Summer Training Project Report on Credit Appraisal

Analysis of Credit Appraisal

at Union Bank of India 18719103911

EXECUTIVE SUMMARY

In today’s scenario, it is very important to understand that every industry needs to support

itself and hedge itself against risks. No matter which industry or sector the company belongs,

it needs to update every day itself to the various things happening all over the world which

may directly or indirectly affect its business, growth and potential in the market. The credit

report is an important determinant of an individual's financial credibility. They are used by

lenders to judge a person's creditworthiness.

The project focused on the analysis of credit appraisal in Union Bank of India (UBI). It is one

of India's largest state-owned banks listed on the Forbes 2000. It has assets of USD 13.45

billion and all the bank's branches have been networked with its 1135 ATMs. It renders

credit ratings to their clients on the basis of their loan sanctioned amount, past records,

validity and feasibility of their projects, etc. Ratings can be assigned to short-term and long-

term debt obligations as well as securities, loans, preferred stock and insurance companies.

Union Bank of India follows a finely defined Credit Rating Model for assessing the

creditworthiness of the applicant. The credit rating model assess various aspects of the

projects and assigns scores against them thereby determining the risk level involved with the

project.

The project starts with the brief introduction to the industry profile related to banking sector

in India and introduction to the company, the mission and vision of the company along with a

brief introduction regarding the products offered by the company. Project also includes the

theoretical framework of the study, that is, credit report and credit rating, corporate credit

rating, term sheets, letter of credit and guarantee. The objective of the study was to know the

credit rating system and the methodologies applied and the way balance sheet and other

financial techniques are used in deciding whether or not to approve the loan. Both primary

and secondary sources were used in this project report.

Gitarattan International Business School Page 1

http://en.wikipedia.org/wiki/Forbes_2000

http://en.wikipedia.org/wiki/India



The analysis was made by various discussions with the staff members of the bank. The

analysis includes evaluation of the management, financial statements of M/S SHIV-VANI

OIL & GAS EXPLORATION SERVICES LTD., and its significant accounting policies. It

also includes analysis of audited balance sheet of M/S. SHIV-VANI OIL & GAS

EXPLORATION SERVICES LTD., its breakup and evaluation of key ratios by Union Bank

of India. It was concluded that in UBI, the process of credit appraisal includes a thorough

study of the project which involves evaluation of management, technical feasibility, financial

viability and risk analysis. Thus, Union Bank of India has sound system for credit appraisal.




1.1 ABOUT UNION BANK OF INDIA

Union Bank of India (UBI) is one of India's largest state-owned banks (the government owns

55.43% of its share capital), is listed on the Forbes 2000. It has assets of USD 13.45 billion

and all the bank's branches have been networked with its 1135 ATMs. Its online Tele

banking facility is available to all its Core Banking Customers - individual as well as

corporate. It has representative offices in Abu Dhabi, United Arab Emirates, and Shanghai,

Peoples Republic of China, and a branch in Hong Kong

The Union Bank of India was built up in twentieth century and declared open by the Father

of the Nation, Mahatma Gandhi. The bank with its efficient value-added services, sustained

growth, consistent profitability and development of new technologies bank has ensured

complete customer delight, living up to its image of, “GOOD PEOPLE TO BANK WITH”.

Bank is offering credit cards, home loan, union de-mat, ATM, International debit card, online

tax payment facility, Railway e-ticketing kiosk, etc., services to its customers through core

banking solution.

The Union Bank of India has 2261 branches out which 1031 branches are under CBS. All the

ATMs are inter-connected through the Bank’s ATM Switch, thus facilitating on-line

operations in case of CBS customers. The Bank is a member of Cash Tree consortium and

also has bilateral arrangement with State Bank of India, enabling the Bank’s ATM cardholder

access to over 20000 ATMs across the country. UBI Net connects 65 Offices and 984

branches located in 323 centers, facilitating speedier transmission of MIS data (Network

Map). The network also facilitates the implementation of Core Banking Solution, apart from

DEMAT services, Cash Management services, fund transfers, messaging system, etc. The

Bank is using VSAT network for connecting branches and ATMs wherever leased line

connectivity is not feasible. We have 590 VSATs operational, connecting 194

branches/extension counters and 316 ATMs.




1.1.1 The Vision Statement

To become the bank of first choice in our chosen area by building beneficial and

lasting relationship with the customers through a process of continuous process.

Technologically Strong

Financially Sound

All India presence

Personalized Services

Value Maximization

1.1.2 The Mission Statement

A logical extension of the Vision Statement is the Mission of the Bank, which is to gain

market recognition in the chosen areas.

To facilitate a process of restructuring of branches to support a greater efficiency in the retail

banking field.

To be premiere bank, responsive to the needs of our target market customers, recognized for

consistently superior service quality innovative products, thereby delivering superior value to our

shareholders.




1.1.3 BOARD OF DIRECTORS

SHRI DEBABRATA SARKAR

Chairman & Managing Director

SHRI S.S.MUNDRA

Executive Director

SHRI SURESH KUMAR JAIN

Executive Director

SHRI CHANDAN SINHA

RBI Nominee Director

SHRI B.M.SHARMA

Chartered Accountant Director

SHRI N.SHANKAR

Director representing Workmen Employees

SHRI B N BHATTACHARJEE

Director representing Officer Employees




1.2 OVERVIEW OF THE INDUSTRY

1.2.1 Introduction to the Banking Sector

The Banking industry comprises of segments that provide financial assistance and advisory

services to its customers by means of varied functions such as commercial banking,

wholesale banking, personal banking, internet banking, mobile banking, credit unions,

investment banking and the like. With years, banks are also adding services to their

customers. The Indian banking industry is passing through a phase of customers market. The

customers have more choices in choosing their banks. A competition has been established

within the banks operating in India. With stiff competition and advancement of technology,

the services provided by banks have become more easy and convenient. Banks are among the

main participants of the financial system in India. Banking offers several facilities and

Opportunities.

The Indian banking can be broadly categorized into nationalized (government owned),

private banks and specialized banking institutions. The Reserve Bank of India acts a

centralized body monitoring any discrepancies and shortcoming in the system. Since the

nationalization of banks in 1969, the nationalized banks have acquired a place of prominence

and has since then seen tremendous progress. The need to become highly customer focused

has forced the slow-moving public sector banks to adopt a fast track approach.




1.2.1.1 Classification of the Banks

Public Sector Banks

Almost 80% of the businesses are still controlled by Public Sector Banks (PSBs). PSBs are

still dominating the commercial banking system. Shares of the leading PSBs are already

listed on the stock exchanges. The PSBs will play an important role in the industry due to its

number of branches and foreign banks facing the constraint of limited number of branches.

Private Sector Banks

The RBI has given licenses to new private sector banks as part of the liberalization process.

The RBI has also been granting licenses to industrial houses. Many banks are successfully

running in the retail and consumer segments but are yet to deliver services to industrial

finance, retail trade, small business and agricultural finance.

Foreign Banks

The number of foreign bank branches in India has increased significantly in recent years

since RBI issued a number of licenses - well beyond the commitments made to the World

Trade Organization. The presence of foreign banks in India has benefited the financial

system by enhancing competition, resulting in higher efficiency. There has also been transfer

of technology and specialized skills which has had some "demonstration effect" as Indian

banks too have upgraded their skills, improved their scale of operations and diversified into

other activities.

At a time when access to foreign currency funds was a constraint for the Indian companies,

the presence of foreign banks in India enabled large Indian companies to access foreign

currency resources from the overseas branches of these banks. Also with the presence of

foreign banks, as borrowers in the money market and their operation in the foreign exchange

market has resulted in the creation and deepening of the inter-bank money market.




Co-operative Banks

Co-operative banks are small-sized units organized in the co-operative sector which operate

both in urban and non-urban centers. Co-operative Banks in India are registered under the

Co-operative Societies Act. The cooperative bank is also regulated by the RBI. They are

governed by the Banking Regulations Act 1949 and Banking Laws (Co-operative Societies)

Act, 1965.

Co-operative banks function on the basis of 'no-profit no-loss'. Co-operative banks, as a

principle, do not pursue the goal of profit maximization. Therefore, these banks do not focus

on offering more than the basic banking services. So, co-operative banks finance small

borrowers in industrial and trade sectors, besides professional and salary classes.

1.2.2 Banking in India

Banking in India originated in the last decades of the 18th century. The first banks were The

General Bank of India, which started in 1786, and Bank of Hindustan, which started in 1790;

both are now obsolete.

The oldest bank in existence in India is the State Bank of India, which originated in the Bank

of Calcutta in June 1806, which almost immediately became the Bank of Bengal. This was

one of the three presidency banks, the other two being the Bank of Bombay and the Bank of

Madras, all three of which were established under charters from the British East India

Company. The three banks merged in 1921 to form the Imperial Bank of India, which, upon

India's independence, became the State Bank of India. In India the banks are being

segregated in different groups.




Each group has their own benefits and limitations in operating in India. Each has their own

dedicated target market. Few of them only work in rural sector while others in both rural as

well as urban.

