ContentsChapter 121.1 INTRODUCTION TO MSMEs IN INDIA21.2
LITERATURE REVIEWError! Bookmark not defined.1.3 Role of SBI in
Financing SMEs31.4 Definition of MSMEs21.5 Need for the Study31.6
OBJECTIVES OF THE STUDY31.7 METHODOLOGY ADOPTED3Chapter 232.1 How
SBI is progressing in SME lending sector32.2 Difficulty in fund
raising32.3 Procedural aspects of appraisal, sanction and disbursal
of MSME loan proposals at SBI32.4 Organization structure32.5 Policy
guidelines in financing SMEs32.6 TYPES OF CREDIT FACILITIES3Chapter
-33Problems of financing MSME3Chapter 43Case
study3Chapter-53Recommendation3Bibliography3
Chapter 1Introduction
1.1 Corporate Salary Account
Corporate Salary Account is one of the most popular retail
products of a bank. A corporate salary account is convenience to
both the employer who arranges the account and operates it for
salary disbursement and the employee who uses it for his/her
banking purposes. A corporate salary accounts advantages are many-
Proficient and well-organized salary disbursal process. The
facility of instant and online transfer of salary which helps in
quick access to funds. It involves less man power and involves
lesser amount of documents to maintain for office record Most of
the banks and financial institutions maintain their dedicated staff
to take care of the needs and requirements of their corporate
clients.It is easy to maintain the documents for each e-transaction
which is easy to retrieve on requirementAlthough Corporate Salary
Account is introduced by the employers for the smooth processing of
salary and wages, the many benefits that the employees enjoys are
mentioned below.Corporate salary accounts are by default, Savings
Accounts. Salary Accounts clearly reflect the net income of an
individual. At times, these records also aid in availing loan
products from the bank like home loan, car loan, mortgage loan,
etc.In contrast to a regular savings account where the account
holder is liable to maintain a minimum balance, corporate salary
accounts are zero balance accounts which does not require the
account holder to maintain a minimum balance in his/ her
account.Corporate salary account holders are provided with benefits
like ATM Card/ Debit card. Some of these Debit cards are can be
used on international purchases as well!Apart from Debit card, the
account holders are given cheque books free of cost. The cheque
book renewal facility is available on request in case of holding a
corporate salary account. A corporate salary account is advised for
corporations who prefer a hassle free banking experience for their
organisation and their employees.
1.2 Definition of MSMEsThe Micro, Small and Medium enterprises
have been defined in the Micro, Small and Medium Enterprises
Development (MSMED) Act which was enacted by the Government of
India on June 16, 2006 and notified on October 2, 2006. With the
enactment of MSMED Act, the paradigm shift that has taken place is
the inclusion of the services sector in the definition of MSMEs
apart extending the scope to medium enterprises. According to the
MSMED Act, 2006, there are two categories of enterprises, namely,
Industrial and Service enterprises. Industrial enterprises are
engaged in manufacture or production, processing or preservation of
goods and service enterprises are engaged in providing or rendering
of services such as small road and water transport operators, small
business, professional and self employed persons, etc. Industrial
enterprises are further classified into Micro, Small and Medium on
the basis of original investment in plant and machinery (excluding
the cost of land and building and other items specified by the
Ministry of Small Scale Industries). Service enterprises are also
further classified into Micro, Small and Medium on the basis of
investment in equipments (excluding the cost of land and buildings,
furniture-fittings, and other items not directly related to the
service rendered).
1.3 Need for the Study The recent economic crisis has seen a
spate of defaults on loans across banks and one of the key reasons
behind this seems to be inadequate credit appraisal process. There
has been an increased focus on credit appraisal with an emphasis on
acquiring a thorough understanding of all aspects of the customer
and his business. Further, there is a growing realization that
there is a need to go beyond just credit appraisal for proper
monitoring of the account post the sanctioning of the loan.
Small and medium-sized enterprises (SMEs) are the backbone of
all economies and are a key source of economic growth, dynamism and
flexibility in advanced industrialized countries, as well as in
emerging and developing economies. Small scale industry in India is
booming and contributing to 40% of GDP, many banks are focusing
their attraction towards this sector. They are responsible for
between 60-70% net job creations in developing countries. Small
businesses are particularly important for bringing innovative
products or techniques to the market.
SMEs are vital for economic growth and development in both
industrialized and developing countries, by playing a key role in
creating new jobs. Financing is necessary to help them set up and
expand their operations, develop new products, and invest in new
staff or production facilities. Many small businesses start out as
an idea from one or two people, who invest their own money and
probably turn to family and friends for financial help in return
for a share in the business. But if they are successful, there
comes a time for all developing SMEs when they need new investment
to expand or innovate further. That is where they often run into
problems, because they find it much harder than larger businesses
to obtain financing from banks, capital markets or other suppliers
of credit.1.4 OBJECTIVES OF THE STUDY To gain a through insight
about the SME segment and its relevance in the present context. To
study and understand some of the products and services initiated by
State Bank of India for the small and medium enterprises. To
understand the credit appraisal procedure and process followed by
State Bank of India. To gain insights on the norms and standards of
credit appraisal for the SMEs at SBI. To understand the credit risk
assessment model adopted by SBI by working on a project.
1.5 METHODOLOGY ADOPTEDIn the early phase of the project an
attempt was made to know about the various products and services
that the bank offers to their cliental which constitutes the small
and medium enterprises. After having the knowledge about the
various schemes that SBI offers to the small and medium
enterprises, attention was drawn towards understanding the
theoretical aspects of the SME business segment in India which
includes the constituents of SMEs, their significance, growth
opportunities, problems relating to SMEs and flow of credit to the
SMEs. Having done the literature study on small and medium
enterprises, it was now time to understand the credit appraisal
process at SBI. During this period it was found that SBI follows an
in depth credit appraisal process which consists of a sixteen step
process. Then some insight was made on various credit facilities
that the bank offers with their assessment methods. Now, after
knowing about the credit facilities that SBI offers, an attempt was
made to know about the various credit appraisal norms and standards
for the SME business segment that SBI follows, which includes loan
policy, quantitative and qualitative standards, documentation
standards, delegation of power and sanctioning authorities and the
pricing policy and pricing mechanism.So far a strong theoretical
and conceptual base was required which helped me in understanding
the drafted project proposals. For a couple of weeks, I then went
through some of the drafted proposals, prepared the CMA document
for each of them manually. Having gone through a number of
proposals, working on an existing project was started by preparing
a case study, working on the CMA, doing the financial projections
and analysis, carrying out the risk assessment process and also
drafted the project proposal. The CMA, financial projections and
analysis, Credit Risk Assessment (CRA) was carried out on the
software that was given by SBI. The project proposal was drafted in
the S-Format as specified by the bank.Since the project carried out
is descriptive and analytical in nature, the various documents and
official files were required for understanding the methodology
adopted by the bank. The data collection was done by personal
interaction with the guide and other bank officials. At the same
time related articles, magazines, in-house journals of the bank,
SBI publications etc were referred.
