A REPORT ON CREDIT APPRAISAL OF INDUSTRIAL FINANCE FOR SME’s SUBMITTED BY: Kulbir Singh Class roll no-2026, Examination roll no-581 Session 2006-2008 A report submitted in partial fulfillment of the requirements of MBA Program of Institute of Management Studies Under the guidance of: Dr. Parmod Sharma Senior Lecturer INSTITUTE OF MANAGEMENT STUDIES 1
83
Embed
A REPORT ON CREDIT APPRAISAL OF INDUSTRIAL FINANCE FOR SME’s
This document is posted to help you gain knowledge. Please leave a comment to let me know what you think about it! Share it to your friends and learn new things together.
Transcript
A REPORT ON
CREDIT APPRAISAL OF INDUSTRIAL FINANCE FOR SME’s
SUBMITTED BY:Kulbir Singh
Class roll no-2026, Examination roll no-581Session 2006-2008
A report submitted in partial fulfillment of the requirements of
MBA Program of Institute of Management Studies
Under the guidance of:Dr. Parmod Sharma
Senior LecturerINSTITUTE OF MANAGEMENT STUDIES
HIMACHAL PRADESH UNIVERSITY SHIMLA
1
TO WHOM IT MAY CONCERN
This is to certify that Mr. Kulbir Singh of MBA, Institute of Management Studies
has undertaken a project on “CREDIT APPRAISAL OF INDUSTRIAL
FINANCE FOR SME’s.” under my guidance. To the best of my knowledge that
project is neither submitted nor published elsewhere.
I recommend and forward the project for evaluation for the award of “Masters in
Business Administration.”
Project GuideDr.Parmod Sharma
ACKNOWLEDGMENT
2
I sincerely feel the credit of the project work could not be
narrowed to only one individual. This work is an integrated effort of all
those concerned with it, it would have been quite difficult without their
direct & indirect co-operation. I wish to express my appreciation and
gratitude to all the concerned people.
First and the foremost my intellectual debt is to Dr.Parmod
Sharma(Senior Lecturer Institute of Management Studies) and Mr.A.K
Sharma (Chief Manager Loan Department Union Bank of India, Shimla)
who have contributed significantly towards the completion of the project.
They have provided the guidelines on which this project was made.
I am thankful to all the people who have given their precious time
and provided me with requisite data without which this project would not
have completed .I also thank them for giving their valuable suggestions
during the entire period of research.
However, I accept the sole responsibility for any errors of omission
and commission.
Kulbir Singh
Roll no-2026/581
3
Table of Contents
CONTENTPAGE NO. 1 Introduction 1.1 Objectives of the Study 5 1.2
Purpose of the Study5 1.3 Limitation of the Study6 1.4 Proposed Methodology6 1.5
Abstract7,8 2. Main Text 2.1 Overview of Indian banking industry 9,10,11 2.2 union bank of
India 12,13,14 2.3 small scale industry15,16,17,18,19,20 3 credit appraisal procedure and
process21 3.1 assessment of credit need 22 3.2 financial statement
analysis23,24,25,26,27 3.3 risks in bank lending 27,28 3.4 financial ratio
analysis32,33,34 3.5 credit rating 35,36,37,38 4 loan facility 4.1 working capital loan
39,40,41,42,43 4.2 term loan 44,45,46,47,48,49,50
4
Table of Contents
CONTENT PAGE NO.5 Documentation and formalities
515.1 NPA classification and recovery52,53,54,55AnnexureAnnexure-
Since Indian banking sector is experience exponential growth, the profit
made by public sector and private sector banks are given below.
