Interner Ship Report %281%29 (1)

SMALL AND MEDIUM ENTERPRISES FINANCING

SMALL AND MEDIUM ENTERPRISES FINANCINGFINAL PROJECT

ASSESSMENT OF THE PROCESS OF CREDIT APPRAISAL IN SME SECTOR

Submitted By

Under the Guidance ofSenior Manager(Credit and Rehabilitation Department)

Project Work Undertaken At

CIRCLE OFFICE, CHANDIGARH

Report submitted in partial fulfillment of the requirementsfor the award ofPost-Graduate Diploma in Banking and Finance (2012-2014)ByNational Institute of Bank Management, Pune

ACKNOWLEDGEMENT

I express my profound gratitude to all who have been instrumental in the preparation of this project report. To start with, I am heartily thankful to the organization PUNJAB NATIONAL BANK for providing the opportunity to undertake this summer internship program which helped me to explore and understand the core area of the process of credit appraisal in SME sector and develop expertise which can prove to be potentially beneficial in my future assignments, further studies and in fulfilling my career objectives.

I am grateful to for their support and guidance.

I wish to place in records my deep sense of gratitude for the contribution, guidance and encouragement of my guide Mr. B.S. Sondhi (Senior Manager, Credit and Rehabilitation Department) for continuous guidance and encouragement.

I am deeply grateful to Dean Sir, Prof. K. Ramesha, for giving me an opportunity, in the form of Summer Internship, to have a practical learning experience at Punjab National Bank. It will inculcate skill and confidence in me, for my future career orientation as a banker.

I would also like to extend special regards & thanks to all the staff and employees of the of the Credit and Rehabilitation Department, Circle Office of Punjab National Bank especially Mr. Amit Bansal for helping me during my internship.

SHIVANI MAHAJAN

TABLE OF CONTENTS

CHAPTER NO.SUBJECTPAGE NO.

1INTRODUCTION5

2PUNJAB NATIONAL BANK : IN BRIEF10

3REVIEW OF LITERATURE11

4METHODOLOGY17

5ANALYSIS & RESULTS20

CASE 1- MEGASTAR

CASE 2- ANG LIFESCIENCES

6INTERPRETATION30

7CONCLUSION33

8EXECUTIVE SUMMARY35

9ISSUES36

10RECOMMENDATIONS38

11IMPLEMENTATION STRATEGY41

12SUGGESTIONS FOR FUTURE RESEARCH42

13BIBLIOGRAPHY43

CHAPTER 1INTRODUCTION

The MSME sector in a developing country has a vital role in the economic and social development. The promotion and growth of MSME sector has been a cardinal feature of the industrial policy over the years. In India, the MSME sector contributes 8% of the countrys GDP, 45% of the manufactured output and 40% of exports and provides employment to about 60 million through 26 million enterprises. The micro and small enterprises sector alone employs over 30 million people and is next only to agriculture sector in employment generation. Thus, MSMEs are important for the national objectives of growth with equity and inclusion.With a view to ensure balanced growth of the MSMEs, Govt. of India has enacted the Micro, Small and Medium Enterprises Development (MSMED) Act, 2006; services sector has become part of Micro, Small & Medium Enterprises. The MSMEs engaged in manufacturing or production and providing or rendering of services are defined as per MSMED Act 2006 for the purpose of bank credit.The policy is aimed to provide direction for the involvement of the bank in the growth of this sector. This would also help the MSME sector which is identified as an Engine of Growth both in terms of employment generation and improving production, to take advantage of various products offered by the bank.

Definition of the MSME sector as per MSMED Act, 2006 A. Direct Finance (Loans/advances granted directly to MSMEs):ENTERPRISEMANUFACTURINGSERVICES

Enterprises engaged in the manufacture or production, processing or preservation of goods and whose investment in plant and machinery is the original cost excluding land and building and the items specified by the Ministry of MSME vide its notification No. S.O.1722 (E) dated 05.10.2006, as specified below:Enterprises engaged in providing or rendering of services and whose investment in equipment (original cost excluding land & building and further, fitting and other items not directly related to the service rendered or as may be notified under the MSMED Act, 2006) as specified below: (These will include small road & water transport operators, small business, retail trade, professional & self employed persons and all other service enterprises).

MicroInvestment in plant and machinery does not exceed Rs. 25 lacs.Investment in equipment does not exceed Rs. 10 lacs.

SmallInvestment in plant and machinery is more than Rs. 25 lacs but does not exceed Rs.5 crore.Investment in equipment is more than Rs.10 lacs but does not exceed Rs.2 crore.

MediumInvestment in plant and machinery is more than Rs.5crore but does not exceed Rs.10 crore.Investment in equipment is more than Rs.2 crore but does not exceed Rs.5 crore.

NOTE:All advances granted to units in the Khadi & Village Industries Sector (KVI), irrespective of their size of operations, location and amount of original investment in plant and machinery/ equipments will be covered under Priority Sector advances and will be eligible for consideration under the sub-target of the micro enterprises segment within the MSE (Micro and Small Enterprises) sector.

Advances to Micro and Small Enterprises constitute advances to Priority Sector.

Advances to Medium Enterprises constitute advances to Non Priority Sector.

B. Indirect Finance (Loans/advances provided to MSMEs through certain agencies involved in promotion/development of the MSME sector):

1. Persons involved in assisting the decentralized sector in the supply of inputs to and marketing of outputs of artisans, village and cottage industries.

2. Advances to co-operatives of producers in the decentralized sector viz., artisans, village and cottage industries.

3. Loans granted by banks to NBFCs for on-lending to Micro and Small Enterprises (manufacturing as well as service).

Classification of finance to MSME Sector

Priority SectorNon Priority Sector

Loans/advances (both fund and non fund based) (other than to Retail Trade) extended to Micro and Small Enterprises(MSE) both industry and service (direct and indirect finance)Loans/advances (both fund and non fund based) (other than to Retail Trade) extended to Medium Enterprises both industry and service (direct and indirect finance)

Loans/advances to retail traders:a. Dealers of essential commodities (fair price shops) and consumer co-operative stores, without any ceiling in credit limit.b. Private retail traders up to a credit limit of Rs.20 lakhs onlyLoans/advances to Retail Traders:Credit facilities extended to retail traders other than (a & b) of adjacent column.

SECURITY NORMS

The security norms for lending to Micro and Small Enterprises (MSEs) are as under:

No collateral security/third party guarantee is insisted in respect of loans/advances to Micro & Small Enterprises as under (including loans sanctioned under KVIC and other Govt. Sponsored schemes):

1. Upto Rs. 10 lacs (which is mandatory).

2. Upto Rs. 25 lacs in respect of units whose track record and financial position are good as per Bank records.

3. Upto Rs. 100 lacs in respect of units in Micro & Small Enterprises sector whose borrowal accounts are recovered under Credit Guarantee Fund Scheme for Micro & Small Enterprises (CGTMSE). The bank shall cover the loans/advances up to Rs. 100 lakhs granted to Micro & Small Enterprises without collateral security and/or third party guarantee, under the Credit Guarantee Scheme for Micro & Small Enterprises (CGSME) of Credit Guarantee Fund Trust for Micro & Small Enterprises (CGTMSE).

4. Presently, CGTSME cover is not available for credit facilities extended to Retail Traders, Educational Institutions, Training Institutes, Training-cum-Incubator Centre and loans and advances to Medium Enterprises.

5. In respect of other Micro and Small Enterprises and the Medium Enterprises the guidelines for obtaining collateral security/third party guarantee on case to case basis as determined by the bank shall continue.

6. In respect of credit facilities extended to Micro and Small Enterprises (MSEs) wherever collateral security and/or third party guarantee is not obtained, CGTMSE cover is to be necessarily taken.

Objectives of the Project

The main objective of the project is to study the credit management of SMEs and its appraisal process carried out in the banks.

The other objectives are as follows:

1. To understand what is meant by SME2. The objective of the project is to get practical exposure for MSME finance and the challenges the banks are facing in financing to these sector. 3. What are the types of Credit facilities available for SMEs? How the assessment of credit proposals is done? 4. To understand the commercial, financial & technical viability of the project & its funding pattern.5. To understand mechanism of credit rating.6. To understand the post-disbursement monitoring measure.7. To understand the quality of credit appraisal in PNB.8. To get practical knowledge and exposure for MSME finance and the current challenges/issues PNB is facing this sector and the corrective measures adopted by the bank.