Many even are only catering in cities. Some are of Indian origin and some are foreign

players. All these details and many more are discussed over here.

The banks and its relation with the customers, their mode of operation, the names of banks

under different groups and other such useful information are talked about. One more section

has been taken note of is the upcoming foreign banks in India.

Post-Independence:

The partition of India in 1947 adversely impacted the economies of Punjab and West Bengal,

paralyzing banking activities for months. India's independence marked the end of a regime of

the Laissez-faire for the Indian banking. The Government of India initiated measures to play

an active role in the economic life of the nation, and the Industrial Policy Resolution adopted

by the government in 1948 envisaged a mixed economy. This resulted into greater

involvement of the state in different segments of the economy including banking and finance.

The major steps to regulate banking included:

The Reserve Bank of India, India's central banking authority, was nationalized on January 1,

1949 under the terms of the Reserve Bank of India (Transfer to Public Ownership) Act, 1948

(RBI, 2005b). In 1949, the Banking Regulation Act was enacted which empowered the

Reserve Bank of India (RBI) "to regulate, control, and inspect the banks in India."




The Banking Regulation Act also provided that no new bank or branch of an existing bank

could be opened without a license from the RBI, and no two banks could have common

directors. As per Section 5(c) of Banking Regulation Act, 1949 a "Banking Company" means

any company which transacts the business of banking in India.

As per Section 5(b) of Banking Regulation Act, 1949, banking means the accepting, for the

purpose of lending or investment, of deposits of money from the public, repayable on

demand or otherwise, and withdraw able by cheque, draft, order or otherwise.

As per Section 5(d) of Banking Regulation Act, 1949, company means any company as

defined in Section 3 of the Companies Act, 1956 and includes a foreign company within the

meaning of Section 591 of that Act.




1.2.3 A Brief about RESERVE BANK OF INDIA

Establishment:

The Reserve Bank of India was established on April 1, 1935 in accordance with the

provisions of the Reserve Bank of India Act, 1934.The Central Office of the Reserve Bank

was initially established in Calcutta but was permanently moved to Mumbai in 1937.The

Central Office is where the Governor sits and where policies are formulated. Though

originally privately owned, since nationalization in 1949, the Reserve Bank is fully owned by

the Government of India.

Preamble:

The Preamble of the Reserve Bank of India describes the basic functions of the Reserve Bank

as:

"...to regulate the issue of Bank Notes and keeping of reserves with a view to securing

monetary stability in India and generally to operate the currency and credit system of the

country to its advantage."

Acts governing Banking Operations:

Companies Act, 1956: Governs banks as companies

Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970/1980: Relates

to nationalization of banks

Bankers' Books Evidence Act

Banking Secrecy Act

Negotiable Instruments Act, 1881




1.3 PRODUCTS AND SERVICES

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

of product and services consists of:

Banking

Accounts & Deposits – cumulative deposit scheme, deposit reinvestment certificate,

monthly income scheme, union flexi-deposit, senior citizens scheme, multi gain savings

account, no frills saving account, union super salary account, union classic current account

Retail Loans – union cash, union home, union health, union miles, union education, union

top up, EMI calculator, union smile.

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

Insurance & Investment – mutual fund, union healthcare

Demit – demit accounts, online share trade

Payment

NRI Banking

Remittance - Union E-Remit, Details for Remittance

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

External Rupee, Union Unfixed, Foreign Currency Deposit

Loan & Services – house loans, foreign currency loans, loans against deposit, immovable

property, and shares or debenture

Payments - Union Bill Pay




Corporate Banking

CMS - Union Speed, Union Centralized Debits/Credits, Union Prompt

E-Tax - Customs and Direct taxes, Central Excise and Service Tax

Trade Finance – trade finance for exporters, trade finance for importers, foreign currency

loans, correspondent banking

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

Syndication of Loans

MSME Banking

Loans & Policies

Internet Banking

Account Information

Transfer of Funds

Bills

Requests

Mails

Trade

Limits

Currency

Uploads

Customization

Financial enquiries

Non-Financial enquiries




2.1 INTRODUCTION

In 1994, the RBI established the Board of Financial Supervision (BFS), which operates as a

unit of the RBI. The entire supervisory mechanism was re-aligned to suit the changing needs

of a strong and stable financial system. The supervisory jurisdiction of the BFS was slowly

extended to the entire financial system except for the capital market institutions and the

insurance sector. Its mandate is to strengthen supervision of the financial system by

integrating oversight of the activities of financial services firms. The BFS has also

established a sub-committee to routinely examine auditing practices, quality, and coverage.

In addition to the normal on-site inspections, Reserve Bank of India also conducts off-site

surveillance which particularly focuses on the risk profile of the supervised entity. The Off-

site Monitoring and Surveillance System (OSMOS) were introduced in 1995 as an additional

tool for supervision of commercial banks. It was introduced with the aim to supplement the

on-site inspections. Under off-site system, 12 returns (called DSB returns) are called from the

financial institutions, which focus on supervisory concerns such as capital

adequacy, asset quality, large credits and concentrations, connected lending, earnings and

risk exposures (viz. currency, liquidity and interest rate risks).

In 1995, RBI had set up a working group under the chairmanship of Shri S. Padmanabhan to

review the banking supervision system. The Committee certain recommendations and based

on such suggestions: a rating system for domestic and foreign banks based on the

international CAMELS model combining financial management and systems; and control

elements was introduced for the inspection cycle commencing from July 1998. It

recommended that the banks should be rated on a five point scale (A to E) based on the lines

of international CAMELS rating model. CAMELS evaluate banks on the following six

parameters:




(a) Capital Adequacy : Capital adequacy is measured by the ratio of capital to risk-

weighted assets (CRAR). A sound capital base strengthens confidence of depositors.

(b) Asset Quality: One of the indicators for asset quality is the ratio of non-performing loans

to total loans (GNPA). The gross non-performing loans to gross advances ratio is more

indicative of the quality of credit decisions made by bankers. Higher GNPA is indicative

of poor credit decision-making.

(c) Management: The ratio of non-interest expenditures to total assets (MGNT) can be one

of the measures to assess the working of the management. . This variable, which includes a

variety of expenses, such as payroll, workers compensation and training investment, reflects

the management policy stance.

(d) Earnings: It can be measured as the return on asset ratio.

(e) Liquidity : Cash maintained by the banks and balances with central bank, to total asset

ratio (LQD) is an indicator of bank's liquidity. In general, banks with a larger volume of

liquid assets are perceived safe, since these assets would allow banks to meet unexpected

withdrawals.

(f) Sensitivity to Risks : This parameter assesses the various risks to which the bank is

exposed. These risks can be market risks, forex risks, interest rate risk etc.




Each of the above parameters is weighted on a scale of 1 to 100 and contains number of sub-

parameters with individual weightages.

TABLE NO.: 1

Rating

SymbolRating symbol indicates

A Bank is sound in every respect.

B Bank is fundamentally sound but with moderate weaknesses.

CFinancial, operational or compliance weaknesses that give cause for

supervisory concern.

DSerious or immoderate finance, operational and managerial weaknesses

that could impair future viability.

ECritical financial weaknesses and there is high possibility of failure in

the near future.

2.2 CREDIT DISBURSEMENT AT UNION BANK OF INDIA

Financial requirements for Project Finance and Working Capital purposes are taken care of at

the Credit Department of the bank. Companies that intend to seek credit facilities approach

the bank. Primarily, credit is required for following purposes:-

1. Working capital finance

2. Term loan for mega projects

3. Non fund based Limits like Letter of Guarantee, Letter of Credit

Companies present audited balance sheets of the current and previous years. These are used

to determine the financial health, turnover trends and rise and fall of profitability. Then credit

rating is done.




The financial health and credit rating are the theoretical methods for determining the right

interest rate. However, in practice, banks consider other factors such as history with client,

market reputation and future benefits with clients.

2.2.1 Credit Risk Management

In today’s scenario, it is very important to understand that every industry needs to support

itself and hedge itself against risks. Risks are of various kinds and in different magnitude. No

matter which industry or sector the company belongs it needs to update every day itself to the

various things happening all over the world which may directly or indirectly affect its

business, growth and potential in the market.

Banks are directly related to people, industry and market. In the recent times, we have seen

that the retail loan section of the banks have come up as one of the important areas. All the

big industries, small and medium enterprises and individuals, avail loans for all their

purposes.

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

check the credit worthiness of the borrower. To rate the worthiness of an individual, banks

have various methods like checking their market image, their past record, potential and

security provided. From this, it is decided that whether they are worthy enough or not. In

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

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

2.2.2 How does risk matter to the bank?

Banks and Financial Institutions perform the essential function of channelizing funds from

those with surplus funds to those with shortage of funds. Broadly, the risks by the banks

today can be classified as under:




I. Credit Risk: It is one of the major risks faced by the banks on account of the nature of

their business activity, which includes dealing with or lending to a corporate, individual,

another bank, financial institution or a country. Credit risk includes borrowers risk and

portfolio risk. Borrower risk may be defined as the possibility that a borrower will fail to

meet his obligations in accordance with agreed terms. Portfolio risk arises due to credit

concentration/investment concentration etc.