BANK MAR.-05 MAR.-06 % CHANGE
PRIVATE SECTOR BANK
ICICI BANK 20,052.00 25,400.70 26.67
HDFFC BANK 6,655.60 8,707.80 30.83
UTI BANK 3,345.80 4,850.80 44.98J& K BANK 1,150.70 1,768.40 53.68
KARUR VYSYA BANK 1,053.40 1,353.50 28.49
FEDRERAL BANK 900.90 2,252.10 149.98
KOTAK BANK 848.90 1,182.31 39.28
YES BANK NA 2,700.00 NA
INDUSIND BANK 2,101.50 368.20 -82.48
ING VYSYA BANK -381.30 90.60 NA
PUBLIC SECTOR BANK
STATE BANK OF INDIA 43,045.20 44,066.70 2.37
BANK OF BARODA 6,768.40 8,269.60 22.18
BANK OF INDIA 3,400.50 7,014.40 106.28
CORPORATION BANK 4,021.60 4,444.60 10.52
IDBI LTD. 3,072.60 5,608.90 82.55
DENA BANK 610.00 729.90 19.66
CANARA BANK 11,095.00 13,432.20 21.07
ALLAHABAD BANK 5,417.90 7,061.30 30.33
PUNJAB NATIONAL BANK 14,101.20 14,393.10 2.07
VIJAYA BANK 3,805.70 1,268.80 -66.66
BANK OF MAHARSHATRA 1,771.20 507.90 -71.32UNION BANK OF INDIA 3,015 3,610.00 19.7
NET PROFIT OF COMMERCIAL BANKS IN INDIA (MN) Rs.
Source: reserve bank of India
12
Corporate Mission:
A logical extension of the Vision Statement is the Mission of the Bank, which is to gain market recognition in the chosen areas.
To build a sizeable market share in each of the chosen areas of business through effective strategies in terms of pricing, product packaging and promoting the product in the market.
To facilitate a process of restructuring of branches to support a greater efficiency in the retail banking field.
To sustain the mission objective through harnessing technology driven banking and delivery channels.
13
To promote confidence and commitment among the staff members, to address the expectations of the customers efficiently and handle technology banking with ease.
ABOUT UNION BANK OF INDIA
“We should have the ability to carry on a
big bank, to manage efficiently Crores of rupees in the course of our
national activities. Though we have not many banks amongst us, it does
not follow that we are not capable of efficiently managing Crores and tens
of Crores of rupees."
MAHATMA GANDHI
Union Bank of India, a public sector bank was incorporated
in 1919.After the inauguration by father of nation “mahatma Gandhi” bank
has travelled a long successful journey of 88 yrs of banking. Union Bank of
India is committed to maintain its identity as a leading innovative
commercial Bank, alive to the changing needs of the society. Union Bank
has offered vast and varied services to its clientele taking care of their
needs. Today, with its efficient customer service, consistent profitability &
growth, adoption of new technologies and value added services, Union
Bank truly lives up to the image of, “GOOD PEOPLE TO BANK WITH”.
The key business areas of the bank are retail banking,
international banking, corporate banking & treasury. As Retail banking is
growing very fast in Indian banking industry union bank of India is also
showing strong growth in this sector. The bank provide housing, retailing
trade, automobile, consumer, education and other personal loans and
deposits services such as fixed , saving and demand deposits for the
valuable clients. The bank has increased forgeion exchange turnover from
361.02 bn in 2004-05 to408.94 bn in 2006-07 with annual growth rate of
14
13.27%. The corporate banking sector offers various loan and free based
products and services to its small and medium enterprises, agriculture
sector.
To boost SME Segment the bank has set up separate SME
cells .the total employee strength of bank are 25,421.
Union bank of India is targeting a 25% growth in its SME portfolio. The
bank SME portfolio in 2005-06 was 6,839 crore and its target in 2006-07
is 8,540 crore. Union bank of India has made an agreement with SIDBI to
provide loan to SMEs. The bank is converting 32 small scale industry
branches to SME branches. Union bank of India and SIDBI are also in the
process of putting up marketing teams in 15 centers for identifying and
appraising SMEs units and lending them.
Union bank of India has a network of more than 2100 branches
all over India. The Bank came out with its Initial Public Offer (IPO) in
August 20, 2002 and govt.of India holds 55.4% of the bank followed by
FII 19.9% & Indian public hold14.8% of the bank. The Bank has over the
years earned the reputation of being a techno-savvy Bank and is one of
the front runners amongst public sector bank in the field of technology. It
is one of the pioneer public sector banks, which launched Core Banking
Solution in 2002. Online Tele banking facility is available to all its Core
Banking customers. The multi facility versatile Internet Banking Solution
provides extensive information in addition to the on line transaction
facility to both individuals and corporate banking with the Core Banking
branches of the Bank. In addition to regular banking facilities, today
customer can also avail variety of value added services like cash
management service, insurance, mutual funds, Demat from the Bank.
