Dissertation

Dissertation Project on

Analysis of Credit Appraisal

of

UNION BANK OF INDIA

BY

MBA 2011-13UNDER THE ESTEEMED GUIDANCE

Senior Professor, RCMA.

32

DECLARATION

I hereby declare that this project report titled “ANALYSIS OF CREDIT

APPRAISAL OF UNION BANK OF INDIA”, submitted to Regional College of

Management is a record of original and independent work carried out in partial

fulfillment of the requirements for the award of MASTERS OF BUSINESS

ADMINISTRATION. This report has been done under the guidance of

Prof.Sanjeev kumar Das.

I also declare that this representation has not been previously published or

submitted as a project report for the award of any Degree or Diploma of Regional

College of Management or anywhere else.

PLACE: Bhubaneswar

DATE:

SIGNATURE OF DECLARANT:

MBA - Finance

32 Chakadola vihar Chandra shekharpur, Bhubaneswar-751023 ODISHA

Tel +91674 2301595/2300455/466 Fax +91674 2300421 E-mail: [email protected]

Faculty Guide Certificate

This is to certify that the work entitled “Analysis of Credit Appraisal of Union Bank of India.” is the project done by Miss Nikhat Anjum a student of MBA [Reg.No. 1106247067] (Second Year) under my guidance and supervision for partial fulfillment of MBA curriculum of Regional College of Management, Bhubaneswar.

To the best of my knowledge and belief the term project report:

1. Embodies the work of candidate himself.2. Has been duly completed.

3. Is up to the standard both in respect to the content and language for being referred to the examiner.

SIGNATURE

32

ACKNOWLEDGEMENT

I would like to express my profound gratitude to all those who have been

instrumental in the preparation of this project report as without their help this

project would have not been possible to complete.

My deepest gratitude to my mentor and project guide Prof. Sanjeev ku. Das who

has been a constant strength and support throughout this project. His guidance has

added immense value to this project.

I would also like to thank God and my family & friends for their help and support

in completing this project.

I give my sincere thanks to all those people who helped me in filling my

questionnaire, without which the project work would not have been commenced.

Nikhat Anjum

1106247067

MBA – Finance

VIth Trisem

Regional College of Management Autonomous

32

CONTENTS

CHAPTER I

Introduction to Union bank of India. Pg 7

Products and services Pg 8,9

Vision and mission Pg 10

CHAPTER II

Objective Pg 11

Introduction to the project Pg 12-15

Breakeven Analysis Pg 16-19

Cash Flow Analysis Pg 20-24

Term Loan Assessment Pg 25-29

Project Report Analysis Pg 30-34

Working Capital Assessment Pg 35,36

32

CHAPTER III

Analysis Pg 37-52

CHAPTER V

Findings Pg 52

Limitations Pg 52

Suggestion Pg 53

Conclusion Pg 54

BIBLIOGRAPHY Pg 55

32

CHAPTER-IINTRODUCTION TO UNION BANK OF INDIA.

Union Bank of India (UBI) is one of India's largest state-owned banks (the government owns 55.43% of its share capital), is listed on the Forbes 2000. It has assets of USD 13.45 billion and all the bank's branches have been networked with its 1135 ATMs. Its online Telebanking facility is available to all its Core Banking Customers - individual as well as corporate. It has representative offices in Abu Dhabi, United Arab Emirates, and Shanghai, Peoples Republic of China, and a branch in Hong Kong

The Union Bank of India was built up in twentieth century and declared open by the Father of the Nation, Mahatma Gandhi. The bank with its efficient value-added services, sustained growth, consistent profitability and development of new technologies bank has ensured complete customer delight, living up to its image of, “GOOD PEOPLE TO BANK WITH”. Bank is offering credit cards, home loan, union demat, Kisan ATM, International debit card, online tax payment facility, Railway e-ticketing kiosk, etc., services to its customers through core banking solution.

32The Union Bank of India has 2261 branches out which 1031 branches are

under CBS. All the ATMs are inter-connected through the Bank’s ATM Switch, thus facilitating on-line operations in case of CBS customers. The Bank is a member of Cash Tree consortium and also has bilateral arrangement with State Bank of India, enabling the Bank’s ATM cardholder access to over 20000 ATMs across the country. UBI Net connects 65 Offices and 984 branches located in 323 centers, facilitating speedier transmission of MIS data (Network Map).

PRODUCTS AND SERVICES

UNION BANK OF INDIA provides various types of product and services .The wide range of product and services consists of

BANKING

Accounts & Deposits – cumulative deposit scheme, deposit reinvestment certificate, monthly income scheme, union flexi-deposit, senior citizens scheme, multi gain savings account, no frills saving account, union super salary account, union classic current account

Retail Loans – union cash, union home, union health, union miles, union education, union top up, EMI calculator, union smile.

Cards - Classic / Silver / Gold, Corporate Credit Cards, Add-On Cards

Insurance & Investment – mutual fund, union healthcare

Demat – demat accounts, online share trading.

Payment

NRI Banking

Remittance - Union E-Remit, Details for Remittance

32 Savings & Deposits - NRO Non Resident Ordinary A/c Scheme, NRE Non

Resident External Rupee, RFC, FCNR(B), Union Unfixed, Foreign Currency Deposit

Loan & Services – house loans, foreign currency loans, loans against deposit, immovable property, and shares or debenture

Payments - Union Bill Pay

Corporate Banking

CMS - Union Speed, Union Centralized Debits/Credits, Union Prompt E-Tax - Customs and Direct taxes, DGFT, Central Excise and Service Tax

Trade Finance – trade finance for exporters, trade finance for importers, foreign currency loans, correspondent banking

Insurance - Non life Insurance – Corporate Agency, Insurance- Corporate Agency

Syndication of Loans

MSME Banking

Loans & Policies

Internet Banking

Account Information Transfer of Funds

Bills

Requests

32 Mails

Trade

Limits

Currency

Uploads

Customization

Financial enquiries

Non Financial enquiries

Vision & Mission

VISIONTo be the premier financial institution in the emerging marketsTechnologically StrongFinancially SoundAll India presencePersonalized ServicesValue MaximizationEmployee SatisfactionSkill Maximization

32

MISSIONTo be premiere bank, responsive to the needs of our target market customers, recognized for consistently superior service quality innovative products, thereby delivering superior value to our shareholders

CHAPTER-II

OBJECTIVE OF THE PROJECT.

The basic objective behind this project was to learn about how retail loans are sanctioned.

To Reduce the level of bad Loans.

32 The process behind every small and big loan

The credit rating system and the methodologies applied.