II. Market Risk: Market risk is the potential of erosion in income or market value of an

asset arising due to changes in market variables, such as interest rate, foreign exchange rate,

equity prices and commodity prices.

Transaction Rate Risk: The risk in the erosion of earnings due to variation in interest

rate within a given time zone is referred to as interest rate risk. Interest rate risk may itself

arise on account of gap or mismatch risk, basis risk, embedded options risk, yield curve risk

etc.

Exchange Rate Risk: This risk is of two types viz. transaction risk and translation

risk. Transaction risk is observed when movements in price of a currency, upward or

downward, results in a loss of a particular transaction. In a situation of Translation risk, the

Balance Sheet of a Bank, when converted in home currency, undergoes a drastic change,

chiefly owing to exchange rate movements and changes in the level of investments or

borrowings in foreign currency even without having translation at a particular point of time.

Equity Price Risk: The risk arises from the potential of an institution to suffer losses on

its exposure to capital markets, from adverse movements in prices of equity.

Commodity Price Risk: The risk arises from the potential of movements in prices of

physical products, which are or can be traded in the secondary market. These products

include agricultural products, minerals, oils and precious metals.




III. Liquidity Risk: It arises due out of the possibility that a bank maybe unable to meet its

liabilities as they become due for payment or may be to find the liabilities at a cost much

higher than normal cost. The risk arises due to mismatch in the timing of inflows and

outflows of funds, and from funding of long term assets by short- term liabilities. Surplus

liquidity could also represent a loss to the bank in terms of earnings missed and hence an

earning risk.

IV. Operational Risk: It arises out of malfunctioning of information systems or service

delivery process or internal sabotage. In all these cases, the losses are similar and even can

generate losses of unknown magnitude.

V. Systemic Risk: Banks are highly inter-related with mutual commitments. Hence the

failure of one institution generates a risk of failure for those other banks which have

committed funds with defaulting bank.

VI. Solvency Risk: It occurs when the bank is landed in a chronic situation of not able to

meet its obligation. This type of risk gives the ultimate impression that the bank has failed.

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

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




2.2.3 Credit Risk

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

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

alternatively, losses from changes in portfolio value arising from actual or perceived

deterioration in credit quality, short of default. Credit Risk of a bank has two distinct facts i.e.

risk inherent to the individual business unit/loan account and risk from macro credit portfolio

perspective. Credit Risk emanates from banks dealings with an individual, corporate, bank,

financial institution or a sovereign. Credit Risk may take the following forms:

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

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

constituents upon crystallization of the liability;

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

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

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

effected;

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

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

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

loan balance as on the date of default and the ‘Quality of risk’ i.e. “severity of losses” which

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

default. Credit Risk is therefore, a combined outcome of:

Default Risk: It is the probability of the event of default, i.e., missing a payment

obligation. In today’s parlance, payment default is declared when a scheduled payment has

not been made within regulatory time from laid down.




Exposure Risk: The outstanding balances at the time of default are not known in

advances particularly under facilities like committed lines of credit, ODs, project financing,

off balance sheet items like guarantees/LC facilities etc. this uncertainty prevailing with

future amounts at risk, generates exposure risk.

Recovery Risk: The losses in case of default are the amount outstanding at default time

less recovery. Normally, once a borrower defaults, banks resort to enforcement of security. It

thus involves great amount of uncertainties. These uncertainties can be traced to :

Value of Collateral Security: Recovery risk depends on the nature of charged assets,

their location and possession, marketability/appeal, legal status etc. At times, the economic

value of assets charged may erode over a period and may even go below the value of

outstanding debt. Contrarily, where collaterals are of high value and are capable of

generating buyer’s interest may even cancel the loss.

Guarantor’s Value: The net worth of guarantors and in turn their ability to discharge

liabilities upon invocation of guarantee may undergo changes affecting the ultimate

realization amount.

Enforceability of Securities: The ability of a bank to access the securities/collaterals

charged to a bank in order to dispose them off may itself be doubtful. Secondly, enforcement

of securities/contracts is also defined by the prevailing legal system.

In view of this, it becomes difficult to predict the recoverable amount in advance. The

combine outcome of all three elements ultimately defines the credit risk of a bank. Once

these estimates are made, the loss in case of default can be measured by using the formula:




EL= PD × EAR × LGD

Where, EL= Expected Loss

PD= Probability of Default

EAR= Exposure at Risk

LGD= Loss Given Default i.e. (1-Recovery Rate)

2.2.4Credit Report and Credit Rating

The credit report is an important determinant of an individual's financial credibility. They are

used by lenders to judge a person's creditworthiness. They also help the person concerned to

narrow down on the financial problem areas. Credit report is a document, which comprises

detailed information about the credit payment history of an applicant. It is mostly used by the

lenders to determine the credit worthiness of an applicant. The business credit reports provide

information on the background of a company. This assists one to take crucial business related

decisions. People can also assess the amount of business risk associated with a company and

then decide whether they would be comfortable in providing them with credit facilities.

The degree of interest that would be shown by investors in their company can also be

gauged from the business credit reports as they can get an idea of the conception of their

customers regarding themselves. Since these records are updated at regular intervals of time

they enable people to identify the risk levels associated with a business as well as its future.

These reports also allow businesses to get detailed information about the financial status of

business partners and suppliers.

2.2.4.1 Corporate Credit Rating

Ratings can be assigned to short-term and long-term debt obligations as well as securities,

loans, preferred stock and insurance companies. Long-term credit ratings tend to be more




indicative of a country's investment surroundings and/or a company's ability to honor its debt

responsibilities. The ratings therefore assess an entity's ability to pay debts.

Union Bank of India follows a finely defined Credit Rating Model for assessing the

creditworthiness of the applicant. The credit rating model assess various aspects of the

projects and assigns scores against them thereby determining the risk level involved with the

project. It is divided in Four Sections:

1. Rating of the Borrower

Financial Risk

Management Risk

2. Market Condition/ Demand Situation

3. Rating of the Facility

4. Business Consideration

1) Rating of the Borrower

It deals with assessing the financial and managerial ability of the borrower. The financial

ability of the firm is derived by calculating ratios that determine the short term and long term

financial position of the firm. Short term ratios include Current Ratio, which determines the

liquidity position of the company over a period of one year. The current ratio is an indication

of a firm's market liquidity and ability to meet creditor's demands. It is excess of current

assets over current liability. If current liabilities exceed current assets (the current ratio is

below 1), then the company may have problems meeting its short-term obligations. If the

current ratio is too high, then the company may not be efficiently using its current assets.

According to the guidelines given to UBI, the ideal level is at 1.33:1. However the acceptable

level is at 1.17:1.At times, current ratio may not be a true indicator. Hence, it is important for

the evaluator to understand the nature of the industry.




Long term ratio includes Debt Equity Ratio. It is a financial ratio indicating the relative

proportion of equity and debt used to finance a company's assets. This ratio is also known as

Risk Gearing or Leverage. A high debt equity ratio is not preferable by an investor as the

company already has acquired high amount of funds from market thereby reducing the

investor share over the securities available, increasing the risk.

It is also important for the lender bank to assess the firm’s debt paying capacity over a

period. Such capacity is derived by calculating ratio like Debt Service Coverage Ratio

minimum acceptable level is 1.50.It also necessary for the lender to determine the ability of

the firm to achieve the projected growth by evaluating the projected sales with actual.

However such parameter remains non applicable if the business is new.

Financial risk evaluation is only one of the parameter and not the only parameter for

determining the risk level. It is important to evaluate the Management Risk also while

evaluating the risk relating to borrower. It is the management of the company that acts as

guiding force for the firm. The key managerial personnel should bear the capacity to bail out

the company from crisis situation. In order to remain competitiveness, it is essential to take

initiatives.

2) Market potential / Demand Situation




A Company does not operate in isolation, there are various market forces that acts in either

favorable or unfavorable manner towards its performance. Thus, the rating would not give

true picture if does take market or demand situation in consideration. The demand supply

situation / market potential play an important role in determining the growth level of the

company like:

Level of Competition: monopoly , favorable , unfavorable

Seasonality in Demand: affected by short term seasonality, long term seasonality or may

not be affected by seasonality in demand.

Raw Material Availability

Location Issues like proximity to market, inputs, and infrastructure: Favorable, neutral,

unfavorable.

Technology, i.e., proven technology- not to be changed in immediate future, technology

undergoes change, outdated technology.

Capacity Utilization

3) Rating of the Facility

The company can start functioning only after completing statutory obligations laid down by

the governing authority. Such statutory obligation involves obtaining licenses, permits for

ensuring smooth operations, preparation and submission of financial statements, stock

statements in the standard format within the given time schedule.

4) Business Consideration




The length of relationship with the bank enables the lender to assess the previous

performance of the account holder. A good track record acts in the favor of the applicant,

however underperformance make the lender more vigilant.

Thus, the Credit rating of the business takes into consideration various aspects that directly or

indirectly bear an effect the performance of the business.