SMALL SCALE INDUSTRY:
15
With the advent of planned economy from 1951 and the subsequent industrial policy
followed by Government of India, both planners and Government earmarked a special
role for small-scale industries and medium scale industries in the Indian economy.
Due protection was accorded to both sectors, and particularly for smallscale industries
from 1951 to 1991, till the nation adopted a policy of liberalization and globalization.
Certain products were reserved for small-scale units for a long time, though this list of
products is decreasing due to change in industrial policies and climate.
SMEs always represented the model of socio-economic policies of Government of
India which emphasized judicious use of foreign exchange for import of capital goods
and inputs; labour intensive mode of production; employment generation;
nonconcentration of diffusion of economic power in the hands of few (as in the case of
big houses); discouraging monopolistic practices of production and marketing; and
finally effective contribution to foreign exchange earning of the nation with low import-
intensive operations. It was also coupled with the policy of de-concentration of
industrial activities in few geographical centers. It can be observed that by and large,
SMEs in India met the expectations of the Government in this respect. SMEs
developed in a manner, which made it possible for them to achieve the following
objectives:
High contribution to domestic production
Significant export earnings
Low investment requirements
Operational flexibility
Location wise mobility
Low intensive imports
Capacities to develop appropriate indigenous technology
Import substitution
Contribution towards defense production
Technology – oriented industries
Competitiveness in domestic and export markets
At the same time one has to understand the limitations of SMEs, which are:
Low Capital base16
Concentration of functions in one / two persons
Inadequate exposure to international environment
Inability to face impact of WTO regime
Inadequate contribution towards R & D
Lack of professionalism
In spite of these limitations, the SMEs have made significant contribution towards
technological development and exports.
SMEs have been established in almost all-major sectors in the Indian industry such
as:
Food Processing
Agricultural Inputs
Chemicals & Pharmaceuticals
Engineering; Electricals; Electronics
Electro-medical equipment
Textiles and Garments
Leather and leather goods
Meat products
Bio-engineering
Sports goods
Plastics products
Computer Software, etc.
An industrial undertaking in which the investment in fixed assets in plant
and machinery whether held on owner ship term on lease or on hire
purchase does not exceed rs. 10 million.It is estimated that in terms of
value, the sector accounts for about 39% of the manufacturing output and
around 33% of the total exports of the country.As per available statistics,
this sector employs an estimated 31 million persons spread over 12.8
million enterprises and the labour intensity in the MSE sector is estimated
to be almost 4 times higher than the large enterprises.
17
In India 2.30 lakhs units are only registered in Gujarat providing
employments to 39 lakhs people in Gujarat, which contributes to 24% of
total employment provided by SSI in India.
Small Scale and ancillary units (i.e. undertaking with investment
in plant and machinery of less than Rs. 10 million) should seek registration
with the Director of Industries of the concerned State Government. The
govt. of India established ministry of small-scale industry in 2001.the role of
ministry of small scale industry is to mainly assist the state in their effort to
promote the growth of SSI, increase the competition and gernation of
The difference between the 2 methods is Rs. 24.2 lakh (which maybe
extended as a Working Capital Term Loan in case of sick units. Since by the
second method the contribution by the promoter is high so it would be
accepted for bank financing.
3 Cash Budget Method:
The borrower is required to submit the cash budget to the bank along with
actual as well as projected financial statements. The budget in the
prescribed format is to be prepared for a period of one year and then split
43
into forecasts for shorter periods say monthly or quarterly. The budget will
provide the following information.
i. The peak level of bank finance required during the course of the year.
ii. The current level of bank finance required as forecasted by the split
budget (on monthly/quarterly) basis.
