 2

Abstract

The project report is on the study of working capital management and the credit appraisal

process of HDFC Bank Ltd. The working capital management here refers to the working capital

loan provided by the bank to the customers and its appraisal.

Working capital is one of the most difficult financial concepts to understand. In fact, the term

means a lot of different things to a lot of different people. By definition, working capital is the

amount by which current assets exceed current liabilities. It involves the relationship between a

firm’s short term assets and its short term liabilities.

Funds needed for short term needs for the purpose like payment of wages, payment to suppliers

and other day to day expenses are known as working capital. The goal of working capital

management is to ensure that the firm is able to continue its operation and that it has sufficient

cash flow to satisfy both maturing short term debt and upcoming operational expenses. Such

funds which are needed by business are provided by banks. HDFC bank provide working capital

loan to its prospective customers.

The first part of the report is to analyze the market, who is the prospective customers of the bank

for working capital loan. To know who are the customers of the HDFC Bank Ltd. near Gomti

Nagar Branch-2, whether they need working capital loan (CC Limit) or not, all such data needs

to be collected.

The second part of the report is the credit appraisal of the working capital loan provided by the

bank. Credit appraisal is an important activity carried out by the credit department of the bank to

determine whether to accept or reject the proposal for finance.


This report talks about bank lending. It starts with principles of lending then through role of RBI

and then types of lending i.e. Fund based lending and Non-fund based lending along with brief

explanations and examples as well.

In the following chapter Credit appraisal is briefly overviewed before talking about the credit

appraisal process in general and then the process undertaken by HDFC Bank Ltd. Credit report

and credit rating is discussed thereafter.

The last there is some of a few cases that I could fully cover during my tenure at the Gomti

Nagar-2 Branch of HDFC Bank Ltd. at Lucknow. This includes the appraisal procedure the bank

took for a working capital loan (CC Limit). In the end, I speak about my findings, conclusion and

recommendations.


Table of Contents

SL. NO. PARTICULARS PAGE NO.1. Introduction 7

2. Industry and Company Overview 10

3. An Overview of Bank Lending 15

4. Objectives 20

5. Research Methodology 21

6. Credit Appraisal Process 22

7. Credit Appraisal at HDFC Bank Ltd. 24

9. Data Analysis, Results and Interpretation 39

8. Case Study 44

9. Findings 46

10. Conclusions 47

11. Limitations of Study 48

12. Recommendations 49

13. References 50


Introduction

Management is an art of anticipating and preparing for risks, uncertainties and overcoming

obstacles. An essential precondition for sound and consistent assets management is establishing

the sound and consistent assets management policies covering fixed as well as current assets. In

modern financial management, efficient allocation of funds has a great scope, in finance and

profit planning, for the most effective utilization of enterprise resources, the fixed and current

assets have to be combined in optimum proportions.

Working capital in simple terms means the amount of funds that a company requires for

financing its day-to-day operations. Finance manager should develop sound techniques of

managing current assets.

Working capital is one of the most difficult financial concepts to understand. In fact, the term

means a lot of different things to a lot of different people. By definition, working capital is the

amount by which current assets exceed current liabilities. It involves the relationship between a

firm’s short term assets and its short term liabilities.

Funds needed for short term needs for the purpose like payment of wages, payment to suppliers

and other day to day expenses are known as working capital. The goal of working capital

management is to ensure that the firm is able to continue its operation and that it has sufficient

cash flow to satisfy both maturing short term debt and upcoming operational expenses. Such

funds which are needed by business are provided by banks. HDFC bank provide working capital

loan to its prospective customers.


Working capital loan is also called as CC Limit or OD Limit, which is provided by banks to the

firms for their day to day payments to the suppliers. Every firm needs funds to carry on its day to

day operations such funds are provided by HDFC bank at lower interest rate. Firms to whom the

CC limit is provided are like: Proprietorship, Partnership, Private Ltd., Public Ltd., and HUF.

Firms should be at least 2 years old to get the CC limit from bank; this is called as “Vintage

Period”. The firm whose turnover is less than 7.5 crore comes under EEG and a firm whose

turnover is more than 7.5 crore comes under BBG (Business banking Group). The bank usually

provides 30% of the turnover as working capital loan to the firms. The bank keeps the Stock and

Debtors as Primary Security and Property as a Secondary Security. Bank does not keep Plot as a

security for working capital loan.

There is also a CC Limit process called “Take over Process”. If a firm is already taking CC limit

from some other bank, then HDFC bank also provide them CC Limit by take over there already

running CC limit from their current bank at much lower rate than they are getting now and they

also enhance the limit value.

CC Limit is called as Cash Credit Limit and OD Limit is called as Overdraft Limit. In CC Limit

bank hypothecate the stock but in OD limit bank does not hypothecate the stock, this is the

difference between CC Limit and OD Limit. But CC Limit is mostly taken by the firms.

After taking the documents from the owner of the firm regarding working capital loan

(CC Limit) the documents are send to the concerned department for further process. Now the

appraisal of the loan has to be done by the credit manager. Credit manager analyze the

documents and see whether the person is eligible for the CC Limit or not.


Overview of Credit Appraisal:

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.


Industry/Company Overview

The HDFC Bank was incorporated on August 1994 by the name of HDFC Bank Limited, with its

registered office in Mumbai, India. HDFC Bank commenced operations as a Scheduled

Commercial Bank in January1995. The Housing Development Finance Corporation (HDFC) was

amongst the first to receive an 'in principle' approval from the Reserve Bank of India (RBI) to set

up a bank in the private sector, as part of the RBI's liberalization of the Indian Banking Industry

in 1994.

