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1 A COMPREHENSIVE PROJECT REPORT ON “CREDIT RISK MANAGEMENT AT AXIS BANKIn Partial fulfillment for the requirement of two year full time Master in Business Administration programme of Gujarat Technological University Guided By: Dr. Sneha Shukla Submitted By: Karansinh Suvan (GLS1050) Utsav Lavingiya (GLS1059) Submitted To: GLS Institute of Computer Technology (MBA) Gujarat Technological University 2010-12
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A

COMPREHENSIVE PROJECT REPORT ON

“CREDIT RISK MANAGEMENT AT AXIS BANK”

In Partial fulfillment for the requirement of two year full time

Master in Business Administration programme of Gujarat Technological University

Guided By:

Dr. Sneha Shukla

Submitted By:

Karansinh Suvan (GLS1050)

Utsav Lavingiya (GLS1059)

Submitted To:

GLS Institute of Computer Technology (MBA)

Gujarat Technological University

2010-12

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CERTIFICATE

GLS Institute of Computer Technology (GLS-MBA)

This is to certify that Mr. KARANSINH SUVAN Roll No. GLS1050 and Mr.UTSAV LAVINGIAYA Roll No. GLS1059 students of GLS Institute Of Computer Technology (GLS-MBA) has successfully completed their Comprehensive Project Report On CREDIT RISK MANAGEMENT AT AXIS BANK in partial fulfillment of the MBA programme of Gujarat Technological University.

________________ ____________________

Dr. Hitesh Ruparel Dr. Sneha Shukla

Director Project Guide

Date: _________________

Place: _________________

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DECLARATION

We, Karansinh Suvan (GLS1050) and Utsav Lavingiya (GLS1059), students of GLS Institute of Computer Technology, hereby declare that we have completed this project on ― CREDIT RISK MANAGEMENT AT AXIS BANK in the academic year 2011-12. The information submitted is true and original to the best of our knowledge. Date: Karansinh Suvan

Utsav Lavingiya

M.B.A. –GLSICT

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PREFACE

The ongoing development of contemporary risk management methods and increase use

of innovative finance product such as securitization and credit derivatives have brought

about substantial changes in the business environment faced by credit institution today.

Especially in the field of lending, this changes and innovation are now forcing banks to

adapt their in-house software systems and relevant business process to meet these new

requirements.

In recent years, many banks have for sake of economy pared down the credit analyst

function and rely increasingly on using outside sources of information such as brokers

reports and credit rating agency reports to rationalize their credit decisions.

It never the less remains important for bankers to learn about an understand the frame

works of credit analysis within the frame work of credit risk management. Aside from the

arguments of due diligence, which means that every bank ultimately is responsible for

safe keeping of depositors funds and accordingly effecting its own credit analysis, is the

issue of comprehension. That is to say, for those banks deciding not to invest in the

analytical function and rely on outside sources of analysis, it never the less remains

important for the reader to not only understand the analyst„s arguments but how those

argument have been reached at in the first place.

This project aims to provide the reader with a structural road map of the analytical

process to study credit risk management policy of the bank.

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ACKNOWLEDGEMENT

With the pleasure by expressing our deepest gratitude to Dr. Hitesh Ruparel (Director,

GLS Institute Of Computer Technology, Ahmadabad), Prof. Sneha Shukla and our all

respected faculties at GLSICT. We are expressing our sincere thanks to AXIS BANK

official for giving us their recorded data to carry out research and for providing their

valuable suggestion and spend valuable time for us from their busy and hectic schedule.

We have tried hard and our level best to make the research as useful as possible and

get a thorough knowledge about the research.

And last, but definitely not the least, an especially valuable asset to us was the help,

support and the encouragement given to us by our family to overcome every hurdle

which we came across during the making of the project.

Date: Thanking You,

Karansinh Suvan

Utsav Lavingiya

M.B.A. –GLSICT

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Executive summary Credit risk management has always been on the radar of the top management of any

company, but at no other time has its relevance been more felt by financial institution

then in the current business scenario - plagued by increasing competition ; and that

great nemesis – the subprime lending crises. In this age of advancing and complex risk

transfer mechanism, it may make sense to step back and take look into the very basics

of the credit risk management. By understanding the overall life cycle of a typical credit

risk management process, we can identify key priority areas and challenges in the credit

risk arena and how a solution can be design to tackle the situation.

Credit risk is the largest and the most elementary risk faced by banks, it essentially

focuses on determining the likely hood of the default or the credit deterioration and how

costly it will turn out to be if it does occur. And this is true for the consumer lending

(Retail) or the Corporate lending (Commercial) as well as the counter party credit risk in

capital markets.

As we have seen in the U.S. the buzz of the subprime crises, it is really important for the

financial institution like banks to minimize the exposure to the risk as they are dealing

with the money of public.

Although dependent on the organization requirement and the profile, credit risk

management life cycles typically involves the process like the Collection of the data

regarding the applicant, Computation of the credit risk, Monitor and manage risk ratings

and Loan disbursement as per the ratings allotted.

The Credit Risk is mainly of two types:

1) Borrower„s Risk

2) Transactional Risk

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Risk Management Solution is consisting of three modules:

1) Risk Identification Module

2) Risk Measurement Module

3) Risk Mitigation Module

Generally, Banks have outsourced their credit rating system to the credit rating

ageneses to make the working smoother and efficient. Here we have created credit

rating model based on certain parameter to get accurate idea of customer‟s credit rating.

Here various cases are studied to evaluate the Credit Risk Management in the AXIS

BANK. The cases are evaluated on the bases of suggested models.