The way balance sheet and other financial techniques are used in deciding whether or not to approve the loan.

The other important aspects apart from the financial techniques which are of equal importance.

INTRODUCTION TO THE PROJECT.

In today’s scenario, it is very important to understand that every industry needs to brace itself and hedge itself against risks. Risks are of various kinds and in different magnitude. No matter which industry or sector the company belongs it needs to update every day itself to the various things happening all over the world which may directly or indirectly affect its business, growth and potential in the market.

With banks the scene is no different, whenever there comes some slowdown or the market

slouches the banks are effected too. Banks are directly related to people and industry and market.

In the recent times, we have seen that the retail loan section of the banks have come up as one of

32the important areas. All the big industry, small and medium enterprises and individuals, avail

loans for all their purposes.

The important thing in this case is that, banks can’t give loans to everyone. They need to check

the credit worthiness of the borrower. To rate the worthiness of an individual to that of a

company there are various methods. From checking their market image, their past record,

potential and security provided, it is decided whether they are worthy enough or not. To talk in

more financial terms, for corporate loans there are various methods like balance sheet analysis,

fund flow and cash flow analysis, working capital management, ratio analysis etc.

Every bank also has their own credit rating system; they take into consideration a number of

things, apart from financial workings. All this and more is discussed at length in the coming

chapter.

Credit Risk

Lending involves a number of risks. In relation to the risks related to credit worthiness of the

counter party, the banks are also exposed to interest rate, forex and country risks.

What is credit risk?

32Credit Risk is the possibility of losses associated with changes in the credit profile of the

borrowers or counter parties. These losses could take the form of outright default or alternatively,

losses from changes in portfolio value arising from actual or perceived deterioration in credit

quality, short of default.

Credit Risk may take the following forms:

In the case of direct lending : principal/and or interest amount may not be repaid;

In the case of guarantees or letters of credit : funds may not be forth coming from the

constituents upon crystallization of the liability;

In the case of treasury operations : the payments or series of payments due from the

counter parties under the respective contracts may not be forthcoming or cease;

In the case of securities trading business : funds/securities settlement may not be

effected;

In the case of cross – border exposure : the availability and free transfer of foreign

currency funds may either cease or restrictions may be imposed by the sovereign.

How to quantify Credit Risk?

Credit Risk has got two components : ‘quantity of risk’ which is nothing but the outstanding loan

balance as on the date of default and the ‘quality of risk’ i.e. “severity of losses” which is defined

by both default probability and the receivers that could be effected in the event of default.

What is Credit Risk Management?

Credit Risk Management covers the systems and processes in place to

Identify and measure the risk involved both at the individual transaction level and portfolio

level.

32 Evaluate the impact of exposure on Banks balance sheet/profit.

Assess the capacity of risk – mitigators.

Design an appropriate strategy to arrest risk – mitigators leading to deterioration in credit

quality/default risk.

It is to be emphasized that Credit Risk Management is not NPA management. NPAs are a legacy

of the past in the present. Credit Risk management is action in present for the future. In an NPA

account, the Credit Risk has crystallized. Credit Risk Management is more concerned with

quality of credit portfolio before default. The Credit Risk approach monitors worsening credit

quality by tracking migration of assets down the rating ladder, with each rating downgrade

representing a higher Credit Risk. This approach enables bank management to take timely action

to stem deterioration in credit portfolio quality much before actual default, which is the last step

in the rating ladder.

Credit Risk Management is also not merely credit management. Credit Management, as is

understood conventionally, is confined to selection, limitation, and diversification and includes

management of NPAs also. In selection i.e. granting a loan or making an investment, borrower’s

financial condition, profitability, cash flows, nature of borrower’s industry, his competitive

position therein, quality of management, presences of collaterals etc. are assessed to ascertain the

repaying capacity. Limitation ensures that individual or group borrower concentrations are not

very large and is within the prescribed exposure limit.

COMMON WINDOW DRESSING PRACTICES

Date of Balance Sheet - If coinciding with end of season, the balance sheet size and liabilities may be smaller than during peak season.

Indicating Current expenses as Capital in Balance Sheet.

32 Resorting to heavy billing of sales on date of Balance Sheet – leading to increased sales &

increased profit.

Preparing Balance Sheet on different dates for associate concerns. (making it difficult to ascertain the extent of interlocking of funds/stocks)

Temporary reduction in CL (for a day or so); Setting off CL against CA, Issuing cheques in payment of CL but not despatching them (reduces

S.Crs. and shows a better current ratio)

Maximising collection of receivables on Balance Sheet date thus showing a large cash balance (including cheques yet to be realised)

Resorting to heavy billing of sales on the date of Balance Sheet, leading to increased sales and profits

Changing the method of Valuation of Stocks

(In an inflationary situation change from weighted average cost of current assets to First in First out method (FIFO) leads to increase in profit).

Changing the method of Depreciation - particularly with retrospective effect

Booking unrealised income as revenue.

BREAK – EVEN ANALYSIS

Definition of BEP

32

Break – even point is the amount of sales at which a unit makes no profit no loss. In other words

it is the level of sale at which sales revenue is equal to the costs of units sold. A unit can earn

profit only if its level of sale is above the break – even point.

Why is BEP calculated?

A term loan should be serviced out of profits. If the unit functions at a level of sale at which

there is no profit, it is natural that it cannot repay the term loan installments. This brings the

necessity for calculating the level of sale above which profits are earned by the unit. In other

words we need to calculate Break – even point.

Step by step procedure for calculating BEP

Optimum Capacity

Where projected profitability statements for many years are given, one should chose the first

year of optimum capacity utilization for calculating BEP.

32Classification of costs

All costs relevant to this year should be taken into consideration and they should be classified

into FIXED COSTS AND VARIABLE COSTS.

Fixed Cost: is one which is incurred irrespective of the level of production. It is there, even if

there is no production or sale. It is a sort of PERIOD COST – a cost be compulsorily incurred

Whether there is sale or no sale. Examples of fixed cost are depreciation, rent, manager’s salary,

interest on term loan etc.

Variable Cost: it is one with directly varies with Sales/ Production. Sales / production increases

thus cost also increases. If there is NIL Sales/Production then cost should also be NIL. Examples

of variable cost are raw material, wages, fuel, interest on working capital etc.

Semi variable cost: there are certain costs which cannot be classified strictly as fixed or as

variable cost. They increase with increase in volume of sales/production increase is not directly

proportional to the increase in sales/production. Examples, semi variable costs are – telephone

charges, selling expenses, power/electricity etc. For banks consider Semi- variables costs as

fixed costs.