HDFC Bank is headquartered in Mumbai. The Bank at present has an enviable network of over

4014 branches spread over 2464 cities across India. All branches are linked on an online real–

time basis. Customer is also serviced through Telephone Banking. The Bank also has a network

of about over 11,766 networked ATMs across these cities.

The promoter of the company HDFC was incepted in 1977 is India's premier housing finance

company and enjoys an impeccable track record in India as well as in international markets.

HDFC has developed significant expertise in retail mortgage loans to different market segments

and also has a large corporate client base for its housing related credit facilities. With its

experience in the financial markets, a strong market reputation, large shareholder base and

unique consumer franchise, HDFC was ideally positioned to promote a bank in the Indian

environment.

Business:

HDFC Bank offers a wide range of commercial and transactional banking services and treasury

products to wholesale and retail customers. The bank has three key business segments:


Wholesale Banking Services – The Bank's target market ranges from large, blue–chip

manufacturing companies in the Indian corporate to small & mid–sized corporate and agri based

businesses.

Retail Banking Services – The objective of the Retail Bank is to provide its target market

customers a full range of financial products and banking services, giving the customer a one–

stop window for all his/her banking requirements.

Treasury – Within this business, the bank has three main product areas – Foreign Exchange and

Derivatives, Local Currency Money Market & Debt Securities, and Equities. The Treasury

business is responsible for managing the returns and market risk on this investment portfolio.

Awards and Achievements:

2015

AIMA Managing India Awards Business Leader of the Year

2015 Aditya Puri

Barron's World's 30 Best CEOs

Mr Aditya Puri

Finance Asia poll on Asia's Best Best Managed Public Company India'

Companies 2015 Best Corporate Governance Rank 3

Best Investor Relations Rank 3

Best CEO Aditya Puri

J. P Morgan Quality Best in class straight through processing

recognition Award rate


SWOT Analysis:

Strength

1. One of the leading new age private sector banks.2. HDFC Bank has over 4014 branches and over 11,766 ATM’s, in 2464 cities in India.3. Existing CBS across its branches.4. Huge Employee base i.e. more than 51000 employees.5. Large collaborations with corporate for employee salary accounts.

Weakness

1. Rural penetration is low.2. Lesser no. of branches when compared with its competitors.

Opportunities

1. Mobile banking, internet banking2. Venturing into rural areas.3. Providing more complex products to the ever increasing demands of the industry.

Threats

1.Competitors2.New banking licenses3. Foreign banks that offer complex products.


Organization Structure:


MD Adiyta Puri

Director Anami Roy

Director Bobby Parikh

Director Pandit Palande

Director Partho Datta

Director Shyamala Gopinath

Director Renu Karnad

Director Keki Mistry

Chief Financial Officer Shashidhar Jagdishan

Branch Banking Head Navin Puri

Operations & Cash Management Bhavesh Zaveri

Chief Information Officer Anil Jaggia

Head, Wholesale Banking, Executive Director Harish Engineer

Head, Retail Liabilities, Marketing & Direct Banking Channels Rahul Bhagat

Executive Vice President Legal & Secretary Sanjay Dongre

Head, Credit and Market Risk and HR Paresh Sukhthankar

Head, Equities, Private Banking Abhay Aima

Head, Government & Microfinance Rajendra Sehgal

Head, Business, Commodities & Rural Banking Anil Nath

Chief Risk Officer Jimmy Tata

Head, Wholesale Credit & Market Risk Kaizad Bharucha

Treasurer Ashish Parthasarthy

Departmental Structure:


Regional Head

Circle Head Direct Report (DR) - Cluster Head

Cluster Head Direct Report (DR) - Branch

Branch Head

Branch Sales Officer (BSO)

Personal Banker Welcome Desk (PB WD)

Teller

Assistant Branch Manager (ABM)

Personal Banker

RM/ Imperia Relationship Manager

Teller Authorizer

Personal Banker Authorizer (PBA)

An Overview of Bank Lending

A developed country like U.S.A. sees its’ major lending activities done by Capital & Money

market, where banks provide services for merger & acquisition and other merchant banking

activities. In India lending is predominantly done by Banks. Capital Market & Money Market are

not as strong and dependable entities as yet as banks in a developing country as India and Indian

Economy. Banks have different ways of extending credit to different types of borrowers for a

wide variety of purposes.

Principles of Lending and Loan Policy:

Principles of Lending:

Banks lend from the funds mobilized as deposits from public. A bank acts in the

capacity of a custodian of these funds and is responsible for its safety, security but at

the same time is also required to deliver justified and assured returns over these

borrowings. A bank looks into following aspects before lending:

Safety: the first rule of lending is to ascertain the safety of the advances made. This

means assessment of the repaying capacity of the borrower and purpose of borrowing.

It also includes assessment of contingencies and a fallback plan for the same. This is

ensured by taking adequate security (readily marketable and free of encumbrances)

by way of guarantee, collateral, charges on property, etc.

Liquidity: The second rule of lending is to ascertain how and when the repayment of

the advances made would happen and that the repayment is timely. This is to

ascertain availability of funds in future and make sure that the funds are not locked up


for a long period. This helps in maintaining balance between deposits and advances

and to meet depositor‘s obligation.

Profitability: The third rule of lending is to lend at higher rate of interest than

borrowing rate. This is called as interest spread / margin. One has to strike a balance

between profitability and safety of funds. Interest rates must be charged competitively

but at the same time spread should be adequate.