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TABLE OF CONTENTS

Preface

Acknowledgement

Executive Summary

RESEARCH METHODOLOGY 10

CH:1 INTRODUCTION OF INDIAN BANKING INDUSTRY 12

1.1 A snapshot of Banking Industry 12

1.2 Classification of Indian Banking Industry 15

CH:2 GLOBAL & LOCAL SCENARIO OF BANKING SECTOR 17

2.1 General Banking Scenario 19

2.2 Global Expansion of Indian Banking 24

2.3 Financial Inclusion & Expansion of Banking Services 29

CH:3 INDUSTRY ANALYSIS 33

3.1 PORTER„S FIVE FORCE MODEL 33

3.2 SWOT ANALYSIS 36

CH:4 INTRODUCTION OF AXIS BANK 40

CH:5 INTRODUCTION TO CREDIT RISK MANAGEMENT 44

CH:6 CREDIT APPRAISAL & CREDIT APPRAISAL MODEL AT AXIS BANK 60

CH:7 CASE STUDY & ANALYSIS 69

7.1 Case Study-I 69

7.2 Case Study-II 82

7.3 Case Study-III 92

7.4 Case Study-IV 103

CH:8 FINDINGS 111

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CH:9 CONCLUSION 113

BIBLIOGRAPHY 114

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Research methodology

Introduction

The banking industry has undergone a sea change after the first phase of economic

liberalization in 1991 and hence credit management. While the primary function of

banks is to lend funds as loans to various sectors such as agriculture, industry,

personal loans, housing loans etc., in recent times the banks have become very

cautious in extending loans. The reason behind this is credit risk. Credit risk ―is the

risk to a bank„s earnings or capital base arising from a borrower„s failure to meet the

terms of any contractual or other agreement it has with the bank. Credit risk arises

from all activities where success depends on counterparty, issuer or borrower

performance‖. Credit risk enters the books of a bank the moment the funds are lend,

deployed, invested or committed in any form to counterparty whether the transaction

is on or off the balance sheet. So now a day, management of credit risk is very

important for the bank.

Objectives of the study

- To evaluate the credit appraisal system and risk assessment model.

- To study the live cases of the credit appraisal on the bases of suggested model.

Scope of the study

- This study is based on suggested credit risk models.

- Cases are evaluated on the basis of last 3 years financial data only.

Research design

- Exploratory in nature

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Sources of data

Secondary data

- Information collected from the Credit Appraisal Officer of AXIS BANK.

- Books, Journals & Magazines.

Methods of Data collection

- Visit of the credit appraisal department & recovery department of AXIS BANK.

- Collection of the various information regarding credit appraisal model from

various books. Beneficiaries:

This study will be helpful to the followings:

- Banks & other Financial Institutions

- Students

- Researchers

Limitations:

- This study considers only Credit Risk Model.

- This model is not useful for new industry or new enterprise where past

data is not available.

- Only five cases have been taken due to time constraint.

Expected Contribution of the Study:

- This study will help the bank to reduce the credit risk through the reducing

procedural loopholes in the appraisal process.

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CHAPTER 1

INTRODUCTION TO BANKING SECTOR

A snapshot of the banking industry

The Reserve Bank of India (RBI), as the central bank of the country, closely

monitors developments in the whole financial sector.

The banking sector is dominated by Scheduled Commercial Banks (SBCs).

As at end March 2002, there were 296 Commercial banks operating in India.

This included 27 Public Sector Banks (PSBs), 31 Private, 42 Foreign and 196

Regional Rural Banks. Also, there were 67 scheduled co-operative banks

consisting of 51 scheduled urban cooperative banks and 16 scheduled state

co-operative banks.

Scheduled commercial banks touched, on the deposit front, a growth of 14%

as against 18% registered in the previous year. And on advances, the growth

was 14.5% against 17.3% of the earlier year.

State Bank of India is still the largest bank in India with the market share of

20% ICICI and its two subsidiaries merged with ICICI Bank, leading creating

the second largest bank in India with a balance sheet size of Rs. 1040bn.

Higher provisioning norms, tighter asset classification norms, dispensing with

the concept of „past due‟ for recognition of NPAs, lowering of ceiling on

exposure to a single borrower and group exposure etc., are among the

measures in order to improve the banking sector.

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A minimum stipulated Capital Adequacy Ratio (CAR) was introduced to

strengthen the ability of banks to absorb losses and the ratio has

subsequently been raised from 8% to 9%. It is proposed to hike the CAR to

12% by 2004 based on the Basle Committee recommendations.

Retail Banking is the new mantra in the banking sector. The home Loans

alone account

For nearly two-third of the total retail portfolio of the bank. According to one

estimate, the retail segment is expected to grow at 30-40% in the coming

years.

Net banking, phone banking, mobile banking, ATMs and bill payments are the

new buzz words that banks are using to lure customers.

With a view to provide an institutional mechanism for sharing of information on

borrowers / potential borrowers by banks and Financial Institutions, the Credit

Information Bureau (India) Ltd. (CIBIL) was set up in August 2000. The

Bureau provides a framework for collecting, processing and sharing credit

information on borrowers of credit institutions. SBI and HDFC are the

promoters of the CIBIL.

The RBI is now planning to transfer of its stakes in the SBI, NHB and National

bank for Agricultural and Rural Development to the private players. Also, the

Government has sought to lower its holding in PSBs to a minimum of 33% of

total capital by allowing them to raise capital from the market. Banks are free

to acquire shares, convertible debentures of corporate and units of equity

oriented mutual funds, subject to a ceiling of 5% of the total outstanding

advances (including commercial paper) as on March 31 of the previous year.

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Reforms in the Banking sector

The first phase of financial reforms resulted in the nationalization of 14 major

banks in 1969 and resulted in a shift from Class banking to Mass banking.

This in turn resulted in a significant growth in the geographical coverage of

banks. Every bank has to earmark a minimum percentage of their Loan

portfolio to sectors identified as “priority sectors”. The manufacturing sector

also grew during the 1970s in protected environs and the banking sector was

a critical source. The next wave of reforms saw the nationalization of 6 more

commercial banks in 1980. Since then the number scheduled commercial

banks increased four-fold and the number of banks branches increased eight-

fold.

After the second phase of financial sector reforms and liberalization of the

sector in the early nineties, the Public Sector Banks (PSB) s found it

extremely difficult to complete with the new private sector banks and the

foreign banks. The new private sector banks first made their appearance after

the guidelines permitting them were issued in January 1993. Eight new private

sector banks are presently in operation. This banks due to their late start have

access to state-of-the-art technology, which in turn helps them to save on

manpower costs and provide better services.

During the year 2000, the State Bank of India (SBI) and its 7 associates

accounted for a 25% share in deposits and 28.1% share in credit. The 20

nationalized banks accounted for 53.5% of the deposits and 47.5% of credit

during the same period. The share of foreign banks ( numbering 42 ), regional

rural banks and other scheduled commercial banks accounted for 5.7%, 3.9%

and 12.2% respectively in deposits and 8.41%, 3.14% and 12.85%

respectively in credit during the year 2000

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Classification of Banks:

The Indian banking industry, which is governed by the Banking Regulation Act of India

1949 can be broadly classified into two major categories, non-

scheduled banks and scheduled banks. Scheduled banks comprise

commercial banks and the co-operative banks. In Terms of ownership,

commercial banks can be further grouped into nationalized banks, the State

Bank of India and its group banks, regional rural banks and private sector

banks (the old / new domestic and foreign). These banks have over

67,000 branches spread across the country. The Indian banking industry

is a mix of the public sector, private sector and foreign banks. The private

sector banks are again spilt into old banks and new banks.