RELEVANCE

MSMEs are responsible for providing employment to a major chuck of population in India. They are responsible for production of most of the inputs to major companies all across the world. Despite their economic significance, SMEs face a number of bottlenecks that prevent them from achieving their full potential. A major obstacle in SME development is its inability to access timely and adequate finance. SMEs need various forms of support like term loans for setting up factories and plants or buying machinery, they need working capital to meet their day-to-day requirements, they need facilities like LCs, BGs as well as bill discounting etc. It is the banks which provide them with these facilities. Hence, RBI has come up with various norms to ensure that the MSMEs are well supported and proper infrastructure is in place to provide them with much needed financial help. Since the inception of the norms by RBI Credit Management of SMEs has become a major thrust area for the banks.

SCOPEThis study will help in understanding everything related to Indian banking industry, SME sector of the country, various credit facilities, and difference between fund-based and non-fund-based facilities of credit, methods of assessment of credit proposals, appraisal system at Punjab National Bank.Although we can study the effects of these facilities on various organizations throughout the country but we are limiting the project till the study of these facilities on MSME sector. Hence the objective of the project is to study all these facilities and other related activities carried out by the banks specific to the MSME sector.

CHAPTER 2PUNJAB NATIONAL BANK: IN BRIEF

GENESIS

Since its humble beginning in 1895 with the distinction of being the first Swadeshi Bank to have been started with Indian capital, Punjab National Bank has continuously strived for growth in business.PNB is the largest nationalised Bank in the country in terms of Branch Network, Total Business, Advances, Operating Profit and Low Cost CASA Deposits. With over 72 million satisfied customers and 5937 domestic branches, PNB has continued to retain its leadership position amongst the nationalized banks. The Bank enjoys strong fundamentals, large franchise value and good brand image. Over the years PNB has remained fully committed to its guiding principles of sound and prudent banking irrespective of conditions. Bank has been earning many laurels and accolades in recognition to its service towards doing good to society, technology usage and on its overall performance. Some of the major awards won by the Bank are theBest Bank Award,Most Socially Responsive Bankby Business World-PwC,Most Productive Public Sector Bank,Golden Peacock Awardsby Institute of Directors, etc VISION

"To be a Leading Global Bank with Pan India footprints and become a household brand in the Indo-Gangetic Plains providing entire range of financial products and services under one roof"

MISSION

"Banking for the unbanked"

CHAPTER 3REVIEW OF LITERATURE

Principles of Lending

i. Identification of Borrower

The first step is to identify credibility and requirements of potential borrower during the first meeting by asking him certain details mentioned below:

a) Name and addressb) Educational background and Qualificationc) Present bank with which the borrower is associatedd) Proposed business activity (project) to be financede) Experience, if any in the concerned fieldf) Total Cost and Investment in projectg) Requirement of finance from bankh) Present dealings with our banki) Industry outlook and competitionj) Potential market and marketing strategyk) Average operating cycle i.e. period of converting raw material to finished goodsl) Securities likely to be offered by the borrower m) Past performance if existing firmn) 3 Cs - Character, Capacity and Credit Worthiness

ii. Purpose of the LoanDuring the first meeting, the details of the loan requirements and purpose for which the loan is to required must be assessed for which the borrower has to provide certain documents containing the details of the business activity proposed, quantum of loan required and total costs related to the project. Also the financial statement including Balance Sheet, Profit & loss Statement, Estimated project cost and other necessary documents based on the project requirements is to be submitted along with the Loan application form.

The proposal is seen in the light of following considerations:a) Is it for productive purpose?b) Is it a legitimate activity?c) Is it new venture or existing?d) If existing - is it for expansion or diversification?

iii. Quantum of Loana) Is should be need-based?b) It should be timelyc) It should be along with borrowers stake/ margin (Varying between 5 to 25%)d) It should neither be over-financed nor under-financed.

The borrower assesses the quantum of loan required for the project with the help of the estimated cost of project and funds available with him and then bank assesses the loan requirement of the borrower using various methods with the help of financial statements and creditworthiness of the borrower. While estimating the borrowers requirement the bank also assesses the viability of the project and profit generating capability of the borrower.

iv. Period of Loan

a) It can be short or long termb) Is should be adequate c) It depends on whether the project is renewal/ revival/ enhancementd) It should consider chances of contingencies

The estimation of period of loan depends upon the time required by the project to start operations & generating turnover capable of making profit. For assessing period of loan, financial techniques like Debt service coverage ratio, breakeven analysis and internal rate of return are used which explain the viability of the project and how fast the project can be implemented to generate earnings.

v. Source of Repayment

a) Out of business/salary income?b) Is it self-liquidating i.e. a working capital account? Cash Credit Hypothecation or Pledge (lock-n-key) facility?c) Out of sale of asset(s) financed or disposal of collateral security?d) Any other source of income like guarantor?

vi. Security Offered

a) Primary Security - stock, Book debts, assets, etc (Hypothecation, Pledge, etc )b) Collateral security and other comfortsc) Secondary -3rd party guarantee or charge on immoveable property- Personal or Corporate Guarantee

vii. Appraisal of Proposal / Sanction

viii. Convey Terms & conditions in writing

ix. Documentation

a) Properly filled up loan application formb) Perfect document related to securities offeredc) Other required related documents

x. Disbursement, Inspection, Insurance & follow up asset verification, stock statements, recovery, renewal.

TYPES OF LENDING

I. Fund Based Lending

In case of Fund Based Lending, the lending bank commits the physical outflow of funds. As such, the funds position of the lending bank gets affected. The Fund Based Lending can be made by the banks in the following forms-

a) Loan: - In this case, the entire amount of assistance is disbursed at one time only, either in cash or by transfer to the companys account. It is a single advance. The loan may be repaid in installments, the interests will be charged on outstanding balance.

b) Overdraft: - In this case, the company is allowed to withdraw in excess of the balance standing in its Bank account. However, a fixed limit is stipulated by the Bank beyond which the company will not be able to overdraw the account. Legally, overdraft is a demand assistance given by the bank i.e. bank can ask for the repayment at any point of time. However in practice, it is in the form of continuous types of assistance due to annual renewal of the limit. Interest is payable on the actual amount drawn and is calculated on daily product basis.

c) Cash Credit: - In practice, the operations in cash credit facility are similar to those of overdraft facility except the fact that the company need not have a formal current account. Here also a fixed limit is stipulated beyond which the company is not able to withdraw the amount. Legally, cash credit is a demand facility, but in practice, it is on continuous basis. The interests is payable on actual amount drawn and is calculated on daily product basis.

d) Bills purchased or discounted: - This form of assistance is comparatively of recent origin. This facility enables the company to get the immediate payment against the credit bills raised by the company. The bank holds the bill as a security till the payment is made by the customer. The entire amount of bill is not paid to the company. The Company gets only the present worth of the amount of bill, the difference between the face value of the bill and the amount of assistance being in the form of discount charges. On maturity, bank collects the full amount of bill from the customer. While granting this facility to the company, the bank inevitably satisfies itself about the credit worthiness of the customer. A fixed limit is stipulated in case of the company, beyond which the bills are not purchased or discounted by the bank.

e) Working Capital Term Loans: - To meet the working capital needs of the company, banks may grant the working capital term loans for a period of 3 to 7 years, payable in yearly or half yearly installments.

f) Packing Credit: - This type of assistance may be considered by the bank to take care of specific needs of the company when it receives some export order. Packing credit is a facility given by the bank to enable the company to buy the goods to be exported. If the company holds a confirmed export order placed by the overseas buyer or a letter of credit in its favour, it can approach the bank for packing credit facility.

II) Non-Fund Based: -

a) Letter of Credit

Introduction The expectation of the seller of any goods or services is that he should get the payment immediately on delivery of the same. This may not materialize if the seller & the buyer are at different places (either within the same country or in different countries). The seller desires to have an assurance for payment by the purchaser. At the same time the purchaser desires that the amount should be paid only when the goods are actually received. Here arises the need of Letter of Credit (LCs). The objective of LC is to provide a means of payment to the seller & the delivery of goods & services to the buyer at the same time.

