A PROJECT REPORT ONSME FINANCEAtDENA BANK (VASHI)
TOWARDS FULFILLMENT OF THE REQUIREMENTS OF POST GRADUATE DEGREE
IN MASTER OF MANAGEMENT STUDIES OF MUMBAI UNIVERSITY
SUBMITTED BYNIYATI R. CHAUDHARY
MMS- ROLL NO.: M1324BATCH 2013-2015
UNDER THE GUIDANCE OFPROF. V. NARAYANAN
FATHER C.RODRIGUES INSTITUTE OF MANAGEMENT STUDIESVASHI, NAVI
MUMBAI
EXECUTIVE SUMMARY
I have undertaken a study on the topic SME Finance which deals
with learning the importance of financing the SME Sector at Dena
Bank.SME Financeis the funding of small and medium sized
enterprises and represents a major function of the general business
finance market in which capital for firms of types is supplied,
acquired, and priced. In India, SME is the biggest provider of
employment next only to Agriculture. The SMEs constitute 95% of
total industrial units and constitute 40% of total industrial
output. Small and medium enterprises (SMEs) are critical for the
economic and social development of emerging markets. They play a
major role in creating jobs and generating income for low income
people. In many emerging markets, however, access to financial
services for SMEs remains severely constrained.For financing SMEs,
bank offers fund based and non-fund based limits for SME. Fund
limits are those in which the banks funds are directly utilized, as
for instance, in the case of limits against stocks or
purchasing/discounting of bills. In short in Fund based bank places
certain funds at the disposal of borrowers and borrowers avail
these funds.Non-fund based facilities are such facilities extended
by banks which do not involve outgo of funds from the bank when the
customer avails the facilities but may at a later date crystallise
into financial liability if the customer fails to honour the
commitment made by availing these facilities.
INDEXSr. No.TopicsPage No.
1Dena Bank-
Introduction.................................................................8
2Introduction to
MSME....................................................................10
3SMEs in
India.................................................................................12
4Definition of
MSME.......................................................................13
5SME
Policy.....................................................................................16
6Common Characteristics of
SMEs..................................................17
7Problems of
SMEs..........................................................................19
8Steps for SME
loans.......................................................................21
9Overview of
Advances...................................................................23
10Methods of
Assessment..................................................................27
11Ratio
Analysis.................................................................................28
12Lending
Methods............................................................................32
13Analysis of SME
Proposal............................................................34
14My comments on financial
indicators...........................................38
15Learning
Experience.......................................................................41
16Conclusion......................................................................................42
17Findings..........................................................................................43
18Bibliography...................................................................................44
DENA BANK- Introduction
Dena Bank is one of the earliest nationalized banks in India;
headquartered in Mumbai. Dena Bank was founded by the family of
Devkaran Nanjee under the name Devkaran Nanjee Banking Company Ltd.
It found its new name,Dena Bank Ltd.(DevkaranNanjee) when it was
incorporated as a Public Company in December 1939. The bank
wasnationalised(and therefore dropped "Limited" from its name) in
1969 along with 13 other banks in India. The bank's head office is
in Mumbai, with a network of 1464 branches (as on March 2013)
across the country. The bank has a network of 1427 ATMs across
India (as on March 2013).Dena Bank is one of the most prestigious
banks of India having a good market share. The Bank is one among
the few banks to receive the World Bank loan for technological
upgradation and training. They are the first bank to introduce
Minor Savings Scheme, Credit card in rural India known a Dena
Krishi Sakh Patra, Drive-in ATM counter of Juhu, Mumbai and
Customer rating system for rating Bank Services.Products and
servicesDena bank provides its banking products and services in
several categories like- Personal banking Priority and SME
International banking Corporate banking Retail banking Mortgage
loans Credit cards
MissionDENA BANK will provide its Customers - premier financial
services of great value, Staff - positive work environment and
opportunity for growth and achievement, Shareholders - superior
financial returns, Community - economic growth
VisionDENA BANK will emerge as the most preferred Bank of
customer choice in its area of operations, by its reputation and
performance
Logo
The logo of Dena Bank depicts Goddess Lakshmi, the Goddess of
Wealth, according to Hindu mythology.It was the desire of the
founding fathers of the Bank that the Bank should be a symbol of
prosperity for all its clients, and the logo represents this
promise.The contemporary 'D' in the logo reflects the dynamism,
dedication and the drive towards customer satisfaction.
INTRODUCTION TO MSME
Micro, Small and Medium Enterprises (MSME) sector has emerged as
a highly vibrant and dynamic sector of the Indian economy over the
last five decades. MSMEs not only play crucial role in providing
large employment opportunities at comparatively lower capital cost
than large industries but also help in industrialization of rural
& backward areas, thereby, reducing regional imbalances,
assuring more equitable distribution of national income and wealth.