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Banking System

in India

Reserve bank of India (Controlling Authority)

Development Financial institutions Banks

IFCI IDBI ICICI NABARD NHB IRBI EXIM Bank SIDBI

Commercial Regional Rural Land Development Cooperative

Banks Banks Banks Banks

Public Sector Banks Private Sector Banks

SBI Groups Nationalized Banks Indian Banks Foreign

Banks

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CHAPTER 2

GLOBAL AND LOCAL SCENARIO OF BANKING SECTOR

Indian Banking System: The Current State & Road Ahead

Introduction

Recent time has witnessed the world economy develop serious difficulties in

terms of lapse of banking & financial institutions and plunging demand.

Prospects became very uncertain causing recession in major economies.

However, amidst all this chaos India‟s banking sector has been amongst the

few to maintain resilience.

A progressively growing balance sheet, higher pace of credit expansion,

expanding profitability and productivity akin to banks in developed markets,

lower incidence of nonperforming assets and focus on financial inclusion have

contributed to making Indian banking vibrant and strong. Indian banks have

begun to revise their growth approach and re-evaluate the prospects on hand

to keep the economy rolling. The way forward for the Indian banks is to

innovate to take advantage of the new business opportunities and at the same

time ensure continuous assessment of risks.

A rigorous evaluation of the health of commercial banks, recently undertaken

by the Committee on Financial Sector Assessment (CFSA) also shows that

the commercial banks are robust and versatile. The single-factor stress tests

undertaken by the CFSA divulge that the banking system can endure

considerable shocks arising from large possible changes in credit quality,

interest rate and liquidity conditions. These stress tests for credit, market and

liquidity risk show that Indian banks are by and large resilient.

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Thus, it has become far more imperative to contemplate the role of the

Banking Industry in fostering the long term growth of the economy. With the

purview of economic stability and growth, greater attention is required on both

political and regulatory commitment to long term development programme.

FICCI conducted a survey on the Indian Banking Industry to assess the

competitive advantage offered by the banking sector, as well as the policies

and structures that are required to further the pace of growth. The results of

our survey are given in the following sections.

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General Banking Scenario

The pace of development for the Indian banking industry has been

tremendous over the past decade. As the world reels from the global financial

meltdown, India‟s banking sector has been one of the very few to actually

maintain resilience while continuing to provide growth opportunities, a feat

unlikely to be matched by other developed markets around the world. FICCI

conducted a survey on the Indian Banking Industry to assess the competitive

advantage offered by the banking sector, as well as the policies and

structures required to further stimulate the pace of growth.

The predicament of the banks in the developed countries owing to excessive

leverage and lax regulatory system has time and again been compared with

somewhat unscathed Indian Banking Sector. An attempt has been made to

understand the general sentiment with regards to the performance, the

challenges and the opportunities ahead for the Indian Banking Sector.

A majority of the respondents, almost 69% of them, felt that the Indian

banking Industry was in a very good to excellent shape, with a further 25%

feeling it was in good shape and only 6% of the respondents feeling that the

performance of the industry was just average. In fact, an overwhelming

majority (93.33%) of the respondents felt that the banking industry compared

with the best of the sectors of the economy, including pharmaceuticals,

infrastructure, etc.

Most of the respondents were positive with regard to the growth rate

attainable by the Indian banking industry for the year 2009-10 and 2014-15,

with 53.33% of the view that growth would be between 15-20% for the year

2009-10 and greater than 20% for 2014-15.

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On being asked what is the major strength of the Indian banking industry,

which makes it resilient in the current economic climate; 93.75% respondents

feel the regulatory system to be the major strength, 75% economic growth,

68.75% relative insulation from external market, 56.25% credit quality, 25%

technological advancement and 43.75% our risk assessment systems.

Change is the only constant feature in this dynamic world and banking is not

an exception. The changes staring in the face of bankers relates to the

fundamental way of banking-which is going through rapid transformation in

the world of today. Adjust, adapt and change should be the key mantra. The

major challenge faced by banks today is the ever rising customer expectation

as well as risk management and maintaining growth rate. Following are the

results of the biggest challenge faced by the banking industry as declared by

our respondents (on a mode scale of 1 to 7 with 1 being the biggest

challenge):

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They also asked their respondents to rate India on certain essential banking

parameters (Regulatory Systems, Risk Assessment Systems, Technological

System and Credit Quality) in comparison with other countries i.e. China,

Japan, Brazil, Russia, Hong Kong, Singapore, UK and USA.

The recent financial crisis has drawn attention to under-regulation of banks

(mainly investment banks) in the US. Though, the Indian story is quite

different. Regulatory systems of Indian banks were rated better than China,

Brazil, Russia, and UK; at par with Japan, Singapore and Hong Kong where

as all our respondents feel that we are above par or at par with USA. On

comparing the results with their previous survey where the respondents had

rated Indian Regulatory system below par the US and UK system, they see

that post the financial crisis Indian Banks are more confident on the Indian

Regulatory Framework.

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The global meltdown started as a banking crisis triggered by the credit quality.

Indian banks seem to have paced up in terms of Credit Quality. Credit quality

of banks has been rated above par than China, Brazil, Russia, UK and USA

but at par with Hong Kong and Singapore and 85.72% of the respondents feel

that we are at least at par with Japan. Thus, they see that the resilience the

Indian Banks showed at the time of financial crisis has led to an attitudinal

shift of our respondents with the past survey indicating Credit quality of

Indian banks being below par than that of US and UK.

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As technology ingrains itself in all aspects of a bank‟s functioning, the

challenge lies in exploiting the potential for profiting from investments made in

technology. A lot needs to be done on the technological front to keep in pace

with the global economies, as is evident from the survey results. Technology

systems of Indian banks have been rated more advanced than Brazil and

Russia but below par with China, Japan, Hong Kong, Singapore, UK and

USA. They find no change on introspection of their past surveys which also

highlighted the need for Indian banks to pace up in adoption of advanced

technology.

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Global Expansion of Indian Banking

The idea of creating bigger banks to take on competition sounds attractive but

one must realize even the biggest among Indian banks are small by global

standards. The lack of global scale for Indian banks came into sharp focus

during the recent financial crisis which saw several international banks

reneging on their funding commitments to Indian companies, but local banks

could not step into the breach because of balance sheet limitations.