2.2.5 Lending Interest Rate

After evaluating the risk level involved, the lender bank decided on lending Interest Rate. In

UBI, these are categorized into 9 segments:

1. Lowest Risk CR-1

2. Low Risk CR-2

3. Medium Risk CR- 3

4. Moderate/ Satisfactory Risk CR- 4

5. Fair Risk CR- 5

6. High Risk CR- 6

7. Higher Risk CR- 7

8. Highest risk CR- 8

9. NPA CR- 9

In UBI, a business receiving Credit Rating above level 6 are not considered good from point

of investment and thus are avoided.

2.2.5.1 Determination of Interest Rate




The interest rate is determined from the interest rate guidelines circular. This circular is

regularly updated to reflect the bank’s latest credit policies. The rupee credit is based on

BPLR and the foreign exchange loans are based on LIBOR. The guidelines define how much

interest rate is to be assigned for a particular credit rating and credit duration. However,

credit rating and its use in determining interest rate is a theoretical concept and the bank may

allow a reduction in interest rate under the following conditions:

Good Client: The organization is a long term client and brings good business to the

bank. The organization’s actions show that it intends to become a long term customer of the

bank.

Banking Consortium: The organization is seeking credit from a consortium of banks. In

some cases like this, the lead bank might decide the interest rate and all the member banks of

the consortium follow this interest rate.

2.2.6 Term Sheet




Following a favorable feasibility check, the next step is preparing term sheet. A Term Sheet

is brief document that provides details on aspects like:

Account Details

Financial highlights for immediate previous two audited years and projection for

proceeding year

Nature of Project

Cost of Project

Means of finance

Purpose

Tenure of Term Loan

Interest rate Reset

Margin

Interest Rate, Commission

Door to Door Tenor, i.e., the period within which the entire amount is to be disbursed.

Repayment Terms

Prime Security

Collateral Security

Upfront fees, i.e., the charges levied by the bank for processing the documents.

2.2.7 Proposal




An approved term sheet leads to preparation proposal. A proposal is prepared in standard

format; this enables the bank to keep a proper track record and also facilitates proper

comparison. A proposal with full-fledged document providing details on project has to be

submitted for requesting finance from bank. A proposal contains information on following

aspects:

Details of Account: It includes name of the Account Holder, Date of incorporation, Line

of Activity, Internal Credit Rating level, Address of the Registered Office, Name of

Directors, Share Holding Pattern, Asset Classification, and Purpose of the Loan.

Securities: Lenders often feel more confident about a loan if they are given a security

interest in the assets of a business. Then, if the borrower does not repay the loan as promised,

the lender can take the property the borrower pledged, sell it and use the proceeds to repay

(or partially repay) the borrowed amount. It provides detailed information on nature of

securities given in lieu of the Loan. They are of two types Prime securities, Collateral

Securities.

Prime Securities: Pari Passu is a term used in banking transactions which means that the

charge to be created is in continuation of an earlier charge which might be held by the same

institution or by any other institution.

Collateral Securities: In lending agreements, collateral is a borrower's asset that is forfeited by

the lender if the borrower is insolvent - that is, unable to pay back the principal and interest on

the loan. When insolvent, the borrower is said to default on the loan, in which the lender

becomes the owner of the collateral.

It includes details on: nature / description of collateral security indicating area & location of

property, value in Rupees, date of valuation along with name of assessor, insurance amount

&date of expiry, personal guarantee / corporate guarantee if any, includes name of the

guarantor, value of guarantee.




Financial Highlights: It provides details of important financial elements over a period of

years. It includes details on paid capital, tangible net worth, net-working capital, current

assets, current liabilities, net profit, net sales, reserves and surplus, intangible assets, long

term liabilities, fixed assets, investments, non-current assets like guarantees, cash accruals,

and capital employed. It also includes ratios like Debt Equity Ratio, Current Ratio, Debt

Service Coverage Ratio and so.

Status of the project: In this part of proposal, a brief about the project is explained; it

includes information on nature, type of project, purpose of the project, commencement

details, the promoters and related details of the project. If it is an on-going project, it also

gives details on progress and status of progress.

Evaluation of Industry :This Section gives brief details on:

Scope of the industry

Growth level and overall performance of the industry

Recent Developments and Trend Evaluation

Conduct of the Account: This section provides details on regularity in Submission of:

Stock Statements / Book Debt Statement

QPR Statements / Half Yearly Statement

Financial Statements

CMA Data

Compliance to Terms of Sanction: It furnishes information on following aspect:

Completion of Mortgage formalities

Registration of Charges with ROC

Whether documents valid and in force

Compliance of RBI guidelines




Exposure details from banking system: The sharing pattern of the banks is mentioned

in this section of proposal. It includes:

Name of the bank

Percentage of share for the fund based and non-fund based Limits

Amount in Rs.

Non Fund based credits are in form of guarantees like Letter of Credit (L/C), Letter of

Guarantee (L/G).

Letter of Credit: A ‘Letter of credit’ also known as documentary credit is the most

commonly accepted instrument of settling international trade payments. A letter of credit is

an arrangement whereby a bank, acting at the request of a customer, undertakes to pay a third

party by a given date, on documents being presented in compliance with the conditions laid

down.

Letter of Guarantee: A letter from a bank stating that a customer owns a particular

security and that the bank will guarantee delivery of the security. A letter of guarantee is used

by an investor who is writing call options when the underlying stock is not in his or her

brokerage account. A Call Option is an agreement that gives an investor the right (but not the

obligation) to buy a stock, bond, commodity, or other instrument at a specified price within a

specific time period.

Assessment of Non Fund Based Limit: Non Fund Based Limits are normally to be

sanctioned for existing customer only who already enjoys fund based limits. If there comes a

new borrower, full processing as applicable to Fund Based Limits are to be carried out.

Borrower’s background and experience of meeting commitments to be examined in details.

L/C limit to be considered as per terms of Purchase or contract, lead period and minimum

economical quantity of supply of stocks. Non Fund based Limits are to be supported by

necessary fund based limits.

Past experience of payment of bills under L/C needs to be verified before considering new

request. Any request for financial Guarantee to be critically examined before taking decision.




Details of Allied Concerns: This section provides information about the allied concerns

aspects like the performance, promoters, share holding pattern, operation exposure and

experience from various banks.

Terms and Condition: It is important both for the bank and the applicant to safeguard

their interest. This could be achieved by settling at mutually acceptable terms and condition

in order to ensure that both the parties; the lender and borrower perform their part of

obligation, thereby not putting other party at loss. All loans are subject to regulations and

conditions. The legal information relating to these regulations and conditions can be viewed

in this section. It is advisable for both the parties to read the information carefully before

approval.

3.1 OVERVIEW




Research is formal work undertaken systematically to increase the stock of knowledge and

the use of this stock of knowledge to devise new applications. This chapter deals with

objectives of the study, the objectives are an end that can be reasonably achieved within an

expected timeframe and with available resources. In general, an objective is broader

in scope than a goal, and may consist of several individual goals. It also deals with the

sources from which the data was collected. The research and methodology adopted for the

present study has been systematic and was done in accordance to the objectives.

3.2 RESEARCH DESIGN

The study is analytical in nature as it aims at analyzing the various sources and schemes of

funding. Two types of data are collected, one is primary data and another one is secondary

data.

Primary Data:

Discussion with managers and other staff members at Union Bank of India.

Secondary Data:

Books Database from Banks

Internal reports of the Bank

Websites

E-circulars of the Bank and RBI.

3.3 SCOPE OF THE STUDY




Offering credit is an operation burdened with risk. Before offering credit to an organization,

its financial health must be analyzed. Credit should be disbursed only after ascertaining

satisfactory financial performance. Based on the financial health of an organization, banks

assign credit ratings. These credit ratings are used to fix the interest rate and quantum of

installment. This study aims to analyze the credit health of organizations that approach Union

Bank of India for foreign exchange credit facilities. After analyzing credit health, the credit

rating is determined. On the basis of credit rating, the interest rate guidelines circular is

consulted to fix a price for the credit facilities i.e. determine the interest rate.

3.4 OBJECTIVES OF THE STUDY

The following are the objectives of the study:

To know the credit rating system and the methodologies applied in the bank.

To assess the financial health of organizations that comes to Union Bank of India for

credit sanctioning regarding import export purposes.

To know the way balance sheet and other financial techniques are used in deciding

whether or not to approve the loan.

To know the other important aspects apart from the financial techniques which are of

equal importance for credit rating and appraisal.

3.5 LIMITATIONS OF THE STUDY




All research studies also have limitations and a finite scope. Limitations are often imposed by

time and budget constraints. We precisely list the limitations of the study. It describes the

extent to which we believe the limitations degrade the quality of the research.

The limitations specific to this project are as follows:

All the factors affecting the financial health of the bank could not be taken into

consideration as it would have become very complicated

The data for the past years was collected from various secondary sources where some

figures were not exactly mentioned and were rounded off due to which there is the possibility

of minimal error.

Though attempt has been made to collect as much data as possible but for some factors

very less but relevant data was available.