The following borrowers are assessed under this method :
a) Borrowers dealing in Cyclical industries like tea, sugar etc.
b) Borrowers availing Fund Based Working Capital limits of Rs.50 crores and
above from the banking industry. 36
Term loan:
Term loans are a lump-sum payment with payback over a specified period
of time. They may be used to finance equipment, a change in ownership, a
new business acquisition or other long-term needs of a company. The
period of loan vary from 3 to 10 years. Investment of these loans from firms
is in plant and machinery, vehicles and certain other equipments.
Repayment period for the term loan is calculated by DSCR and the
repayment should start immediately after the cash gernation. The formula
for calculating DSCR
(NPAT +int.on term loan + deprecation)
(Int. on term loan +installment of term loan)
The idle ratio is considered to be 2:1while in case of SSI 1.5:1 ratio is
considered to be good.
Appraisal for long term in case of an industry or a project is a long term
investment decision. So it should require a detailed study. The appraisal is
done on the basis of following steps:
1. Technical Feasibility:
44
The infrastructure required for the manufacturing process is studied
here. The location selected should be ideal with regard to
transportation, communication network, availability of water, climatic
conditions, and availability of manpower and disposal of waste. Size
of the plant & type of technology adopted is another important
aspect. The size of the plant or its capacity should be matching to the
requirements of the estimates of the project.
2. Economic Feasibility:
The unit should undertake detailed market study. The demand &
supply gap of the product should be assessed. The time of the unit
entering into the market is also important.
3. Financial Feasibility:
The cost of the project & the estimated time for execution is an
important factor. The promoter’s efficiency to complete the project
within the given period is most important. The source of finance,
without leaving any gap & availability of cash at the right time is to
be ensured. Possibility of cost escalation, cost overruns etc. to be
assessed. The financial feasibility is assessed by financial projection,
fund flow and cash flow statement, ratio analysis and by non
discounted and discounted cash flow statements.
Pay back period method: Payback period is calculated by
comparing cash out flow (investment) with cash inflow (cash profit)
and finding out that at what time they will be equal. Lower the
payback period better the project.
Average rate of return :
It is calculated as Average profit after tax
Average book value of investment
It is compared with the rate of return of other market investments.
Discounted cash flow technique
45
I. Net present value
It is calculated as =present value of cash inflow – present value of
cash outflow
The project is accepted if NPV is positive and rejected if NPV is
negative
2 Benefit cost ratio:
The entire cash inflow is discounted at the rate of interest to
arrive at present value rate.
BCR= present worth of the benefits (cash inflow)
Present worth of cost (investment)
The project is accepted if the BCR is more than one and rejected if BCR is
less than one.
Break even analysis:
Break even point is the point of sales at which a units makes no profit or no
loss. A unit can earn profit only if its level of sale is above the break even
point. Once the BEP is calculated, the sales projection made in the
profitability statement is compared with the break even point of sale. In
case the difference between projected sale and BEP sale is very low, it is
very risky to finance the project. On the other hand if projected sale is high
than BEP the profitability of earning some profit is still there are some
deviations in the project.
BEP can be classified in three ways 1 in terms of no. of units of sale 2 in terms of sale in rupees3 in terms of capacity utilisation
1 BEP in units = fixed cost Contribution/ unit OR fixed cost
Sales price/unit – variable cost/ unit
2 BEP in rupees = fixed cost * total sales in rupees Total contribution
46
3 BEP in terms of capacity utilisation BEP in capacity = No. of units at BEP * 100 Total capacityTo study the viability of the project the project having BEP above of 75% of capacity utilisation should not be accepted for finance
Sensitivity analysis:
While giving credit to the company an exercise is done known as sensitivity analysis.