In this light, 93.75% of all respondents to their survey are considering

expanding their operations in the future. They further asked participants on

the methods that they consider suitable to meet their expansion needs. They

divide them into organic means of growth that comes out of an increase in the

bank‟s own business activity, and inorganic means that includes mergers or

takeovers.

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We see from the above graph that amongst organic means of expansion,

branch expansion finds favor with banks while strategic alliances is the most

popular inorganic method for banks considering scaling up their operations.

On the other hand, new ventures and buyout portfolios are the least popular

methods for bank expansion.

Scope for New Entrants

81.25% also felt that there was further scope for new entrants in the market,

in spite of capital management and human resource constraints, as there

continue to remain opportunities in unbanked areas. With only 30-35% of the

population financially included, and the Indian banking industry unsaturated

with CAGR of well above 20%, participants in their survey felt that the market

definitely has scope to accommodate new players.

While there has been prior debate, they questioned banks on NBFCs and

Industrial houses being established as banking institutions and find opinion to

be marginally against the notion, with 35.71% in favour while 42.86% were

against them being established as banks.

However, on further questioning, 57.14% of respondents feel that the above

may be allowed but only if it is along with specific regulatory limitations. Banks

felt that limitations regarding track record, ensuring adequate capitalization

levels, a tiered license that enables new entrants to enter into specific areas

of the business only after satisfactorily achieving set milestones for the prior

stages, cap on promoter's holdings and wider public holding in addition to a

common banking regulator on a level playing field are essential before they

may set themselves up as banks.

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Banking Activities

Over the last three decades, there has been a remarkable increase in the

size, spread and scope of activities of banks in India. The business profile of

banks has transformed dramatically to include non-traditional activities like

merchant banking, mutual funds,new financial services and products and the

human resource development.

Their survey finds that within retail operations, banks rate product

development and differentiation; innovation and customization; cost reduction;

cross selling and technological up gradation as equally important to the

growth of their retail operations. Additionally a few respondents also find pro-

active financial inclusion, credit discipline and income growth of individuals

and customer orientation to be significant factors for their retail growth.

There is, at the same time, an urgent need for Indian banks to move beyond

retail banking, and further grow and expand their fee- based operations, which

has globally remained one of the key drivers of growth and profitability. In fact,

over 80% of banks in their survey have only up to 15% of their total incomes

constituted by fee- based income; and barely 13% have 20-30% of their total

income constituted by fee-based income.

Out of avenues for non-interest income, we see that Banc assurance

(85.71%) and FOREX Management (71.43%) remain most profitable for

banks. Derivatives, understandably, remains the least profitable business

opportunity for banks as the market for derivatives is still in its nascent stage

in India.

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There is nevertheless a visibly increased focus on fee based sources of

income. 71% of banks in their survey saw an increase in their fee based

income as a percentage of their total income for the FY 2008-09 as compared

to FY 2007-08. Indian banks are fast realizing that fee-based sources of

income have to be actively looked at as a basis for future growth, if the

industry is to become a global force to reckon with.

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Financial Inclusion and Expansion of Banking Services

Transition from class banking to mass banking and increased customer focus

is drastically changing the landscape of Indian banking. Expansion of retail

banking has a lot of potential as retail assets are just 22% of the total banking

assets and contribution of retail loans to GDP stands merely at 6% in India

vis-à-vis 15% in China and 24% in Thailand. All banks in their survey weigh

Cost effective credit delivery mechanisms (100%) as most important to the

promotion of financial inclusion. This was followed by factors such as

identifying needs and developing relevant financial products (75%),

demographic knowledge and strong local relations (62.5%) and ensuring

productive use and adequate returns on credit employed (43.75%) in

decreasing levels of importance. In fact, India has an expanding middle class

of 250 to 300 million people in need of varied banking services. While 60% of

our population has access to banks, only 15% of them have loan accounts

and an overwhelming 70% of farmers have no access to formal sources of

credit, reflective of immense potential for the banking system This is mirrored

in the fact that while our survey finds no discernible shift in the lending pattern

of banks across Tier 1, Tier 2 and Tier 3 cities over the last two years, 93%

Indian Banking System: The Current State & Road Ahead Page | 20

participants still find rural markets to be to be a profitable avenue, with 53% of

respondents finding it lucrative in spite of it being a difficult market. Cost of

accessing markets has been the only sour note in the overall experience of

our respondents in rural markets At the same time, more than 81.25% of our

respondents have a strategy in place to tap rural markets, with the remainder

as yet undecided on their plan of action. Tie ups with micro finance institutions

(MFIs)/SHG and introduction of innovative and customized products are

considered most important to approaching rural markets according to

respondents, more so as compared to internet kiosks, post offices and supply

chain management techniques

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Additionally, 81.25% of respondents found branchless banking to be an

effective and secure way of reaching out to rural markets, with mobile,

biometric and handheld devices, equally popular amongst banks. Some

respondents also found the Business Correspondents model to be an

untapped model for financial inclusion.

As Indian financial markets mature over time, there is also a need for

innovative instruments to deepen the market further. Suggestions ranged from

micro saving and micro insurance initiatives, Cash deposit machines,

warehouse receipts, to prepaid cash cards, derivatives, interest rate futures

and credit default swaps as a means to further the financial inclusion and

expansionary process.

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Credit Flow and Industry

India Inc is completely dependent on the Banking System for meeting its

funding requirement. One of the major complaints from the industry has in fact

been high lending rates in spite of massive cuts in policy rates by the RBI. We

asked the banks what they felt were major factors responsible for rigid prime

lending rates.

None of the banks in their survey considered the cap on bank deposit rates to

be one of the causes of inflexible lending rates. Due to long-term maturity, the

trend seems to be changing. However, there are other factors which have led

to the stickiness of lending rates such as wariness of corporate credit risk

(33.33%), competition from government small savings schemes (26.67%).

Benchmarking of SME and export loans against PLR (20.00%) on the other

hand, do not seem to have as significant an influence over lending rates

according to banks.

The great Indian industrial engine has nevertheless continued to hum its way

through most of the year long crisis. We asked banks about the sectors that

they consider to be most profitable in the coming years (Fig. 12). All

respondents were confident in the infrastructure sector leading the profitability

for the industry, followed by retail loans (73.33%) and others

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(Source: Annual survey, February 2010)

(FEDERATION OF INDIAN CHAMBERS OF COMMERCE & INDUSTRY)

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CHAPTER 3

INDUSTRY ANALYSIS

Competitive Forces Model

(Porter’s Five Force Model)

(2)

Potential Entrants is

high as development

financial institutions as

well as private and

Foreign Banks have

entered in a big way

(1)

Rivalry among existing

firms has increased with

liberalization. New

products and improved

customer services is the

focus.