BEP can be expressed in three ways:

1) In terms of number of units of sale

2) In terms of amount of sale in rupees

3) In terms of capacity utilization

Depending upon the requirement in which BEP is to be expressed, different formulae are used

for calculating BEP.

BEP in units of sale: Anyone of the three formulae can be used depending on the availability of

data.

(I)BEP in units = Fixed cost or

32 Contribution per unit

BEP in units = Fixed Cost or

Sale price per unit – Variable cost per unit

(II) BEP in rupees: Any one of the following two formulae can be used.

BEP in rupees = BEP in units X sales Price per unit

BEP in rupees = Fixed Cost X Total sale in Rs.

Total contribution

(III) BEP in terms of capacity utilization

BEP in capacity = No. of units at BEP X 100

Total Capacity

Calculation of BEP when PV ratio is given

PV ratio [profit volume ratio] is equal to Total contribution

Total sales

Break Even point = Fixed Cost

P/V Ratio

Margin of safety = actual Sale – BEP (Sales)

It is the measure of cushion available in the given level sale. More the margin of safety, stronger

is the unit. Where the margin of safety is low, the possibility of the unit coming to loss is quite

high and banks avoid financing such units.

Margin of safety is also calculated in the form of ratio as given below

Margin of safety = Actual sale – BEP (sale) X 100

Actual sale

32

Uses of Break Even Point Analysis

To study the viability of the project – (projects having BEP above 75% of capacity utilization

should not be accepted for finance)

To decide the optimum product mix, products with higher contribution should be chosen.

To decide the required level of production in order to attend a desired level of profit.

Limitations of BEP

Based on many unrealistic assumptions.

It assumes that volume of sales and volume of production are equal. In reality this situation

seldom happens.

It assumes that all revenues are perfectly variable with the physical volume of production.

It assumes that all the costs are neither perfectly variable or absolutely fixed over the entire range

of volume of production.

CASH FLOW ANALYSIS

The following I the text of the revised Accounting Standard (AS) 3, ‘Cash Flow Statements’,

issued by the Council of the Institute of Chartered Accountants of India. This standard

supersedes Accounting Standard (AS) 3, Changes in financial position’, issued in June, 1981.

32In the initial years, this accounting standard will be recommendatory in character. During this

period, this standard is recommended for use by companies listed on a recognized stock

exchange and other commercial, industrial and business enterprises in the public and private

sectors.

Objectives

Information about the cash flows of an enterprise is useful in providing users of financial

statements with a basis to assess the ability of the enterprise to generate cash and cash

equivalents and the needs of the enterprise to utilize those cash flows. The economic decisions

that are taken by the users require an evaluation of the ability of an enterprise to generate cash

and cash equivalents and the timing and certainty of their generation.

The statement deals with the provision of information about the historical changes in cash and

cash equivalents of an enterprise by means of a cash flow statement, which classifies cash flows

during the period from operating, investing and financing activities.

Benefits of Cash Flow Information

A cash flow statement in conjunction with other financial statements provides information that

enables users to evaluate the changes in net assets of an enterprise, its financial structure and its

ability to affect the amounts and timing of cash flows in order to adapt to changing

circumstances and opportunities. Cash flow information is useful in assessing the ability of the

enterprise to generate cash and cash equivalents. It also enhances the comparability of the

reporting of operating performance by different enterprises because it eliminates the effects of

using different accounting treatments for the same transactions and events.

32Historical cash flow information is often used as an indicator of the amount, timing and certainty

of future cash flows. It is also useful in checking the accuracy of past assessments of future cash

flows and in examining the relationship between profitability and net cash flow and the impact of

changing prices.

Cash and Cash Equivalents

Cash equivalents are held for the purpose of meeting short term cash commitments rather than

for investments and other purposes. For an investment to qualify as a cash equivalent, it must be

readily convertible to a known amount of cash and be subject to an insignificant risk of changes

in the value . Therefore, an investment normally qualifies as a cash equivalent only when it has

short term maturity of, say, three months or less from the date of acquisition. Investments in

shares are excluded from cash equivalents unless they are, in substance, cash equivalents; for

example, preference shares of a company acquired shortly before their specified redemption date

(provided there is only an insignificant risk of failure of the company to repay the amount at

maturity).

Presentation of Cash Flow Statement

The cash flow statement should report cash flows during the period classified by operating,

investing and financing activities.

An enterprise presents its cash flows from operating, investing and financing activities in a

manner which is most appropriate to its business. Classification by activity provides information

that allows users to assess the impact of those activities on the financial position of the enterprise

32and the amount of its cash and cash equivalents. This information may also be used to evaluate

the relationships among those activities.

Operating Activities

The amount of cash flows arising from operating activities is a key indicator of the extent to

which the operations of the enterprises have generated sufficient cash flows to maintain the

operating capability of the enterprise, pay dividends, repay loans and make new investments

without recourse to external sources of financing. Information about the specific components of

historical operating cash flows is useful, in conjunction with other information, in forecasting

future operating cash flows.

Examples of cash flows from operating activities are;

Cash receipt from sale of goods and the rendering of services;

Cash receipts from royalties, fees, commissions and services;

Cash payments to suppliers for goods and services;

Cash payments to and on behalf of employees

Investing Activities

The separate disclosure of cash flows arising from investing activities is important because the

cash flows represent the extent to which expenditures have been made for resources intended to

generate future income and cash flows. Examples of cash flows arising from investing activities

are:

a) Cash payments to acquire fixed assets (including intangibles). These payments include those

relating to capitalized research and developing costs and self – constructed fixed asset.

b) Cash receipts from disposal of fixed assets (including intangibles);

32c) Cash payments to acquire shares, warrants or debt instruments of other enterprises and

interests in joint ventures (other than payments for those instruments considered to be cash

equivalents and those held for dealing or trading purposes) ;

d) Cash advances and loans made to third parties (other than advances and loans made by a

financial enterprise);

Financing Activities

The separate disclosure of cash flows arising from financing activities is important because it is

useful in predicting claims on future cash flows by providers of funds (both capital and

borrowing) to the enterprise.

Reporting Cash Flows from Operating Activities

An enterprise should report cash flows from operating activities using either;

The direct method, whereby major classes of gross cash receipts and gross cash

payments are disclosed; or

The indirect method, whereby net profit or loss is adjusted for the effects of transactions

of non-cash nature, and deferrals or accruals of past or future operating cash receipts or

payments, and items of income or expense associated with investing or financing casgh

flows.