MSMEs are complementary to large industries as ancillary units and
this sector contribute enormously to the socio- economic
development of the country. The MSMEs constitute over 90% of total
enterprises in most of the economies and are credited with
generating the highest rates of employment growth and account for a
major share of industrial production and exports.
In India, the Micro, Small & Medium Enterprises (MSMEs) play
a pivotal role in the overall industrial economy of the country.
Micro and Small Enterprises (MSEs) 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;
non concentration 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. In recent years the Micro, Small & Medium Enterprises
(MSME) sector has consistently registered higher growth rate
compared to the overall industrial sector. With its agility and
dynamism, the sector has shown admirable innovativeness and
adaptability to survive the recent economic downturn and
recession.
As per available statistics (4th Census of MSME Sector), this
sector employs an estimated 59.7 million persons spread over 26.1
million enterprises. It is estimated that in terms of value, MSME
sector accounts for about 45% of the manufacturing output and
around 40% of the total export of the country.MSMEs have been
established in almost all-major sectors in the Indian industry such
as: _ Food Processing _ Agricultural Inputs_ Chemicals &
Pharmaceuticals_ Engineering; Electrical, Electronics_
Electro-medical equipment_ Textiles and Garments_ Leather and
leather goods_ Meat products_ Bio-engineering_ Sports goods_
Plastics products_ Computer Software, etc.
Small and Medium Enterprises (SMEs) In India
The small and medium enterprises segment has been a topic of
intense deliberation among banks, financial institutions, industry
and academicians. In India, small and medium enterprises (SME) is a
generic term used to describe small scale industrial (SSI) units
and medium-scale industrial units. The Small and Medium Industries
occupy a very important position in any economy. Traditionally they
produce certain specialized items for which they enjoy virtual
monopoly of skill and expertise developed over the years. Many
items produced in the small scale sector are also used as raw
materials in the large scale industry and thus small scale
industries contribute to large scale production in no small
measure.The SME sector produces a wide range of industrial products
such as food products, beverages, tobacco and tobacco products,
cotton textiles, wool, silk, synthetic products, jute, hemp &
jute products, wood & wood products, furniture & fixtures,
paper & paper products, printing publishing and allied
industries, machinery, machines, apparatus, appliances and
electrical machinery. SME sector also has a large number of service
industries.In India, SME is the biggest provider of employment next
only to Agriculture. The SMEs constitute 95% of total industrial
units and constitute 40% of total industrial output.Formerly, both
Government and RBI credit policy placed emphasis on manufacturing
units from the Small Scale Sector. However, in order to make the
size of the unit and the technology employed by firms to be
globally competitive, the definition of Small Scale Sector was
revisited. Keeping in view the same and the global practices, it
was decided to broaden the concept of SSI Sector by inclusion of
services within its ambit as also including the Medium Enterprises
in a composite sector of Small & Medium
Enterprises.Subsequently, MSMED Act was operationalised with effect
from 2nd October 2006, which defines an enterprise instead of an
industry to give recognition to service sector and also defines a
medium enterprise to facilitate technology upgradation.Banks were
advised to formulate comprehensive and more liberal policies than
the existing policies in respect of loans to SME Sector.
DEFINITION OF MSMEMICRO:-Micro (manufacturing)
EnterprisesEnterprises engaged in the manufacturing/production or
preservation of goods and whose investment in plant and machinery
(original cost excluding land and building) does not exceed Rs. 25
lakh, irrespective of the location of the unit.
Micro (service) EnterprisesEnterprises engaged in the
providing/rendering of services and whose investment in equipment
(original cost excluding land and building and furniture, fitting
and such items as in 1.1.2) does not exceed Rs. 10 lakh.
SMALL:-Small (manufacturing) Enterprises:Enterprises engaged in
the manufacture/production or preservation of goods & whose
investment in plant and machinery (original cost excluding land and
building & the items specified by the Ministry of Small Scale
Industries vide its notification No.S.O.1722 (E) Dated October 5,
2006 as furnished in Annexure I) does not exceed Rs. 5 crores.
Small (service) EnterprisesEnterprises engaged in the
providing/rendering of services and whose investment in equipment
(original cost excluding land and building & furniture,
fittings and other not directly related to the service rendered or
as may be under the micro, Small and Medium Enterprises
development, (MSMED), Act 2006) does not exceed Rs. 2 crore.
MEDIUM:-Medium (manufacturing) EnterprisesEnterprises engaged in
the manufacture/production or preservation of goods and whose
investment in plant and machinery (original cost excluding land and
building and the items specified by the Ministry of Small
Industries vide its notification No.S.O. 1722(E) dated October 5,
2006) is more than Rs. 5 crore but does not exceed Rs. 10
crore.