(4)

Bargaining power of

buyers is high as

corporate can raise

funds easily due to

high Competition.

(3)

The threat of

substitute product is

very high like credit

unions and investment

houses. There are other

substitutes as well banks

like mutual funds,

stocks, government

securities, debentures,

gold, real estate etc.

ubstitute is high due to

competition from NBFCs

and insurance companies as

they offer a high rate of

interest than Banks.

(5)

Organizing power of the

supplier is high. With the

new financial instruments

they are asking higher

return on the investments

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1. Rivalry among existing firms

With the process of liberalization, competition among the existing banks

has increased. Each bank is coming up with new products to attract the

customers and tailor made Loans are provided. The quality of services

provided by banks has improved drastically.

2. Potential Entrants

Previously the Development Financial Institutions mainly provided project

finance and development activities. But they now entered into retail banking

which has resulted into stiff competition among the exiting players.

3. Threats from Substitutes

Competition from the non-banking financial sector is increasing rapidly. The

threat of substitute product is very high like credit unions and in investment

houses. There are other substitutes as well banks like mutual funds, stocks,

government securities, debentures, gold, real estate etc.

4. Bargaining Power of Buyers

Corporate can raise their funds through primary market or by issue of GDRs,

FCCBs. As

a result they have a higher bargaining power. Even in the case of personal

finance, the buyers have a high bargaining power. This is mainly because of

competition.

5. Bargaining Power of Suppliers

With the advent of new financial instruments providing a higher rate of

returns to the investors, the investments in deposits is not growing in a

phased manner. The suppliers demand a higher return for the investments.

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6. Overall Analysis

The key issue is how banks can leverage their strengths to have a better

future. Since the availability of funds is more and deployment of funds is

less, banks should evolve new products and services to the customers.

There should be a rational thinking in sanctioning Loans, which will bring down

the NPAs. As there is a expected revival in the Indian economy Banks

have a major role to play.

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SWOT Analysis

The banking sector is also taken as a proxy for the economy as a whole. The

performance of bank should therefore, reflect “Trends in the Indian Economy”.

Due to the reforms in the financial sector, banking industry has changed

drastically with the opportunities to the work with, new accounting standards

new entrants and information technology. The deregulation of the interest

rate, participation of banks in project financing has changed in the

environment of banks.

The performance of banking industry is done through SWOT Analysis. It

mainly helps to know the strengths and Weakness of the industry and to

improve will be known through converting the opportunities into strengths. It

also helps for the competitive environment among the banks.

a) STRENGTHS

1. Greater securities of Funds

Compared to other investment options banks since its inception has been a

better avenue in terms of securities. Due to satisfactory implementation of

RBI‟s prudential norms banks have won public confidence over several years.

2. Banking network

After nationalization, banks have expanded their branches in the country,

which has helped banks build large networks in the rural and urban areas.

Private Banks allowed operating but they mainly concentrate in metropolis.

3. Large Customer Base

This is mainly attributed to the large network of the banking sector. Depositors

in rural areas prefer banks because of the failure of the NBFCs.

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4. Low Cost of Capital

Corporate prefers borrowing money from banks because of low cost of

capital. Middle income people who want money for personal financing can

look to banks as they offer at very low rates of interests. Consumer credit

forms the major source of financing by banks.

b) WEAKNESS

1. Basel Committee

The banks need to comply with the norms of Basel committee but before that

it is challenge for banks to implement the Basel committee standard, which

are of international standard.

2. Powerful Unions

Nationalization of banks had a positive outcome in helping the Indian

Economy as a whole. But this had also proved detrimental in the form of

strong unions, which have a major influence in decision-making. They are

against automation.

3. Priority Sector Lending

To uplift the society, priority sector lending was brought in during

nationalization. This is good for the economy but banks have failed to manage

the asset quality and their intensions were more towards fulfilling government

norms. As a result lending was done for non-productive purposes.

4. High Non-Performing Assets

Non-Performing Assets (NPAs) have become a matter of concern in the

banking industry. This is because reduced to meet the international standards

of change in the total outstanding advances, which has to be reduced to meet

the international standards.

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c) OPPORTUNITIES

1. Universal Banking

Banks have moved along the value chain to provide their customers more

products and services. like home finance, Capital Markets, Bonds etc. Every

Indian bank has an opportunity to become universal bank, which provides

every financial service under one roof.

2. Differential Interest Rates

As RBI control over bank reduces, they will have greater flexibility to fix their

own interest rates which depends on the profitability of the banks.

3. High Household Savings

Household savings has been increasing drastically. Investment in financial

assets has also increased. Banks should use this opportunity for raising

funds.

4. Untapped Foreign Markets

Many Indian banks have not sufficiently penetrated in foreign markets to

generate satisfactory business therefore, it can be concluded clear

opportunity exists in such markets.

5. Interest Banking

The advance in information technology has made banking easier. Business

can effectively carried out through internet banking.

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d) THREATS

1. NBFCs, Capital Markets and Mutual funds

There is a huge investment of household savings. The investments in NBFCs

deposits, Capital Market Instruments and Mutual Funds are increasing.

Normally these instruments offer better return to investors.

2. Changes in the Government Policy

The change in the government policy has proved to be a threat to the banking sector. Due to some major changes in policies related to deposits mobilization credit deployment, interest rates- the whole scenario of banking industry may change.

3. Inflation

The interest rates go down with a fall in inflation. Thus, the investors will shift

his investments to the other profitable sectors.

4. Recession

Due to the recession in the business cycle the economy functions poorly and

this has proved to be a threat to the banking sector. The market oriented

economy and globalization has resulted into competition for market share.

The spread in the banking sector is very narrow. To meet the competition the

banks has to grow at a faster rates and reduce the overheads. They can

introduce the new products and develop the existing services.

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CHAPTER 4

INTRODUCTION TO AXIS BANK

Axis Bank was the first of the new private banks to have begun operations in

1994, after the Government of India allowed new private banks to be

established. The Bank was promoted jointly by the Administrator of the

specified undertaking of the Unit Trust of India (UTI - I), Life Insurance

Corporation of India (LIC) and General Insurance Corporation of India (GIC)

and other four PSU insurance companies, i.e. National Insurance Company

Ltd., The New India Assurance Company Ltd., The Oriental Insurance

Company Ltd. and United India Insurance Company Ltd.