Definition

A Letter of Credit (LC) is an arrangement whereby a bank (the issuing bank) acting at the request & on the instructions of the customer (the applicant) or on its own behalf,i. Is to make a payment to or to the order of a third party (the beneficiary), or is to accept & pay bills of exchange (drafts drawn by the beneficiary); orii. Authorizes another bank to effect such payment, or to accept & pay such bills of exchanges (drafts); oriii. Authorizes another bank to negotiate against stipulated document(s), provided that the terms & conditions of the credit are complied with.

Parties to the LC

i. Applicant The buyer who applies for opening LCii. Beneficiary The seller who supplies goodsiii. Issuing Bank The Bank which opens the LCiv. Advising Bank The Bank which advises the LC after confirming authenticityv. Negotiating Bank The Bank which negotiates the documentsvi. Confirming Bank The Bank which adds its confirmation to the LCvii. Reimbursing Bank The Bank which reimburses the LC amount to negotiating bankviii. Second beneficiary The additional beneficiary in case of transferable LCs

Confirming bank may not be there in a transaction unless the beneficiary demand confirmation by his bankers & such a request is made part of LC terms. A bank will confirm an LC for his beneficiary if opening bank requests this as part of LC terms. Reimbursing bank is used in an LC transaction by an opening bank when the bank does not have a direct correspondent/branch through whom the negotiating bank can be reimbursed. Here, the opening bank will direct the reimbursing bank to reimburse the negotiating bank with the payment made to the beneficiary. In the case of transferable LC, the LC may be transferred to the second beneficiary & if provided in the LC it can be transferred even more than once.

b) Bank Guarantees

A contract of guarantee is defined as a contract to perform the promise or discharge the liability of the third person in case of the default. The parties to the contract of guarantees are:i. Applicant: The principal debtor person at whose request the guarantee is executedii. Beneficiary: Person to whom the guarantee is given & who can enforce it in case of default.iii. Guarantee: The person who undertakes to discharge the obligations of the applicant in case of his default.

Thus, guarantee is a collateral contract, consequential to a main contract between the applicant & the beneficiary.

a) Deferred Payments Guarantees

A deferred payment guarantee is a contract under which a bank promises to pay the supplier the price of machinery supplied by him on deferred terms, in agreed installments with stipulated interest in the respective due dates, in case of default in payment thereof by the buyer. As far as the buyer of the plant and machinery is concerned, it serves the same purpose as term loan.

b) Lease Finance

A lease is a contract between the owner of an asset (the lessor) and its user (the lessee) for the right to use the asset during a specified period in return for a mutually agreed periodic payment (the lease rentals). The important feature of a lease contract is separation of the ownership of the asset from its usage. Long-term, non-cancellable lease contracts are known as financial leases. The essential point of financial lease agreement is that it contains a condition whereby the lessor agrees to transfer the title for the asset at the end of the lease period at a nominal cost. At lease it must give an option to the lessee to purchase the asset he has used at the expiry of the lease. Under this lease the lessor recovers 90% of the fair value of the asset as lease rentals and the lease period is 75% of the economic life of the asset. The lease agreement is irrevocable. Practically all the risks incidental to the asset ownership and all the benefits arising there from are transferred to the lessee who bears the cost of maintenance, insurance and repairs. Only title deeds remain with the lessor. Financial lease is also known as capital lease. In India, financial leases are very popular with high-cost and high technology equipment.

c) Hire Purchase Finance

Hire purchase is a purchase of an asset in which customer makes down payment and finance rest of the amount through financial institutions or bank. On rest of the unpaid amount he pays interest at a certain pre-described rate of interest. After making complete payment the asset becomes the legal right of customer. With a hire purchase agreement, after all the payments have been made, the business customer becomes the owner of the equipment. This ownership transfer either automatically or on payment of an option to purchase fee.

Loan Guidelines & Objectives of Punjab National Bank

The prime objectives of the Loan Policy of bank :

The credit management & Risk policy of the bank at the macro level is an embodiment of the banks approach to understand, measure and manage the credit risk and aims at ensuring sustained growth of healthy loan portfolio while dispensing the credit and managing the risk. This would entail educing exposures in high risk areas, emphasizing more on the promising industries/ productive sectors

Punjab National Bank Time Norms for disposal of Loan Applications

To facilitate timely disposal of application, the bank has launched MSME Credit scoring Model live at all the branches. The following time norms should be adhered strictly:

Upto Rs.2 Lakh2 weeks

AboveRs.2 Lakh and upto Rs.50 Lakh4 weeks

AboveRs.50 and upto Rs.100Lakh5-6 weeks

Above Rs. 100 lakh and upto Rs. 100 crore6-7 weeks

Above Rs. 100 crore8-9 weeks

SME Cell of Punjab National BankTo drive the growth of MSME credit, the Bank has adopted a new business model by establishing SME Cells for centralized processing and sanction of MSME credit proposals falling beyond the sanctioning powers of the branches. The model envisages the following distinct advantages:

Faster decision and delivery of credit. Focused approach for capturing the business and catering to MSME sector. Efficiency in credit appraisal, as the SME Cell is handling exclusively MSME Credit. Effective utilization of skilled manpower and developing specialization Relief/support to branches for processing high value proposals Exclusive marketing team to source the proposals and effective forward linkages.

They are located in the premises of the respective Circle Offices

Roles and responsibilities of SME Cell

a. Shall adhere to all credit policy and operational guidelines, enumerated in the manual of instructions/Circulars issued from time to time. b. Shall process/handle the credit proposals falling beyond the branch powers and ensure disposal of the same within the stipulated time frame duly adhering to the relevant norms including credit risk assessment viz., fresh sanctions, renewal of existing limits (with or without enhancement), additional limit, adhoc limit, ratification/approval/ modification in the existing sanction terms and conditions, reduction in ROI/service charges by taking up with concerned authorities, debt restructuring of MSME accounts and is responsible for growth in business and monitoring of SME credit mobilized/handled through the Hub.c. Shall capture the business by financing the supply chain of corporate.d. Shall review (which is other than MTR) and monitor the accounts falling under the powers of SME Cell.e. Shall ensure that the sanction proceedings in respect of the proposals handled by it are issued promptly to the branches/clients.f. Shall keep HO updated about the performance of the Cell at periodical intervals.g. Shall have good liaison with industry associations, district industry centres, cluster development authorities, trade fair authorities etc, for promoting Bank's loan products and increasing MSME credit exposure.

SME LENDING IN PNB :

AMOUNT OF LOAN

Term Loan (Need based). Working Capital Requirement Computed and Sanctioned at 20% of projected realistic annual turnover basis. Composite Loan Limit has been raised to Rs. 100 Lakh (for Term Loan and Working Capital).

APPLICATION

1. Simplified Loan Application Forms for convenience of borrowers.2. Online Application.3. Speedy Processing within specified time norms, i.e:-

COLLATERAL SECURITY

Advances upto Rs.10.00 Lakh without collateral security.

Advances over Rs.10 Lakh and upto Rs.25 Lakh, based on good track record and financial position, no collateral insisted upon.

Advances upto Rs.100 Lakh guaranteed under Credit Guarantee Fund Trust for Micro & Small Enterprises (for manufacturing & service enterprises) without collateral security / third party guarantee.

VARIOUS MSME SCHEMES:

1) Sarthak Udhyami : Scheme for financing Micro and Small Enterprises2) PNB Pragati Udhyami : Scheme for financing industry related Services/ Business Enterprises3) PNB Kushal Udhyami4) PNB Garage Yojana5) loans for setting up industrial Estates6) PNB Vikas Udhyami : Scheme for loans acquisition of ISO 9000 Series Certification7) SME Sahayog Scheme8) PNB artisan Credit Card : Scheme to provide hassle free financial support to Artisans9) PNB Laghu Udhyami Credit Card : a simplified loan delivery mechanism10) Scheme for advances to Small Road Transport Operators11) Scheme for advances to Owner-Driver of taxi cars, three wheeler, Station Wagons, Tempos, etc.