Medium (service) EnterprisesEnterprises engaged in the
providing/rendering of services and whose investment in equipment
(original cost excluding land and building and furniture, fittings
as such items as in 1.1.2) is more than Rs. 2 crore but does not
exceed Rs. 5 crore.
Banks lending to medium enterprises will not be included for the
purpose of reckoning under priority sector.Manufacturing
SectorService Sector
Original Investmentin Plant & Machineryin Equipments
Micro EnterprisesUp to Rs.25 lacsUp to Rs. 10 lacs.
Small EnterprisesFrom Rs.25 lacs to Rs.500 lacsFrom Rs.10 lacs
to Rs.200 lacs.
Medium EnterprisesFrom Rs.500 lacs to Rs.1000 lacsFrom Rs.200
lacs to Rs.500 lacs.
Tiny Unit would be Micro Enterprises. SSI would be Small
Enterprises.
SMEs have been established in almost all-major sectors in the
Indian industry such as:
1. Agriculture inputs2. Chemical & Pharmaceuticals3.
Electrical, Electronics4. Bio-engineering5. Engineering6. Food
Processing7. Electro-medical equipment8. Textiles and Garments9.
Sports goods10. Plastics products11. Meat Products12. Computer
software13. Leather and Leather goods etc.
SME Policy
Objectives The SME Loan Policy is framed with the following
objectives: To improve flow of credit to SME sector. To formulate
norms of lending to SME sector, to ensure availability of adequate
and timely credit to the sector. To provide guidelines to the
branches to dispense credit to SME sector. To devise an
organizational structure at all levels for handing SME credit
portfolio in a more focussed manner.
APPLICABILITY OF THE POLICY:
Our Banks loan policy document covers policy guidelines for
sanctioning fund based credit facilities such as Working Capital
Facilities, Term Loan facilities and all Non Fund Based facilities.
In case of advances to Small and Micro units, being a Priority
Sector Advance, RBI guidelines/Govt. of India guidelines are
followed. Thus, the captioned policy shall always act as
supplementary and not a substitute for our Banks Loan Policy.
COMMON CHARACTERISTICS OF SMEs
(a) Born out of individual initiatives & skillsSME startups
tend to evolve along a single entrepreneur or a small group of
entrepreneurs; in many cases; leveraging on a skill set. There are
other SMEs being set up purely as a means of earning livelihood.
These includes many trading and retail establishments while most
countries continue SMEs to manufacturing services, others adopt a
broader definition and include retailing as well.
(b)Greater operational flexibilityThe direct involvement of
owner, coupled with flat hierarchical structures and less number of
people ensure that there is greater operational flexibility.
Decision making such as changes in price mix or product mix in
response to market conditions is faster.
(c)Low cost of productionSMEs have lower overheads. This
translates to lower cost of production, at least upto limited
volumes.
(d)High propensity to adopt technologyTraditionally SMEs have
shown a propensity of being able to adopt and internalize the
technology being used by them.
(e)High employment orientationSMEs are usually the prime drives
of jobs, in some cases creating upto 80%. Jobs SMEs tend to be
labor intensive per se and are able to generate more jobs for every
unit of investment, compared to their bigger
counterparts.(f)Utilization of locally available human &
material resourcesSMEs provide jobs locally and hence utilize
manpower available locally. Since it is available for them to
transport materials over long distances, they often improvise with
materials which are available locally.
PROBLEMS OF SMES
Financial problems of SMEs: The financial problem of SMEs is the
Root Cause for all the other problems faced by the SME sector. The
small and medium industrialists are generally poor and there are no
facilities for cheap credit. They fall into the clutches of money
lender who charges very high rates of interest, or else they borrow
from the dealers of their goods, who exploit them by completing
them to sell their products at very low price. After the
nationalization of 14 major Indian Banks in July, 1969, the
Commercial banks were providing only a small proportion of SMEs
financial requirements. Credit to the SME sector continues to be
non-commensurate with its contribution to the total industrial
output. As against the share of the village and SME at 40% in the
industrial out, its share in total credit to the industrial sector
is only about 30%.
Raw Material problem of SMEs: This difficulty is experienced in
a very pronounced form. The quantity, quality and regularity of the
supply of raw materials are not satisfactory. There are no quantity
discounts, since they are purchased in small quantities and hence
charged, higher prices by suppliers. Difficulty is also experienced
in procuring semi-manufactured materials. Financial weakness stands
in the way of securing raw materials in bulk in a competitive
market.
Production problem of SMEs: SME units suffer from inadequate
work space, power, lighting and ventilation, and safety measures
etc. These short comings have tended to endanger the health of
workmen and have adversely affected the rate of production. Many
units are following primitive methods of production. Adoption of
modern techniques is either disliked by the entrepreneurs is not
feasible. Wage rates and service conditions of small industries are
not attractive to skilled labor.Managerial problem of SMEs: Small
scale industries in our country have suffered from the lack of
entrepreneurial ability to develop initiative and undertake risks
in the unexplored industrial fields. The inefficiency in management
comes first among managerial problems. The entrepreneurial ability
of promoters of cottage industries and SMEs are handicapped by
technical knowhow in the areas of production, finance, accounting
and marketing management.