Chapter 2LITERATURE REVIEW
Venkatesh (2011), in his article published by The Indian Banker,
asserts that the importance of SMEs in the Indian economy cannot be
underscored enough. They contribute to a significant proportion of
the GDP (40% of manufacturing output, 35% of exports) and to
overall employment creation. Banks have played and will play a
major role in transforming these SMEs into the mid- and large
corporates of tomorrow through various business models including
simple financing to more complex structures, supply chain finance,
private equity funding and trade. However, the recent credit
crisis, revealed, albeit for a small period of time, the
deficiencies in SME financing - India has a lot to learn from other
emerging countries in innovative ways of serving the SME customers
e.g. in Mexico where a central facilitating agency converts trade
receivables claims of SMEs from large customers into electronic
commercial paper and sells it to the market. Moreover, enhancement
of existing credit information sharing backbone can help improve
penetration of credit to this segment. Aligning organisation and
value proposition for SME and affluent banking can significantly
improve profitability of banks. Banks will need to think about the
key challenges and issues, which concern this sector most, and the
imperatives they will need to adhere to for unleashing the
potential of the Indian entrepreneur.
Banks are still the single largest supplier of debt funds to
SMEs in most developed economies, says Hall (2010), in his article
published by the International Journal of Entrepreneurship and
Small Business. He shows, on the basis of publicly available data
for APEC economies, that the real growth of bank lending to SMEs
appears to be negative or to have declined in almost all economies
over the decade from 1997. Prior to 1997, the real rate of growth
of bank finance to SMEs was positive. By contrast, throughout the
period 1994-2007, the growth of real lending to large firms has
usually been positive and growing. His study explores these trends
in detail and reaches the conclusion that there has been a decline
in the availability of bank finance to SMEs in the developed
economies in absolute and real terms. It also examines some
possible reasons for this phenomenon and discusses the
implications. It concludes that the problems banks face meeting BIS
Basle II requirements, in accounting for intangibles, and thus
assessing collateral, is a possible contributor. Finally, it
suggests ways that the World Bank and Bank of International
Settlements (BIS) could make more effective use of available data
from banks to better understand the phenomenon.
Tagoe, et. al (2008) report that their study which examined the
relationship between information management practices of small and
medium size enterprises (SMEs) and their access to bank finance
found that SMEs that keep records and present certain types of
information improve their access to bank finance. Other factors,
such as the age of the SME and the context within which it
operates, play very minor roles in determining access to finance.
In their research, Javalgi and Todd (2011) report that research
concerning the internationalization of SMEs is available in the
context of developed economies but less can be found dealing
specifically with the entrepreneurial behaviour and international
expansion of SMEs in emerging markets such as India. Their research
extends the literature addressing the relationships surrounding the
internationalization of SMEs in India as related to entrepreneurial
behaviour, firm resources, and commitment to internationalization.
It shows that Entrepreneurial orientation, a commitment to
internationalization, and the ability to leverage human capital
influence the international success of Indian SMEs.Beck & Kunt
(2006) present a research on access to finance by small and
medium-size enterprises (SMEs). SMEs form a large part of private
sector in many developed and developing countries. While
cross-country research sheds doubt on a causal link between SMEs
and economic development, there is substantial evidence that small
firms face larger growth constraints and have less access to formal
sources of external finance, potentially explaining the lack of
SMEs contribution to growth. Financial and institutional
development helps alleviate SMEs growth constraints and increase
their access to external finance and thus levels the playing field
between firms of different sizes. Specific financing tools such as
leasing and factoring can be useful in facilitating greater access
to finance even in the absence of well-developed institutions, as
can systems of credit information sharing and a more competitive
banking structure. Thampy (2010) emphasizes on the fact that a
major bottleneck to the growth of the vital Indian small and medium
enterprises (SME) sector is its lack of adequate access to finance.
His paper examines the major issues in the financing of SMEs in the
Indian context, such as the information asymmetry facing banks and
the efficacy of measures such as credit scoring for SMEs; whether
transaction lending would be adequate to address the information
issues or would lending have to be based on a relationship with the
SME, using both hard and soft information; and whether the size and
origin of the bank affect the availability of credit to SMEs. de la
Torre, et. al, (2010) say it is conventional wisdom that small and
niche banks have an advantage in serving SMEs because they can
overcome SME opaqueness through relationship lending. But their
paper shows that there is a gap between this view and what banks
actually do. Banks perceive SMEs as a core and strategic business
and seem well-positioned to expand their links with SMEs. The
intensification of bank involvement with SMEs in various emerging
markets is neither led by small or niche banks nor highly dependent
on relationship lending. Rather, all types of banks are catering to
SMEs and large, multiple-service banks have a comparative advantage
in offering a wide range of products and services on a large scale,
through the use of new technologies, business models, and risk
management systems.
Javalgi, et. al, (2012), through their article, contribute to
the understanding of entrepreneurship in SMEs in emerging markets
such as India. They say that advancements in internet technology
are enabling Indian entrepreneurs to engage in entrepreneurial
activities and innovations using new business models to achieve
scale and scope as they begin to compete in a global marketplace.
An understanding of how these Indian entrepreneurs are successfully
growing and rapidly expanding their businesses is critical, not
only from research perspective, but also from a practitioner
view.
Chapter 3Financing MSMEs by SBI3.1 Role of SBI in Financing SMEs
State Bank of India has been playing a vital role in the
development of small scale industries since 1956. The Bank has
developed a wide array of products to meet the changing needs of
the industry. It provides end -to -end solutions for the financial
needs of the industry. To service the specific credit needs of
small and medium enterprise (SME) the Bank established the Small
& Medium Enterprise business unit in 2004. Apart from the
general working capital requirements (like Cash credit, Bill
Discounting limits, LC, BG etc) to meet the day to day requirements
and term loans to take care of investment needs for acquiring fixed
assets, Bank has an array of products/schemes to cater to the
enterprise specific requirements of SME Units both in Manufacturing
and Trade and services sectors. Brief details of some of the
schemes are as under:
ProductEligibilityQuantum of finance Margin Repayment
SME CREDIT CARDCustomers of the following segments with a
satisfactorytrack record for the last two years :- Small industrial
units Small retail traders Professionals self employed persons
Small business enterprises Transport operatorsMaximum - Rs.
10lacs20%a) The working capital component should be reviewed every
year provided the credit summation is not less than 50% of the
projected turnover. If the credit summation is less than 50%, then
a repayment schedule should be fixed for the outstandings in
suitable monthly instalments. b) The Term Loan component should be
repayable in a maximum of 5years in suitable instalments.
SME SMART SCOREThe chief promoter /chief executive should be
below 66 years of age The applicant must obtain a minimum score of
60% with a minimum of 50% under each sub-head of Business and
Personal details and a minimum of 10% under collateral details.SSI
UNITSRs.5lacs to below Rs.50lacs20% of annual turnover for WC loan
and 67% of project cost for TLTRADE & SERVICESRs.5lacs to
Rs.25lacs15% of annual turnover for WC and 67% of project cost for
TL.25% for working capital component and 33% for TL component.WC
loan to be reviewed annually and renewed once in twoyears. TL not
more than 5years excluding moratorium notexceeding 6months
STANDBY LINE OF CREDIT
Rated SB3 or its equivalent under the new CRA andabove.