RBI internal guidelines are not available.

4.1 OVERVIEW




Analysis of data is a process of inspecting, cleaning, transforming, and modeling data with the

goal of highlighting useful information, suggesting, conclusions, and supporting decision

making. In this chapter, the data that was gathered with help of internal reports of bank was

analyzed to reach at the conclusion. Complete process is analyzed with the help of a case study.

Taking M/S SHIV-VANI OIL & GAS EXPLORATION SERVICES LTD. and its balance

sheet as used by the bank.

4.2 M/S. SHIV-VANI OIL & GAS EXPLORATION SERVICES

LTD.

4.2.1 History

Shiv-Vani Oil & Gas Exploration Services Limited (SVOGESL), headquartered in New Delhi,

was incorporated in December 1989, and rapidly evolved to emerge as a key player in the

upstream sector of the oil industry. SVOGESL offers a wide spectrum of services in the field of

oil and natural gas exploration and production. These include shot hole drilling, seismic

surveying, directional drilling, well development, down hole operations, engineering and

logistics, natural gas compression and allied services across 36 sites in India and the Middle

East. Shiv-Vani has expanded its considerable capabilities through the acquisition of cutting

edge technologies, latest equipment and the forging of new partnerships.

4.2.2 Group Companies




Shiv-Vani Oil & Gas Exploration Services Ltd. (INDIA)

Shiv-Vani Oil & Gas Co. LLC (OMAN)

SV Oil & Nature Gas Limited (MAURITIUS)

SV Videsh Limited (Cyprus)

SV Oil & Natural Gas Limited (MAURITIUS)

Oil Block Holding Limited (Cyprus)

Shiv-Vani Oil Services Limited (India)

Shiv-Vani Singapore PTE Limited (Singapore)

TNG Shiv Geo Oil Services Limited (India)

4.3 EVALUATION OF MANAGEMENT

Market reputation of the promoter / management of the company: Satisfactory

Business managed by qualified personnel: The qualified professionals & experienced

persons are proposed to be appointed for managing the overall operation of the company.

Details of key management personnel of Shiv-Vani Oil & Gas Exploration Services Ltd. are

as under:

Mr. Prem Singhee is the Chairman and Managing Director of the Company since its

inception. He holds a Bachelor’s degree in commerce from Osmania University, and has

more than twenty six years’ of experience in the oil and gas industry. Mr. Singhee is a

brother of Mr. Padam Singhee. He is also a son-in-law of Mr. Dwarka Das Daga.

Mr. Padam Singhee is a Joint Managing Director of the Company. He has been

working with the Company since 1990. He is a graduate in commerce from Osmania

University, and has more than twenty two years’ of experience in the oil and gas industry.

Mr. Prateep Kumar Lahiri has been a Director of the Company since 1995. Mr. Lahiri

holds a Master degree in history from Allahabad University (Uttar Pradesh) and is a




retired Indian Administrative Service (IAS). He has experience of working in senior

positions with various administrative departments of the State and Central Government.

He served as Executive Director on the resident Board of Directors of Asian

Development Bank, Manila. He was Secretary to the Government of India, Ministry of

Finance, and Department of Revenue. Prior to that he was Secretary to Government of

India in the Ministry of Mines. At present, he is also Director of Vishwakriya Housing

Finance Limited and Bharat Seats Limited. He is also a Chairman, Governing Council &

Executive Board of ISM University, Dhanbad.

Captain Hiteshi Chander Malik has been a Director of the Company since October

2007. He has rich aviation experience with the Ministry of Defense, the Department of

Civil Aviation. He has also worked with the Directorate General of Civil Aviation and

worked in the capacity of Advisor to the Ministry of Civil Aviation and continued to

advise four Honorable Ministers till August 2004.

Mr. Dwarka Das Daga has been a Director of the Company since 1990. He holds a

Bachelor’s degree in commerce from Calcutta University and is currently also working as

a director of Daga Shipping Agents Pvt. Ltd. Mr. Dwarka Das Daga is the father-in-law

of Mr. Prem Singhee.

Mr. Rajneesh Gupta joined the Board on 30 January 2009. He holds a B.Sc degree

from Allahabad University and completed his Engineering in Electrical (Hon.) from

Punjab Engineering College in 1969. He was selected for the All India Engineering

Services Examination 1970 and joined the Indian Telecom Services (ITS) in January

1972 in the Department of Telecommunications of the Government of India.

He has rich experience of 35 years, worked as Chairman & Managing Director of

Mineral Exploration Corporation Ltd. under the Ministry of Mines and worked as

Managing Director of Bharat Gold Mines Ltd.




Mr. Om Prakash Garg was appointed as a Director of the Company in 1992. He is a

graduate in commerce from Maharishi Dayanand University (Haryana) and has

experience in various industries. He is a Managing Director of Overseas Carpets Ltd. and

a Director of Dwaresh Overseas Construction Pvt. Ltd, New link Overseas Finance Ltd.

and various other organizations/ companies.

Mr. Sachikanta Mishra was appointed as a nominee Director of the Company on 13

February, 2012. He is Post Graduate in Mathematical Economic with about 12

years’ experience macro modeling, strategy, research, financial and management

consulting etc. Currently working as Vice president in IFCI, Managing the Corporate

Advisory Group

Decision making – Is it concentrated? : A committee of directors comprising of

qualified & experienced personnel will professionally manage the company.

Organization structure / Succession planning / Labor relations: The Company will

be a professionally managed company hence, any threat of succession planning is not

perceived.

4.4 Forming Part of financial statements of SHIV-VANI OIL &

GAS EXPLORATION SERVICES LTD.

4.4.1 Significant Accounting Policies




Basis of preparation of financial statements: These financial statements have been

prepared on an accrual basis and under historical cost convention and in compliance, in

all material aspects, with the applicable accounting principles in India, the applicable

accounting standards notified under section 211 (3C)and the other relevant provisions of the

Companies Act, 1956. All the assets and liabilities have been classified as current or non-

current as per the Company’s normal operating cycle and other criteria set out in Schedule VI

to the Companies Act, 1956. Based on the nature of the products and the time between the

acquisition of assets for processing and their realization in cash and cash equivalent, the

company has ascertained its operating cycle to be less than 12 months.

Use of estimates: The preparation of the financial statements in conformity with GAAP

requires management to make estimates and assumptions that affect the reported balances of

assets & liabilities and disclosure relating to contingent liabilities as at the date of financial

statements and reported amounts of income and expenses during the period. Accounting

estimates could change from period to period. Actual results could differ from those

estimates. Appropriate changes in estimates are made as the Management becomes

aware of change in circumstances surrounding the estimates. Changes in estimates are

reflected in the financial statements in the period in which changes are made, if material,

their effects are disclosed in the notes to the financial statements. The management

periodically assesses using, external and internal sources, whether there is an indication that

an asset may be impaired. An impairment loss is recognized wherever the carrying value of

an asset exceeds its recoverable amount.

An impairment loss for an asset is reversed if, and only if, the reversal can be related

objectively to an event occurring after the impairment loss was recognized. The carrying

amount of an asset is increased to its revised recoverable amount, provided that this amount

does not exceeds the carrying amount that would have been determined (net of any

accumulated amortization).




Revenue Recognition: Revenue is primarily derived from oil & gas exploitation and

other allied services. The same is accounted for by the Company on the basis of Gross value

of work done. Profit on sale of fixed assets / investments are recorded on transfer of title

from the company and are determined as the difference between the sale price and carrying

value of the fixed asset / investments. Interest is recognized using the time-proportion

method based on rates implicit in the transaction.

Provisions and Contingent liabilities: A provision is recognized if, as a result of a past

event, the company has a present legal obligation that can be estimated reliably, and it is

probable that an outflow of economic benefits will be required to settle obligation. Provisions

are determined by the best estimate of the outflow benefits required to settle the obligation at

the reporting date. Where no reliable estimate can be made, a disclosure is made as

contingent liability. A disclosure for a contingent liability is also made when there is a

possible obligation or a present obligation that may, but probably will not, require an outflow

of resources. Where there is a possible obligation or a present obligation in respect of which

the likelihood of outflow of resources is remote, no provision or disclosure is made.

Provision for onerous contracts, i.e. contracts where the expected unavoidable costs of

meeting the obligations under the contract exceed the economic benefits expected to be

received under it, are recognized when it is probable that an outflow of resources embodying

economic benefits will be required to settle a present obligation as a result of an obligating

event, based on a reliable estimate of such obligation.

Fixed Assets and Capital work-in-progress: Fixed assets are stated at cost, less

accumulated depreciation and impairments, if any. Direct costs are capitalized until fixed

assets are ready for use. Borrowing costs directly attributable to acquisition or construction of

fixed assets, which necessarily take a substantial period of time to get ready for their intended

use, are capitalized. Capital work-in-progress comprises outstanding advance paid to acquire




fixed assets, and the cost of fixed assets that are not yet ready for their intended use at the

reporting date.

Depreciation and amortization: Depreciation on fixed assets is provided on the

straight-line method at the rate prescribed under Schedule XIV to the Companies Act, 1956.