Sickness of SMEs: A serious problem which is hampering small and
medium sector has been sickness. Many small units have fallen sick
due to one problem or the other. Sickness is caused by two sets of
factors, Internal and external factors. From among the various
internal and external causes of sickness the important ones are bad
management, high rate of capital gearing, inadequacy of finance,
short of raw materials, outdated plant and machinery, low labor
productivity etc., Besides these factors, some aggregate economic
behavior of the country such as availability of credit, volume of
money supply, capital market activity or level of investment and
price level fluctuations, may have important bearing on industrial
sickness in the country.
Steps for SME Loans
Application for loan by SME to branch Inspection/Survey of SME
by the Executives of that branch. Sending the Documents of survey
by Local branch to the zonal branch Preparing credentials of
Promoters and firm by branch and investigating the same Estimating
the amount of loan to be sanctioned and forwarding the documents
for sanctioningdocuments for sanctioning. If the loan is been
sanctioned then disbursement of the loan amount into account of the
SMEdisbursement of the loan amount into account of the SME.The
above figure shows the steps for availing finance through Bank
using loans. Here is the brief description of the above shown
procedure: First of all the SME who wants to avail loan has to
visit the local branch office of the bank of their area, where by
the loan application is been filled by the SME. After that the
executives of that branch check whether all the necessary documents
are provided by the SME or not, then if all necessary documents are
submitted the next step comes whereby the officials of that local
branch go to the premises of that SME and just have a brief survey
of promoter as well as the premises. After they are satisfied they
send the file of necessary documents to the zonal branch, where by
the credit appraisal takes place, which consist of credit appraisal
of promoter, financial appraisal, determining cost of project,
understanding various means of finance used, profitability
estimate, cash flow projections , marketing appraisal etc. This
step brings out the clear picture whether the loan should be given
to the SME or not? If the branch is satisfied with the details then
it forward the request of granting loan to the sanctioning
authority. And finally after the verification by sanctioning
authority, the disbursement of loan amount takes place in the
account of that SME This whole procedure right from application to
disbursement of loan amount takes approximately 20-25 days as the
procedure involves analysis of documents by various branches and
thus the movement of documents amongst them, if all this procedure
would have taken place at single place then it would take only
10-12 days for disbursement.
Overview of Advances: Credit Facilities
A. FUND BASEDFund limits are those in which the banks funds are
directly utilized, as for instance, in the case of limits against
stocks or purchasing/discounting of bills. In short in Fund based
bank places certain funds at the disposal of borrowers and
borrowers avail these funds.1. CASH CREDITCash credit/overdraft is
a form of credit facility in which a borrower is sanctioned a pre-
arranged limit with the freedom to borrow as much money as he
requires. It is operated in exactly the same way as a current
account on which an overdraft has been sanctioned. In case of flow
of credit to the account, he can withdraw afresh subject to the
limit sanctioned. Bank charges interest on the outstanding
balances.The customer need not draw at once the whole of the credit
limit sanctioned but can withdraw from his cash-credit account as
and when he needs the funds and deposit the surplus cash/funds
proceeds of sale etc., into the account. The various types of
securities against which CC is allowed are pledge, hypothecation of
goods or produce, pledge of documents of title to goods, mortgage
of immovable property, book debts, trust securities, etc.In CC
accounts borrower is allowed to draw on account within the
prescribed limit, and when required.
2. TERM LOANTerm loans are sanctioned for acquisition of fixed
assets like land, building, plant & machinery, office
equipments, furniture & fixture, etc for purchase of transport
vehicles, for purchase of agriculture equipments, machinery &
other movable assets like tractors, pumps sets, cattle, etc.The
term loan would be a loan, which is not a demand loan and is
repayable in terms i.e. installments irrespective of period or the
security cover.Term loans are normally granted for the period
varying from 3 to 7 years and in exceptional cases beyond 7 yrs.B.
NON FUND BASED Non-fund based facilities are such facilities
extended by banks which do not involve outgo of funds from the bank
when the customer avails the facilities but may at a later date
crystallise into financial liability if the customer fails to
honour the commitment made by availing these facilities. Non-fund
limits are those in which the banks funds are not directly involved
but where the banks funds would be involved in certain
contingencies.Non-fund based facilities are generally extended in
the form of Bank Guarantees, Acceptances and Letters of Credit.