CHAPTER 4METHODOLOGY

METHODOLOGY - DATA COLLECTIONPrimary Data: Discussions with the Senior Manager, SME Cell (Credit and rehabilitation department), Circle Office, Chandigarh Questions and interviews with representative sample of officers and employees. Discussions with overseeing executive of SME & Priority Credit Group.Secondary Data : Various published sources like Credit Policy of the Bank, Term loan Manuals etc. Manuals of Instructions and Circulars issued by the Bank time to time. Websites of RBI, PUNJAB NATIONAL BANK, MSMEs, etc. Various newspapers, periodicals and published articles on the industry that is being studied.

Data Analysis & Presentation :Data Processing After gathering the required data from different sources, processing, determining the job specifications, the actual process of grading, rating and evaluating the job will be carried out. The job values will be translated into different grades to implement the Memorandum of Understanding signed with the Government.Tools & Techniques to be used: 1) Current RatioThe benchmark Current Ratio of 1.33 : 1 is always desirable, whereas it is felt that some relaxations need to be made in this regard in case of SMEs. They may be permitted to maintain a minimum current ratio 1:1 as against 1.25-1.33:1, stipulated for others. If there is deviation than stipulated range then the sanctioning of limit is permitted by a authority one level higher than the sanctioning authority. Classification of Current Assets and Current Liabilities under MPBF method would be based on extant RBI/Bank guidelines.

2) Debt: Equity Ratio

The following may be accepted as the benchmark in this regard: W/C Limits up to Rs.5 Crores to Micro & Small Enterprises : 4:1. W/C Limits over Rs.5 Crores to Micro & Small Enterprises:3:1. W/C Limits to Medium Enterprises:3:1.3) Debt Service Coverage Ratio

The benchmark accepted for this parameter is 1.50 which is desired and can be accepted at 1.25 in some cases with proper explanation for SME projects.

4) Fund flow Analysis

The fund flow analysis for a project is done to assess the short term need of finances which are met by long term sources available. The fund flow statement helps in assessing Net Working Capital and is considered satisfactory if the firm has its short term requirements fully met by long term sources and the firm do not faces any long term deficits.

5) Sensitivity Analysis

In this tool we analyze the impact of adverse developments on certain significant variables like DSCR, Sales, Net profit, etc. due to escalation in raw material cost, decrease in capacity utilization etc. with the help of this technique we can analyze various scenarios which can develop in case of contingencies and thus helps in understanding the viability of the project in stressed situation.

CHAPTER 5ANALYSIS & RESULTS

CASE 1MEGASTAR FOODS PRIVATE LIMITED is a private limited company formed on 28th November, 2011 registered with Registrar of Companies, Punjab and Chandigarh, Ministry of Corporate Affairs. Having registered office at Plot No. 807, Industrial Area, Phase-II, Chandigarh. In terms of the Memorandum & Articles of Associations, the main objects of the company are to carry on the business of running of Roller Flour Mill

Proposal at a Glance:Under the present proposal MEGASTAR FOODS PRIVATE LIMITED envisages to set up a Roller Flour Mill at Village Solkhian, Tehsil & Distt. Ropar, Punjab. The Proposed project shall be equipped with all facilities for the production

Cost of project and means of finance :

S.NO.PARTICULARSPROPOSEDCOST ALREADY INCURREDAs on 19.01.2013COST YET TO BE INCURRED

1Land53.8853.880.00

2Building136.4064.2272.18

3Plant and Machinery533.39 51.00482.39

4Misc. Fixed Assets1.400.001.40

5Preliminary and preoperative expenses32.885.8527.03

6Securities18.3917.890.50

7M.M. For working capital 206.0410.17195.87

TOTAL982.38203.01779.37

Means of Finance:

S. NO.PARTICULARSACTUAL AS ON 31.03.2012ADDITION PROPOSEDFUNDS ALREADY INUCTEDFUNDS YET TO BE INDUCTEDTOTAL COST

1Partners Capital156.69156.69

2Unsecured Loans1.991.99

3Term Loan50.6025.0025.0075.60

4Internal Cash accruals17.1413.263.8817.14

TOTAL209.2842.1413.2628.88251.42

Debt Equity Ratio : For expansion plan: 1.46 : 1For over all project: 0.43 : 1

Promoters contribution :For expansion plan: 40.67%For over all project: 69.93%

INFRASTRUCTURE FACILITIES:

LOCATION:The site is located at village solkhian, Tehsil and distt. Ropar, Punjab. The site map is enclosed for your reference. There is no problem in approach to factory.

Land : Party has purchased a plot of land area measuring 12 Bighas 1 Biswa or say 2.51 acres and the construction as per approved building plan has been started, the photographs for the same are enclosed. The party has obtained CLU from deptt. of Town and Country Planning Punjab. High tension line is passing over the said land and the party to get these lines shifted by applying to concerned authority before starting any construction as the Raw material godown is proposed under the HT line the photograph for the same is attached. In the CLU issued it is mentioned that no construction is to be done under H.T/L.T transmission electric lines if any passing through the site or shall get these lines shifted by applying to concerned authority. BM to get the legal opinion done from the advocate and ensure that the title is clear in the name of Company and no adverse features are there.

BUILDING: The building comprises of one main Raw Material godown which is proposed under H.T transmission line, one raw material godown for regular working of mill, one work shed for installation of machinery of flour mill. Party has proposed one more work shed for expansion in future. One finished material godown and office block. The party has changed the location of entrance gate which is not as per approved layout plan.Total building area is sufficient for housing the existing as well as machinery proposed under expansion program.

POWER:It is essentially required for the operation of plant and machinery, equipments and for the general purpose.The party has got sanction of power load for 495 KW form Punjab State power com. Ltd. The sanctioned load is sufficient for the said plant. The sanction letter is attached with the report.

Standby Arrangements:Party is not having any standby arrangement in form of Gen Set and not planning for any standby.

Water:The party has arrangement of their own bore well water supply and the water is also available from govt. supply line.

Machinery and Equipment:Installed set up of machine and proposed to be installed are sufficient for the production.

Raw material: The raw material required is wheat which is available in market; the promoters are already dealing in the current activity so no problem foreseen in purchase of raw material.

Capacity UtilizationThe proposed capacity utilization is as under:1st Year2nd Year3rd Year onwards

70%80%85%

The existing Kuber Flour Mill is running at 60% capacity utilization, Moreover the company is not having any standby arrangement for power supply. The party is has said that they will be selling the material to Nestle Thaliwan but no MOU has been signed so far. Keeping in view that the promoters are experienced in the activity and both the existing units are in profit we are assuming capacity utilization as under. Promoter has also cleared that they will be achieving production of 90-95 T.P.D for first year of production.

BREAK EVEN POINT ANALYSIS - The Break even point at 65.79% salesDebt Equity Ratio - The Debt Equity Ratio is 1.46Average DSCR - the Average DSCR is 2.66

SENSTIVITY ANALYSIS:

ParticularsDSCR

MaximumMinimumAverage

Normal2.086.422.66

On reduction in sales price by 5%-1.35-0.26-0.43

Above position reveal that project is more sensitive to increase in the sales price.

CASE II

SANCTIONING AUTHORITYMCCMDEDOthers

The proposal falls under the powers of COCAC I on account of restructuring of proposed exposure of Rs. 1311.26 lacs.

Reference No. / Date: 1488002012000026 DATED 27.12.2012

1. Name of the Borrower and BO & Controlling Office : M/s ANG Life Sciences (I) Pvt. Ltd. BO Sector 9 D Chandigarh Rs. In crores

GIST OF THE PROPOSALA. Sanction of Working Capital Limits with reduction from the existing level:-Restructuring of working capital limits under DRM SME :- (Rs. in lacs)ExistingProposed

2012-132013-14

FB300.00175.00200.00

NFB275.00275.00275.00

TOTAL 575.00450.00475.00

B. Sanction of FITL of Rs. 249.42 lacs being the amount of interest on WC limits Rs. lacs 64.70 lacs and Rs. 145.11 lacs on Term Loans till 30.09.2012 and further interest of Rs. 39.60 lacs on TL for next 6 months (upto 31.03.2013), repayable in 60 monthly installments on ballooning basis starting from October 2012. The interest on FITL be serviced as and when due. C. Reschedulement of TL existing TL of Rs. 586.84 lacs (TL I, II & III) principal outstanding as on COD i.e. 30.09.2012 repayable in 60 monthly installments with moratorium period of 12 months from COD i.e. first installments to start w.e.f October 2013.