The Bank today is capitalized to the extent of Rs. 403.63 crores with the

public holding (other than promoters and GDRs) at 53.72%.

The Bank's Registered Office is at Ahmedabad and its Central Office is

located at Mumbai. The Bank has a very wide network of more than 896

branches and Extension Counters (as on 31st December 2009). The Bank

has a network of over 4055 ATMs (as on 31st December 2009) providing 24

hrs a day banking convenience to its customers. This is one of the largest

ATM networks in the country.

The Bank has strengths in both retail and corporate banking and is committed

to adopting the best industry practices internationally in order to achieve

excellence.

Mission

Customer service and product innovation tuned to diverse needs of

individual and corporate clientele.

Continuous technology up gradation while maintaining human values.

Progressive globalization and achieving international standards.

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Core values

Customer satisfaction through

Providing quality service effectively and efficiently

“smile, it enhances your face value” a service quality stressed on

Periodic customers service audits

Maximization of stakeholder value

Business divisions

Treasury management

Treasury is responsible for the maintenance of the statutory requirements

such as the cash reserve ratio (CRR), statutory liquidity ratio (SLR) and the

investment of such funds. It also manages the assets and liabilities of the

bank. Primary dealing activities can be classified into

Money market operations

Foreign exchange operations

Derivatives

Merchant Banking and capital markets

Axis Bank is a registered merchant Banker. The services offered are:

Private placement/syndication

Issue management

Debenture trustees

Depository services

Project advisory services, capital market services, advisory on Mergers

& Acquisition

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Retail financial services

All branches have a dedicated financial advisory desk, wherein the mutual

fund schemes are marketed. The objective is to provide customers with a

larger portfolio of investment avenues thereby enhancing customer

relationship. Other products handled by the department include sale of Gold

Coins as well as marketing of Depository services.

Corporate and institutional banking

Cash management Services

Business current Accounts

Correspondent Banking

Government Business

Retail Banking

Retail banking is one of the key departments in the bank. It has the largest

variety in its portfolio which consists of retail asset and retail liability products.

Retail banking by definition implies banking services which are offered to

individual customers as opposed to corporate banking which is meant for

companies.

International banking

Major functions include

Handling regulatory issues which include compliance with

regulations of various authorities such as RBI regulations, FEMA

etc

Keeping a track of the business volumes being generated by the

branches and controlling the margins

Maintaining relationship with correspondent Banks outside India

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Advances

The function involves extending fund and non-fund based credit facilities to

different clients in the country, the department aims to maximize the interest

spread earned on funds available with the bank while keeping the risk on the

credit portfolio at acceptable limits. The department also tries to maximize fee-

based income from both fund based and non-fund based activities.

Board of Directors:

Shri N.C. Singhal

Shri J.R. Varma

Dr. R.H. Patil

Smt. Rama Bijapurkar

Shri R.B. L. Vaish

Shri M.V. Subbiah

Shri Ramesh Ramanathan

Shri K.N. Prithviraj

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CHAPTER 5

Introduction to Credit Risk Management

Definition

Of all different types of risks that a bank is subject to, credit risk can be

defined as the risk of failure on the part of the borrower to meet obligations

towards the bank in accordance with the Terms and conditions that have been

agreed upon. Inability and/or unwillingness of the borrower to repay debts

may be the cause of such default.

The bank aims at minimizing this risk that could arise from individual

borrowers or the entire portfolio. The former can be addressed by having well-

developed systems to appraise the borrowers; the latter, on the other hand,

can be minimized by avoiding concentration of credit exposure with a few

borrowers who have similar risk profiles. Credit risk management becomes

even more relevant in the light of the changes that have been brought about

in the economic environment, including increasing competition and thinning

spreads on both the sides of Balance sheet

Determinants of Credit Risk

Factors determining credit risk of a bank‟s portfolio can be divided into

external and internal factors. The banks do not have control on external

factors. These include factors across a wide spectrum ranging from the state

of the economy to the correlation among different segments of industry. The

risk arising out of external factors can be mitigated via diversification of the

credit portfolio across industries especially in light of any expectations of

adverse developments in the existing portfolio.

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Given that the banks have very little control over such external factors, the

bank can minimize the credit risk that it faces mainly by managing the internal

factors.

These include the internal policies and processes of the bank like Loan

policies, appraisal processes, monitoring systems etc. These internal factors

can be taken care of, partly, via effective rating and monitoring systems, entry

level criteria etc. These processes would enable improvement in the quality of

credit decisions.

This would effectively improve the quality (and hence profitability) of the

portfolio. While monitoring systems are useful tool at post-sanction stage,

rating systems act as important aid at the pre-sanction stage.

Introduction to Credit Tools

The Bank has developed tools for better credit risk management. These focus

on the areas of rating of corporate (pre-sanctioning of Loans) and monitoring

of Loans (post-sanctioning). The focus of this manual is to familiarise the user

with the credit rating tool.

Credit Rating: Definition

Credit rating is the process of assigning a letter rating to borrowers indicating

the creditworthiness of the borrower. Rating is assigned based on the ability

of the borrower (company) to repay the debt and his willingness to do so. The

higher the rating of a company, the lower the probability of its default. The

companies assigned with the same credit rating have similar probability of

default.

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Use in decision-making

Credit rating helps the bank in making several key decisions regarding credit

including:

• Whether to lend to a particular borrower or not; What price to charge

• What are the products to be offered to the borrower and for what tenor

• At what level should sanctioning be done

• What should be the frequency of renewal and monitoring

It should, however, be noted that credit rating is one of the inputs used in

taking credit decisions. There are various other factors that need to be

considered in taking the decision (e.g., adequacy of borrower‟s cash flow,

collateral provided, and relationship with the borrower). The rating allows the

bank to ascertain a probability of the borrower‟s default based on past data.

Main features of the rating tool:

i) Comprehensive coverage of parameters.

ii) Extensive data requirement.

iii) Mix of subjective and objective parameters.

iv) Includes trend analysis.

v) 13 parameters are benchmarked against other players in the segment. The

tool contains the latest available audited data/ratios of other players in the

segment. The data is updated at intervals.

vi) Captures industry outlook.

vii) Eight grade ratings broadly mapped with external credit rating agency‟s

ratings prevalent in India.