32Reporting Cash Flows from Investing and Financing Activities

An enterprise should report separately major classes of gross cash receipts and gross cash

payments arising from investing and financing activities, except to the extent that cash flows

described above are reported on a net basis.

Reporting Cash Flows on a Net Basis

Cash flows arising from the following operating, investing or financing activities may be

reported on a net basis.

a) Cash receipts and payments on behalf of customers when the cash flows reflect and the

activities of the customer rather than those of the enterprise; and

b) Cash receipts and payments for items in which the turnover is quick, the amounts are large,

and the maturities are short.

TERM LOAN ASSESSMENT

COST OF PROJECT

Funds required for –

Acquisition of land and its development

Constitution of building

Acquisition and erection plant & machinery

Acquisition of other assets

Preliminary & pre – operative expenses

Margin for working capital

Project cost – sources

Own funds (capital and reserve)

Unsecured long term loans from friends, relatives and others

32 Term loans from banks and financial institution

Subsidies from government if any

ANALYSIS OF COST OF PROJECT & SOURCES OF FINANCE

Land:

Is the location suitable for the project?

How land is acquired?

Is it adequate for the project?

Is it planned for future expansion?

How is it valued, excessive or reasonable?

In case of loan the cost to be released along with the borrowers margin

Buildings:

Are the buildings needed for the actual productions justified?

Are there any unnecessary constructions like guest houses?

Are the estimates enclosed from an authorized architect?

Does the cost assessed is reasonable and justified?

Plant and machinery:

Are these really needed for actual production?

Are they brand new or second hand?

Are all quotations given for new machineries which are latest and relevant

If second hand, any competent authority assessed the value?

Are the prices reasonable and realizable with similar types?

If the technical knowhow is to be acquired from outside is the cost included in

quotations?

Margin is normally @ 25%

32Miscellaneous Assets:

What are included miscellaneous assets?

Do these items are genuinely required or provided for future contingencies?

Are quotations given or these are assessed approximately?

Are all electrical fittings and fixtures properly and reasonably assessed with relevant

quotations?

Preliminary / pre- operative expenses:

What are they?

Are they properly classified?

Whether all these are justified?

Is interest cost during construction period arranged for by borrower?

What is their accounting system to capitalize/ absorb the expenditure?

Margin for working capital:

Is it properly assessed?

Is there enough NWC in the system as on date and on projected basis?

What are the sources? Are they really on long term basis or arranged or on short term

basis?

Whether undertakings can be obtained from contributors that they shall not be withdrawn

during currency of banks finance?

Sources of finance:

Capital – is it properly arrived at?

Whether personal balance sheets are given to know actual capital contribution?

Whether the capital investment in the project is correctly related to the credit reports of

the individuals?

Are the unsecured loans properly planned?

Is there any interest and at what rate and interest?

32

TECHNICAL APPRAISAL

1) LOCATION : The location of a project is highly relevant to its technical feasibility and

hence special attention will have to be paid to this feature. Projects whose technical

requirements could have been well taken care of in one location sometimes fail because

they are established in another place where conditions are less favourable. One project

was located near a river to facilitate easy transportation by barge but lower water level in

certain seasons made essential transportation almost impossible.

2) INFRASTRUCTURE FACILITY: confirm that the needed infrastructure facilities are

available in the area. Power, water , fuel required are available or not. Sources of water

etc.

3) LAND AND BUILDINGS: whether owned or rented or leased. Scope of future

expansion, is the building adequate, is it well protected etc.

4) MANUFACTURING PROCESS: study the flow chart and identify the critical process on

which quality of finished products rely. Duration of the process, input and output, is it

mechanized or labor intensive? Etc.

325) TECHNICAL KNOW HOW: important feature of the feasibility relates to the type of

technology to be adopted for the project. A new technology will have to be fully examined and tried before it is adopted. It is equally important to avoid adopting equipment or processes which are obsolete or likely to become outdated soon. The principle underlying the technological selection is that “a developing country cannot afford to be the first to adopt the new nor yet the last to cast the old aside”. Is it indigenous or imported? Can it be easily adopted?

6) PLANT AND MACHINERY: is it appropriate to the production process? Condition of

machinery, installation process, servicing etc.

7) LICENSES AND PERMITS: are they current and valid? Any restrictions imposed, if yes

then why?

8) PRODUCTIVITY CAPACITY: licensed capacity, installed capacity, any expansion

undertaken etc.

9) TYPE OF PRODUCT: product and its uses, who are going to use it, is it in demand etc.

10) RAW MATERIALS: what are the raw material? Their availability, supply, time needed

for arranging supply, payment terms etc.

11) STORAGE FACILITIES: has provision been made for future or not?

12) MARKETTING ARRANGEMENTS: by whom is it done? Any permanent

arrangements, is their any volatility in their prices etc.

13) MANAGEMENT /LABOR ARRANGEMENTS: who manages it, are they qualified, is it

labor oriented, any unresolved problem till now etc. The labour requirements of a project,

need to be assessed with special care. Though labour in terms of unemployed persons is

32abundant in the country, there is shortage of trained personnel. The quality of labour

required and the training facilities made available to the unit will have to be taken into

account.

PROJECT REPORT ANALYSIS

TOTAL PROJECT COST

SOURCE OF FINANCE

PROMOTERS

ECONOMIC VIABILITY

TECHNICAL FEASIBILITY

SURPLUS GENERATION/PROFITABILITY

PROJECT IMPLEMENTATION SCHEDULE

CAPACITY TO SERVICE THE DEBT

Payback Method

The method determines the period needed to recover the initial cash investment through annual

cash flows estimated to be generated.

Payback period = Cash investment/ Annual cash inflow

Cash Inflow = net PAT + Depreciation + Other non-cash write offs (intangible)

Project Appraisal

Assessment of project

32 Study of project report

Feasibility study

Financial viability

Cost of project

Sources of finance

Project Report

Cost of the project

Sources of finance

Proforma balance sheet and projections

Financial highlights with ratios

Cash flow and fund flow statements

Project implementation schedule

Debt service coverage ratio

Cost of production and profitability

Technical report

Feasibility Study

Generally the entrepreneurs submit a project report & it is duty of appraising officer to cross

check the reliability of assumptions made in the project report.

Managerial Competence

Technical Feasibility

Commercial Viability

Ecological Analysis

Managerial Competence

Capability of the entrepreneur in implementing & managing the project.

32

Technical Feasibility

Study of aspects relevant to production of finished goods of proper quality like permits,

machinery, availability of spare parts, infrastructure facility, power, water, fuel etc.

Commercial Viability

Whether the goods can be sold in the quantity and prices as projected. Projection and forecasting,

capacity utilization, price levels etc.