1. BANK GUARANTEE Bank Guarantee is a promise by Bank on behalf
of its customer to a third party to pay an amount specified in
guarantee deed in case the customer fails to perform the obligation
as stipulated in deed.Issuing of guarantees on the behalf of their
customers to third parties is one of the services rendered by
banks. Such guarantees are contracts to perform the promise or
discharge the liability of the constituent on whose behalf they are
given, in case of his default or failure to perform the contracts
undertaken by him. The party in whose favor the guarantee is given
is called the beneficiary, whereas the issuing bank is called the
guarantor and the third party on whose behalf of guarantee is given
is called the principal debtor. Every guarantee must specify the
amount and period of the liability to be undertaken by the
bank.Bank Guarantee can be financial guarantee or performance
guarantee.2. LETTER OF CREDITLetter of Credit is a document issued
by Bank which usually provides an irrevocable undertaking for
payment to a beneficiary against submission of documents as stated
in letter of credit.Letter of credit (LC) is issued by the bank at
the request of its customer in favor of third party informing him
that the bank undertakes to accept the bills drawn on its customers
up to the amount stated in the Letter of credit subject to
fulfillment of the conditions stipulated therein.Therefore, when
bank issues Letter of credit, it assumes responsibility to pay its
beneficiary on production of bills drawn in accordance with the
terms and conditions of the Letter of credit.
WORKING CAPITAL FINANCEWorking Capital Finance (WCF) is extended
for carrying out normal trading/ manufacturing activities. The
working capital finance is provided for a relatively shorter period
generally for a period of 1 year and renewed on yearly basis
considering the performance of the borrower.The Working Capital
Finance is considered only after project nearing completion and
after full tie up of term loan requirement.The Working Capital
limits of the borrower are assessed by adopting various methods
such as Projected Turnover Method (Nayak Committee Recommendation),
Permissible Bank Finance Method, Cash Budget Method etc. depending
upon the aggregate working capital limit required / enjoyed from
the banking system, nature of activity, production cycle etc.
Methods of assessment or lending methodsType of borrowerMethod
of assessment
For credit limit up to Rs 2crore (Rs 5Crore in case of
MSME)Turnover MethodBut in case when working capital cycle is
higher, the borrower will have the choice to be assessed under
Turnover method or Modified MPBF method.
For credit limit beyond Rs 2crore(Rs 5crore in case of MSME)
Modified MPBF method.
For industries where operations are seasonal or project based in
nature like tea, sugar, software, contractors, builders &
developers, etcIn case of software industryWorking capital upto Rs.
2crore - Turnover method with an option to borrower to be assessed
under cash budget methodWorking capital above Rs. 2crore Cash
Budget Method
Contractor/ Builder & DevelopersCash Budget method or
Modified MPBF method as deemed fit on case to case basis.
Other Seasonal industries viz sugar, tea, jute, etcCash Budget
Method
Ratio AnalysisThe performance of a unit is judged in the
following parameters:-a) Growth in salesb) Margin of profitc)
Utilization (i.e. turnover) of assetsd) Financial
strength/healthFinancial ratios in respect of these parameters
should be calculated and used as a measure of evaluation of
performance. However, ratio by themselves cannot be good or bad but
must be judged against ratio of previous years or against those of
similar units in the same industry or of an entire industry.
Reasons for an upward or downward trend in ratios have to be found
and the ratios interpreted accordingly.
1. Growth in Sales:Growth in sales is an important indicator of
progress of a unit. The growth may be either in terms of value or
in terms of number of unit sold. Thus, although the figures may
show an increase in sales, the increase may be due to an increase
in the price per unit.
The ratio for evaluating growth in sales isPercentage increase =
(Current years sales - Previous years sales) *100 Previous years
sales
This ratio can be calculated in terms of amount or in terms of
number of unit sold.
2. Margin of profit:Every concern would like to make profit.
However, the margin of profit and the quantum have to be compared
over the years. There are four ratios through which this can be
done.
a) Gross margin ratio = Gross Profit * 100 Net Sales
b) Operating profit margin ratio = Operating profit * 100 Net
Sales
c) PBIT ratio = Profit before interest & tax * 100 Net
Sales
d) Net profit margin ratio = Net profit * 100 Net Sales
The higher the ratio, the higher is the operating efficiency of
the unit.
3. Utilization of Assets:The efficiency of a concern is judged
from the extent to which it utilizes its assets. If assets are not
fully utilized, it would mean that the money invested in these
assets is lying idle and this is a cost to the firm. The assets
could be land and building, plant and machinery or inventory or
debtors; each of these should be utilized in such a way that they
contribute the maximum towards the profits of the firm. For a
manufacturing concern, the use of assets is for achieving sales and
hence ratios based on sales and assets are used to evaluate
performance. The following ratios are useful:-a) Total assets
turnover ratio = Gross Sales Total Tangible Assets
b) Current assets turnover = Gross Sales Current Assets
c) Fixed assets turnover ratio = Gross Sales Fixed Assets
Normally, a higher ratio means better utilization of assets.