Selectively for SB4 (or its equivalent under newCRA)rated unitsFund
based limits and Non-fund based limits15% of working capital
facilities subject to a maximum ofRs.5 crs. The facility may be
made available as fundbased and/or non fund based limits subject to
the overallexposure being within the SLC.(WC)In the case of
consortium advances, only our share inthe consortium should be
reckoned for arriving at thequantum.As per the terms of the
original limitsOne per cent higher than that applicable to the
CashCredit limit. Discretion to waive the additional cost restswith
the controller.
TRADERS EASY LOAN (TEL)Existing customers with a satisfactory
track record.New connections including take - over can be
consideredsubject to take- over norms.Rs.0.25 lac to Rs.500
lacs.loan component shall not exceed 20% of the projected annual
turnover or 75% of the capital costs to beincurred for business or
65% of realizable value of propertywhichever is less.
In the case of rice mills, the quantum of finance can beassessed
based on pucca records of the unit and can befixed anything between
20% to 40% of the projected annual turnover.For existing borrowers
who have been sanctioned otherlimits the Loan can be sanctioned
subject to :-i) the existing loan accounts have
conductedsatisfactorily for the last three years;ii) the eligible
amount ie., the outstandings in theexisting accounts and the
proposed loan shouldbe within 65% of realizable value of the
propertymortgaged to the Bank without resorting torevaluation of
the property.35% of the realizable value of the property to
bemortgaged or 25% of the costs to be incurred for thebusiness if
TEL is availed for capital expenditureCash Credit - On demandDemand
Loan - 36 monthsTerm Loan - Upto a maximum of 60 months based
oncash flows in monthly / quarterly / half yearly installments
Doctor plusIndividuals, partnerships, corporates, trusts
withpowers to borrow Promoters should be registered practitioners
andshould possess minimum qualification to practice in adiscipline
such as MBBS/ BDS/ BAMS/ GAMS/ BHMSMaximum of Rs.5 crores of which
a sub ceiling forworking capital limits at 10% of total loan amount
for upto Rs.1 crore 5% % of total loan amount for above Rs.1
croreminimum Rs.10lacsMinimum DSCR 1:1.5Upto Rs. 5lacs : 10%Above
Rs.5 lacs : 15% (can be reduced by 5% oneauthority higher than the
sanctioning authority)Maximum upto 7 years - Max. moratorium 12
months
Rent plusIndividuals /partnership firms/ corporateMinimum
Rs.50,000/-MaximumMetro & urban Centres - Rs.10 crs.Subject to
60% of the gross rental income for theresidual lease period less
(advance rent received+property tax + income tax + other statutory
dues of thelessor) or 85% of the market value of the
propertywhichever is less40% (CGMs of Circles have discretion to
reduce themargin to 30%In equated instalments at the same frequency
at whichrent is received in a maximum period of 7 years or
theresidual lease period whichever is less.
3.2 SBIs contribution in MSME Role of Government and Banking
Regulator in SME LendingAs is apparent, the above factors are only
idealistic solutions and may not be practical for SMEs to follow
because they are faced with several problems such as weak financial
strength, inability to provide adequate collateral and other
factors. Hence, the Government and banking supervisors should take
a holisticview of the SME Sector while considering SME
financing,taking into account the risks faced by banks and the
problemsfaced by SMEs. In this regard, the initiatives takenup by
the Government and Banking Regulators acrossvarious countries and
in India are as follows:(a) 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 commercialise 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 programme called SME Force
(SME Financing for Organisationally Competent and Excellent
Franchise Businesses), which is a franchisedevelopment financing
facility that will be implemented with the participation of
franchiser organisations.
It is a known fact that the smaller the business, the more
significant the switching costs are likely to be and, therefore, it
is less likely that the benefits of switching outweigh thecosts
involved 438 The Chartered Accountant September 2005 (b) Indian
scenario Governmentinitiatives: Even in India, the financing of the
SME sector has received some attention since independence. Some of
the initiatives taken by the Government in this regard are as
follows:_ Setting up of the Small Industries Development Bank of
India (SIDBI), as the apex refinance institutionin India for the
purpose of channelling of finance to Small Scale Industries (SSIs)
and SMEs in an organised manner. In line with the announcement made
in the Interim Budget for 2004-2005, SIDBI has proposed two fund
based initiatives for improving credit flow to the SME sector as
follows:_ A contribution of Rs. 100 crore to the Rs. 500 crore
corpus of the SME Growth Fund (SGF), which shall make primarily
equity/equity related capital investments in accordance with SEBI
guidelines, in SMEs operating in various growth sectors such as the
life sciences, biotechnology, etc._ The SME Fund of Rs. 10,000
crore to give an impetus to the flow of funds to the SME sector.
This fund has begun operations with effect from April 2004. Under
the Fund, assistance is provided to SMEs at affordable rates of
interest, and direct finance is extended to SMEs through SIDBIs
network of branches. Further, refinance to State Financial
Corporations (SFCs) has also been made attractive in terms of low
rates of interest. The Government of India has launched the Credit
Linked Capital Subsidy Scheme (CLCSS), which aims at facilitating
technology upgradation of SMEs in specified
products/sub-sectors.Existence of collateral that can be offered to
banks by SMEs could be one effective wayof mitigating risk. Banks
could, therefore, look at collateral when pursuing the question
ofSME lending September 2005 The Chartered Accountant 439_ SIDBI
has recently negotiated a line of credit with the World Bank for
financing and development of SMEs in India, with a view to upscale
the credit flow to the sector and raising resources for the SME
Fund.(c) Indian scenario RBI initiatives:The RBI, from time to
time, has formed several committees and working groups to study the
flow of credit to the SME sector in a comprehensive manner, and has
issued detailed guidelines in this regard. Recently it has
constituted an Internal Group under the Chairmanship of Shri C. S.
Murthy to, interalia, consider the relaxation and liberalisation of
credit lending norms that are applicable to the SME sector. The
Group has submitted its report on June 6, 2005. The Internal Group,
with reference to financing of SMEs, has recommended:_ Constitution
of empowered committees at the regional offices of the Reserve Bank
to periodically review the progress in SME financing and also to
coordinate with other banks/financial institutions and the state
governments in removing bottlenecks, if any, to ensure smooth flow
of credit to the sector._ Opening of specialised SME branches in
identified clusters/centres with preponderance of SME units to
enable entrepreneurs to have easy access to bank credit and to
equip bank personnel to develop the equisite expertise._
Empowerment of the boards of banks to formulate policies relating
to restructuringof accounts of SME units subject to certain
guidelines._ Restructuring of accounts of corporate SME borrowers
having credit limits aggregating Rs. 10 crore or more under
multiple banking arrangements to be covered under the revised CDR
mechanism. Appropriate authorities are currently examining the
above recommendations of the Internal Group.
2.2 General aprehensions in lending to msmes Lack of collateral
Lack of financial Discipline Lack of marketing Lack of cash
flows
Chapter 4Project Appraisal, Loan Sanction and Disbursement
Procedures at SBI4.1 Procedural aspects of appraisal, sanction and
disbursement of MSME loan proposals at SBI
Receipt of application for loan from the client
Submission of project report, various documents & financial
details
Thorough study of the documents submitted by the client
Collecting information about the company & the promoters
Field visit and site inspection
Preparation of Credit Monitoring Arrangement (CMA)
Financial Projections and Analysis
Credit Risk Assessment (CRA)
Drafting of final project proposal
Proposal is submitted to concerned authorities for sanction
Conveying sanction of credit limits & acceptance of terms
and conditions sanction.