Depreciation for assets purchased / sold, impaired or discarded during a period is

proportionately charged. Individual low cost assets (acquired for less than Rs. 5000/-) are

depreciated fully in the year of purchase.

Retirement & Other benefits to employees

Gratuity: In accordance with the Payment of Gratuity Act, 1972, the company provides

for gratuity, a defined benefit retirement plan covering eligible employees. The plan

provides a lump-sum payment to vested employees at retirement, death, incapacitation or

termination of employment, of an amount based on the respective employee’s salary and

the tenure of employment with the company subject to conditions specified in aforesaid

act.

Provident Fund: Eligible employees receive benefits of provident fund, which is a

defined benefit plan. Both the employee and the Company makes monthly contribution to

the provident fund plan equal to a specified percentage of the covered employee’s salary.

The rate at which the annual interest is payable to the beneficiaries is being administered

by the government.

Compensated Absence: The employees of the Company are entitled to

compensate absences which are both accumulating and non-accumulating in nature.

The expected cost of accumulating compensated absence is measured based on the

additional amount expected to be paid as a result of the unused entitlement that has

accumulated at the Balance Sheet date. Expenses on non-accumulating compensated

absences are recognized in the period in which the absences occur.




Foreign Currency Transactions: Investments in foreign entities are recorded at the

exchange rate prevailing on the date of making the investment. Transactions in foreign

currencies are recorded at the rates prevailing on the date of transaction. Monetary items

denominated in foreign currency are restated at the rate prevailing on the balance sheet date.

Exchange difference arising on the settlement of monetary items or on reporting company’s

monetary items at rates different from those at which they were initially recorded during the

year or reported in the previous financial statements, are recognized as income or expense in

the year in which they arise except in case of long term liabilities, where they related to

acquisition of fixed assets, in which case they are adjusted to the carrying cost of such assets.

Taxes: Tax expense comprises of current tax related to earlier years & deferred tax.

Income tax is accrued in the same period when the related revenue and expenses arise. A

provision is made for income tax annually, based on the tax liability computed, after

considering tax allowances & exemption. Provisions are recorded when it is estimated that a

liability due to disallowances or other reason is probable. The difference that result between

the profit considered for Income Taxes and the profit as per the financial statements are

identified, and thereafter a deferred tax asset or deferred tax liability is recorded for timing

differences, namely the differences that originate in one accounting period and reverse in

another, based on the tax effect of aggregate amount of timing difference.

The tax effect is calculated on the accumulated timing difference at the end of an accounting

period based on enacted or substantively enacted regulations. Deferred tax assets are

recognized only to the extent that there is reasonable certainty that sufficient future taxable

income will be available against which such deferred tax assets can be realized. Tax credit is

recognized in respect of Minimum Alternate Tax (‘MAT’) as per the provisions of Section

115JAA of the Income Tax Act, 1961 based on convincing evidence that the Company will




pay normal income tax within statutory time frame and is reviewed at each Balance Sheet

date. The MAT credit is recognized as an asset in accordance with the recommendation

provided in the Guidance Note issued by the Institute of Chartered Accountants of India.

Earnings per Share: Basic earnings per share are calculated by dividing the net profit or

loss for the period attributable to equity shareholders by the weighted average number of

equity shares outstanding during the period. For the purpose of calculating diluted earnings

per share, the net profit or loss for the period attributable to equity shareholders and the

weighted average number of shares outstanding during the period adjusted for the effects of

all dilutive potential equity shares.

Investments: Investments are classified as long term based on Management’s intention

at the time of purchase. Cost for overseas investment comprises the Indian Rupee value of

the consideration paid for the investment translated at the exchange rate prevalent at the date

of investment. Long-term investments are carried at cost less provisions recorded to

recognize any decline, other than temporary, in the carrying value of each investment.

Impairment of assets: The Company assesses at each balance sheet date whether there is

any indication that an asset may be impaired. If any such indication exists, the Company

estimates the recoverable amount of the asset. If such recoverable amount of the asset or the

recoverable amount of the cash generating unit to which the asset belongs is less than its

carrying amount, the carrying amount is reduced to recoverable amount.

The reduction is treated as an impairment loss and is recognized in the profit & loss account.

If at the balance sheet date there is an indication that if a previously assessed impaired loss

no longer exists, the recoverable amount is reassessed and the asset is reflected at the

recoverable amount subject to a maximum of depreciated historic cost.

Cash Flow Statement : Cash flows are reported using the indirect method, whereby net

profit before tax and extra ordinary items are adjusted for the effects of transactions of a non-




cash nature, any deferrals or accruals of present or future operating cash receipt or payments

and item of income or expenses associated with investing or financing cash flows. The cash

flows from operating, investing and financing activities of the company are segregated.

Inventories: Stores, spares (consumable & capital) parts & other consumables are valued

at cost on First-in-first-out basis.

Segment Data: The Company considers its principal activity of providing oil and natural

gas exploitation services to be a complete segment and all revenues for the year ended 31

March 2011 have been derived from this segment.

Borrowing Costs: Borrowing Cost that are directly attributable to the acquisition,

construction or production of a qualifying asset, is capitalized as part of the cost of that asset

in accordance with the Accounting Standard 16 on “Borrowing Costs”. Other borrowing

costs are charged to revenue.

Events occurring after the Balance sheet date: Where material, events occurring after

the date of the Balance Sheet are considered up to the date of approval of accounts by the

Board of Directors.

4.4.2 Audited Balance-Sheet of SHIV-VANI OIL & GAS EXPLORATION

SERVICES LTD.

TABLE NO.: 2 (Rs. In Crore)

As At As At




S.No. Particulars 31.03. 2011 31.03. 2010

(A) SOURCES OF

FUNDS

1. SHAREHOLDER

S' FUNDS

(a) Share Capital 46.36 46.36

(b)Reserves and

Surplus

908.14 954.50 878.26 924.63

2. DEFERRED TAX

LIABILITY

133.80 97.45

3. LOAN FUNDS

(a) Secured Loans 1868.46 1677.70

(b)Unsecured

Loans

458.26 2326.73 51.07 1728.77

Total 3415.03 2750.85

(B) APPLICATION

OF FUNDS

1. FIXED ASSETS

(a) Gross Block 2313.95 2084.74

Less: Depreciation 344.19 244.25

(b) Net Block 1969.76 1840.49

(c) Capital Work-

in-progress

138.25 2108.02 224.33 2064.82

2. INVESTMENTS 56.83 56.78

3. CURRENT

ASSETS, LOANS

& ADVANCES

(a) Inventories 199.08 73.00




(b) Sundry Debtors 641.05 268.96

(c) Cash & Bank

Balances

245.42 43.02

(d) Loans &

Advances

591.70 629.97

Total 1677.24 1014.95

4. LESS: CURRENT

LIABILITIES &

PROVISIONS

(a) Current

Liabilities

370.47 344.87

(b) Provisions 75.49 57.53

Total 445.95 402.40

1231.28 612.55

(C) MISCELLANEOUS

EXPENDITURE

1. Deferred Revenue

Expenditure

18.90 18.90 16.69 16.69

TOTAL 3415.03 2750.85

4.4.3 Analysis of M/S. SHIV-VANI OIL & GAS EXPLORATION

SERVICES LTD. By Union Bank of India

TABLE NO.: 3

BREAK UP OF BALANCE SHEET (Rs. In Crore)




S.No. Particulars 31.03.2010 (Aud.)

31.03.2011 (Aud.)

(A) CURRENT ASSETS

1. Cash & Bank Balance 15.59 18.81

2. Investments

a) Govt./Other Trustee Securities

b) Fixed Deposits with banks/ MMMF/ .

27.43 226.61

3. Receivables

a) Inland up to 6 months 197.50 293.05

b) Exports

4. Inventory 73.00 199.08

a) Raw Materials

- Indigenous 52.56

- Imported

b) Stores & Spares

- Indigenous 61.96 117.68

- Imported

c) Stock-in-Process 10.34 28.18

d) Finished Goods

e) Others (Scrap) 0.70 0.66

6. Advances to Suppliers of Raw Materials / Stores/Spares




7. Advance Tax Payment 47.76 102.71

8. Other Current Assets 225.00 485.45

TOTAL CURRENT ASSETS 586.28 1325.71

(B) CURRENT LIABILITIES

1. Short Term borrowings from bank 139.25 203.00

2. Unsecured Borrowings (include. ICDS etc.)

3. Sundry Creditors 239.33 252.50

4. Advances / Progress payment from Customers/Dep. From dealers

5. Unsecured borrowings from others

6. Installments of TL/DPG/Deb./R.P.Share/ADR/GDR due within one year

176.87 243.23

7. Int. & Other charges accrued & due for payment.

Int. & Other charges accrued but not due

8. Provision for Taxation 48.14 65.71

9. Dividend Payable 4.67 9.34

10. Other statutory liabilities 4.75 0.51

11. Other Current Liabilities / ACCEPTANCES

105.50 117.91

TOTAL CURRENT LIABILITIES 718.52 892.18




(C) FIXED ASSETS (Net of Depreciation)