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Special features of the web based credit rating tool

i) Centralized data base.

ii) Easy accessibility and faster computation of scores.

iii) Selective access to users based on the area of operation. Branches have

access to the data pertaining to their branch only, Zonal offices have access

to the data pertaining to all the branches under their control and the Credit

Department and Risk Department at Central Office have access to all

accounts.

iv) Adequate security system and provision of audit trails for confidentiality.

v) Maintaining of past rating records in the system for collection of empirical

data on rating migrations. This will enable the bank to arrive at PDs

(Probability of Default) factor.

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Rating Tool for Small and Medium Enterprises (SME)

The SME rating tool has been developed for the purpose of assigning a credit

rating to the SME borrower of the Bank. The aim of the tool is to provide a

standardised system for the bank to evaluate the credit risk of different

borrowers. It should, however, be noted that this tool is not the standalone

exercise for the purpose of sanctioning of Loan to a SME borrower. It should

be supplemented with other inputs important in the sanctioning process.

The following broad areas have been considered for determining the rating of

Borrowers in the SME category:

Financial performance

Business performance

Industry outlook

Quality of management

Conduct of account (after roll out of the Monitoring tool)

Within each of these broad areas, various parameters have been used for

obtaining an overall rating of the borrower. In the following sections, we shall

discuss in greater detail the structure of the tool and the methodology of using

it.

Parameters used in credit rating of SME:

The rating tool for SME borrowers assigns the following weightages to each

one of the four main categories

i) Scenario (I) without monitori

Parameter Weightage (%)

Financial performance 40

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Operating performance of business 22.5

Quality of management 22.5

Industry outlook 15

ii) Scenario (II) with monitoring tool: The weightages would be conveyed

separately on roll out of the tool.

Parameters used in the SME tool

Financial performance

The tool in its current form uses various parameters for rating a

borrower on its financial strength. These various sub-parameters give

us an idea of the different sources of risk being faced by a company in

different areas.

Operating performance of business

Operational efficiency of a borrower is important in deTermining the

generation of cash for repayment of its debt obligations. The

parameters in this category assess the borrower‟s competence in its

primary activities.

Quality of management

Quality of the management of a borrowal unit has a direct impact on

the performance of the unit. Also, it would have a direct impact on the

integrity of the borrower especially in Terms of its willingness to repay

its debt.

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Industry

In order to undertake the credit rating of any borrower, it is important to

assess the riskiness of the industry to which that borrower belongs.

Borrowers, which are similarly ranked in Terms of financial

performance, operating performance of business and quality of

management may have different credit ratings due to the risks inherent

in their industry. The risk assessment in industry sectors is done at the

Central Office level and appropriate score for each industry has been

allocated in the tool. On selection of the relevant industry sector, the

tool will automatically reckon the allocated score.

Three types under SME tool

i) Manufacturing

ii) Services and

iii) Trading

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Various parameters under each of the above stated parameters for these

three types of SME tool are as under:

1 Manufacturing

i) Financial performance

Sr. No. Sub parameters Weightage (%)

F1 Net Sales Growth Rate (%) 10

F2 PBDIT Growth Rate (%) 7

F3 PBDIT/Sales (%) 10

F6 TOL/TNW 10

F7 Current Ratio 10

F8 Operating Cash Flow 8

F9 DSCR 8

F12*$ Foreign exchange risk 10

F13 Expected values of D/E, if 50% of NFB credit

devolves (corrected for margin)

5

F24 Realisability of Debtors 12

F27* State of export country economy 5

F28* Fund repatriation risk 5

TOTAL 100

* Applicable for export units

$Applicable for units having imports and or exports

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ii) Operating performance of business

Sr. No. Sub parameters Weightage (%)

B7 Credit period allowed 10

B8 Credit Period Availed 10

B9 Working Capital Cycle 20

B10 Tax incentives 10

B13 Production Related Risk 10

B14 Product Related Risks 10

B15 Price Related Risk 10

B20 Client Risk 10

B21 Fixed Asset Turnover 10

TOTAL 100

iii) Quality of management

Sr. No. Sub parameters Weightage (%)

M1 HR policy/track record of industrial unrest 15

M2 Track Record in Default of Statutory Dues 16

M3 Market Report of Management reputation 15

M4 History of FERA violation/ED enquiry 8

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M6 Too Optimistic Projections of Sales and Other

Financials

16

M9 Technical & Managerial Expertise 15

M8 Capability to raise money 15

TOTAL 100

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2 Services

i) Financial performance

Sr. No. Sub parameters Weightage (%)

F1 Net Sales Growth Rate (%) 10

F2 PBDIT Growth Rate (%) 7

F3 PBDIT/Sales (%) 10

F6 TOL/TNW 10

F7 Current Ratio 10

F8 Operating Cash Flow 8

F9 DSCR 8

F12*$ Foreign exchange risk 10

F13 Expected values of D/E, if 50% of NFB credit

devolves (corrected for margin)

5

F24 Realisability of Debtors 12

F27* State of export country economy 5

F28* Fund repatriation risk 5

TOTAL 100

* Applicable for export units

$Applicable for units having imports and or exports

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ii) Operating performance of business

Sr. No. Sub parameters Weightage (%)

M1 HR Policy/Track Record in Industrial Unrest 15

M3 Market Report of Management Reputation 20

M4 History of FERA violation/ED enquiry 10

M6 Too Optimistic Projections of Sales and Other

Financials

20

M8 Capability to raise money 15

M12 Mix of Professional and Traditional

Management

20

TOTAL 100

iii) Quality of management

Sr. No. Sub parameters Weightage (%)

M1 HR Policy/Track Record in Industrial Unrest 15

M3 Market Report of Management Reputation 20

M4 History of FERA violation/ED enquiry 10

M6 Too Optimistic Projections of Sales and Other 20

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Financials

M8 Capability to raise money 15

M12 Mix of Professional and Traditional

Management

20

TOTAL 100

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3 Trading

i) Financial performance

Sr. No. Sub parameters Weightage (%)

F1 Net Sales Growth Rate (%) 10

F2 PBDIT Growth Rate (%) 7

F3 PBDIT/Sales (%) 10

F6 TOL/TNW 10

F7 Current Ratio 10

F8 Operating Cash Flow 8

F9 DSCR 8

F12*$ Foreign exchange risk 10

F13 Expected values of D/E, if 50% of NFB credit

devolves (corrected for margin)

5

F24 Realisability of Debtors 12

F27* State of export country economy 5

F28* Fund repatriation risk 5

TOTAL 100

* Applicable for export units

$Applicable for units having imports and or exports

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ii) Operating performance of business