C. Approval of ROI/ Service charges as under:-

FacilityExistingProposedApplicable rateIncome Earned

Last YearCurrent year upto_______

Rate of interestIntt. Non- Intt. Intt.Non-Intt.

CCBR +3.50%BR + 2.50% BR +3.50%6.88

TLBR +3.50%+0.50%TPBR + 2.50% + 0.50%TPBR +3.50%+0.50%TP0.00

WCTLNaBR+2.50% +0.50%TPNA

FITLNaBR + 1% +0.50%TPNA

Processing FeeAs applicable Rs. 225/- per lacs on FB and 50% of same on NFB limits0.791.47

Upfront FeeNANANA

Lead Bank FeeNANANA

Commission on NFBAs applicableAs applicable As applicable-0.23-3.54

Other charges, if anyAs applicableAs applicable As applicable

The account turned NPA as on 30.06.2011 and interest in the account has not been recognized as income during 2011-12 and during current year also. However, we are proposing the conversion of same into FITL.

D. Approval of other Issues, if any :

1. To permit the substitution of personal guarantee of Sh. Gian Chand Arora (NMs of Rs. 28.66 lacs) with that of Sh. Neeraj Gupta (NMs of Rs. 34.72 lacs) due to old age of Sh. Gian Chand Arora. 2. Allocation of CC (H) limit of Rs. 10 lacs each at BO: Basant Avenue, Amritsar and BO Baddi for operational convenience. 3. To permit the waiver of Intersol charges for transfer to/from main account to the accounts where limits are allocated vice-versa.

Whether fresh/renewal/ enhancementRestructuring of existing debts under DRM SME scheme by way of

Asset Classification as on 30.09.2012 and last PMS scoreSub Standard PMS rank not applicable.

Credit Risk Rating by Bank is ---------- indicating ------------ riskRatingDate of RatingScoreABSReasons for degradation

PresentPNB NS06.12.12NA31.03.12NPA-SS

PreviousA-14.12.1061.3531.03.10NA

Rating from External Agency (The external rating should be mapped to the internal rating)Facility ratedRatingDate of ratingRating AgencyRemarks

This is an NPA account, the rating from outside agency has not been got done and same will be stressed after the up gradation of the account.

Whether priority/non priority sector as per PS&LB guidelines (Latest being PS&LB/LBC/Codified Circular No. 11 dated 16.7.2011)Sub-sector may also be mentioned.MSME(Manufacturing) Medium (Non priority)

Whether Agriculture/Retail/ SME/Others (Please specify)Others

a) Whether Sensitive Sector Real Estate/Capital Marketb) Applicable Risk weightNA This is Sub standard account, NPA since 30.6.2011

Consortium/Multiple BankingSole Banking

Lead BankNA

PNBs Share %100%

Date of application Date of receipt of proposal At BO/CO/HODate of clarifications, if any, received at CO/HODate of submission of proposal Remarks Initially the firm submitted the proposal in February 2012 but the same could not be processed due to non submission of complete information. Later On the firm submitted the proposal, in October 2012 and the complete proposal in all respect along with required information on 5/12/12

Date of last sanction & authority/In Principle Consent25.1.2011, CH, CO chd.

Customer ID No.CFF000132

Activity code (as per ladder)7309

Justification & Viability of the Project:

i) In terms of LA Cir. 14/2011 (DRM SME), the viability of the project has to be established before going for restructuring. In this regard, it is submitted that the TEV of the project was conducted by Sh. B. S. Sondhi, Sr. Manager (Industry), Circle Office; Chandigarh who vide his report dated 05.12.12 has stated that the unit is technically feasible and economically viable. He has submitted a detailed report, a copy of which is enclosed with this proposal and the same is an integral part of the proposal. We concur with the views submitted by Sr. Manager (Industry). The detailed projections are furnished as per annexure. The compliance of other viability criteria as per LA Cir 14/2011 dated 31.1.2011, DRM for SMEs is as under:-

PARTICULARSDRM for SMEsCompliances

Minimum Average DSCR1.25The average DSCR is 2.13 times

Maximum period within which the unit should become viable7 yearsThe unit is viable.

Maximum repayment period of all term loans/FITL/WCTL.10 yearsThe project is viable and all proposed loan shall be repaid in full within a maximum period of 7 years from the cutoff date of restructuring...

Minimum Promoters Contribution of which at least 50% must come upfront.15% of the long term requirement of funds plus the monetary value of the sacrifices made by the lendersNo fresh term loan has been proposed and the promoter has contributed Rs. 148.53 lacs by way of unsecured loans after 31.3.2011 and up to 30.09.2012. These unsecured loans have been contributed from friends and relatives. The company has deposited Rs. 251.84 lacs in due date after the classification of account as NPA as on 30.60.2012 and we have issued the fresh LCs of Rs. 200 lacs. So the party has already inducted the sufficient funds in the company by way of their contribution, resulting in the reduction in the CC limits by Rs. 75 lacs approx.

ii) The CIBIL data in respect of director(s) and guarantor(s) as well as Company has been drawn. Nothing adverse has been observed except some credit card/personal loan overdue. While extracting CIBIL of Company, NO Company found has been extracted meaning thereby that the loan details of the PNB in respect of Company has not been feeded into the system.iii) Although the past conduct of the Company was not satisfactory and the reasons for the same was observed as dispute among the directors. However with the taking over the charge of the company by Shri Rajesh Gupta and his family, exclusively, it is hoped that the conduct of account will be satisfactory in future.In view of the above the restructuring proposal of the party may please be considered on the existing terms and conditions. The calculated DSCR is as under :- (Rs. in lacs)2013201420152016201720182019Total

Net profit after tax-100.73171.32253.41354.77463.13541.17540.092223.17

Depreciation68.7470.0472.1476.5484.3493.34102.84567.98

Interest on Term Loan122.34107.4994.1075.6454.0931.225.21490.09

Add: Intt. on WC limits upto 30.09.12 (converted into FITL)38.68

Total funds available129.04348.85419.65506.94601.56665.73648.143281.23

Repayment of term loan0.0061.82118.68164.91164.91188.89137.05836.26

Interest on Term Loan122.34107.4994.1075.6454.0931.225.21490.09

Less : FITL 108.76108.76

Repayment of unsecured loans026.0020.0030.0075.0050.00125.00326.00

Total Debts to be served13.58195.32232.78270.55294.00270.11267.261543.59

DSCR9.50*1.791.801.872.052.462.432.13

Average D.S.C.R.2.13

*DSCR is 9.50 during current year; this is mainly on account of the deferment of the interest by creating FITL.

The average DSCR is 2.13:1, which is satisfactory. A)Justification for working capital sanctioni) Assessment of Fund Based Limits (Rs. in lacs)1. Justification for Fund based working capital limits proposed : (Rs. in lacs)

31.03.1231.03.1331.03.14

ActualEstimatedProjected

Sales677.081545.151931.44

Cost of Production839.401649.331833.97

Cost of Sales877.181697.881823.83

Purchases524.641218.841451.00

NWC Projected/Actual12.30155.92219.45

Current Ratio1.021.331.38

The unit started commercial production on 27.09.2008. They had in the past already achieved sales of Rs.677.08 lacs up to September 2012 and further Rs. 175.16 lacs and Rs.194.87 lacs during October and November 2012 respectively. Total sales achievements up to November 2012 come to Rs. 1047.11 lacs. During the current year the party has estimated sales of Rs.1545.15 Lacs for the current year and Rs. 1931.44 lacs for next year. The company has submitted that they have already achieved the sales of Rs. 10.47 Crore till 30.11.2012. In view of the above, the projected sales are acceptable. The unit of the company was not functioning smoothly during last year due to the change in management and the year 2011-12 may not be treated as the base for calculations.