In this method we basically check the volatility in the profit of the company due to
change independent variable. The subsequent DSCR is calculated and the ability to
COMMENT ON FINANCIAL INDICATOR:14.2 AUDIT NOTES IN BALANCE SHEET IF ANY , TO BE SPECIFIED:14.3 COMMENT ON FINANCIAL INDICATOR ON CASH BASIS :--
31.03.2004 31.03.2005
Net cash flow from the operating activities
Net cash flow from investing activities
Net cash flow from financing activities
Increase in cash and cash equivalent Cash and cash equivalent at the end of year
14.4 COMMENT ON ESTIMATED BALANCE SHEET OF 31.03.2006
15 EVALUATION OF MANAGEMENT
16 EVALUATION OF INDUSTRY
17 EVALUATION OF BUSINESS RISK
18 CONDUCT OF THE ACCOUNT :
(1) A) regulatory in submission of Stock / book debt statement
QPR / half yearly statement Financial statement CMA data(2) name of the statement/ return Stock statement /BD/MSOD QPR/ half yearly statement
58
No. of statement/ return received during the year
Last statement /return received
b) COMMENTS ON OPERATION / OVERDUES(1) Turnover in the account is commensurate With the limit
(2) Frequent excesses are given
(3) Cheques are returned frequently
19 COMLIANCE TO TERM OF SANCTION: a) Completion of mortgage formalities : b) Registration of charges with ROC c) Whether document valid and in force d) Compliance of RBI guidelines e) Whether consortium meeting held At a prescribed periodic intervals Where the bank is the leader
20 a) DATE OF INSPECTON:DURING THE FINANCIAL YEAR
20 b) NATURE AND VALUE OF COLLETERAL SECURITY:
Nature / description of collateral security indicating area & location of property
Value (rs. )
Date of valuation Along with name of the valuer
Insurance Amount and date of expiry
c) PERSONAL GUARNTEE/ CORPORATE GUARNTEE
21a) WHETHER THE NAME OF THE COMPANY/ DIRECTORS FIGURE IN RBI DEFAULTER / CAUTION LIST / ECGC. IF YES, PLEASE FURNISH DETAIL
b) WHETHER DIRECTOR/ PARTNER / PROMOTERS IS A DIRECTOR IN OUR / OTHER
59
BANK OR IS RELATED TO THEM
c) ANY LITIGATION IN FORCE AGAINST THE FIRM/COMPANY OR AGAINST THE PARTNER/ DIRECTORS. IF SO MENTION DETAILS & PRESENT POSITION
22 AUDIT OBSERVATIONS a) Internal b) Concurrent c) Statuaryd) RBI inspection e) Stock audit 23 ANY IRREGULAR FEATURE OBSERVED IN THE MONITORING REPORT
24 EXPOUSRE DETAILS FROM OUR BANK
Limit existing
Limit recommended
D.P. o/s as on date of inspection
Value of security
Irregularities
A} non fund based limit Import/inland/L/CLetter of guarantee
SUB LIMIT {a} B} fund based limitsWcdl/FclCc/pc/FdbpSUB LIMIT {b}C} TERM LOANTERM LOAN SUB LIMIT {C}GRAND TOTAL{A+B+C}
b) DETAILS OF EXCESS ALLOWDED DURING THE YEAR:
c) OTHER EXPOUSRE, IF ANY, INCLUDING INVESTMENTS:
60
d) OTHER LIABILTIES OF DIRECTORS (IN THEIR INDIVIDUAL CAPACITY)
25a) EXPOUSRE DETAIL FROM BANKING SYSTEM NAME OF THE BANK
NON FUND BASED%Share Amt. % share Amt.
b) CONDUCT OF THE ACCOUNT AND EXPOUSRE DETAIL FROM FINANCIAL INSTITUTIONS: c) VALUE OF ACCOUNT d) DETAILS OF FOREIGN CURRENCY EXPOUSRE COMMITMENTS AND UNHEDGED POR
Amt. in USD
Name of the corporate Amount of exposure Unhedged portion
Due dates for payment (range)