Risk diversion: An old saying says ― “never put all your eggs in one basket”. A

lender must lend to a diversified customer base. Diversification must be made in

terms of geographical locations, borrowers, industry, sector etc. It is done so as to

mitigate adverse financial effects of a business cycle, catastrophe, chain effect etc.

Loan Policy: Banks are basically a lending institution. Its major chunk of revenue is

earned from interest on advances. Each bank has its own credit policy, based on the

principles of lending, which outlines lending guidelines and establishes operating

procedures in all aspects of credit management. The policy is drafted by the Credit Policy

Committee and is approved by the bank‘s board of directors.

The credit policy sets standards for presentation of credit proposals, financial covenants,

rating standards and benchmarks, delegation of credit approving powers, prudential limits

on large credit exposures, asset concentrations, portfolio management, loan review

mechanism, risk monitoring and evaluation, pricing of loans, provisioning for bad debts,

regulatory/ legal compliance etc. The lending guidelines reflect the specific bank's

lending strategy (both at the macro level and individual borrower level) and have to be in

conformity with RBI guidelines. The loan policy typically lays down lending guidelines

in the following areas:


Credit-deposit ratio: Banks are under an obligation to maintain certain statutory

reserves like cash reserve ratio (CRR – to be kept as cash or cash equivalents), statutory

liquidity ratio (SLR – to be kept in cash or cash equivalents and prescribed securities),

etc. These reserves are maintained for asset – liability management (ALM) and are

calculated on the basis of demand and time liabilities (DTL). Banks may further invest in

non – prescribed securities for the matter of risk diversion. Funds left after providing for

these reserves are available for lending. The CPC decides upon the quantum of credit that

can be granted by the bank as a percentage of deposits.

Targeted portfolio mix: CPC has to strike balance between risk and return. It sets the

guiding principles in choosing preferred areas of lending and sectors to avoid. It also

takes into account government policies of lending to preferred / avoidable sectors. The

bank assesses sectors for future growth and profitability and accordingly decides its

exposure limits.

Loan pricing: Risk-return trade-off is a fundamental aspect of risk management.

Borrowers with weak financial position and, hence, placed in higher risk category are

provided credit facilities at a higher price (that is, at higher interest). The higher the credit

risk of a borrower the higher would be his cost of borrowing. To price credit risks, bank

devises appropriate systems, which usually allow flexibility for revising the price (risk

premium) due to changes in rating. In other words, if the risk rating of a borrower

deteriorates, his cost of borrowing should rise and vice versa.

At the macro level, loan pricing for a bank is dependent upon a number of its cost factors

such as cost of raising resources, cost of administration and overheads, cost of reserve

assets like CRR and SLR, cost of maintaining capital, percentage of bad debt, etc. Loan

pricing is also dependent upon competition


Collateral security: As part of a prudent lending policy, bank usually advances loans

against some security. The loan policy provides guidelines for this. In the case of term

loans and working capital assets, bank takes as 'primary security' the property or goods

against which loans are granted. In addition to this, banks often ask for additional security

or 'collateral security' in the form of both physical and financial assets to further bind the

borrower. This reduces the risk for the bank. Sometimes, loans are extended as 'clean

loans' for which only personal guarantee of the borrower is taken.

Types of Lending:

Lending can be for long term tenure or short term tenure. Lending is broadly classified into two

broad categories: fund based lending and non-fund based lending.

Fund Based Lending:

This is a direct form of lending in which a loan with an actual cash outflow is given to the

borrower by the Bank. In most cases, such a loan is backed by primary and/or collateral security.

The loan can be to provide for financing capital goods and/or working capital requirements.


Lending TenureShort Term

Working CapitalFund BasedCash Credit

Overdraft

Non-Fund BasedLetter of Credit

Bank Guarantee

Long TermTerm Loan

Loan: -In this case, the entire amount of assistance is disbursed at one time only, either in

cash or by transfer to the company’s account. It is a single advance. The loan may be

repaid in installments, the interests will be charged on outstanding balance.

Overdraft: - In this case, the company is allowed to withdraw in excess of the balance

standing in its Bank account. However, a fixed limit is stipulated by the Bank beyond

which the company will not be able to overdraw the account. Legally, overdraft is a

demand assistance given by the bank i.e. bank can ask for the repayment at any point of

time. However in practice, it is in the form of continuous types of assistance due to

annual renewal of the limit. Interest is payable on the actual amount drawn and is

calculated on daily product basis.

Cash Credit: - In practice, the operations in cash credit facility are similar to those of

overdraft facility except the fact that the company need not have a formal current

account. Here also a fixed limit is stipulated beyond which the company is not able to

withdraw the amount. Legally, cash credit is a demand facility, but in practice, it is on

continuous basis. The interests is payable on actual amount drawn and is calculated on

daily product basis. Concept of margin also plays a vital role unlike overdraft.

Working Capital Term Loans: - To meet the working capital needs of the company,

banks may grant the working capital term loans for a period of 3 to 7 years, payable in

yearly or half yearly installments.


Objectives

- To know who are the prospective customers of the bank for working capital loan.

- To study the credit appraisal methods.

- To understand the internal steps taken by the bank for scrutinizing the customer’s

details and credentials.

- To understand the commercial, financial & technical viability of the proposal

proposed and it’s finding pattern.


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 know whether the interest rate is dependent upon the type of business or not

- To know whether the interest rate is dependent upon the turnover or not

- To study the credit appraisal system in HDFC Bank Ltd.

Data collection:

i. Primary data:

Informal interview with manager at HDFC Bank Ltd.