Documentation Process
Disbursement of loan
Follow-up
Supervision and Monitoring & Control
The above chart shows the whole process of credit delivery
carried out at SBI; however, this flow varies from banks to banks.
Different banks have their own formats and may differ marginally in
credit delivery. SBI which is countrys largest lender, this is the
normal flow which is followed. The process may vary marginally for
the type of facilities involved, but more or less this is the
standard set for credit delivery. Receipt of application of loan
from the client This is the initial step in the process of credit
appraisal and credit delivery. In the application all the
fundamental details regarding the borrower, nature of business,
group concerns if any, other banking relations, purpose of taking
the loan, loan amount and other important facets are obtained.
Submission of project report, various documents and financial
details - In this stage all the required documents are obtained
from the applicant in order to have an assessment of the proposed
request. The borrower needs to submit the audited financial
statements for the past three years, details of existing borrowing
arrangements, reports of existing bankers on the applicant copy,
financial statements and reports of associate firms and groups if
any and a detailed report for the purpose of taking a loan.
Through study of the documents submitted by the clients Having
received all the relevant documents from the client, the banker now
thoroughly assesses all the documents with much care. If he feels
necessary he can ask the client to produce some more documents
which would help the banker in better assessment of the proposed
loan. Collecting information about the company and promoters The
banker then tries to find out all the details regarding the
business in which the client is engaged. He tries to understand all
the facts like line of business, area of operations, production
process, nature of business, promoters of the company, their
qualification and experience etc.
Field visit and site inspection After collecting the details
regarding the company and its promoters the banker then along with
the client proposes to visit the location or site where the company
or particular plant is located. This is done to check whether the
details provided by the client are in alignment with the actual
facts provided. A through site inspection is done. During the site
inspection all the documents and certificates such as statutory
clearances from various govt departments and agencies, licenses/
permits/ approvals and clearances are verified.
Preparing the Credit Monitoring Arrangement Before preparing the
credit monitoring arrangement the banks lending policy/RBI
guidelines, prudential exposure norms, industry exposure
restrictions, industry related risk factors and defaulters in that
industry, government regulations/legislations impacting that
industry, acceptability of the promoters, financial status in broad
terms and whether it is acceptable is checked and verified. The
banker also examines whether the project cost is prima face
acceptable, critical aspects of the project like demand, product
cost, profitability etc are prima face in order or not. The banker
also analyzes the past trends in sales past deviations in sales and
profits if any, production capacity and also checks the compliance
with lending norms and other mandatory guidelines as applicable.
Having thoroughly studied all the above parameters if the banker is
satisfied he then prepares the credit monitoring arrangement as
prescribed by RBI guidelines.
Financial Projections and Analysis After all the above process
the banker then does the financial analysis which includes the
examination and analysis of cost of project and source of finance,
project cost with reference to estimates and quotations,
arrangements proposed for raising debt/equity, capital structure of
the firm, feasibility of the projections/estimates of sales, cost
of production and profits covering the period of repayment, BEP in
terms of sales value and % of installed capacity under a normal
production year and cash flows and fund flows. The banker also
checks whether the profitability is adequate to meet stipulated
repayments with reference to DSCR and ROI, industry profile and
prospects, technical feasibility with reference to report of
technical consultants if available, companys structure and systems
and applicants strength on inter firm comparison.
Credit Risk Assessment Having done a through and a detailed
financial analysis and if the banker is satisfied with all the
financial requirements of the borrower, he then goes in for
carrying out a credit risk assessment which includes both borrower
rating as well as facility rating. The CRA model of the bank is
unique and one of the most effective rating models. The credit
rating model accounts for all types of risk ranging from financial
risk, business risk, industry risk, management risk and various
qualitative factors.
Drafting the project proposal Once the borrower is rated then
the draft proposal is prepared in the prescribed format of the bank
with required back up details and with recommendations for
sanction. Once the draft proposal is ready it is sent to the
appropriate sanctioning authority. The sanctioning authority is to
ensure that the sanction is within the powers delegated to the
authority.
Conveying sanction of credit limits and acceptance of terms and
conditions Once the proposal is sanctioned by the appropriate
sanctioning authority the information is then conveyed to the
client regarding the sanction and the credit limits being
sanctioned. Having done this the client and the banker have a
meeting where in the banker decide upon the terms and conditions
which may basically include proposed pricing based on rating, tenor
of repayment, installment amounts, security primary and collateral,
margins for the facility, ECGC cover where applicable and other
standard covenants.
Documentation Process The systems and procedures for
documentation have been laid down keeping in view the ultimate
objective of documentation which is to serve as primary evidence in
any dispute between the bank and the borrower and for enforcing the
bank's right to recover the loan amount together with interest
thereon, in the event of all other recourses proving to be of no
avail After the client has accepted all the terms and conditions ha
is required to file all the documents required as per the banks
norms and standards.
Disbursement of loan Once all the documentation process is
completed and verified the bank then disburses the loan as per the
orders of the sanctioning authority.
Follow-Up The credit appraisal process does not end at the
disbursement of loan. SBI has a well defined post sanction process
which it follows in three steps i.e. follow-up, supervision and
monitoring and control. The follow-up function will cover ensuring
on an ongoing basis compliance with terms and conditions of
sanction through the system of control measures/ feedback viz
inspection visits, prescribed financial and operating statements
from the borrower, interaction with borrowers etc. It also involves
tracking performance of the borrower ensuring safety and
recoverability of the advances
Supervision This stage involves ensuring proper follow-up of
advances and observance at the operating level of system laid down
by the bank. Ensuring that security documents are kept current and
that all related documentation formalities are observed by the
officials responsible. The supervisor looks out for early warning
signals, identify incipient sickness and initiate proactive
remedial actions. Maintaining ongoing contact with the borrower and
co-lenders and keeping abreast of developments in the borrowers
entity and business environment. The supervisor also needs to check
from time to time the quality of the assets that are being
maintained.
Monitoring and Control Monitoring and Control function ensures
that effective supervision is maintained on advances and
appropriate responses are initiated whenever early warning signals
are seen. This function also tracks customer satisfaction and
provides responses where necessary. This function basically
includes ongoing monitoring of asset portfolio by tracking changes
from time to time, chalks out and arrange for carrying out specific
actions to ensure high standard asset content, examination of NPAs
with a view in recognizing the problem assets and drawing up
recovery up gradation path for these and monitoring the recovery
process. This function also includes the redressal of customers
complaints.
4.2 Organization structure
Maintenance wing
Processing Wing
4.3 Policy guidelines in financing SMEs
Loan Policy
State Bank of Indias (SBI) loan policy is aimed at accomplishing
its mission of retaining the banks position as a premier financial
services group, with world class standards & significant global
business, committed to excellence in customer, shareholder &
employee satisfaction & to play a leading role in the expanding
& diversifying financial services sector, while continuing
emphasis on its development banking role. The policy establishes a
commonality of approach regarding credit basics, appraisal skills,
documentation standards and awareness of institutional concerns and
strategies, while at the same time leaving enough room for
flexibility and innovation. The objective is to maintain banks
undisputed leadership in the Indian banking scene.