1. Land & Building 20.95 20.60

2. Plant & Machinery 1804.60 1935.09

3. Other Fixed Assets 11.78 10.72

4. Furniture & Fixture 3.16 3.36

5. Capital Work in Progress 224.33 138.25

Less: Revaluation Reserves

TOTAL FIXED ASSETS 2064.82 2108.02

(D) LONG TERM LIABILITIES

1. Debentures 250.00

2. Term Deposits

3. Term Loans from Banks/ FIs 1412.01 1273.29

4. Deferred Tax Liability 97.44 133.80

5. Other Term Liabilities (include. ECB/ADR/GDR/Loans etc.

0.65 357.20

TOTAL LONG TERM LIABILITIES

1510.10 2014.29

(E) MISCELLANEOUS ASSETS

Investments 56.78 56.83

1. Amounts due from Associates/ Subsidiaries

316.11 159.04

2. Other Loans & Advances




3. Bals/Dep. with Government Departments/Statutory Bodies

4. Adv. to Suppliers of Capital Goods

5. INTEREST & OTHER RECEIVABLES

DEFERRED TAX ASSET

6. Security Deposits 1.66 12.15

Book Debts Older than 6 Months 110.91 180.33

7. Other Miscellaneous Assets/ ICD etc.

TOTAL MISCELLANEOUS ASSETS

485.45 408.35

(F) NET WORTH

1. Ordinary Share Capital (Paid up) 46.36 46.36

2. General Reserves 31.00 41.00

3. Revaluation Reserves

4. Share Premium 458.02 458.02

5. Other Reserves 44.60 39.60

6. Balance of Profit 344.64165 369.52

TOTAL NET WORTH 924.63 954.50

(G) INTANGIBLE ASSETS

1. Goodwill

2. Adverse P & L A/c




3. Other Intangible Assets 16.69 18.90

TOTAL INTANGIBLE ASSETS 16.69 18.90

TOTAL ASSETS 3153.24 3860.98

TOTAL LIABILITIES 3153.24 3860.98

4.4.4 Key Ratios evaluated by Union Bank of India

TABLE NO.: 4

S.No. Particulars 31.03.2010 (Aud.) 31.03.2011 (Aud.)

1. Paid up Capital 46.36 46.36




2. Reserves & Surpluses 878.26 908.14

3. Intangible Assets 16.69 18.90

4. Tangible Net Worth 907.93 935.60

5. Long Term Liabilities 1510.10 2014.29

6. Capital Employed 2418.03 2949.89

7. Net Block 2064.82 2108.02

8. Investments 56.78 56.83

9. Other Non-Current Assets 428.67 351.53

10. Net Working Capital -132.24 433.52

11. Current Assets 586.28 1325.71

12. Current Liabilities 718.52 892.18

13. Current Ratio 0.82 1.49

14. Debt Equity Ratio 1.66 2.15

15. DER (TOL/TNW) 2.45 3.11

16. SALES & SERVICE

17. - Domestic 1071.80 1222.13

18. - Exports

19. - Job WorkLess: Excise Duty

20. Net Sales & Job Work 1071.80 1222.13

21. Other Income 17.00 11.49

22. Net Profit Before Tax 150.46 84.65




23. Net Profit After Tax 92.0058 40.65

24. Depreciation 81.72 106.40

25. Cash Accruals 173.73 147.05

26. Percentage(%) of Net Profit to Sales

14.04 6.93

27. ROCE 6.22 0.00

5.1 MAJOR FINDINGS

Capital : Against the authorized share capital of Rs.70 Crore, the paid up capital for

March 2011 is Rs 46.36 Crore. During the year the company has allocated 2457895 equity

share of Rs.10/- each at a premium of Rs.370/- per share to “Templeton Strategic Emerging




Market Funds III L.D.C on preference basis so there is no increase/decrease of paid up

capital.

Reserve & Surplus : No premium collected for current year. The reserve & surplus

increased by Rs.29.88 Crore over previous year balance of R&S of Rs.878.26 Crore resulting

the net R&S as on 31.03.2011 at Rs.908.14 Crore.

Tangible Net Worth : The TNW increased from Rs.907.93 Crore as of 31.03.2011 to

Rs.935.60 Crore as of 31.03.2011.

Long Term Liabilities : The Term Liabilities increased by Rs.504.19 Crore from

31.03.2010 to 31.03.2011 mainly on account of increase in Deferred Tax liability by

Rs.36.36 Crore & increase in Debentures by Rs.250 Crore & increase in Foreign currency

convertible bonds by Rs.356.55.

Net Block : The Net Block increased by Rs.43.20 Crore from 31.03.2010 to 31.03.2011

mainly due to increase of Rs.130.49 Crore in P&M and Rs0.20 Crore in Furniture & Fixture

but also decrease of Rs.86.08 Crore in Capital work in progress & Rs.0.35 Crore in L&B.

NON Current Assets : On account of decrease in the Loans & Advances, this has been

taken as NCA, the total NCA decreased by Rs.77.10 Crore during 2010-2011.

NWC : Due to increase in the Net Block & decrease in NCA,the NWC increased from

negative(-)Rs.132.24 Crore as of 31.03.2010 to Rs.433.52 Crore as on 31.03.2011.

Current Assets : The CA increased from Rs.586.28 Crore on 31.03.2010 to Rs.1325.71

Crore on 31.03.2011 mainly due to increase in the Sundry debtors and other Current assets.

Current Liabilities : We have considered the Term Loan installments due for payment

during 2011-12 as CL for 31.03.2011. The company has to repay the TL installment of

Rs.243.23 Crore during 2011-2012.WC outstanding also increased from Rs.139.25 Crore




(31.03.2010 Aud B/s) to Rs.203 Crore(31.03.2011 Aud B/s).The level of Sundry Creditors

also increased by Rs.13.17 Crore which has altogether resulted as increase of Rs.173.66

Crore in total Current liabilities resulting the CL increased from Rs.718.52 Crore as on

31.03.2010 to Rs.892.18 Crore as on 31.03.2011.

Current Ratio & DER : Due to increase in CA, the CR has increased from 0.82 to 1.49

respectively from March2010 to March2011.Though the CR is below than the minimum

prescribed by our bank, however the TOL/TNW for March2011 charge 1% additional

interest for no compliance of the financial covenants including Min. Current Ratio of 1.7:1

and TOL/TNW of 3.50:1. Accordingly we are charging 1% additional interest over the

prescribed ROI of BPLR+0.50%.

Net Income & Profitability : The Company is working as service provider to Oil

Exploration companies such as ONGC Oil India ltd etc. Despite of increase in the Net

Income from Rs.1071.80 Crore during 2009-2010 to Rs.1222.13 during 2010-2011, the Net

Profit after Tax declined from Rs.92.01 Crore to Rs.40.65 Crore during the same period. This

has happened mainly due to increase in the borrowing cost (Interest paid) on Term Loan &

other direct expenses including consumption of Stores and spares. As the total outstanding of

Secured Term Loans declined by Rs.122.99 Crore, the interest and financial charges paid

increses by approx Rs.46.88 Crore.

5.2 DISCUSSION

With the help of secondary data and reports provided by the bank, the findings of the study

are as follows:




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

method available.

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

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

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

about any organization.

Retail loan sector in India has a long way to go; a steady growth is projected in the

coming years.

VI.1 CONCLUSION

Credit Appraisal is a process of appraising the credit worthiness of loan applicants. The funds

of depositor’s i.e. general public are mobilized by means of such advance / investment. Thus,




it extremely important for the lender bank to assess the risk associated with credit; thereby

ensure the security for the funds deposited by the depositors. In Union Bank of India, the

credit appraisal is done by thorough study of the project which involves: evaluation of

management, technical feasibility, financial viability and risk analysis.

The credit report is an important determinant of an individual's financial credibility. These

are used by lenders to judge a person's creditworthiness. It renders credit ratings to their

clients on the basis of their loan sanctioned amount, past records, validity and feasibility of

their projects, etc. Every bank has its own credit rating system and it tries to update the

system with the latest method available. In credit rating systems, the ratios have a very

important role to play; a thorough understanding of them leads one to the future prospects of

the borrower and also tells a lot about its financial soundness. Another important thing is the

balance sheet, its break up and the study of it, tells a lot about any organization.

Bank takes the audited balance sheets of their borrowers and breaks it according to their

prescribed Performa, calculates the key ratios and then evaluates the creditworthiness of its

borrowers. From the above analysis, the important or key aspects that Union Bank of India

emphasizes in rating any organization are: organization’s capital, its reserve and surplus,

tangible net worth, its long term liabilities, net block, non - current assets, organization’s net

working capital, its current assets and current liabilities, its current ratio and debt – equity

ratio and organization’s net income and profitability.

VI.2 RECOMMENDATIONS

After carrying on the study, the following recommendations have been made:




The appraisal system is to be made more realistic and transparent. The applicant and, if

required, his consultant should be briefed on the objective procedures which bank applies

to arrive at decisions so as to educate them to understand the requirements of bank and to

prepare credit proposals in a scientific manner .