Collecting information from the customers regarding working capital loans

ii. Secondary data:

Books, Websites, Customer files at HDFC Bank, Circulars of HDFC Bank

Tools Used for the Analysis:

i. One Way ANOVA (SPSS)

ii. Post Hoc Test


Credit Appraisal Process


Receipt of application from applicant

Title clearance reports of the properties to be obtained from empanelled

Advocates

Assessment of proposal

Proposal preparation

Receipt of documents

(Balance sheet, KYC papers, Different govt. registration no., MOA, AOA etc.

Pre-sanction visit by bank officers

Preparation of financial data

Valuation reports of the properties to be obtained from empanelled valuer/engineers

Check for RBI defaulters list, willful defaulters list, CIBIL data, ECGC, Caution list etc


Sanction/approval of proposal by appropriate sanctioning authority

Documentations, agreements, mortgages

Disbursement of Loan

Post sanction activities such as receiving stock statements, review of accounts, renew of accounts, etc

(On regular basis)

Credit Appraisal at HDFC Bank Ltd.

Credit Appraisal – Initial due Diligence & Financial Analysis:

The process of credit appraisal would begin with the selection of the borrower. The process

would broadly cover:

I. Appraising the borrower/business

II. Appraising/assessing the credit requirement and structuring the credit delivery, security,

etc. Appraisal of the borrower would include background check and assessment of

managerial and financial capability/strength, project execution/management ability,

success in joint venture for technology/ market, retention of professional talent at various

levels, management control, promoters’ shareholding etc.

Both the above aspects need to be appraised/ examined at the time of the initial entry of a

customer to the Bank as also at the time of subsequent periodic reviews. Naturally, the appraisal

would be different in respect of:

- Retail segment like personal loans for consumer durables, house etc

- Small business like loans to business enterprises

- Farming sector/agriculturists

- MSME sector

- Corporate in manufacturing, infrastructure, services, wholesale trade and other

sectors.


Background of the Borrower/Management:

Background of the borrower needs to be done through scrutiny of antecedents, experience in the

line of business, managerial, marketing, technical competence, organizational strength, integrity

etc. Track record with us, status report from the other banks, reports in the sector from our

borrowers in similar business, RBI/CIBIL reports on defaulters/willful defaulters,

Corporate action taken by SEBI/NSE/BSE, reports from their vendors/dealers who may be our

customers, actual performance vs estimates, frequent overdrawing, history of restructuring etc.

In case of adverse report in any of the above areas, there could be justifications/mitigations

which should be looked into. If need be the appraising officer may personally visit the other bank

for personal discussions. The gist of such oral discussion may be recorded in the file of the

borrower and brought out in the proposal. KYC guidelines as framed by RBI and adopted by

Bank are to be followed by the branches.

Financial appraisal: Analysis of financial parameters/ratios should be done. Aspects like

i. Balance sheet strength

ii. Growth in TNW, sales, PAT etc

iii. Borrower’s ability to service the principal and interest, meet the cash flow requirement in

respect of payments, absorb additional burden due to escalation of raw material cost etc

iv. Position of receivables/inventory etc should be looked into.

The following parameters ratios should be computed:


i. TNW with reconciliation of change in TNW

ii. Current Ratio

iii. Total outside liabilities/equity (DER)

iv. Profit before interest, depreciation, taxes, appropriation (PBIDTA/EBIDTA)

v. Profit After Tax/Net sales

vi. Inventory + receivables/Sales ratio

vii. PAT/Capital employed

viii. Investments

ix. Segmental Revenue if applicable

Check Points for Due Diligence/Assessment in Credit Proposal:

1. Articles of Incorporation - A corporate registration is the cornerstone and basis for

legitimacy, as it requires the business to rely upon its corporate name, image and

reputation.

2. Status Reports - This is useful to show that the company continues to exist and operate

as a legal entity, and has not been dissolved and/or reincorporated under another name.

Most companies that actively engage in business with serious clients will have one that is

relatively recent. Whenever new proposals are put up for approval, status reports of the

company / group needs to be obtained from their existing bankers. Obtaining status

reports is an essential step in due diligence process, in all advance accounts.

3. Market Enquiries - This serves as an important tool. Verification of the antecedents of

the borrower through discrete market enquiries could amply reveal inherent deficiencies.


Cross verification with our existing customers in the line and other players in the line,

would serve as first hand information.

4. Licenses / Certifications - Ask for a copy of licenses, permits, registrations or

certifications if they are directly related to and required for the specific work the

company must perform. If copies are not available, request the number and issuing

authority of each document.

5. Web Site Addresses - All Companies have their websites. Companies that say they do

not have a website or do not need one have to be treated with caution. Good companies

always make efforts to allow clients or partners to keep in touch with them, receive notice

of changes of office address, e-mail addresses or phone numbers, reminders of services

offered or updates on new services.

6. Corporate Brochure or Company Overview - Every company should have a

professional and well-developed presentation of their business concept or services. This

evidences the level of preparation of the company, and demonstrates whether they have

sufficiently developed their capabilities. Project Reports / Information Memoranda, are

not to be taken for face value. They need to be critically examined vis-à-vis other sources

like similar businesses.

7. Each proposal should bear reference related to RBI/CIBIL/ECGC/ List of Defaulters /

willful Defaulter List, etc. As per existing guidelines, Branch / Zonal Office must bring

out this aspect in the proposal.

8. Pre-Sanction Inspection – Branches should note to conduct pre-sanction inspections

before submitting new proposals. Inspection reports should be prepared strictly as per the

format. Findings of the inspection should be brought out in the proposal.


9. It should invariably include the place of work of the entity in addition to visiting the

corporate office, meeting promoters & employees etc.