The policy aims at continued growth of assets while endeavoring
to ensure that these remain performing & standard, as a matter
of policy the bank does not take over any Non-Performing Asset
(NPA) from other banks.
The Central Board of the bank is the apex authority in
formulating all matters of policy in the bank. The board has
permitted setting up of the Credit Policy & Procedures
Committee (CPPC) at the Corporate Centre of the Bank of which the
top management are members, to deal with issues relating to credit
policy & procedures on a bank-wide basis. The CPPC sets broad
policies for managing credit risk including industrial
rehabilitation, sets parameters for credit portfolio in terms of
exposure limits, reviews credit appraisal systems, approves
policies for compromises, write offs, etc. & general management
of NPAs besides dealing with the issues relating to delegation of
powers.
Based on the present indicators the following exposures have
been prescribed by the Credit Policy and Procedures Committee which
says that the maximum aggregate credit facilities (fund based and
non fund based) should not exceed Rs.20 crores for individuals as
borrowers, maximum aggregate credit facility should not exceed Rs.
80 crores for non corporates like partnership, HUF and associations
and maximum aggregate credit facility to the corporate entities
should be as per prudential norms of RBI on exposures.Some of the
other loan policy as set up by the apex authority of the bank are
as follows. The policy applies to all domestic lending. Foreign
branches have their own policies Optimum exposure levels are set
out in the policy to different sectors in order to ensure growth of
assets in an orderly manner. Term Loans (loans with residual
maturity of over 3 years) should not in the aggregate exceed 35% of
the total advances of SBI. The bank shall endeavour to restrict
fund based exposure to a particular industry to 15% of the banks
total fund based exposure. The bank shall restrict the term loan
exposure to infrastructure projects to 10% of banks total advances.
The bank shall endeavour to restrict exposure to sensitive sectors
(i.e. to capital market, real estate, and sensitive commodities
listed by RBI) to 10% of banks total advances. The banks aggregate
exposure to the capital markets shall not exceed 5% of the total
outstanding advances (including commercial paper) as on March 31 of
the previous year.
(annexure 1) TYPES OF CREDIT FACILITIESThere are basically two
heads under which a loan sanctioned to any corporate entity can be
classified as shown below:
1. Fund Based Working Capital loan Term Loan Stand By Line of
Credit
2. Non-Fund Based Letter of Credit Bank Guarantee Stand By Line
of Credit
Fund based requirements supports the industry/corporate to meet
their funding requirements for working capital finance or towards
acquiring fixed assets etc. Hence, funds deployed in a business
enterprise can be broadly classified into two components viz. fixed
capital and working capital.
Fixed capital is invested in fixed assets (capital assets),
through which enterprises engages for manufacturing of
goods/products for sale/acquire assets for providing services and
generate profits. To meet such requirement banks offer the product
called Term Loans, which are available for a period not less than 3
years whereas the loans provided for a period of one to three
years, are classified as Demand Loans.
On the other hand, working capital is deployed in purchasing the
items, which are transformed into saleable goods by the production
process so to meet this day to day requirement banks offer working
capital loan which is considered to be a short-term loan and has to
be renewed every year. Besides meeting the credit requirement of
the borrowing enterprise by way of fund based credit facilities,
banks also cater to the non-fund based requirements of their
clients. The fund based facilities provided by banks require
immediate outlay of funds which must be provided beforehand whereas
the non-fund based facilities are essentially in the nature of
promise made by banks in favor of a third party to provide funds on
behalf of their clients if certain situations emerge or certain
conditions are fulfilled. These non-fund based facilities may be in
the nature of bank guarantee or letter of credit issued by
banks.
Working Capital Loan Working capital refers to the source of
financing required by businesses on a continual basis for meeting
the short term needs. Working capital purpose may be defined as the
funds required in carrying the required level of current assets to
enable the unit to run its operations at the expected levels
without any liquidity constraints.
Operating Cycle Concept of Working Capital The operating cycle
concept of working capital envisages measurement of the average
time taken by an enterprise in manufacturing the goods and selling
them for cash so that the funds can be deployed for starting other
batch of production. Cash is required to purchase the raw
materials, a manufacturing enterprise ensures that there should
always be a minimum level of stock of raw material, which takes
care of regular demand as well as any abrupt discontinuity in
demand or supply; these raw materials are then pressed into
production. The processing time depends on the nature and
specification of the final product. In the course of processing,
the enterprise may generate stock of semi-finished goods in the
course of production now, when semi finished goods finally rolled
out as finished goods these are stored till sale of goods as well
as the process of delivery takes some time. The enterprise may have
to ensure that a minimum level of finished goods always remains
available to meet the unforeseen demand. A portion of sale proceeds
may remain locked for sometime in form of receivables and on expiry
of credit period they are realized. Thus, every rupee invested in
current assets at the beginning of the cycle comes back to the
promoter with the profit element added after a lapse of specific
time period and this length is known as working capital cycle.
Hence, as the funds are locked in the cycle the enterprise
requires funding from banks for smooth functioning of their day to
day activities.
The figure below shows the operating cycle or working capital
cycle
Assessment of Working Capital Loan - The figure below shows the
block diagram of balance sheet where the left hand side represents
the liabilities/sources of funds and right hand side represents
assets/application of funds. Long-term liabilities include equity
capital, retained profits, term loans and unsecured loans while
current liabilities include creditors, working capital bank finance
and other current liabilities.
All the short-term sources are used to fund the current assets
and the difference between current assets and current liabilities
known as net working capital is funded by long-term sources which
can be through internal cash accruals etc. as depicted clearly from
the figure below.
It is believed that bank credit should be the last resort which
should be tapped only after all internal and external sources of
funding working capital requirements of the enterprise are
exhausted. Hence, banks lend only a portion of working capital gap
(WCG), which is the value of the acceptable level of current assets
after netting off the other sources of funding working capital
requirements.
Long Term LiabilitiesFixed Assets
Current Assets
Current Liabilities
Hence, method of computation of Assessed Bank Finance (ABF) is
adopted by the bank, there are various methods for the computation
of the same as proposed by Tandom and Nayak committee out of which
the method adopted by State Bank of India is given asABF = WCG
(actual/projected) NWCWhere, ABF= Assessed Bank Finance WCG=
Working Capital Gap = Current Assets - Other Current Liabilities
NWC= Net Working Capital = Current Assets - Current Liabilities
The financing of working capital also depends upon some set
benchmark for the ratios that is current ratio should at least be
1.2 for trading companies and 1.33 for rest and gearing ratio
(TOL/TNW) should not exceed 5 for trading and 3 for others.