However, too high a ratio (especially Current Assets Turnover
ratio) could mean inadequate investment for that levels of
activity-in other words, over trading.
4. Financial Strength: There are two aspects of financial
strength- liquidity and solvency.Liquidity is the ability of the
firm to pay off current liabilities (normally) by the conversion of
assets into cash through sales. Current Ratio = Current Assets
Current Liabilities
According to the guidelines given to DENA BANK the ideal level
is at 1.33:1 however the acceptable level is at 1.17:1.
Liquidity can also be measured through,Net Working Capital =
Current assets Current liabilitiesThe higher the ratio, the higher
is liquidity.
In order to judge whether the borrower will able to pay loan
installments and interest periodically, the Debt Service Coverage
Ratio (D.S.C.R.) is used. It is calculated thus:
Debt Service Coverage Ratio = Net profit (after tax) + interest
on long term loan + depreciation Installment of long term loan +
interest on long term loan
It is also important for the bank to assess the firms debt
paying capacity over a period. Such capacity is derived by
calculating ratio like Debt Service Coverage Ratio minimum
acceptable level is 1.50.
Debt Equity Ratio It 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.
Interest coverage ratio:- Interest Coverage Ratio is an
indicator as to the number of times the profit covers the interest
liability of the company. This is a risk parameter and an indicator
to the extent to which the interest liability will be serviced on
the time. Interest for this purpose would mean gross interest
payable by the borrower and profit would mean the gross profit
before interest.
Interest Coverage Ratio = Net profit + Depreciation + Interest
Interest
The more the number of times of coverage of interest the better
it would be for the financial strength of the company. Interest
coverage should be minimum 1.5 times.
LENDING METHODS1. Modified MPBF method2. Turnover method3. Cash
budget method
Modified MPBF methodFor credit limit beyond Rs 2crore (Rs 5crore
in case of MSME)Contractor/ Builder & Developers (Cash Budget
method or Modified MPBF method as deemed fit on case to case
basis.)
1. Total Current Assets
2. Other Current Liabilities (Other than bank borrowing)
3. Working Capital Gap (WCG) (1 - 2)
4. Min. stipulated Net Working Capital, i.e. 25% of ( WCG-export
receivable)
5. Actual/Projected net working capital
6. Item 3 minus item 4
7. Item 3 minus item 5
8. Maximum Permissible Bank Finance (Item 6 or 7 whichever is
lower)
9. Excess borrowings representing short fall in NWC (4 - 5)
Turnover methodFor credit limit up to Rs 2crore (Rs 5Crore in
case of MSME)In case of software industry when working capital upto
Rs. 2crore (Turnover method with an option to borrower to be
assessed under cash budget method)
1. Projected annual Turnover/Gross sales
2. Working capital requirement @ 25 % of PAT
3. Bank borrowing @20% of PAT
4. Minimum NWC @ 5% of PAT
5. Actual NWC/Projected NWC
6. MPBF [2-3]
Cash Budget methodIn case of software industry when working
capital above Rs. 2croreIn case of contractor/ Builder &
Developers (Cash Budget method or Modified MPBF method as deemed
fit on case to case basis.)Other Seasonal industries viz sugar,
tea, jute, etc
Beginning Cash Balance
Expected Cash Receipts:
Cash sales
Collection of accounts receivable
Other income
Total Cash
Expected Cash Payments:
Raw materials (or inventory)
Payroll
Other direct expenses
Advertising
Selling expenses
Administrative expenses
Plant and equipment expenditures
Other payments
Total Cash Expenses
Ending Cash Balance
Analysis of SME Proposal (Case-study)Proposal forSanction of
Fresh Cash Credit Hypothecation (Stock-cum- Book Debts) limit of Rs
67.50 lacs (Rupees Sixty Seven Lacs Fifty Thousands)
Name of Business entityM/S XYZ
Business AddressMumbai
Line of ActivityTraders in Building Material &
CeramicsAuthorized Distributor of ABC
Banking HistoryM/S XYZ is proprietary concern established on
01.08.2007.The firm is engaged in the business of trading of
Building materials & titles and is authorized distributor of
MNO since 01.08.2008. The promoter is well experienced in this line
of activity.At present firm is maintaining current accounts with
IDBI Bank, Abhudaya Co-op Bank, etc.They are not enjoying any
credit facilities with any bank.The Credit Opinion Report from IDBI
Bank has been obtained and satisfactory operation observed without
having any credit facility.Further to that, Branch has also
obtained Credit Report from X Bank and Y Bank and found operation
is satisfactory.Business of the firm is growing and to meet the
increased working capital needs of the growing business firm has
requested for working capital finance.The firm is presently
operating from hired shop / goes down in Mumbai.The firm has
offered immovable property situated at Mumbai having realizable
value of Rs.67.50 lacs as collateral security which will cover 100%
of the proposed limit.The limit requested falls within the norms
lay down by our Bank under Trade Finance Scheme.