10. Critical information as envisaged in Credit policies / Circulars, are to be obtained and

scrutinized.

11. Scrutiny of statements of accounts with previous / existing bankers, to be done, to

ascertain their conduct. This is more so necessary while takeover of the facilities is

involved.

12. Risk Mitigation - Proper coverage of risk and mitigation in the proposal reflects good

understanding of the business. As per existing guidelines, Branch / Zonal Office must

bring out these aspects in the proposal.

13. Status of Litigation If the company is involved in any litigation/disputes/ arbitration,

Zone / Branch should give details in the proposal.

14. Assessment of Limits Financial parameters like DER, Current Ratio for W/C & DSCR,

DER, FACR, BEP, IRR, sensitivity analysis for Term Loan are to be properly captured in

the proposals. Proposals should not be considered without these parameters being

adequately brought out.

15. Risk Rating - Risk Rating Exercise for Credit Rating & Pricing has to be done as per

different Risk Scoring Modules.

16. The security which is obtained by the Bank (either as principal or as collateral) shall be

verified as to its title clearance as well as value by independent Panel Advocates/ Valuers

and periodical Encumbrance Certificate shall be obtained. In this regard, extant

guidelines, is enumerated in Branch Circular from time to time are to be meticulously

observed.


Check points for Pre and Post Monitoring Norms:

Pre Disbursement:

Suitable monitoring of various acts by the customer/Branch officials/out-side agencies should be

done at the pre-disbursement stage. Depending upon the terms of sanction in each case, the

following actions/steps, wherever applicable, may be taken prior to disbursement:

Obtention of satisfactory credit reports from existing lenders and other service providers

such as D&B, CIBIL etc. if stipulated. Branch staff, which is processing the applications

for credit requests of new customers, should personally call on the Bank/FI with whom

the incumbent is presently enjoying facilities and discreetly enquire about the conduct

and general aspects of the account. This is in addition to obtaining status reports.

The personal visit to the operating staff of that Bank/FI may reveal more about the

proposed borrower which may not have been incorporated in the report. Wherever it is

not desirable to obtain Status Report for the fear of putting our competitor on guard,

decision may be taken on the basis of scrutiny of proponent’s statement of account for the

last one year with the existing Banker and the fact that the Sanctioning Authority has

satisfied itself about the credit worthiness of the proponents on the strength of statement

of account for the last one year and that status report is not being obtained for the fear of

putting the existing banker on guard should be recorded in the proposal.

However, in case Branch desires not to obtain ‘Status Report’ from other Bankers/Service

providers prior to disbursement then specific ‘approval’ of the higher authority viz GM NBG

and/or GM Head Office should be obtained


In such cases the Branch should obtain status report subsequently and the staff should visit the

Bank/FI immediately after disbursement to discreetly enquire about the conduct and general

aspects of the account.

Adhering to Head Office guidelines for Credit Rating exercise pertaining to entry level

for new accounts.

Post-sanction inspection of the unit prior to disbursement. Needless to add, pre-sanction

inspection report cannot substitute the need of pre-disbursement inspection

Issuance of sanction letter and acceptance of terms, conditions and stipulations of

sanctions by the borrowers.

Execution of all relevant documents, including creation of collateral security / mortgage

etc. as per terms of sanction

Furnishing of Letters of guarantee by guarantors.

Disbursement of amounts by other participating financial agencies / Banks / Financial

Institutions etc.

Clarity in regard to draw down of amounts such as first date of disbursal and last date of

disbursal, the stages in which the monies are required to be drawn, its acceptance and

evaluation at Branch level (If these are already included in the credit proposal, the same

must be adhered to).

Vetting of documents

Credit Process Audit compliance

Post Sanction Pre Disbursement approval wherever branch level sanction

Keeping the duly completed/signed check list on record along with other security

documents


During Disbursement:

Credit delivery in loan accounts is distinct from running accounts such as Cash Credit. All

disbursements whether in loan account or in running accounts, will be related to actual /

acceptable performance of the business unit and should never lose sight of basic objective of

safety of Bank's exposure in the credit assets. The disbursements should commensurate with the

progress of the project / business activity, also taking into account the extent of margin brought

in by the promoters up to the given point of time.

The sanction of the limit is not a commitment in isolation to extend funds to the borrower under

all circumstances. It is only a financial contract to make available funds for due performance of

various business objectives and goals set out in his proposal. Bank's disbursements depend upon

due performance compliance of borrower's own commitments. Therefore, the credit delivery has

to be used as an effective monitoring tool to ensure that there are only normal and acceptable

credit risks.

The following aspects wherever applicable, may be considered for monitoring:

(a) Loan Accounts :

Actual Implementation vis-a-vis Project schedule.

Possibility of time or cost overrun.

Adequacy of arrangements to meet cost overruns.

Impact of time overrun on timely cash generations of the project.

Verification of end-use of funds with reference to verifiable records such as invoices,

account books, registers, records, inspection of the unit etc.


Certificate from Company’s Statutory Auditors on the extent of cost incurred on the

project at any given point of time, implementation progress certificate from approved

architect/contractor etc., wherever applicable.

Disbursements to be made, to the extent possible, directly to the suppliers / service

providers and the element of cash withdrawals to be kept minimum.

Status report on the suppliers of machinery as per the guidelines which ensures

genuineness of supplier/transaction must be obtained.

(b) Cash Credit Accounts:

Compliance of sanction terms / stipulations (any exception requires approval of

appropriate authority)

Verification of completion of the implementation of the project/business activity and

readiness to commence commercial production.