Ecological Analysis

Environmental damage

Restoration measures

Sources of finance

Capital / equity

Reserves/ subsidies

Unsecured loans

Term loans from financial institution

Cost of project

Land and site development

Building

Plant and machinery

Miscellaneous assets

Consultancy fees

Contingencies

Financial Viability

32 Financial projections

Fund flow and cash flow statements

Ratio Analysis

BEP

Non discounted cash flow technique

Discounted cash flow technique

Debt Service Coverage Ratio (DSCR)

DSCR = NPAT +Intt on TL + Depreciation/ Intt on TL + installment of TL

Ideal DSCR is 2:1

For SSI it is 1.5:1

Repayment period can be reduced where DSCR is high.

Repayment period can be increased up to permissible limit where DSCR is low.

Average Rate of Return

ARR = Average profit after tax/Average book value of investment x 100

It is comparable with the rate of return in market in other investments

Discounted Cash Flow Techniques

Net Present Value [NPV]

Cost Benefit Ratio [CBR]

Internal Rate of Return [IRR]

NPV

The entire cash inflow is discounted at the rate of interest to arrive at present value of

return.

NPV = present value of cash inflow minus present value of cash outflow.

32 The project Is accepted if NPV is positive and rejected if NPV is negative.

BCR

The entire cash inflow is discounted at the rate of interest to arrive at present value of

return.

BCR = Present worth of benefit/ Present worth of costs

The project is accepted if BCR is more than one and rejected if less than one.

IRR

IRR is the rate of discount at which present value of cash inflows is equal to the present

value of cash outflows.

The project is accepted if IRR is more than the expected rate of return.

Higher the IRR, better is acceptability of the project.

Working Capital Assessment

Working capital, also known as net working capital, is a financial metric which represents

operating liquidity available to a business. Along with fixed assets such as plant and equipment,

working capital is considered a part of operating capital. It is calculated as current assets minus

32current liabilities. If current assets are less than current liabilities, an entity has a working

capital deficiency, also called a working capital deficit.

A company can be endowed with assets and profitability but short of liquidity if its assets cannot

readily be converted into cash. Positive working capital is required to ensure that a firm is able to

continue its operations and that it has sufficient funds to satisfy both maturing short-term debt

and upcoming operational expenses. The management of working capital involves managing

inventories, accounts receivable and payable and cash.

Current assets and current liabilities include three accounts which are of special importance.

These accounts represent the areas of the business where managers have the most direct impact:

accounts receivable (current asset)

inventory (current assets), and

accounts payable (current liability)

The current portion of debt (payable within 12 months) is critical, because it represents a short-

term claim to current assets and is often secured by long term assets. Common types of short-

term debt are bank loans and lines of credit.

An increase in working capital indicates that the business has either increased current assets (that

is received cash, or other current assets) or has decreased current liabilities, for example has paid

off some short-term creditors.

CONCEPTS FOR WORKING CAPITAL ASSESSEMENT

Gross Working Capital [GWC] = Total of Current Assets

Net Working Capital [NWC] = CA - CL

Working Capital Gap [WCG] = [CA –CL {Excl STBB}]

Permissible Bank Finance [PBF] = WCG – [Higher of stipulated NWC or available NWC]

32

METHODS OF ASSESSMENT OF WORKING CAPITAL

TURNOVER METHOD : under this method, the WC limit shall be computed at 20% of the

projected sales turnover accepted by the Bank. 5% of projected sales should be available as

margin. In the case of SSI borrowers seeking/enjoying fund based working capital facilities up to

Rs. 5 Lacs, the limits shall be assessed on the basis of turnover method.

FLEXIBLE BANK FINANCE METHOD: it is an extension of Maximum Permissible Bank

Finance [MPBF] with customer friendly approach in as much as the scope of current assets is

made broad based and for evaluating projected liquidity, acceptable level of current ratio is taken

at 1.17:1 against benchmark of 1.33:1. this method is applicable for accounts with credit limits of

more than Rs. 5 crores.

CASH BUDGET METHOD : this method may be adopted in case of specific

Industries/Seasonal activities such as software, construction, film, sugar, fertilizers etc. the

required finance is arrived at from the projected cash flows and not from the projected values of

assets and liabilities.

NET OWNED FUNDS METHOD: the credit needs of NBFCs shall be assessed based on this

method, rescribed by the RBI.

CHAPTER-III : ANALYSIS

The whole project is based on the process of advancing loans to a company or an organization,

which has now become a very crucial part of every bank. I had learned how to advance loans of

various kinds, right from comfort loans, vehicle loans, housing loans, education loans etc. to

32corporate lending. Corporate lending play important role because these are huge lending and so

they need to be taken care of. As in, when a company or an organization asks for loan then the

bank needs to check a number of things. There is a long process, at the end of which the bank

decides whether to lend the money or not.

BRIEF BACKGROUND:

The firm was established in 1991 by the proprietor Mr. G H Pal. The unit is engaged in

processing of cotton seed oil and trading of soyabean, groundnut and various grains according to

season. Initially, the unit was started with three oil expellers. Thereafter they installed three more

oil expellers in the year 2004. Again they installed six more high capacity machines in 2006.

Therefore, presently they are working with 12 expellers/machines. Now they proposed to install

12 new machines in the newly constructing building. However, they proposed to sell the oldest

six machines within very short time. Mr. Sumit Pal S/o Shri G H Pal has recently completed

MBA and looking after financial matters of the firm. The account was taken over in August 2003

from XYZ Bank where they were enjoying credit facilities at lower level.

FINANCIAL INDICATORS :

( Rs. In Lac)

Year Ending

31.3.07

(Aud.)

31.3.08

(Aud.)

31.3.09

(Aud.)

31.3.10

(Aud.)

31.3.10

(Proj.)

31.3.11

(Est.)

Paid up Capital 31.63 33.19 37.09 47.54 66.50 161.01

Reserves & Surplus - - - - - -

Intangible Assets - - - - - -

Tangible Net Worth 31.63 33.19 37.09 47.54 66.50 161.01

Long Term Liabilities 81.87 85.48 121.10 89.45 137.00 230.00

32Capital Employed 113.50 118.67 158.19 136.99 203.50 391.01

Net Block 16.15 18.93 33.70 33.34 26.64 220.00

Investments 6.47 7.61 13.70 15.10 10.00 15.10

Non Current Assets 11.35 3.01 4.37 5.92 9.37 8.83

Net Working Capital 79.53 89.12 106.42 82.63 157.49 147.08

Current Assets 206.38 267.52 571.58 573.98 712.49 684.08

Current Liabilities 126.85 178.40 465.16 491.35 555.00 537.00

Current Ratio 1.63 1.50 1.23 1.17 1.28 1.27

D E Ratio (TL/TNW) 1.12 3.23 3.26 1.89 2.96 1.43

DER (TOL/TNW) 6.58 7.95 15.81 12.22 10.40 4.76

DER (TOL/TNW) Excl.