PBF Calculation is as under:- Rs in lacs 31.03.201231.03.1331.03.14

Actual EstimatedProjected

Level of Current Assets

Stock- RM112.9783.4899.38

Stock WIP70.6054.4464.40

Stock FG98.8456.3466.48

Receivables231.87327.77409.20

Total514.28522.03639.46

Other Current Assets

Cash/Bank35.7663.8666.49

Advances to suppliers

Others61.6945.0085.00

Total OCA97.45108.86151.49

Level of Current Liabilities

Creditors223.94291.56361.70

OCL10.228.429.80

Total CL234.16299.98371.50

Holding level of CA and CL (Months)31.03.12Actual Last Accepted31.03.13Estimated31.03.14Projected

RM 2.581.000.830.83

SIP1.011.000.500.50

FG1.350.510.500.50

Receivables4.113.802.502.50

Creditors5.123.003.003.00

Justification of Norms:- Stocks:-Raw Material The projected level of RM is 0.83 months as against past accepted of 1.00 months, which is justified. Hence accepted for the purpose of PBF,

SIPThe projected level of SIP is 0.50 months as against the last accepted of 1.00 months, which is justified. Hence accepted for the purpose of PBF

FGThe projected level of FG is 0.50 months as against the last accepted level of 0.51 months, which is justifiable, hence accepted.

Receivables:- The projected level of debtors is 2.50 months as against the last accepted level of 3.80 months, which is justified. Hence accepted for the purpose of PBF.

OCA: They have been accepted in lump sum and comprise of cash/bank balances, advances to suppliers, advance income tax and other current assets. The projected level is lower as compared to last year.

Creditors:-The creditors have been accepted at 3.00 months level as compared to last year level of app. 5.12 months level and last accepted level of 3 months. The company has informed that due to shortage of funds it had not been able to pay the price of goods purchased on credit. But now they are reducing the level of creditors and also enable it to purchase at competitive prices and sometime it can also avail some discount which will also improve the credibility and profitability of the company. Hence the projected level of creditors has been accepted.

Other CL:- The level of OCL projected is also reasonable. Hence the projected level is justified.PBF is worked out as per traditional method

S.No.2012-132013-14

Estimated Projected

1Chargeable Current Assets522.03639.46

2.Other Current Assets108.86151.49

3.Total Current Assets630.89790.95

4.Other Current Liabilities299.98371.50

5.Working Capital Gap330.91419.45

6.Margin Requirement @25% of TCA157.72197.74

7.NWC Projected155.92219.45

8.Col.5minus 6173.19221.71

9.Col.5 minus 7174.99200.00

10.Maximum PBF175.00200.00

Thus PBF of Rs.175.00 Lacs is calculated for 2012-13 and Rs.200.00 Lacs for 2013-14. We are proposing that the PBF for the year 2013-14 will be released with prior permission of CO after obtaining the PBS / ABS as at 31.3.13 and ensuring that the key figures are in line with the projections submitted.

b) Justification for Non Fund based limitsNon fund based Limits:-(Rs. in lacs)2012-13

Annual Purchases1218.84

Purchases against LC (80%)975.07

Monthly Purchases81.25

Usance Period (Mths)3.00

Lead Time(Mths) Average 0.50

Total Time (Mths)3.50

LC Required284.39

LC Recommended275.00

Overall usance is taken for 3 monthsJustification of LC:Purchase against L/C is considered to be about 80% of the total purchases.LC is required to purchase raw material from supplier in and outside India to maintain continuous supply of RM. Hence we are proposing ILC/FLC (DA/DP) limit of Rs. 275.00 lacs. Further, we recommend margin of 15% with usance on ILC and FLC at 90 days and 180 days respectively, which is according to last sanction. So it is recommended.

c) Justification for FITL The account is NPA since 30.06.2011 and the RI/DI in the account as on 30.09.2012 is as under:-(Rs. in lacs)

NatureLimitInterest Overdue #Principal Overdue

CC(H)300.0064.700.00

TL-I457.50106.33128.87

TL-II164.8033.9041.15

TL-II45.004.886.51

Total209.81175.53

# includes DI of Rs. 12.25 lacs and Penal Interest of Rs. 20.39 lacs and the same has been taken into consideration in respective account while calculating the interest.The party has requested for conversion of the above outstanding interest as on 30.09.2012 into FITL and also requested for funding the further interest on TLs upto 31.3.2013 which is approx of Rs. 39.61 lacs totaling to Rs. 249.42 lacs. The FITL is proposed to be repayable in 60 monthly installments on ballooning basis starting from October 2012 i.e. one year moratorium from COD. The interest on FITL @ 12% be serviced as and when due. In view of the fact that as proposed in the TEV study report, we recommend for sanction of FITL of Rs. 249.42 lacs. d) Justification for Rephasement of the Term Loans.

The company is presently availing the following 3 term loans :- (Rs. in lacs)NatureDate of sanctionLimitLedger o/sPrincipal Overdue

TL-I18.09.06457.50*430.06128.87

TL-II18.02.08164.80*137.2741.15

TL-II25.01.1145.0019.516.51

Total667.30586.84175.53

*Both of these term loans were rescheduled vide DGM CH sanction dated 31.03.2009. Due to the problems as enumerated elsewhere in the proposal, the company could not service the TL promptly and the account is in NPA category since 30.06.2011. The company has requested for reschedulement of the TL installments. The TEV study has proposed the repayment of the TL in phased manner as under :- (Rs. in lacs)

Year No. of Installments Amount of instalment Total

2013-1467.34x644.01

2014-15127.34x1288.03

2015-16129.78x12117.37

2016-17129.78x12117.37

2017-18129.78x12117.37

2018-1966x17.12102.70

Total 586.85

The interest on TL upto 31.3.2013 is proposed to be funded as FITL. The interest after 01.04.2013 will be serviced as and when levied. The ROI proposed on TL is 13.50% (BR+2.50%+0.50%TP).

13.Pricing

(a) Justification

The applicable ROI in the account is BR +3.50% as per the last sanction, as the rating as per ABS of 31.3.2010 is A and account has turned NPA as on 30.06.2011 and the rating as per the module is PNB-NS and calculated rate for A rated borrower is BR +3.50% for SME borrowers till the account is upgraded and credit risk rating as per the Credit Risk rating module is done. However at the time of last sanction concession of 0.5% from applicable rate of interest was allowed to the party which was withdrawn from the date of classification of account under NPA category. The ROI proposed as per the restructuring scheme is as under:-

ParameterRate of interest proposedApplicable Proposed concession

Working CapitalBR +3.50%BR+3.50%Nil

FITL BR+1%+0.50%TPBR+3.50%+0.50%TP2.50%

Term Loan BR+2.50%+0.50%TP1.00%

The proposed concessions falls within the vested powers of COCAC I. In view of the fact that the company is in liquidity problem and their accounts are NPA, we recommend for approval of the above ROI. The proposed concession will be with right to recompense.

(b) ROI/other charges stipulated by other participating banks, if applicable : NA

14.Other Issues not discussed elsewhere

A. To permit the substitution of personal guarantee of Sh. Gian Chand Arora (NMs of Rs. 28.66 lacs) with that of Sh. Neeraj Gupta (NMs of Rs. 34.72 lacs) due to old age of Sh. Gian Chand Arora. Sh. Gian Chand Arora, is the father of Sh. Marut Arora, who was previously the director of company. The company has requested that the guarantee of Sh. Gian Chand Arora be substituted with Sh. Neeraj Gupta. As Sh. Marut Arora has already resigned from the management of the company and his father Sh. Gian Chand Arora having age of 60 years is not ready to give the guarantee rather stressing for the release of the guarantee. Sh. Arora is also bed ridden. In view of the above, the company has requested for substitution of the personal guarantee of Sh Gian Chand Arora (NM of Rs. 28.66 lacs) with that of Sh. Neeraj Gupta (NMs of Rs. 34.72 lacs). In view of the fact that the guarantee is being substituted with the person having better NMs (including IP). In view of the genuine reasons explained by the party, we recommend for the substitution of the personal guarantees as above.

B. Allocation of CC (H) limit of Rs. 10 lacs each at BO: Basant Avenue, Amritsar and BO Baddi for operational convenience. The company is having their factory at Baddi and the corporate office at Amritsar. The company has requested for allocation of limits of Rs. 10 lacs each at BO Baddi and BO Basant Avenue, Amritsar for their operational convenience. In view of the genuine request of the company, we recommend for allocation of the limits as above.

C. Waivement of intersol charges in respect of accounts where the limit is being allocated i.e Baddi and Basant Avenue, Amritsar and BO Sector 9-D ChandigarhIn view of the allocation of limits at Baddi and BO: Basant Avenue the company has requested for waivement of Intersol charges for the transactions to be entered between/among all the above 3 accounts and which is also justified.