Term Loan Financing A term loan is provided for acquisition of
long term assets such as fixed assets, long term working capital
margin as well as to acquire capital goods, which are required to
be repaid out of cash generations from operations over a period of
time. Repayment of term loans is, therefore, required as per
schedule planned beforehand. The scope and approach in providing
term credit by lending bankers are, thus different from working
capital credit or other conventional form of advances. Term loan is
a form of a participation loan as the lending institution has a
stake in the unit covering a fairly long period of time and longer
the period of repayment, the riskier is the proposition. Hence, any
appraisal of term loan has an inbuilt method of assessment of the
risk contained therein.
The basic purpose of appraisal of proposal for providing term
credit requirements is to ensure that the borrower acquires the
proposed fixed assets, puts them to use in producing merchandise
which would have a market, and generate enough cash from operations
to repay the term loan and service the interest commitments thereon
over the stipulated period of repayment. The appraisal process,
therefore, visualize a meticulous examination of all the relevant
aspects of the economics of the project.
Appraisal of Term Loan - Prima facie Acceptability The analyzer
should inspect the Memorandum of Association & Articles of
Association of the borrower organization, should check the RBI and
SBI policy guidelines, government regulations, exposure norms, the
credit history of the borrower is checked with the help of CIBIL,
ECGC etc and finally the debt to equity ratio of the borrower
organization. Once these all are under the satisfactory level the
credit analyst will move further with the appraisal process.
Technical Feasibility - The examination of this dimension consists
of an assessment of the various requirement of the actual
production process. It is in short a study of the availability,
costs, quality & accessibility of all the goods & services
needed. Location - The location of the project is highly relevant
to its technical feasibility & hence special attention will
have to be paid to this feature. Projects whose technical
requirements could have been taken care of in one location
sometimes fail because they are established in another place where
conditions are less favorable. The accessibility to the various
resources has meaning only with reference to location. Inadequate
transport facilities or lack of sufficient power or water for
instance, can adversely affect an otherwise sound industrial
project. Size of the plant - One of the most important
considerations affecting the feasibility of a new industrial
enterprise is the right size of the plant. The size of the plant
will be such that it will give an economic product, which will be
competitive when compared to the alternative product available in
the market. A smaller plant than the optimum size may result in
increased production costs & may not be able to sell its
products at competitive prices. Type of technology - An important
feature of the feasibility relates to the type of technology to be
adopted for a project. A new technology will have to be fully
examined & tired before it is adopted. It is equally important
to avoid adopting equipment or processes which are absolute or
likely to become outdated soon. Labour The labour requirements of a
project need to be assessed with special care. Though labour in
terms of unemployed persons is abundant in the country, there is
shortage of trained personnel. The quality of labour required &
the training facilities made available to the unit will have to be
taken into account.
Having looked at all the above parameters a technical report is
to be prepared using the banks consultancy cell, external
consultants etc., should be obtained with specific comments on the
feasibility of scheme, its profitability, whether machinery
proposed to be acquired by the unit under the scheme will be
sufficient for all stages of production, the extent of competition
prevailing, marketability of the products etc.
Economic Viability An economic viability has reference to the
earning capacity of the project. Since earnings depend on the
volume of sales, it is necessary to determine how much output or
the additional production from an established unit the market is
likely to absorb at given prices.
Market Study - A thorough market analysis is one of the most
essential parts of project investigation. This involves getting
answers to three questions.a) How big is the market?b) How much it
is likely to grow?c) How much of it can the project capture? The
first step in this direction is to consider the current situation,
taking account of the total output of the product concerned &
the existing demand for it with a view of finding whether there is
unsatisfied demand for the product. Care should be taken to see
that there is no idle capacity in the existing industries. Future
Possible future changes in the volume & patterns of supply
& demand will have to be estimated in order to assess the long
term prospects of the industry. Forecasting of demand is a
complicated matter but one of the vital importance. It is
complicated because a variety of factors affect the demand for
product e.g. technological advances could bring substitutes into
market while changes in tastes & consumer preference might
cause sizable shifts in demand. Intermediate product The demand for
Intermediate product will depend upon the demand & supply of
the ultimate product. The market analysis in this case should cover
the market for the ultimate product.
Financial Analysis - Data from the borrower should be analyzed
to ensure that the project meets the minimum financial criteria.
Thus the data can be broadly grouped as: Cost of the project
including working capital margin-A comprehensive and critical
review of the project cost is necessary to ascertain, the
reasonability and flexibility of estimates of cost, arrangement for
raising funds for financing of the project, acceptability of the
project and the modifications required Cost of Production and
Estimates of Profitability -A complete and vital assessment of the
production cost is necessary to determine, the quality of product,
the true production cost, demand gap-reasonableness of price in
competition, Break-Even analysis to ascertain profit margin. The
estimate of profitability enables the banker to draw up the
repayment programme, start-up time, etc. Break Even Point: In a
manufacturing unit, if at a particular level of production, the
total manufacturing cost equals the sales revenue, this point of no
profit/no loss is known as the break-even point The Break-even
point is worked out as under: Fixed Cost Unit Sale Price Unit
Variable Cost
Where, contribution is give as unit selling price minus variable
cost per unit. Break even point is expressed as a percentage of
full capacity. A good project should have break-even point of at
least 75%. Cash Flow estimates and Sources of Finance- The cash
flow estimates will help to decide the disbursal of the term loan,
ensure when the cash is needed, sources of cash, repayment of loans
and interest from cash accruals. Apart from it cash flow estimates
will help in calculation of debt service coverage ratio (DSCR)
which is the most important single factor in all the term credit
analysis. Debt/ Service Coverage Ratio The debt service coverage
ratio serves as a guide to determining the period of repayment of a
loan. This is calculated by dividing cash accruals in a year by
amount of annual obligations towards term debt. This ratio is
valuable, in that it serves as a measure of the repayment capacity
of the project/ unit & is, therefore, appropriately included in
the cash flow statements. The ratio may vary from industry to
industry but one has to view it with circumspection when it is
lower than the benchmark of 1.75. The repayment programme should be
so stipulated that the ratio is comfortable.
Managerial Competency In a dynamic environment, the capacity of
an enterprise to forge ahead of its competitors depends to a large
extent, on the relative strength of its management. Hence, an
appraisal of management is the touchstone of term credit analysis.
This aspect is often not given the importance it warrants. It
should not be overlooked since the management impacts overall
performance of the company and hence its ability to repay loans. It
deals with the study of individual and the related aspects. It
helps to find out the visionary concepts through the analysis and
also helps the lender to focus on the ability and willingness to
pay the debts. It basically involves the examining of Quality and
depth of management Experience, qualifications and capabilities.
Management style i.e. conservative, centralized, decentralized
Business and Industrial experience Business attitude and aptitude
Business foresight etcCommercial Viability - Once all other aspects
of project success has been analyzed, for a lending bank most
important part is to check the implementation period of the
project, moratorium required , check the projected profitability,
breakeven analysis, Debt Service coverage Ratio (DSCR) etc. All
this is done to examine in how many years the borrower would be
able to pay back the debt.
For term loan appraisal some cut-off of ratios should be
achieved i.e. Gross DSCR should be at least 1.75, gearing
ratio(TOL/TNW) should not be more than 3 and repayment schedule
should not be more than 8 years this will also include the
moratorium. In absence of the same deviation has to be approved by
the appropriate authority
All the points covered so far are very core points and is not
the core competency of a credit analyst and hence, for such kind of
sensitive analysis for term loans especially for green field
projects bank has to employ experts from external agencies or
technically reputed consultants who have a sound knowledge about
the industry or products as discussed in this section and the
report submitted by such consultants is known as TEV (Techno
Economic Viability) report.