The proposal Complies with the norms laid down are given here
under: 1) The Firm is dealing with Commodities like Titles and
building material.2) The proprietor is permanent residents of
Mumbai.3) The Property offered as Collateral Security is also
located within Mumbai.4) The Firm is to bank exclusively with Dena
Bank for Business Purposes. All other accounts with other banks are
proposed to be closed before release of the limit.5) The Firm is
registered under Sales Tax.6) Sales Tax return for the current
financial year 2012-13 has been obtained and verified.7)
Appropriate License is issued by Competent Authority under Shop
& Establishment Act.8) The limits are secured by more than 100%
collateral security.9) The total DER is well within maximum
permitted level as per Schemes guidelines
Details of existing facilities enjoyed / Current A/c with us, if
any & conduct of accountFresh Limit Proposed.The account is
newly canvassed by the Branch. The firm is not having any limit and
now requested for fresh Cash Credit limit of Rs 80.00 lacs.
Details of existing limits enjoyed / Current A/c with Banks,
present
1. IDBI Bank.2. Abhudaya Bank3. Kotak Mahindra Bank4. HDFC
Bank5. Term Loan of Rs.38.00 lacs against Shop from Abhudaya Co-op
Bank with present O/S of Rs.26.27 lacs.6. Housing Loan of Rs.9.49
lacs from Abhudaya Co-op Bank with present O/S of Rs.8.96 lacs.
Hence it is stipulated that all the above current accounts to be
closed before release of Limit in compliance with Trade Finance
Policy and firm to exclusively bank with us.Further, branch to
obtain satisfactory credit report from the Abhyudaya Co-op Bank for
loan accounts maintained with them before disbursement of proposed
limit.
Key Financial Indicators(For borrowers with credit limit in
excess of Rs.10 lacs or Turnover in excess of Rs.40 lacs, financial
data from audited B/S to be
taken)S/NDescription2010-11Audited2011-12Audited2012-13Estimated2013-14Projected
ATurnover (gross sales)341.48357.37470.00587.50
BNet Profits before Tax15.0016.7022.1525.83
CTotal Outside Liabilities115.3583.32143.77155.00
DNet Worth29.0239.3253.4770.29
EDebt Equity Ratio [c/d]3.972.122.692.20
FCurrent Ratio1.741.731.501.57
GInterest Coverage Ratio4.425.503.182.59
HCurrent Asset Turnover Ratio9.437.326.276.53
Security OfferedPrimary (1) Hypothecation of Stocks and Book
debts.
Value of Primary Security(Stock + Book Debts)Stock- Rs 79.03
lacs (As per Stock Statement Nov 2011)Book debt- Rs 84.74
lacsTotal- Rs 163.77 lacs
Realizable Value of Collateral & Collateral
CoverageRealizable Value : Rs 67.50 lacCoverage of collateral :
100.00%
Rate of InterestBase Rate+2.05=12.50%
Internal Credit RatingScore : 81 Grade : BBB
Computation of limits(Rs in lacs)S noParticularsAmount
AActual Turnover of previous yearRs 357.37
BProjected Turnover for current yearRs 470.00
C% change in turnover (B should not be more than 125% of
A)31%
DAccepted Sales Turnover i.e. 125% of previous sales turnoverRs
446.71
EPermissible limit (20% of D)Rs 89.34
Margin requirement (5% of D)Rs 22.33
FAmount of limit RequestedRs 67.50
FMPBF (least of D & E)Rs 67.50
GOf which : Fund basedNon-Fund basedRs 67.50Nil
Actual Net Working Capital AS of 31.03.2012 against the minimum
margin requirement of Rs.22.33 lacsRs.48.98
In view of the above and looking too good relationship and
better business opportunity, branch has recommended for sanction of
CCH Limit of Rs.67.50 lacs to the firm.My Comments on financial
indicators
Sales Turnover: The sales turnover of the firm has increased
from Rs.341.48 lacs as of 31.03.2011 to Rs.357.37 lacs as of
31.03.2012 representing a growth of 5%. The Firm has estimated
Sales Turnover of Rs 470.00 lacs for the year 2012-13 representing
a growth of 31% over the previous year, which they are confident to
achieve as they have already reported a turnover of Rs.352.32 lacs
for the period from April, 2012 to December,15 2012 which when
amortized comes to 100%. Hence the estimated sales turnover of Rs.
470.00 lacs for 2012-13 can be considered as achievable and
accepted. Similarly, for the year ending 31.03.2014 the firm has
projected sales turnover of Rs.587.50 lacs representing a growth of
around 25%, which is also considered as achievable looking to the
past track record and availability of working capital.