CHAPTER 6INTERPRETATION

CASE 1:

SWOT ANALYSISStrengths The promoters are Qualified and Experienced.

Weakness: Presently promoters are depending upon existing customers and trying to get orders from Nestle Thaliwan, As such promoters may face problem in sale of product at such a high level.

Opportunities Opportunity to improve quality standards. To explore themselves at higher level.

Threats Market is highly competitive. Changes in govt. policies.

CASE IIStrengths & Weakness with mitigants, if any

Strengths:

Company has set up a state of art line of production and has well qualified quality control and assurance staff. The company is an established player in the Pharma sector having good track record till 31.3.2011. After takeover management has accelerated efforts to tie-up with new companies for getting more business. The company has set up a separate marketing division for taking care of marketing of the products and requirements etc. The unit is set up in township where HP Govt. has provided all required infrastructure facilities with incentives like capital subsidy, excise duty and sales tax exemption for 10 years and availability of cheap electricity. Weaknesses: Two promoter directors conversant with the Pharma sector have resigned and remaining promoter director is from the building construction sector. Newly inducted director also has no experience in this sector.

Mitigants: The Rajesh Gupta is technocrat and running a construction company successfully under his proprietorship since long. He is associated with company since inception of this company and fully involved him in this company. With the passage of time he attained good experience in Pharma sector also and the same is evident from the 1st six months working of the current financial year.

Opportunities:

The companys has invested fresh funds after takeover of management to upgrade its in house testing facilities and to qualify WHO norms which will help the company to step in export market in future.

Threats: Inherent threat of competition associated from peer sector companies in operation in the area. Mitigates: The company has installed latest technology plant and has edge over other companies due to new technology production facilities.

CHAPTER 7CONCLUSIONS

CASE STUDY IA. The parameters on which pre-sanction appraisal has been based are subject to variation at very fast pace. Hence, post sanction and post disbursement period should be reviewed at quick intervals and any requirement, which has not been covered in above appraisal, should be immediately looked into and corrective measures are taken.

B. The unit will employ professional and experienced work force for machines proposed to be installed under expansion program.

C. The genuineness of the data submitted by the party please be verified.

D. Branch to ensure that matching Electric Power Load is installed at unit site. All local certificates/permissions to be obtained and held on record.

E. As discussed in report that High tension line is passing over the said land and the party to get these lines shifted by applying to concerned authority before starting any construction as the Raw material godown is proposed under the HT line the photograph for the same is attached. In the CLU issued it is mentioned that no construction is to be done under H.T/L.T transmission electric lines if any passing through the site or shall get these lines shifted by applying to concerned authority. Before sanction/disbursement BM to ensure compliance of instructions issued by deptt of Town and Country Planning Punjab.

CASE IIIn view of the above, we recommend for the approval of the following facilities for restructuring of account under DRM-SME:-

A. Sanction of Working Capital Limits with reduction from the existing level:-Restructuring of working capital limits under DRM SME :- (Rs. in lacs)ExistingProposed

2012-132013-14

FB300.00175.00200.00

NFB275.00275.00275.00

TOTAL 575.00450.00475.00

B. Sanction of FITL of Rs. 249.42 lacs being the amount of interest on WC limits Rs. lacs 64.70 lacs and Rs. 145.11 lacs on Term Loans till 30.09.2012 and further interest of Rs. 39.60 lacs on TL for next 6 months (upto 31.03.2013), repayable in 60 monthly installments on ballooning basis starting from October 2012. The interest on FITL be serviced as and when due.

C. Reschedulement of TL existing TL of Rs. 586.84 lacs (TL I, II & III) principal outstanding as on COD i.e. 30.09.2012 repayable in 60 monthly installments with moratorium period of 12 months from COD i.e. first installments to start w.e.f October 2013.

D. The approval of ROI on the WCTL, TL as discussed under column no. 13 of the board note :-

ParameterRate of interest proposedApplicable Proposed concession

Working CapitalBR +3.50%BR+3.50%Nil

FITL BR+1%+0.50%TPBR+3.50%+0.50%TP2.50%

Term Loan BR+2.50%+0.50%TP1.00%

CHAPTER 8EXECUTIVE SUMMARY

The project deals with various aspects related to the credit appraisal process. It deals with various facilities provided by the bank to its borrowers and other related facilities. It includes all the details which I learnt from the two months duration of my internship.

In the introduction chapter, MSMEs definition, its contribution in the countrys growth, security norms, objective, relevance and scope of this project report has been included in brief. The second chapter includes about the introduction of Punjab National Bank, in which I have done this project. Next chapter is review of literature, which includes principles of lending, types of lending, loan guidelines and objectives of Punjab National Bank, information of SME Cell of Punjab National Bank, details about term loan, etc.

The fourth chapter is about the methodology adopted in conducting this project. The next chapter includes the analysis and results. Under this three case studies are included. The next part includes the interpretation of the case studies included in the previous part. This part includes the work done in the previous part. The next chapter includes the conclusions of these case studies.

On the basis of the previous work done in the report, recommendations, implementation strategy, suggestions for future research and bibliography are followed.

CHAPTER 9ISSUES

MSME FINANCING AND CREDIT TRENDS AND ISSUES

1.1 Tariff InversionTariffs are not entirely free from inversion, that is, higher rates on inputs like steel, plastics, energy, and metals semi-manufactured than on finished products. This inversion which, since the reform was at its peak in the late 1990s, has declined but not disappeared. Inversion particularly hurts small firms since they have a comparative advantage in .manufacturing. in its original sense. Additionally, theveryhigh uncompensated costs of energy, especially electricity and petroleum - based energy, which are not vetted even for export industries, impose large costs on location of manufacturing.

1.2 Exchange Rates Not Aggressive EnoughExchange-rate policies have been particularly hurtful to small firms, especially in areas dominated by SMEs, like textiles. Theeffective exchange rate of the rupee has been higher than the value that prevailed at the end of the stabilization period. If it can move back to those values the small firms of export can rise, as can manufactured goods production. It is worth remembering that export-led growth economies greatly under- valued their currencies for long periods to prime the export engine.

1.3 Erroneous Sickness Data In reporting the data on lending to small firms banks include loans made out under many sop programs of the Planning Commission. Most of these are giveaways at best. Naturally, this magnifies the scenario of overall sickness of and loans outstanding against small firms. In reality, the nonperforming loans outstanding against small firms are much smaller than in lending to medium and large firms. Such erroneous data bases not only outsiders against lending to small firms but the bankers themselves.

1.4 Underdeveloped Venture Capital Industry Compounding the problem of non-availability and high cost of credit is the fact that venture capital institutions in the country are shy of exploiting emerging entrepreneurial opportunities for small firms. They suffer from a banking mindset, bureaucratic norms, and target orientation, and focus on the growth phase of enterprises.

1.5 Exit SystemConsidering the volatile market situation in India, businessmen particularly in the MSME sector are walking a tight financial rope. Amidst uncertainties, entrepreneurs need government help in exiting a business when it is no longer financially viable or at least after he has spent his last rupee to keep it running. About a third of small industries at the all India level are classified as sick. According to the third All India Census of SSIs 2001-02, 11 States of the 35 States and Union Territories share among themselves 89% of the sick and incipient units and 9 among them have 69% of the units closed. These numbers speak of the units that have entered the books of the financing institutions. There are many who did not borrow but fell sick. They have assets like the land and machinery, which are locked for decades without remedy. A rough estimate of such assets in the industrial estates alone would be 5-6% of the GDP!! The acknowledged problems common to small enterprises as a whole persisting for over four decades include: lack of demand, lack of access to finance, non-availability of raw material, inadequate and high cost infrastructure, low capability for technological up-gradation etc. The direct intervention in the credit market for SMEs did some good, but it has also engendered the growth due to the banks lending to some sectors that lead to avoidable portfolio risks. Banks carry now as much as 30-35% in the unacknowledged sick industries portfolio. RBI Annual Reports on sickness and rehabilitation, despite redefining sickness and reformulating guidelines for rehabilitation, indicate that the banks are averse to take on rehabilitation.