U/sec. loans as quasi-

capital 1.50 3.28 3.592.56

Net Sales 200.99 600.46 1720.71 2097.75 2500.0 2600.00

Other Income 0.43 0.52 1.28 3.19 1.00 8.00

Net Profit Before tax 1.72 2.67 4.73 11.01 12.22 40.78

Net Profit After Tax 1.71 2.67 4.02 9.35 10.72 29.80

Depreciation 2.17 2.06 4.60 4.28 3.75 9.70

Cash Accruals 3.88 4.73 8.62 13.63 14.47 39.50

Capital of the firm is showing increasing trend due to retention of part of net profits in the

system. The proprietor has infused additional funds of Rs. 3.45 lacs as capital apart from

32balance net profits of Rs. 7.00 lacs as of 31.03.2010, which resulted it has increased from Rs.

37.09 lacs as of 31.03.09 to Rs. 47.54 lacs as of 31.03.10. The proprietor has estimated to

induct Rs. 100.00 lacs additional funds apart from plough back of profit to raise the capital to

Rs. 161.01 lacs as of 31.03.2011.

Unsecured loans are continuously increased year after year. The same are mainly raised from

family members/relatives. An undertaking from the party should be obtained that these

unsecured loans will be retained in the system till currency of bank finance, as NWC and

DER are depend upon these loans.

NWC in the system as of 31.03.08 stands at Rs. 82.63 lacs, which provide the margin (25%)

for availing the fund based limit upto Rs. 380.00 lacs.

CR of 1.17 as of 31.03.10 has come down from 1.23 as of 31.03.09, which is due to

repayment of T/L and reduction in unsecured loans i.e. short term sources are used for long

term uses, which is internal diversion of funds and should be avoided by the firm. Though it

is still within the acceptable level.

DER in normal condition is above the bench mark level, showing the firm’s high dependency

on outside liabilities. The firm should reduce the outside liabilities or raise capital/family

deposits. However, if unsecured loans raised from family members/relatives are taken as

quasi-capital, the DER as of 31.03.10 is worked out to 3.59, which is within acceptable level.

An undertaking from the party to be obtained that these unsecured loans will be retained in

the system till currency of bank finance.

Sales turnover of the firm has increased substantially from Rs. 600.46 lacs as of 31.03.08 to

Rs. 1741.28 lacs (190%) as of 31.03.2009 and Rs. 2097.75 lacs (21.91%) as of 31.03.10

reflecting the good progress of the unit during last two years. The same are estimated at Rs.

2600.00 lacs as of 31.03.11 with the growth of 24%, which looking to their past performance,

can be considered achievable.

The firm is earning net profits continuously. As of 31.03.10 the firm has registered 132%

growth in net profit as against 21.91% growth in net sales over the last year. The firm has

estimated much improved profit margin due to reduction in manufacturing/power expenses

on account of installation of new plant & machinery.

Cash accruals are sufficient to service the interest on WC.

32Overall financials can be considered as satisfactory as of 31.03.2008.

COMMENTS ON ASSESSMENT OF LIMITS :

a) PROJECTED LEVEL OF SALES:

PARTICULAR SALES (IN LACS)

MAR-07 200.99

MAR-08 600.46

MAR-09 1720.71

MARCH 2010 2097.75

Sales turnover of the firm is showing increasing trend. The firm has achieved sales

turnover of Rs. 2097.75 lacs against projected sales of Rs. 2500.00 lacs i.e. 84%. The

firm has achieved 22% growth in sales from Rs. 1720.71 lacs to Rs. 2097.75 lacs as of

31.03.10. During this fiscal, the firm has projected sales of Rs. 2600.00 lacs. From April

to September 10, the firm has registered sales of Rs. 595.25 lacs, which is slightly

decreased by 3.2% as compared to last year correspondence period sales of Rs. 614.90

lacs. However, it is marginal difference, which can be filled during peak season starting

from October to May. Looking to their last 3 years performance and proposed expansion

of unit, we may consider sales of Rs. 2500.00 lacs during 2009-11 achievable with about

20% growth over the previous year.

b) INVENTORY & RECEIVABLE NORMS

32The major raw material of the unit is cotton seeds, soya seeds, etc., which are processed

and converted into oil. These raw materials are purchased from Mandi and Cotton

Ginning & Processing Mills. During last 3 years, the actual stock holding & receivables

level remained as under:

Particulars 2007-09 2009-10 2010-11

Total Inventory 173.22 356.69 447.13

Receivables 91.97 183.25 92.93

Sundry Creditors 108.61 236.61 88.85

The level of stock holding and debtors as of March 2008, March 2009 and March 2010

indicate working capital cycle of peak season of 8 months. In view of the fact that it is a

seasonal unit and the firm is required to make bulk purchases of cotton/soya seeds during

the crop season to ensure regular production/working of the unit, the holding can be

considered reasonable. Looking to the situation, it is required to make Peak Level and

Non-Peak level limits i.e. during the peak season & off-season of the crop.

c) WORKING CAPITAL ASSESSMENT

Based on projected sales of Rs. 2500.00 lacs for 2010-11, the WC requirement of the

party as per turnover method can be worked out as under:

Projected Sales achievable during 2010-11 : 2500.00

25% of Sales : 625.00

5% of sales as margin : 125.00

Available margin (NWC) : 82.63

o MPBF : 500.00

32Further, based on FBF method of assessment, the WC requirement is worked out as

under:

(Rs. in lacs)

MAR-09 MAR-10

Total Current Assets. 581.26 712.49

Less: Current Liabilities

(Other than Bank Borrowings)

241.90 150.00

Working Capital Gap 339.36 571.86

iNWC 95.21 157.49

Flexible Bank Balance (FBF) 244.15 414.37

Net Sales 1741.28 2500.00

NWC to TCA % 16% 22%

Flexible Bank Finance to TCA % 42% 58%

Sundry Creditors to TCA % 40% 21%

Therefore, C.C.(Hyp) limit of Rs. 380.00 lacs as recommended by the branch, can be

considered. However, looking to past trend and seasonal business – crop season from

October to May, it will be justified to renew Peak-Season & Non-Peak Season limits at

25% margin as under:

Rs. 380.00 lacs – From October to May.