The process followed in sanctioning the loan and documentation required is cumbersome;

hence it is suggested to make the process easier.

Bank should develop flexible systems and procedures for dealing with customers and

modify their role to be a facilitator. It may either provide software to these customers to

prepare stock and financial statements or help and guide them in preparation of renewal

proposal / statements.

A few changes and improvements in the policies could help infuse credit appraisal.

The bank should expand its presence in international markets.

Having such a strong technological base, the bank must use these capabilities to

differentiate its products and services from those of its competitors.

Union bank of India should take care that fresh generation of NPA’s should not take

place. It needs more efficient system to assess the quality of assets.

Bank should focus on reducing the expenses as the increase in expenses has badly

affected the growth in net profit.

Bank should increase the number of branches only if they are profitable enough.

REFERENCES

BOOKS:




Srivastava, R.M & Nigam, Divya (2010): Management of Indian Financial Institution

(10th edition), Himalya Publishing House.

Bhole, L.M (2009): Financial Institution and Markets (5th edition), Tata Mc Graw- Hills.

M.Y.Khan’s, Corporate Finance and Its Basic Usage.

Credit Appraisal, Risk Analysis and Decision Making book, by DD Mukherjee.

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

By Bhattacharya, Hrishikesh.

WEBSITES

http://www.rbi.org.in/ , last accessed on 8 August July, 2012

http://www.unionbankofindia.co.in/ , last accessed on 14 August, 2012

http://www.unionbankofindia.co.in/about_us.aspx , last accessed on 18 August, 2012

http://www.unionbankofindia.co.in/PER_retailloans.aspx , last accessed on 25 August,

2012

http://economictimes.indiatimes.com/shiv-vani-oil-&-gas-exploration-services-ltd/

balancesheet/companyid-10432.cms, last accessed on 27 August, 2012

http://www.shiv-vani.co.in/pdf/Annual%20report/AnnualReport2010-11.pdf , last

accessed on 5 September, 2012

http://www.shiv-vani.co.in/pdf/Annual%20report/Annual_Rreport_2012.pdf , last

accessed on 10 September, 2012

http://www.shiv-vani.co.in/pdf/notice/shivani-notice-2011.pdf ,last accessed on 19

September, 2012

http://en.wikipedia.org/wiki/Union_Bank_of_India,last ,accessed on 27 September,2012

Inter – Office And Intra- Office Circulars.

ANNEXURE

Format of Term Sheet


http://en.wikipedia.org/wiki/Union_Bank_of_India,last

http://www.shiv-vani.co.in/pdf/notice/shivani-notice-2011.pdf

http://www.shiv-vani.co.in/pdf/Annual%20report/Annual_Rreport_2012.pdf

http://www.shiv-vani.co.in/pdf/Annual%20report/AnnualReport2010-11.pdf

http://economictimes.indiatimes.com/shiv-vani-oil-&-gas-exploration-services-ltd/balancesheet/companyid-10432.cms

http://economictimes.indiatimes.com/shiv-vani-oil-&-gas-exploration-services-ltd/balancesheet/companyid-10432.cms

http://www.unionbankofindia.co.in/PER_retailloans.aspx

http://www.unionbankofindia.co.in/about_us.aspx

http://www.unionbankofindia.co.in/

http://www.rbi.org.in/



Union Bank of IndiaIndustrial Finance Branch, New Delhi

APPROVAL OF BROAD TERMS OF THE PROPOSAL

IFB: ADV: Dated:

Name of the account

Account with

Group

Existing connection or

new connection

Credit Rating

Background of promoters

(Rs. In Crores)

Brief Financials




Year (Aud.) Year (Aud.) Year (Prov.)

Net Sales

PAT(Loss)

TNW*

Current Ratio

TOL/TNW

RATIO

(Rs. In Crores)

Nature of Project

Cost of Project

MEANS OF FINANCE

Nature of Facility




Amount Rs. (In Crores)

Margin

Interest/Commission

Interest reset

Purpose

Period of the facility

Moratorium

Door To Door Tenor

Repayment terms

Security – Prime

Collateral security

Upfront fees

Prepayment terms

Whether conforms to Loan

Policy




Customer profitability, (in

case of existing accounts)

1. Commission earned on

bills

purchased/discounted.

2. Processing charges

3. Commission on LC/LG

4. Credit balances in

a. SB

b. CD

5. Term deposits

a. Through own sources

b. Through third party

UNION BANK OF INDIA

Break Up of Balance Sheet




ACCOUNT:

BRANCH: Industrial Finance Branch, New Delhi

(Rs. In Crore)

S.No. Particulars 31.03.2010 (Aud.)

31.03.2011 (Aud.)

(A) CURRENT ASSETS

1. Cash & Bank Balance

2. Investments

a) Govt./Other Trustee Securities

b) Fixed Deposits with banks/ MMMF/ .

3. Receivables

a) Inland up to 6 months

b) Exports

4. Inventory

a) Raw Materials

- Indigenous

- Imported

b) Stores & Spares

- Indigenous

- Imported

c) Stock-in-Process




d) Finished Goods

e) Others (Scrap)

6. Advances to Suppliers of Raw Materials / Stores/Spares

7. Advance Tax Payment8. Other Current Assets

TOTAL CURRENT ASSETS

(B) CURRENT LIABILITIES

1. Short Term borrowings from bank

2. Unsecured Borrowings (include. ICDS etc.)

3. Sundry Creditors

4. Advances / Progress payment from Customers/Dep. From dealers

5. Unsecured borrowings from others

6. Installments of TL/DPG/Deb./R.P.Share/ADR/GDR due within one year

7. Int. & Other charges accrued & due for payment.

Int. & Other charges accrued but not due

8. Provision for Taxation

9. Dividend Payable

10. Other statutory liabilities




11. Other Current Liabilities / ACCEPTANCES

TOTAL CURRENT LIABILITIES

(C) FIXED ASSETS (Net of Depreciation)

1. Land & Building

2. Plant & Machinery

3. Other Fixed Assets

4. Furniture & Fixture

5. Capital Work in Progress

Less: Revaluation Reserves

TOTAL FIXED ASSETS

(D) LONG TERM LIABILITIES

1. Debentures

2. Term Deposits

3. Term Loans from Banks/ FIs

4. Deferred Tax Liability

5. Other Term Liabilities (include. ECB/ADR/GDR/Loans etc.

TOTAL LONG TERM LIABILITIES

(E) MISCELLANEOUS ASSETS




Investments

1. Amounts due from Associates/ Subsidiaries

2. Other Loans & Advances

3. Bals/Dep. with Government Departments/Statutory Bodies

4. Adv. to Suppliers of Capital Goods

5. INTEREST & OTHER RECEIVABLES

DEFERRED TAX ASSET

6. Security Deposits

Book Debts Older than 6 Months

7. Other Miscellaneous Assets/ ICD etc.

TOTAL MISCELLANEOUS ASSETS

(F) NET WORTH

1. Ordinary Share Capital (Paid up)

2. General Reserves

3. Revaluation Reserves

4. Share Premium

5. Other Reserves

6. Balance of Profit

TOTAL NET WORTH




(G) INTANGIBLE ASSETS

1. Goodwill

2. Adverse P & L A/c

3. Other Intangible Assets

TOTAL INTANGIBLE ASSETS

TOTAL ASSETS

TOTAL LIABILITIES

ABBREVIATIONS USED




BOPP Biaxially Oriented Film

CBS Core Banking Solution

VSAT Very Small Aperture Terminal

EMI Equated Monthly Installment

NRO Non Resident Ordinary

NRE Non-resident Indian

CMS Cash Management Services

E-TAX Electronic tax

UBI Union Bank of India

USD Union States Dollar

ATM Automated Teller Machine

CBS Core Banking System

PSBs Public Sector Banks

RBI Reserve Bank of India

BFS Board of Financial Supervision

OSMOS Off-site Monitoring and Surveillance System

CAMELS Capital Adequacy, Asset, Quality, Management, Earning, Liquidity

CRAR Capital to Risk (Weighted) Assets Ratio

GNPA Gross Non Performing Asset

MGNT Management

EL Expected Loss


http://www.investopedia.com/terms/e/equated_monthly_installment.asp

http://en.wikipedia.org/wiki/Non-resident_Indian_and_Person_of_Indian_Origin

http://www.borealisgroup.com/industry-solutions/advanced-packaging/flexible-packaging/bopp-film/



PD Probability of Default

EAR Exposure at Risk

LGD Loss Given Default

ROC Registration of Charges

L/C Letter of Credit

L/G Letter of Guarantee

IAS Indian Administrative Service

ITS Indian Telecom Services

GAAP Generally Accepted Accounting Principles

MAT Minimum Alternate Tax

NCA National Credit Act

NWC Net Working Capital

CL Current Liability

CA Current Asset


Summer Training Project Report on Credit Appraisal

Documents

dwarka das

miscellaneous

dealers unsecured

core banking

tangible net

building plant

gas exploration

sv oil amp