CHAPTER 10RECOMMENDATIONS

1. Mechanism for reminder of documents submissionThere have been numerous instances where the borrower is not clear about which document needs to be submitted and when. A list is provided by the bank for the same yet there are many borrowers who do not submit the required documents on time. These shortcomings come out during the auditing process after which the banks contact the concerned borrower to obtain the required documents and reports. One of the most common document which is found missing is the Quarterly Performance Report (QPR). Banks must come up with a mechanism to alert the borrower if the report has not been submitted and deadline is approaching. This will ensure that the bank will be updated about the borrower throughout the period when the borrower has taken debt from the bank. It also helps keep a tab on the activities of the borrower and instills discipline in the borrowers. This also saves time of the auditor and improves the efficiency of the bank.

2. Differential interest ratesIf possible different benchmarks must be set for different industries belonging to different sectors. Similarly, different interest rates must be applied to different sectors since there is usually a very vast difference between different sectors. Geographical locations must also be looked at while coming up with the interest rates. Using similar rates for different sectors as well as different locations impedes the uniform growth of the economy. 3. Overcome information asymmetry Accurate information about the borrower is a critical input for decision-making by banks in the lending process. Where information asymmetry (a situation where business owners or managers know more about the prospects for, and risks facing their business than their lenders) exists, lenders may respond by increasing lending margins to levels in excess of that which the inherent risks would require.

However, the sheer ticket size of SME lending makes it unviable for banks to invest in development of information systems about SME borrowers. In such situations, banks may also curtail the extent of lending even when SMEs are willing to pay a fair risk adjusted cost of capital. The implication of raising interest rates and/or curtailing lending is that banks will not be able to finance as many projects as otherwise would have been the case.

The length of the relationship between a bank and its SME customers is an important factor in reducing information asymmetry, as an established relationship helps to create economies of scale in information production. A relationship between a SME and a bank of considerable duration allows the bank to build up a good picture of the SME, the industry within which it operates and the caliber of the people running the business. The closer the relationship, the better are the signals received by the bank regarding managerial attributes and business prospects.SMEs are required to provide accurate and qualitative information to the banks for them to undertake a reliable risk assessment. Accurate risk assessments obviously rely upon good information regarding the SME and its prospects. Hence, it is suggested that banks should make efforts to encourage SMEs to improve the quality of information provided.

4. NPA Reduction Insufficient data on the SMEs, the lack of credible published information about their financial health, the high vulnerability of small players in a liberalizing market and the inadequacy of risk management systems in banks are also factors leading to higher NPAs and lower profitability than potential in SME lending. This can be overcome by collection of authentic data on the SME segment, educating the enterprises on the need for reliable financial data, evolving suitable risk models and close monitoring of accounts by the bank.

5. Adopt cross-country perspectives Increased competition in financial markets in developed countries has led several Governments and Banking Regulators to encourage banks and other financial institutions to launch a number of initiatives to serve the financing needs of SMEs effectively. Some of these initiatives (along with necessary government and regulatory support) include the promotion of venture capital; receivables financing; leasing finance; soft loans, grants, and guarantees for entry into public tenders; setting up of special financing companies with state participation; micro-finance programmes, etc. For instance, New Zealand has introduced a scheme called BIZ Investment Ready, which targets innovative businesses and entrepreneurs seeking funds to expand, diversify or commercialize a new concept. The European Union has devised a scheme to facilitate contacts between SMEs and banks and other financial institutions, by developing a code of good practice for SME lending. The Philippines has instituted a financing program called SME Force (SME Financing for Organizationally Competent and Excellent Franchise Businesses), which is a franchise development financing facility that will be implemented with the participation of franchiser organizations

6. Better training There is a critical need to devote substantial resources to improving the skills and capabilities of banks' lending officers, especially with regard to the analysis of the SMEs' financial statements. Understanding the nature of the borrower's business and the cash-flow required is paramount to preventing the creation of NPAs.

7. Innovative Delivery channels They need to improve their delivery platforms by using Internet banking, mobile banking and card-based platforms for delivery of transaction-banking as well as credit products, and enhance the service element. SMEs look for convenience and simplicity in their banking requirements and banks should deliver these through an effective use of technology

8. Updated policy The Bank should keep on revising its Credit Policy which will help Banks effort to correct the course of the policies. The Chairman and Managing Director/Executive Director should make modifications to the procedural guidelines required for implementation of the Credit Policy as they may become necessary from time to time on account of organizational needs.

9. Timely disbursement The time period taken by the banks to sanction the limits should be significantly reduced to allow the borrowers to make use of the credit when the need is most felt.

10. Monitoring

Closely monitoring and inspecting the activities and stocks of the borrowers from time to time can avoid the misuse of working capital

11. New facilities Bank must extend working capital finance through non-fund based facilities.

12. SME Cells

Specialized SME Cells should be available in thrust areas in order to promote manufacturing and industrial units in a specific industrial area. Thus SME Cells must be opened at prominent places where there is huge opportunity of customers seeking loan facilities for their various needs.

13. 4-C Approach

Banks are now better equipped to handle the needs of the SME sector due to the improvement in their technology and risk management. It helps the bank to recognize SME clusters by adopting the 4-C approach of: Customer focus, Cost control, Cross-selling and Containing risk.

Bank recognizes the important role of Micro, Small and Medium Enterprises (MSME) in the economic development through their contribution to GDP, export and employment generation. Towards this, as at the end of March 2013, credit to MSME sector was 61,478 crores constituting 22.07% of total credit.Without adequate bank finance, SMEs cannot acquire or absorb new technologies nor can they expand to compete in global markets or even strike business linkages with larger firms. Similarly, banks cannot consider the financing of SMEs as a viable option unless their priorities are addressed by SMEs. In this regard, SMEs should be assisted largely by public initiatives involving participation of the banking industry. In India, however, the various public initiatives for promoting finance to SMEs have not been as successful as envisaged because there has been some overlapping of regional and national initiatives. Efforts to harmonize the standards and practices, therefore, need to be properly coordinated to facilitate SME finance further.

CHAPTER 10IMPLEMENTATION STRATEGY

The implementation strategy which is followed in banks is through the circulars and policy guidelines which are being forwarded to concerned departments and then a follow up is being done that whether the guidelines issued are being followed. This methodology is successful in banks due to presence of strong communication system with the help of the good connectivity of each level with different levels and effective organization setup which caters to well established implementations of the rules and guidelines.Thus recommendations provided above can be implemented with the help of improved policies with the help of deeper research and analysis of customer and banks own requirements. In case of credit Appraisal process various committees have provided their recommendations from time to time and further the regulator is expected to continuously focus on improvements that can be made in this area with help of analyzing various peculiarities regarding rate of interest and certain sectors which need more focus.

CHAPTER 11SUGGESTIONS FOR FUTURE RESEARCH

My project work is mainly concerned with the system adopted by Punjab National Bank for appraisal of credit proposal of MSME borrower. As per my findings system & guidelines are perfect but there is scope of improvement in implementation. Further study can be made to reduce the time taken from canvassing a MSME borrower to sanction loan from branch through our RO/CO/HO.

Further research can also be made in field of analysis & assessment of need of the borrower in order to provide full support in growth of MSME sector of the economy.

I have listed some of the problems faced by MSMEs in order to obtain finance for their smooth operation. I have also listed some likely solutions which might come in handy to avoid the problems faced by the MSMEs. But, how to implement these solutions in the practical scenario has not been discussed. Future research in this regard will be beneficial to both, the bank as well as the borrowers. It will also help the government in achieving the desired results and expedite the growth of the economy.

Similarly, I have listed that the bank and the borrower need to be alerted in case of an incomplete or irregular submission of documents by the borrower. This can be implemented with the help of a software application. How this can be implemented can be a part of future research.

I have recommended that there be different benchmarks for different sectors of the economy. An analysis on whether this is feasible or not and how this can be implemented may be studied in detail.

CHAPTER 12BIBLIOGRAPHY

List of websites:www.rbi.orgwww.pnbindia.inwww.planningcommision.nic.inwww.indiabudget.nic.inwww.web.worldbank.org.www.google.comwww.msme.gov.in

List of circulars of Punjab National Bank on: Credit Policy Delegation of Power Rate of Interest Working Capital Finance Manual RBI Master Circular on Priority Sector RBI master Circular on MSMEs RBI Master Circular on Micro lending Daily Newspaper Credit Reports of two MSME firms Management of Bank Lending book- Dr. V. S. Kaveri

5 | Page