Rs. 135.00 lacs – From June to September

32d) TERM LOAN ASSESSMENT

The firm was sanctioned T/L of Rs. 17.90 lacs for purchase/installation of 6 jumbo

expellers to expand the capacity of the unit in June 2006. Presently they are working with

12 expellers/machines. Also they proposed to sell the oldest six machines within very

short time. Expected sale proceeds of six old machines about Rs. 18.00 lacs will be

utilized for adjustment of existing Term Loan and other long term uses.

The firm has now proposed to construct new building shed and to install advanced

technology 12 new oil expellers alongwith remaining 6 existing expellers out of 12.

Therefore, the firm intend to work with total 18 expellers to increase the production with

improved quality at reduced cost.

The cost of project & means of finance as per Technical Inspection Report dated 30.09.2010

are as under:

Cost of project Means of funding

Land & Site development owned by the

firm.

0.00 Promoter’s contribution 61.00

Construction cost of shed& building 106.28 Term Loan from Bank 118.80

Electric Installation 14.62

Plant & Machinery 58.52

Misc./Sundry exp. 0.38

TOTAL 179.80 TOTAL 179.80

LAND:

CONSTRUCTION OF BUILDING:

i

32The firm has obtained construction permission from the competent authority. Out of own

contribution, the firm has already started/completed construction of building & civil works as

under:

Particulars Construction area

(In sq.ft.)

Works completed till

19.09.2010

Oil Mill Shed 4300 90%

Raw Material godown 4300 90%

Finished material godown 4300 90%

Shed for overhead tank 2800 60%

Platform No.1 10500 25%

Platform No. 2 10500 25%

As per certificate of Chartered Engineer, xyz city, the construction works of around Rs.85.75

lacs are already completed. The technical inspecting officials have also confirmed the above

stage of completion. The construction cost is varied from Rs. 150/- to Rs. 600/- depending upon

the works, which is considered reasonable and justified.

ELECTRIC INSTALLATION

Electric installation is mainly consisting of 14 TEFC Motors, 36 pieces Start Delta starter, main

switch, other accessories, etc. These items will cost Rs. 10.20 lacs as per quotation obtained from

Allied Electric Stores, xyz city. Transformer of 500 KVA costing Rs. 4.42 lacs as per quotation

of M.P. Transformer Pvt. Ltd. is to be installed for smooth and adequate supply of power.

PLANT & MACHINERY

32The firm has been working with 12 oil expellers with about 100% capacity utilization. To

improve the quality and enhance the capacity, they have decided to purchase 12 new expellers

and install them alongwith existing 6 out of 12 expellers in a new building adjacent to existing

one. Particulars of P&M, cost & manufacturers/suppliers are proposed as under:

(Rs. in lacs)

PARTICULARS Manufacturer/Supplier No. Rate Total Cost

‘Sona’ Oil Expellers M/s xyz 1 12 2.50 30.00

Chainlink convear with

gearbox & chin fitting

M/s xyz 2 1 6.65 6.65

Wash Tank 7 ton with 3

HP Motor

1 1.05 1.05

Filter with pump 1 1.65 1.65

Elevator 30’ 1 1.05 1.05

Dicordicator complete

automatic plants

1 7.50 7.50

Underground tank with

cover & partition

1 0.40 0.40

Storage tank 10 0.264 2.64

32Motor stand (6 no.),

foundation bolt (6 no.) &

pipe fitting,

0.56

VAT 2.68

Expeller Spare parts Xyz 3 - - 4.34

TOTAL 58.52

12 pieces of are to be purchased from @ Rs. 2.50 lacs each total costing Rs. 30.00 lacs as per

their quotation dated 14.04.2008. Other supporting items like, wash tank, filter, elevator,

dicordicator complete automatic plant, etc. are proposed to be purchased from.

Keeping in view the volume of project, projected misc./sundry expenses of Rs. 0.38 lac are

reasonable. Therefore, total cost of project Rs. 179.80 lacs is acceptable.

The firm has proposed to contribute 40% margin towards construction of building and 25%

margin for plant & machinery.

As per technical report, the firm has acquired 6 new machines, elevator and conveyor and these

machines are installed in new mill shed alongwith 12 old machines. When in near future 6 more

new machines are supplied, old 6 machines will be sent back to the supplier under buyback

arrangement. The other items are also expected to receive very soon. With the installation and

implementation of all the plant & machinery as proposed herein above, the quality and capacity

of the unit are expected to increase. The capacity will be increased from 80000 quintal to 129000

quintals per season i.e. 540 quintals per day for 240 days working in 2 shifts of 12 hrs. During

32the current year i.e. 2008-09, capacity utilization is projected at 75% i.e. 90000 quintals with

working of 18 oil expellers (12 new & 6 existing).

The firm has requested for Term Loan of Rs. 130.00 lacs for the above project. But due to

totaling mistake in one quotation and repeatation of some electrical parts & machineries, total

project cost has been assessed at reduced level of Rs. 179.80 lacs instead of Rs.194.63 as per

technical report dated 30.09.2008. Accordingly, the term loan of Rs. 118.80 lacs can be taken for

financial assistance. The loan is proposed in 6 years after moratorium period upto March 2009.

The following details & analysis are given as per the project report submitted by the Society:

PROFITABILITY DETAILS: (Rs. in lacs)

PARTICULARS

Actual 2007-08

Est.

08-09

PROJECTED

09-10 10-11 11-12 12-13 13-14 14-15

RECEIPTS

Net Sales 2097.75 2600 2725 2850 2975 3100 3225 3300

EXPENDITURE

Raw material consumption

1937.16 2388.03 2500 2615 2725 2840 2955

3025

Purchase & Processing exp

87.9595.00 97.00

100.00

103.00

107.00

110.00

110.00

Selling & Admn. Exp.

9.6915.00 16.00 17.00 18.00 19.00 20.00

21.00

Total Expenditure2034.8 2498.

03 2613 2732 2846 2966 30853156

32Profit Before Dep. Int. & Tax

62.95 106.97

117.00

123.00

134.00

139.00

145.00

149.00

Interest on Proposed T/L @ 12% 6.19 13.09 10.61 8.16 5.71 3.26

Interest on CC 38.33 40.00 40.00 40.00 40.00 42.00 44.00

Existing T/L 1.91 132 0 0 0 0 0

Intt. to others 10.62 10.50 10.50 10.50 10.50 10.50 10.50

Total Interest 50.86 58.01 63.59 61.11 58.66 58.21 57.76

Depreciation 4.22 9.70 16.46 15.71 14.14 12.72 11.45

55.08 67.71 80.05 76.82 72.8 70.93 69.21

Profit Before Tax 5.77 12.04 15.95 21.18 30.20 39.07 45.79

Income Tax Provn. -1.25 -1.99 -2.34 -3.11 -4.45 -5.78 -6.78

Profit After Tax 4.52 10.05 13.61 18.07 25.75 33.29 39.01

Interest calculated @ 12% p.a.