Disbursements to be made, to the extent possible, directly to the suppliers/service

providers and the element of cash withdrawals to be kept minimum.

Even while making direct payments, whenever doubt arises about the genuine nature of

the transaction, due care is to be exercised.

Stock inspection data regarding regular movement of goods, actual sales keeping pace

with projections, not having unacceptable quality rejections in sales, not accumulating

slow/ obsolete inventory, elongation of debtors beyond acceptable levels, change in credit

periods from suppliers etc.

Meaningful on site/off site verification of Stock/Book Debt statements to ensure

adequacy of Drawing Power/Drawing Limit


Post Disbursement:

Monitoring of the actual performance of the borrowers on monthly basis by calling for

MSOD statements and comparing the same with the projected performance figures

appearing in the customer’s own CMA data submitted to Bank, sanctioned proposal / QIS

returns etc. Any substantial deviation will have to be probed into, not waiting for

submission of audited financials.

Obtention of Stock/Book debts statements as per stipulation and scrutiny thereof.

Periodical inspections by our staff.

Stock Audit by approved C.As as per extant policy.

Timely obtention and analysis of Audited statements of Accounts.

Timely review of account

Timely identification of accounts showing symptoms of strain and, wherever considered

fit, resort to prompt restructuring of the account, so that the rehabilitation process is

meaningful.

Monitoring of an account is not confined to any single office (Branches including Large

Corporate/Mid Corporate branches/Zonal Office /NBG office/Divisional Office/Head Office)

and concerted efforts will have to be made at all levels with whatever information available at

each level, to prevent any deterioration in asset quality. Under-lending or delay in lending can be

equally painful to the wellbeing/viability of the borrower’s unit and this itself can lead to asset

becoming non-performing.


Credit Report and Credit Rating:-

Credit Report:

The credit report is an important determinant of an individual's financial credibility. They are

used by lenders to judge a person's creditworthiness. They also help the person concerned to

narrow down on the financial problem areas.

Credit report is a document, which comprises detailed information about the credit payment

history of an applicant. It is mostly used by the lenders to determine the credit worthiness of an

applicant. The business credit reports provide information on the background of a company. This

assists one to take crucial business related decisions. People can also assess the amount of

business risk associated with a company and then decide whether they would be comfortable in

providing them with credit facilities. The degree of interest that would be shown by investors in

their company can also be gauged from the business credit reports as they can get an idea of the

conception of their customers regarding themselves. Since these records are updated at regular

intervals of time they enable people to identify the risk levels associated with a business as well

as its future. These reports also allow businesses to get detailed information about the financial

status of business partners and suppliers.


Credit Rating:

Ratings can be assigned to short-term and long-term debt obligations as well as securities, loans,

preferred stock and insurance companies. Long-term credit ratings tend to be more indicative of

a company's investment surroundings and a company's ability to honor its debt responsibilities. .

The ratings therefore assess an entity's ability to pay debts. There are various organizations that

perform credit rating for various business organizations.

HDFC Bank Ltd. follows a finely defined Credit Rating Model for assessing the creditworthiness

of the applicant. The credit rating model of HDFC Bank Ltd. assesses various aspects of the

projects and assigns scores against them thereby determining the risk level involved with the

project.

It is divided in five sections:

1. Rating of the borrower

- Financial risk

- Management risk

2. Market condition/ Demand situation

3. Rating of the facility

4. Business consideration

5. Cash flow related parameters

1) Rating of the borrower: This part of credit rating model deals with assessing the financial

and managerial ability of the borrower. The financial ability of the firm is derived by calculating

ratios that determine the short term and long term financial position of the firm.


Short term ratios include Current Ratio, determines the liquidity position of the company over a

period of one year. The current ratio is an indication of a firm's market liquidity and ability to

meet creditor's demands. It is excess of current assets over current liability. If current liabilities

exceed current assets (the current ratio is below 1), then the company may have problems

meeting its short-term obligations. If the current ratio is too high, then the company may not be

efficiently using its current assets.

According to the guidelines given to HDFC Bank Ltd. the ideal level is at 1.33:1 however the

acceptable level is at 1.17:1.

However at times current ratio may not be a true indicator, the current ratio for road projects is

very high but this does not indicate that the company is not using its assets well but the ratio is

high because the activity involves more in dealing with current assets. Hence it is important for

the evaluator to understand the nature of the industry.

Long term ratio include Debt Equity Ratio is a financial ratio indicating the relative proportion

of equity and debt used to finance a company's assets. This ratio is also known as Risk, Gearing

or Leverage. A high debt equity ratio is not preferable by an investor as the company already has

acquired high amount of funds from market thereby reducing the investor share over the

securities available, increasing the risk.

It is also important for the lender bank to assess the firm’s debt paying capacity over a period.

Such capacity is derived by calculating ratio like Debt Service Coverage Ratio minimum

acceptable level is 1.50.

It is also necessary for the lender to determine the ability of the firm to achieve the projected

growth by evaluating the projected sales with actual. However such parameter remains non

applicable if the business is new.


Financial risk evaluation is only one of the parameter and not the only parameter for determining

the risk level. It is important to evaluate the Management Risk also while evaluating the risk

relating to borrower.

It is the management of the company that acts as guiding force for the firm. The key managerial

personnel should bear the capacity to bail out the company from crisis situation. In order to

remain competitive it is essential to take initiatives. Such skills are developed over years of

experience, thus for better performance it is required to have a team of well qualified and

experienced personnel.