Net Profit before Tax: The Net Profit of the firm shows an
increasing trend over the past years. The profit margins are in the
range of 3-4% which is considered as satisfactory looking to the
bulk business module of the firm. The profits of the firm is at par
with the Industry standards. The profits including margins are
expected to improve during the current year ending 31.03.2013 and
same trend is projected for 2014 and the same can be considered as
achievable.
Current Ratio: The current ratio for the past two years as well
as estimated/ projected for the next two years can be considered as
satisfactory as the same are above the benchmark level of Policy
guidelines.
Debt equity ratio: The Capital/ Net worth of the firm is strong
and it is increasing due retention of retained earnings. More over
the proprietor is retaining major portion of the profit in the
business and hence current net worth of the firm is satisfactory.In
view of the above the Debt Equity Ratio (DER) for the year 2011
& 2012 is comfortable at 3.97 and 2.12 respectively as against
the maximum permissible level of 6:1 as required under Trade
Finance scheme. Further the estimated/ projected DER for 31.03.2013
& 31.03.2014 is well within the maximum permissible level of
6:1 and can be considered as satisfactory.
Interest Service Coverage Ratio: The above ratios on actual
basis for the last two years as well as estimated level for the
current year ending 31.03.2013 are above the minimum required level
and hence can be considered as satisfactory.The overall financial
position of the firm is satisfactory and with the increase in
business over the next years the financial position is expected to
further improve.
Projected Turnover The Sales Turnover of the firm shows an
increasing trend from Rs.341.48 lacs as of 31.03.2011 to Rs.357.37
lacs as of 31.03.2012 representing a growth of 5%.The Firm has
estimated Sales Turnover of Rs 470.00 lacs for the 2012-13
representing a growth of 31% over the previous year, which they are
confident to achieve as they have already reported a turnover of
Rs.352.32 lacs for the period from April,2012 to December, 15 2012
which when they annualized comes to 105%. Hence the estimated sales
turnover of Rs.470.00 lacs for 2012-13 can be considered as
achievable and accepted. Similarly, for the year ending 31.03.2014
the firm has projected sales turnover of Rs.587.50 lacs
representing a growth of around 25%, which is also considered as
achievable looking to the past track record and availability of
working capital.
Debt Equity RatioDebt Equity Ratio (DER) for the year 2011 &
2012 is comfortable at 3.97 and 2.12 respectively as against the
maximum permissible level of 6:1 as required under Trade Finance
Scheme. Further the estimated / projected DER for 31.03.2013 &
31.03.2014 is well within the maximum permissible level of 6:1 and
can be considered as satisfactory.
Learning Experience
It was a great experience to join a Nationalized Bank for
training and learning things. I learnt a lot in the Credit
Department (SME) of Dena Bank. Here I worked on appraisals, which
are beyond the scope of this project. The new day in the premises
of the bank started with a new project report in the hands. After
reading carefully the whole project report, I had to make proposals
on a format of crediting appraisal of the bank. Various proposals
were look after by me. After making the proposals, I handed over
all the work done to my senior. He used to make necessary
corrections in the work done and hence it was an opportunity for me
to learn more and more.Hence the whole experience of working in
such a place was amazing. I learnt to a great extent about the
whole procedures to sanction a limit to the different
borrowers.
Conclusions
The project gives the detailed knowledge of the whole process of
sanction a limit which Dena Bank performs.Starting from the loan
application from the borrower and compilation of Confidential
Reports on him and the guarantor, the process continues till the
disbursement of loan and after it the close monitoring till the
adjustments of Banks Loan.The project was an attempt to understand
and perform the work in the credit transaction and the credit
appraisal which I had included in this project is just an example
of it.I had worked on many such appraisals, which are beyond the
scope of this project. Hence the whole experience of working in
such a Nationalized Bank was amazing. I found lots of things to
learn and understand here. Hence to conclude, I just state that it
was a great job done in a Nationalized Bank with the experienced
employees.
Findings
After undertaking the in depth theoretical study such as types
of advances, SME policy of DENA BANK, CMA, working capital and
various financial under SMEs, it was found that the several
Industries are growing through credit/advances granted by banks and
SMEs is a one of the fast growing Industries within all the
sectors.
In India, the Micro and Small Enterprises (MSEs) sector plays a
pivotal role in the overall industrial economy of the country. It
is estimated that in terms of value, the sector accounts for about
for 39% of the manufacturing output and around 33% of the total
export of the country. Further, in recent years the MSE sector has
consistently registered higher growth rate compared to the overall
industrial sector. The major advantage of the sector is its
employment potential at low capital cost. 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.
Thus SME plays a very significant role in the socio-economic
development of the country.
Bibliographywww.denabank.comen.wikipedia.org/wiki/Dena_Bank
Circulars and Policy of Dena bankProposals of SME40