Chapter -5Problems of financing MSME(annx) 2There are a number
of issues in lending to the SME sector, which banks generally face.
The key issues among them are outlined
below:InformationAsymmetry:Accurate information about the borrower
is a critical input for decisionmaking 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 inviable 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 riskadjusted 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.Collateral: Existence of
collateral that can be offered to banks by SMEs could be one
effective way of mitigating risk. Banks could, therefore, look at
collateral when pursuing the question of SME lending. It can also
be stated that a borrowers willingness to accept a collateralised
loan contract offering lower interest (relative to unsecured loans)
will be inversely related to its default risk. However, not all
SMEs would be able to offer collateral to banks. Hence, Reserve
Bank of India (RBI) allows banks, with a good track record and fi
nancial position on SSI units, to dispense with collateral
requirements for loans up to Rs. 25 lakhs.
Granularity:This refers to a situation where the risk grading
system at banks does not have the requisite capability to
discriminate between good and bad risks. The consequence is
tightening of credit terms, or an increase in prices, or both. From
the borrowers perspective, this leads to an outcome where the bank
is overpricing good risks and underpricing bad risks. The fact that
most banks in India have not developed adequate expertise in SME
lending risk assessment exercises leads to the problem of
granularity when it comes to SME lending.Pecking Order
Theory:Pecking order theory flows from the above two issues,which
makes SME lending highly difficult for banks. Under this
hypothesis, SMEs,which face a cost of lending that is above the
true risk adjusted cost,will have incentives to seek out
alternative sources of funding. Evidence suggests that in such
situations SMEs prefer to utilise retained earnings instead of
raising loans from banks.Moral Hazard:Even when loans are made to
SMEs,it may so happen that the owners of these SMEs take higher
risks than they otherwise would without lending support from the
banks. One reason for this situation is that the owner of the firm
benefits fully from any additional returns but does not suffer
disproportionately if the firm is liquidated.This is referred to as
the moral hazard problem, which can be viewed as creating a
situation of overinvestment. The moral hazard problem may, thus,
result in SME lending turning bad in a short period of time, a
situation that all banks would like to avoid.Switching Costs:SMEs
may find it harder to switch banks,when countered with any issue.
It is a known fact that the smaller the business, the more
significant the switching costs are likely to be and,therefore, it
is less likely that the benefits of switching outweigh the costs
involved. This situation results in SME lending becoming a sellers
market,which may not be attractive to SME borrowers. Steps for
Smooth SME LendingIn order to ensure that the Small and Medium
Enterprises (SMEs) play a very significant role in the economy in
terms of balanced and sustainable growth, employment generation,
development of entrepreneurial skills and contribution to export
earnings. However, despite their importance to the economy, most
SMEs are not able to stand up to the challenges of globalisation,
mainly because of difficulties in the area of financing. With the
opening up of the Indian economy, it has become necessary to
consider measures for smoothening the flow of credit to this
sector.
The Remedies :Following are the remedial measure to be
takenCollateral:Existence of collateral that can be offered to
banks by SMEs could be one effective way of mitigating risk. Banks
could, therefore, look at collateral when pursuing the question of
SME lending. It can also be stated that a borrowers willingness to
accept a collateralised loan contract offering lower interest
(relative to unsecured loans) will be inversely related to its
default risk. However, not all SMEs would be able to offer
collateral to banks. Hence, Reserve Bank of India (RBI) allows
banks, with a good track record and financial position on SSI
units, to dispense with collateral requirements for loans up to Rs.
25 lakhs.Relationships:The length of the relationship between a
bank and its SME customers is also 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 calibre of the people running the business.Quality
of Information: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.Customer
Consideration:The SME market is somewhat different to the corporate
market in that corporate customers generally have a wide range of
financing options to choose from and are not as dependent on bank
financing as is the case with SMEs. The extent to which SMEs can
take necessary steps, with the aid of public initiatives, to easily
switch to another bank is another factor that can influence the
level of competitive pressure on banks in the case of SME
lending.Role of Government and Banking Regulator in SME Lending, As
is apparent, the above factors are only idealistic solutions and
may not be practical for SMEs to follow because they are faced with
several problems such as weak financial strength, inability to
provide adequate collateral and other factors.Hence, the Government
and banking suIt is a known fact that the smaller the business, the
more significant the switching costs are likely to be and,
therefore, it is less likely that the benefits of switching
outweigh the costs involved pervisors should take a holistic view
of the SME Sector while considering SME financing, taking into
account the risks faced by banks and the problems faced by SMEs. In
this regard, the initiatives taken up by the Government and Banking
Regulators across various countries and in India are as
follows.Crosscountry 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; microfinance programmes, etc.Global Scenario:For
instance, country like New Zealand had introduced a scheme called
BIZ Investment Ready, which targeted innovative businesses and
entrepreneurs seeking funds to expand, diversify or commercialise a
new concept. The European Union had 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 had instituted a financing programme called SME Force
(SME Financing for Organisationally Competent and Excellent
Franchise Businesses), which is a franchise development financing
facility that will be implemented with the participation of
franchiser organisations.
Chapter 4Case studyHaving studied the procedural aspects of msme
lending by sbi a case study is presented below incorporating the
findingsNAME: M/s XYZ Biosciences Private LimitedBUSINESS SEGMENT:
SERVICES/REGULATORYREGION: APSECTION 1 : DETAILS OF THE PROPOSAL
Case study on Financing XYZ Bioscience ltd.Name and location of the
bankLength of relationshipFacilities availedType of facilityLoan
amount(In Rs. Lakhs)Rate( % )
State Bank of Hyderabad13 yearsCash CreditFund based
limit20.0013.00
Stand by line of creditFund based limit5.0013.50
Letter of creditNon-fund based limit60.00-
Bank GuaranteeNon-fund based limit0.50-
Term loan IFund based limit80.0013.25
Term loan IIFund based limit50.2513.25
Key Project Parameters
Project cost 121.84
Debt80.00
Equity41.84
D/E Ratio1.91:1.00
Tenor of the loan84 months
Gross avg DSCR8.71
Minimum security margin53.87%
Promoters contribution34.34%
movement of long term fundsColumn1Column2
Fund flowsEstimated(Current Yr) 2012Projected(Next Yr) 2013
Long term Sources274.8176.76
a) Cash Accruals50.8176.76
b) Equity Funds69
c) Loans80
d)Others(SAM)75
Long Term Uses209.86125.76
a)CAPEX209.8677.31
b)Others48.45
Long term surplus/Deficit64.95-49
Constitution: pvt.ltdSector: TeluIndustry and nature of
activity: Services, company started Telugu news channelROI : Term
Loan: 5.00% above base rate i.e15.00% p.a. Overdraft: 4.25% above
base rate i.e14.25% p.a.