2) Market potential / Demand Situation: A Company does not operate in isolation there are

various market forces that acts in either favorable or unfavorable manner towards its

performance. Thus the rating would not give true picture if does take market or demand situation

in consideration.

The demand supply situation / market Potential plays an important role in determining the

growth level of the company like

1. Level of competition: Monopoly, Favorable, Unfavorable

2. Seasonality in demand: affected by short term seasonality, long term seasonality or may

not be affected by seasonality in demand.

3. Raw material availability

4. Location issues like proximity to market, inputs, infrastructure: Favorable, neutral,

unfavorable

5. Technology i.e. proven technology: Not to be changed in immediate future, technology

undergoes change, outdated technology.


3) Rating of the Facility: The Company can start functioning only after completing statutory

obligations laid down by the governing authority. Such statutory obligation involves obtaining

licenses, permits for ensuring smooth operations. Preparation and Submission of Financial

Statements, Stock statements in the standard format within the given time schedule.

4) Business Consideration: The length of relationship with the bank enables the lender to assess

the previous performance of the account holder. A good track record acts in the favor of the

applicant, however an under-performance make the lender more vigilant. The income value to

the bank is also given due consideration. Thus Credit Rating of the Business takes into

consideration various aspects that have direct or indirect effect on the performance of the

business.

After evaluating the risk level involved the lender bank decides on lending interest rate.

In HDFC Bank Ltd. they are categorized in 9 segments:

1. Lowest Risk CR-1

2. Low Risk CR-2

3. Medium Risk CR- 3

4. Moderate/ Satisfactory Risk CR- 4

5. Fair Risk CR- 5

6. High Risk CR- 6

7. Higher Risk CR- 7

8. Highest risk CR- 8

9. NPA CR- 9

In HDFC Bank Ltd., a business receiving Credit Rating above level 6 are not considered good

from point of investment and thus are avoided.


Data Analysis, Results and Interpretation

Questionnaire:

Q.1 You are doing banking or funding your business from which bank?

o HDFC Banko ICICI Banko AXIS Banko SBIo PNBo Bank of Barodao Union Banko Others, ______________

Q.2 Are you satisfied with services provided by your bank?

o Yeso No

Q.3 If No, what are the problems you are facing?

Q.4 Are you taking any CC Limit or OD Limit?

o Yeso No

Q.5 If Yes then how much and at which rate?

Q.6 If No, then are you interested in taking any CC limit or OD Limit?

o Yes o No

Q.7 Your firm is of which type:

o Proprietorshipo Partnershipo Private Ltd.

Q.8 How much is your turnover?

o Less than 1 Cro 1 to 5 Cr


o More than 5 Cr

Hypothesis Testing:

To know whether the interest rate is dependent upon the type of business or not.

Ho: Means of interest rate for Proprietorship, Partnership and Private Ltd. are same

H1: Means of interest rate for Proprietorship, Partnership and Private Ltd. are not same

Result:

Descriptive

N Mean Std. Deviation Std. Error

95% Confidence Interval for Mean

Minimum MaximumLower Bound Upper Bound

Proprietorship 24 12.45 .491 .100 12.25 12.66 11 13

Partnership 7 12.04 .721 .272 11.38 12.71 11 13

Private Ltd. 4 12.16 .533 .266 11.31 13.01 12 13

Total 35 12.34 .557 .094 12.15 12.53 11 13

ANOVA

Sum of Squares df Mean Square F Sig.

Between Groups 1.057 2 .528 1.778 .185

Within Groups 9.509 32 .297

Total 10.565 34


Post Hoc Tests

Multiple Comparisons

Tukey HSD

(I) Your firm is of which type?

(J) Your firm is of which type?

Mean Difference (I-J)

Std. Error Sig.

95% Confidence Interval

Lower Bound Upper Bound

Proprietorship Partnership .411 .234 .200 -.16 .99

Private Ltd. .292 .294 .588 -.43 1.02

Partnership Proprietorship -.411 .234 .200 -.99 .16

Private Ltd. -.120 .342 .935 -.96 .72

Private Ltd. Proprietorship -.292 .294 .588 -1.02 .43

Partnership .120 .342 .935 -.72 .96

Interpretation:

Since, P Value = 0.185 which is more than significance value i.e., P>0.05

Therefore, HO is accepted

Hence we can say that, rate of interest for proprietorship; partnership and private ltd. are

same i.e. around 12%.


To know whether the interest rate is dependent upon the turnover of the business or

not.

Ho: Means of interest rate for turnover Less than 1 cr., 1-5 cr., More than 5 cr., are same

H1: Means of interest rate for turnover Less than 1 cr., 1-5 cr., More than 5 cr. are not

same.

Result:

Descriptive

N MeanStd.

DeviationStd.

Error

95% Confidence Interval for Mean

Minimum MaximumLower Bound Upper Bound

Less Than 1 crore 11 12.87 .202 .061 12.73 13.00 13 13

1-5 crore 15 12.39 .309 .080 12.22 12.56 12 13

5 crore & Above 9 11.61 .343 .114 11.35 11.87 11 12

Total 35 12.34 .557 .094 12.15 12.53 11 13

ANOVA

Sum of Squares df Mean Square F Sig.

Between Groups 7.883 2 3.941 47.016 .000

Within Groups 2.683 32 .084

Total 10.565 34


Post Hoc Tests

Multiple Comparisons

Tukey HSD

(I) How much is your turnover?

(J) How much is your turnover?

Mean Difference (I-J)

Std. Error Sig.