1.External commercial borrowing
2. Importance usance bills received on collection basis duly accepted and outstanding
3. L/Cs & PAD for import of goods capital equipments.
4. Others exports Receivables
5. Other import obligation
6. Foreign currency loan availed from authorized dealers in India
7. Any other exposure, please specify
26 OPERATIONAL EXPERIENCES a) WITH RESPECT TO SISTER/ ALLIED CONCERN
61
b) COMMENTS ON OTHER BANKS CREDIT REPORT ON SISTER CONCERNS 27 OMMENT ON ASSESMENT OF LIMITS
INVENTORY AND RECEIVABLE NORMInventory Previously
accepted level
Actual on the assessment year
Estimates Indicative Norms
Month value month value
RM-IMPORTRM-INDIGENOUS
WIP/ FIG
RECIEVABLE-LOCAL
RECIEVABLE EXPORTS
SUNDRY CREDITORS
OTHER CA
OTHER CL
raw material
stock in progress
Receivable ( domestic)
Receivable( exports)
Working capital assessment2005(act.) 2006(est.)
Total current assetsOther current liabilities ( other than bank borrowing )Working capital gap
Actual/ projected NWC
FBF
ASSESSMENT OF NON – FUND LIMITS A inland / import l/c
For purchase of raw material / stocks Imp. indigenous
Purposed purchase (% of total purchase) Purchase Purchase under l/c
A Average time taken from date of l/c till the date of shipment (days)
B Average time taken from date of shipment to the 62
date of retirement of the bill under l/c (days) Total A (a+b)
C Average rotation of letter of credit in one year (365/a) times
D Level of l/c ( projected purchase/import during the year )/cContingencies (IF ANY)
Limit requiredTotal l/c requirement =
Our share –
Limited recommended
Bank guarantee
a. Year FY- FY-Total score obtained Grade
Parameter
Borrower ratingBorrower rating
Facility rating
Risk mitigators
Business aspects Total marks with grade
29. Credit rating
30. industry
31. industry scenario
32. out look
33. recommendation
Approved
63
GLOSSARY
Acid test A stern measure of a company's ability to pay its short term debts, in that stock is excluded from asset value. (liquid assets/current liabilities) Also referred to as the Quick Ratio.
Cost of goods sold (COGS)
The direct costs attributable to the production of the goods sold by a company. The directly attributable costs of products or services sold (usually materials, labour, and direct production costs). COGS = net sale -gross profit.
Cash flow statement The statement showing the movement of cash in and out of a business from day-to-day direct trading and other non-trading or indirect effects, such as capital expenditure, tax and dividend payments.
Capital employed The value of all resources available to the company, typically comprising share capital, retained profits and reserves, long-term loans and deferred taxation.
Cost of debt The rate that has to be received from an investment in order to achieve the required rate of return from the creditors
Coverage ratios A group of ratios that measures a firm’s ability to meet its recurring fixed charge obligations, such as interest on long term debt, lease payments, and/or proffered stock dividends
Average collection period
This represents the no. of days’ worth credit sales that is locked in debtors.
Current liabilities Liabilities that is normally payable within a year and are not for along term.
Current ratio A liquidity measures defined as current assets divided by current liabilities.
64
Default risk
The uncertainty of expected returns from a security attributable to possible changes in the financial capacity of the security issuer to make future payments to the security owner. Treasury securities are considered to be default free. Default risk is also referred to as “financial risk” in the context of marketable securities management.
Inventory turnover The ratio of net sales to inventory.
Letter of credit A letter from a bank mentioning that it has established a line of credit in favor of a certain party
Letters of guarantee
letters of guarantee are concerned with providing safeguards to buyers that suppliers will meet their obligations or vice-versa, and are issued by the supplier's or customer's bank depending on which party seeks the guarantee.
Net working capital Net working capital is the difference between total current assets total current liabilities.
Operating cycle The operating cycle of a firm begins with the acquisition of raw materials and ends with the collection of receivables.
Sensitivity analysisA technique of risk analysis which studies the responsiveness of the criterion of merit like net present value or internal rate of return to variations in underlying factors like selling price, quantity sold, etc.
Term loan A loan which is generally repayable in more than one year and less than ten years.
Turn over ratiosTurn over ratios, also referred to as activity ratios or asset management ratios, measure how efficiently the firm employs the assets.
Working capitalThere are two measures of working capital- gross working capital and net working capital. Gross working capital is the total of current assets. Net working capital is the difference between the total current assets and the total current liabilities.