SECTION A2
PERFORMANCE DETAILS a) Performance and financial indicators:
Last two years actualsCurrentNext year
Year
AuditedAuditedEstimatesProjectio
(Estimates(Estimates)ns
)@2012@201320142015
Gross Sales (value)250367.5454.5561.5
Net Sales ( value)250367.5454.5561.5
(Exports sales)
[225][330][412.5][511.5]
Net Sales (Quantity)8 FTEs + FFS15 FTEs + FFS20 FTEs + FFS25
FTEs + FFS
(Exports Sales)8 FTEs 15 FTEs20 FTEs 25 FTEs
Raw Materials42.2562.1176.8194.89
Power and Fuel6.8010.0012.3615.28
Direct labour82.50110.25136.35168.45
SG & A costs
33.2747.6258.9072.81
Interest5.4716.5014.6213.02
Operating Profit(OP)19.3638.0966.8190.09
after interest
OPM% ( OP/ NS%)9.93%14.85%17.92%18.36%
PBT18.5337.2665.9889.26
PBT / Net Sales7.41%10.14%14.52%15.90%
PAT13.5326.0847.4862.48
Cash Accruals50.8176.7696.05119.73
PBDIT60.45103.61128.34158.70
Interest Coverage11.056.288.7812.19
Ratio *
Paid Up Capital (PUC)69.0069.00144.00144.00
TNW154.19181.11224.36275.76
Adj. TNW154.19181.11224.36275.76
TOL/TNW0.680.590.420.30
TOL / Adj.TNW0.680.590.420.30
Current Ratio3.251.212.302.23
NWC55.786.7948.146.18
DSCR3.724.646.137.82
ROE%23.05%35.70%40.01%44.07%
@ figures in brackets denote estimates at the time of last
renewal * Interest Coverage ratio: Calculation method EBITDA /
Interest.
a)Feasibility reportTechnicalRaw Materials is an essential
ccomponent in the process of execution of R&D projects. The raw
materials are sourced in advance after the project gets awarded in
case of FFS projects or on regular basis in case of FTE projects.
Of this 90% of the chemicals are sourced locally from Hyderabad.
Sigma Aldrich/ Alfa Aesar, AVRA Labs and other standard vendors are
registered as preferred suppliers as they are stated to be having
international reputation and an excellent database of chemicals.
Approximately 10% of the chemicals are imported from various parts
of the world and the lead time for getting these chemicals is
usually 10-12 days.Manpower/labour: the company has already hired
35 employees and will be hiring around 20 more shortly in its
rolls. As stated the chemists recruited into the company have an
M.Sc(Chemistry) and PhD with varied experiences in the
industry.MarketingMarketing and selling Arrangements:The company
has a registered US entity XYZ Biosciences Inc. As stated the
presence of the US company is primarily for the purpose of ensuring
that the intellectual property of the client is maintained. Foreign
companies tend to sign projects with US company to ensure that
their intellectual property is protected. As stated XYZ Bioscience
also has a tie up with Seven Hills Research Inc for marketing
purposes. The projects are generally signed by these organisations
and executed by the Indian company, XYZ Biosciences pvt
ltd.Financiali) Commercial viability(Company as a whole)
31.03.201231.03.2013
1. Net Sales250367.50
2. OP24.8354.59
3. PBT18.5337.26
4. PAT13.5326.08
5. Cash Accruals50.8176.76
6. PBDIT60.45103.61
20122013201420152016201720182019
Sales250367.50454.50561.50668.80800.70951.241167.63
Net Profit13.5326.0847.4862.4887.97112.83146.89188.26
Cash Accruals50.8176.7696.05119.73140.88169.25198.97244.15
Interest4.6413.2011.129.026.914.822.720.66
Total55.4589.96107.17128.75147.79174.07201.69244.81
TL repayments0.001112121212129
Interest4.6413.2011.129.026.914.822.720.66
Total4.6424.2023.1221.0218.9116.8214.729.66
Gross DSCR0.003.724.646.137.8210.3513.7025.34
Net DSCR0.006.9889.9811.7414.1016.5827.13
Average Gross DSCR8.63
Average Net DSCR13.71
Comments on DSCR(in brief):The position of DSCR can be
considered satisfactory, the unit is capable of meeting the
repayment obligations in respect of proposed term loan
Security Margin: Particulars20122013201420152016201720182019
WDV of Fixed
Assets173.41237.32227.26268.58247.92268.58247.92266.11
Aggregate Term Loan80685644322080.00
Security Margin
Available93.41169.32171.26224.58215.92248.58239.92266.11
% of Margin53.87%71.35%75.35%83.62%87.09%92.55%96.77%100%
Minimum security Margin is 53.87%Basewd on the detailed analysis
of the proposal the sbi have approved sanction of a loan of ...
amount subject to the compliance by borrower in terms of
collaterals, and loan document requirements.
Chapter-5Recommendation 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 harmonise the standards and practices,
therefore, need to be properly coordinated to facilitate SME
finance further.
SMEs are increasingly using products such as derivatives to
manage their FOREX flows. Bank needs to offer sophisticated
products to the SMEs in a simplified manner. They need to innovate
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.
The Bank should keep on revising its Credit Policy which will help
Banks effort to correct the course of the policies Banks have to
grant the loans for the establishment of business at a moderate
rate of interest. Because of this, the people can repay the loan
amount to bank regularly and promptly. Bank should not issue entire
amount of loan to agriculture sector at a time, it should release
the loan in installments. If the climatic conditions are good then
they have to release remaining amount. SBI has to reduce the
Interest Rate. SBI has to entertain indirect sectors of agriculture
so that it can have more number of borrowers for the Bank.
BibliographyBooks - Credit Appraisal, Risk Analysis and Decision
Making, by D.D Mukherjee, 2010, Snow White Publications Pvt Ltd.
Projects, by Prasanna Chandra, Tata McGraw Hill Education Private
Limited (2009) Business World, 2009, The SME White book 2009-2010.
New Delhi: ABP Pvt. Ltd.
SBI Mannuals and Print Material
Loan Policy and SBI Norms for Credit Appraisal SME Products and
Services of State Bank of India CRA Models for Trading and
Non-Trading Sectors (Value Statements and Scoring Boards) Research
Documents
Banking Opportunities Entry strategy and the Road Ahead,
Destination India, Price Water House Coopers. India Banking 2010-
Towards a High Performing Sector, McKinsey & Company The Indian
Banking Sector- On the Road to Progress, G.H. Deolalkar Indian
Banking System- The Current State & Road Ahead, FICCI Annual
Survey, February 2010. The World and the Indian Banking Industry-
Munich Personal Repec Archive, IIM Ahmadabad.
Websites - www.statebankofindia.com www.investopedia.com
www.rbi.org.in www.banknetindia.com www.msme.gov.in
www.msmehyd.ap.nic.in www.sme.in www.smechamberofindia.com
www.dsir.gov.in/reports/mitcon/chap2.pdf Oxford Journals/World Bank
Review/ Small manufacturing enterprises in developing countries/
I.M.D. Little/ volume 1/ no. 2/ Pg. No. 203-235
www.crisil.com/Strategies for increasing credit flow/Prabal Dutta
www.zunia.org/Micro small and medium enterprises in India: An
appraisal/December 1, 2009/ Ghatak