95% Confidence Interval

Lower Bound Upper Bound

Less Than 1 crore 1-5 crore .482* .115 .001 .20 .76

5 crore & Above 1.257* .130 .000 .94 1.58

1-5 crore Less Than 1 crore -.482* .115 .001 -.76 -.20

5 crore & Above .776* .122 .000 .48 1.08

5 crore & Above Less Than 1 crore -1.257* .130 .000 -1.58 -.94

1-5 crore -.776* .122 .000 -1.08 -.48

*. The mean difference is significant at the 0.05 level.

Interpretation:

Since, P Value = 0.000 which is less than significance value i.e., P<0.05

Therefore, HO is rejected and H1 is accepted.

Hence we can say that, rate of interest is different for different turnovers.

The business whose turnover is more than 5 cr. from them bank charges lower rate of

interest than others i.e. around 11%.


Case Study

Mr. XYZ is a customer of the bank who holds a current account with the branch. He owns a

cement store nearby and approached the bank for a Working Capital loan (CC Limit) of

Rs. 40, 00, 000 as he wanted to expand his business.

PRE-SANCTION ACTIVITIES:

1. KYC formalities

2. Scrutiny of bank accounts

3. Family background, social reputation, duration in the business

4. Checking RBI’s willful defaulters’ list, Special Approval List (SAL) of ECGC, CIBIL

report.

5. The acceptability of the product, its market demand/supply position, market competition,

market arrangement etc. has to be checked

6. Techno-economic appraisal of the unit to be carried out as per the guidelines by

Technical Appraisal Department (TAD) of HDFC

7. Visit to the store and residence of the applicant

8. Checking store rent agreement, residence proof etc.

9. Checking of documents


ASSESSMENTS:

1. Working capital assessment:

As this unit’s WC requirement is below Rs.5 crores, the bank adopts Turnover

method for assessment. Under this method the WC is arrived @ 20% of the

projected turnover based on the assumption of a three month operating cycle.

2. Financial ratios:

- Debt equity ratio: Mr. XYZ business’ D/E ratio stood at 1.7:1 which was considered

as a very strong one by the bank.

- Current ratio: His current ratio was 1.5:1 as he does business on a credit basis more

often and received the money once in a month from the customer.

- Debt Service Coverage Ratio: He had a fair DSCR ratio of 1.65:1 which implied

that he generated enough Net operating income to pay off his debts.

As all factors were satisfactory, Mr. XYZ application was passed.

POST-SANCTION ACTIVITIES:

1. Monitoring the accounts on a regular basis

2. Visit to the store for checking of stock

3. Acquire monthly stock statement as well as receivables account

4. Balance sheet evaluation

5. Collection of repayment should be maintained

6. Prevent account form being sub-standard


Ensure utilization of funds for genuine purpose

Findings

- By using SPSS and applying tools like One Way ANOVA and Post Hoc Test, it is clear

that bank charges lower interest rate from the businesses whose turnover is high as they

take CC limit more than others whose turnover are less.

- Interest rate is not dependent upon the type of business i.e. Proprietorship, Partnership

and Private Ltd.

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

project proposed and its funding pattern & further checks the primary or collateral

security cover available for the recovery of such funds.

- Credit is core activity of the banks and important source of their earnings which go to pay

interest to depositors, salaries to employees and dividend to shareholders.

- Credit and 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

- The loan policy of HDFC Bank Ltd. contains various norms for sanction of different

types of loans.

- For each type of loan, there are different norms as per the guidelines of RBI.

- The assessment of financial risk involves appraisal of the financial strength of the

borrower based on performance & financial indicators.


Conclusions

- The requirement of credit is ever increasing.

- In most of the cases, hypothecation and/or mortgage are used to create securities for the

banks.

- Every bank has its own internal credit rating procedure to rate the clients (Borrowers).

- After doing the assessment of the financial indicators it is up to the judgment of the top

management of the bank to sanction such loan. The very decision could be against the

assessment result.

- If the company is with bank from inception stage then they are given preference, as

credible and loyal party over their financial indicators.


Limitations of the Study

- As the credit appraisal is one of the most 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, analysis was of limited areas only.

- The study was only on desk jobs related to credit. I was not exposed to the field

survey and valuation part.

Actual balance sheets, ratios, financial statements of the customers were not shared with me for my records and thus my study lacks certain details.


Recommendations

- Closely monitoring and inspecting the activities and stocks of the borrowers from time to

time can avoid the misuse of advances.

- The bank must further secure itself by holding a second charge on all the fixed assets of

the borrower.

- The time period taken by the banks to sanction the limits should be significantly reduced

to allow the borrowers to make use of the credit when the need is most felt.

- There should be a standard rating process to remove the subjectivity and different

perceptions of the rater (person who does credit rating process for a borrower company).

It will remove the human biasness in the process.

- Personal guarantee does not give any physical asset to the bank. It is for the moral

binding on the part of the borrower. Hence, bank should prefer to use this type of

guarantee as this will reduce the default rate on the part of borrower.

- Faster dispersion of credit is of paramount importance. A proposal has to pass through

different channels which lead to delay in the dispersal of credit. There is a need of drastic

reduction in these channels for faster decision making. This will curtail avoidable delays,

improved efficiency besides reducing appraisal time as well as cost.


References

- www.hdfcbank.com

- www.rbi.org.in

- www.wikipedia.com

- www.investopedia.com

- www.theofficialboard.com

Books Referred:

- I.M Pandey – Financial Management – Vikas publishing House Pvt. Ltd.

- Credit & Banking – K.C Nanda


http://www.theofficialboard.com/

http://www.investopedia.com/

http://www.wikipedia.com/

http://www.rbi.org.in/

http://www.hdfcbank.com/