As per IC 8088 dtd. 26.08.08 interest rate for food & agro based processing units with investment in plant & machinery upto Rs. 10.00 crores for the amount of advance above Rs. 1.00 crore with CR-5 will be applicable @ BPLR-1.75% i.e. 12.25% at present.

CALCULATION OF DSCR -

(Rs. in lacs)

Year 08-09 09-10 10-11 11-12 12-13 13-14

32

PAT 10.05 13.61 18.07 25.75 33.29 39.01

Depreciation 9.70 16.46 15.71 14.14 12.72 11.45

Interest 58.01 63.59 61.11 58.66 58.21 57.76

Sub total (A) 77.76 93.66 94.89 98.55 104.22 108.22

Interest 58.01 63.59 61.11 58.66 58.21 57.76

Installments 0 19.80 19.80 19.80 19.80 19.80

Sub total (B) 58.01 83.39 80.91 78.46 78.01 77.56

DSCR 1.34 1.12 1.17 1.26 1.34 1.39

Average DSCR

CREDIT RATING :

a)

Year Previous yr. Current yr.

Total score obtained 72% 71%

32Grade CR-5 CR-5

b)

Parameters Marks obtained

Previous yr. Current yr.

Max. Obtained Max. Obtained

Borrower rating 67 48 46 34

Facility rating 21 16 29 22

Risk Mitigators 5 5 20 12

Business aspects 4 1 5 3

Total Marks with grade 97 70 100 71

Thus we can see, that in terms of financial assessment this is what is done in a broad scale. Although banks use many different models and ways to assess a borrower. Another important thing to keep in mind is that credit appraisal consists of many different kinds of appraisal that is the borrowers market worth and the like, which are also very crucial part.

CHAPTER-IVFINDINGS :-

That the banks have their own credit rating system and that they try to update it with the

latest method available.

32 The ratios have a very important role to play; a thorough understanding of them leads one

to the future prospects of the borrower and also tells a lot about its financial soundness.

Another important thing is the balance sheet, its break up and the study of it, tells a lot

about any organization.

Retail loan sector in india has a long way to go, a steady growth is projected in the

coming years.

LIMITATIONS :-

The time given for the project, was not sufficient enough to study and understand the

retail loans approval process of the Union bank of India.

The banks have their own confidential information and it was very difficult to make the

project and analyze it on the basis of hypothetical information.

SUGGESTIONS :-

UBI has this time ranked 5th among all the Nationalized banks. The reason for its ranking

was the number of NPAs it had. It was found that a number of retail loans ended up in

NPAs . UBI needs to develop a competitive edge and the managers and the assistants

need to keep a tab on the loans given.

Usually the managers would only fulfill their required target and then would forget about

more borrowers. They need to have more borrowers both for small and big loans.

32 Many times they pass a loan without the proper appraisal, i.e. the client may lack either

the projected and estimated balance sheet or the proper documents. In such cases there

should be a strict protocol followed.

CONCLUSION :-

As discussed in the project above, Credit Appraisal appears to be the back bone of the banking

institution. It is equally important and dangerous, as there is always the chance of default or

some other risk. After dealing with almost every aspect of loans and advances one can

summarize that with a little bit of strict measures and a keen eye and understanding of a

company’s balance sheet one can very well save the institute the risk other than the default risk.

Even the default risk can be to a certain limit mitigated, if we before sanctioning the amount

check the profile of the customer. Industry Report, bank’s own experiences and the ability of the

borrower to run his enterprise professionally are certain things one can check.

A very crucial aspect of credit appraisal is the credit rating, Union bank has introduced their

own Internal Rating system of all borrowers enjoying/seeking credit limits above Rs. 2 lacs. The

rating grades range from CR1 to CR8. Credit ratings up to CR5 are investment grade. CR6 to

CR8 are non-investment grade as per the loan policy of the bank. Migration in credit rating,

especially downward migration should be discussed in detail and road map to improve the credit

rating has to be drawn up/implemented. A lot of times for some reasons, credit report is not

submitted and the submission of the proposal and its sanctioning is done without it, while

keeping in mind other necessary factors. In order to potential NPAs it is significant to have a fair

understanding of the borrower’s financial health. Thus, at least last three years balance sheet and

Profit and loss accounts should be obtained, in addition to projections of next 2 years. Now, most

of the time customers to prove their credit worthiness make the estimated balance sheets

unrealistic, such areas should be stressed and it should be checked whether the borrower has the

ability to go as per the projected Balance Sheet. The important factors which should be given

special consideration are trend in sales, both quantity and quality, it should be positive with the

32industry trend. Disparities in the sales pattern should be analyzed properly. Profitability should

be critically analysed, it should be checked with the existing norms of the balance sheet.

Working Capital and its assessment should be done before taking a decision about the borrower.

Credit rating is a very important step in deciding whether to sanction or decline a proposal. All

the stages should be vetted and the necessary action should be taken while making any decision.

The other important things to be kept in mind is the security offered, the documents submitted

and the market reputation of the borrower.

It is true that the fear of NPAs looms large whenever a borrower new or old comes for the loan,

but if the all the steps are properly followed and all the aspects looked at, then the banks should

not have any problem in giving out loans and advances of any kind.

BIBLIOGRAPHY

Bessis Joel, ‘Risk Management in Banking’

RBI guidance notes on Credit Risk Management.

Credit Risk Models and Management, 2nd edition by David Shimko.

32 Credit scoring and its applications by Lync.Thomas, David B. Ederman and Jonathan N.

Crook.

Banking Strategy, Credit Appraisal and Lending Decisions: A Risk-Return Framework.

By Bhattacharya, Hrishikesh

Financial Statement Analysis: A Practitioner's - by Martin S Fridson, Fernando Alvarez

Analysis of Financial Statements - by Leopold A Bernstein, John J Wild

Financial Analysis: Tools and Techniques a ... - by Erich A Helfert

Sites Referred:

www.defaultrisk.com

www.cmie.com

www.crisil.com

www.unionbankofindia.com

www.unionbankofindia/aboutus.co.in

www.unionbankofindia/retailloans/unionshare.co.in