Sr. No. Sub parameters Weightage (%)

B3 Inventory Turnover 16

B7 Credit period allowed 10

B8 Credit Period Availed 12

B9 Working Capital Cycle 16

B10 Tax incentives 10

B14 Product Related Risks 12

B15 Price Related Risk 12

B24 Sustainability of Sales 12

TOTAL 100

iii) Quality of management

Sr. No. Sub parameters Weightage (%)

M1 HR Policy/Track Record in Industrial Unrest 15

M2 Track Record in Default of Statutory Dues 16

M3 Market Report of Management Reputation 15

M4 History of FERA violation/ED enquiry 8

M6 Too Optimistic Projections of Sales and Other

Financials

16

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M8 Capability to raise money 15

M12 Mix of Professional and Traditional

Management

15

TOTAL 100

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CHAPTER 6

OVERVIEW OF CREDIT APPRAISAL

Credit appraisal means an investigation/assessment done by the banks

before providing any Loans & advances/project finance & also checks the

commercial, financial & technical viability of the project proposed, its funding

pattern & further checks the primary & collateral security cover available for

recovery of such funds.

Credit Appraisal Process

Receipt of application from applicant

Receipt of documents

(Balance sheet, KYC papers, Different govt. registration no., MOA, AOA, and

properties documents

Pre-sanction visit by bank officers

Check for RBI defaulters list, willful defaulters list, CIBIL data, ECGC, Caution

list etc

Title clearance reports of the properties to be obtained from empanelled

Advocates

Valuation reports of the properties to be obtained from empanelled

valuer/engineers

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Documentations, agreements, mortgages

Disbursement of Loan

Post sanction activities such as receiving stock statements, review of

accounts, renew of accounts, etc

(On regular basis)

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CREDIT APPRAISAL MODEL AT AXIS BANK

Credit to SME Sector

AXIS bank provides credit to SME sector under following Schemes

SME – Schematic (Fast Track)

It includes structured products basically to provide fast services to clients. It

includes various products like:

Mpower OD and Mpower Term Loan

Business Loan for Property

Power Rent

Power Trade

Zero Collateral Loans (ZCL) to MSE under CGS

Card Power

Enterprise Power

Business Power

Mpower OD and Mpower Term Loan:

The product aims at to provide both Working capital and Term

finance requirements of a trade enterprise. The facility is in the form

of a Cash Credit (for Working Capital requirements) and Term Loan

(Financing Capital expenditure). The facility is secured by

hypothecation of Working Capital assets and further collateralized

by charge over an immovable property/ financial asset. Non-Fund

based facilities can also be granted under the product. The

maximum Loan amount under the product is Rs. 2.50 Crs.

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Business Loan for Property:

The product is aimed at providing finance to business enterprises

for acquition of an immovable property. The facility is in the form of

a Term Loan repayable by EMIs. The maximum Loan amount under

the product is Rs. 5 crores.

Power Rent:

The product generally known in market parlance as “Lease Rental

Discounting” is aimed at providing a Term Loan to owners of

properties against their lease rental receivables. The Loan amount

is assessed on the basis of the net present value of the rental

receivables over the lease period (after deducting margin and

taxes). The lease rentals are hypothecated in bank‟s favor and the

Loan is further collateralized by charge over the property. The

product specifies a minimum-security coverage of 1.5 times.

Maximum Loan amount under the product is Rs. 20 crores.

Power Trade:

The product aims to provide both working capital and Term finance

requirements of a trade enterprise. The facility is in the form of a

cash credit (for working capital requirements) and Term Loan

(financing capital expenditure). The facility is secured by

hypothecation of working capital assets and further collateralized by

charge over an immovable property/ financial asset. Non- fund

based facilities can also be granted under the product. The

maximum Loan amount under the product is Rs. 2.5 crores.

Zero Collateral Loans (ZCL) to MSE under CGS:

This product facilitates the MSEs and software/IT related services

to avail both working capital and term finance from bank. The facility

is secured by guarantee cover of credit guarantee fund trust for

micro and small enterprises (CGTMSE) and there is no collateral

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security to be taken in such cases. Maximum loan amount under

the product is Rs. 1.00 crore.

Card Power:

This is a scheme for financing credit/debit card receivables of units

installing pour EDC machines. Both demand loan & term loan

facilities are offered to the borrowers, subject to a maximum of Rs.

2.5 crores. All trading/ retailing activities (with a few exceptions like

liquor, tobacco, seasonal business etc.), where credit/ debit cards

are used are eligible for the loans.

Enterprise Power:

This product has been developed to meet the credit needs of the

Micro and small enterprises covering both manufacturing and the

service sectors. The facilities offered include CC Rupee export

credit; pre & post shipment credit & non-fund based facilities like LC

& BG. The maximum limit is restricted to Rs. 1.00 Crore.

Business Power:

Business Power is an unsecured Term Loan (Maximum loan

amount under the product is Rs. 35 lacs) to be repaid by way of

EMI‟s over a maximum period of 4 years.

SME- Non Schematic (Standard)

For a business on the growth phase with a wide range of opportunities to

explore, timely availability of credit is an integral ingredient needed to

scale new heights. Axis Bank understands this and endeavor to be not

just a bank but also financing partner, so that focus on business needs

becomes possible whereas Bank cater to meet financing needs.

Their services ranging from Funded to Non-Funded, from Short Term to

Long Term and from Credit to Trade Services ensures to get finance the

way it is best suited for business.

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Services:

Cash Credit

Working Capital Demand Loan

Export Finance

Short Term Loan

Term Loan

Clean Bill Discounting

LC Backed Bill Discounting

Co-Acceptance of Bills

Credit Facilities against Guarantee or Stand By Letter of Credit

issued by Foreign Banks

Letter of Credit

Bank Guarantee

Solvency Certificates

Cash Credit:

Bank offer Cash Credit facilities to meet day-to-day working capital

needs. Cash Credit is provided against the primary security of

stock, debtors, other current assets, etc., and/or collateral security

of movable fixed assets, immovable property, personal or

corporate guarantee, etc. Interest is charged not on the sanctioned

amount but on the utilized amount

Working Capital Demand Loan:

Bank also provides working capital facilities in the form of Working

Capital Demand Loan instead of cash credit facility. The primary or

collateral security will be as mentioned in cash credit facility. Here

also interest is levied on the amount drawn rather than on the

amount utilized.

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Export Finance:

Bank provides finance for export activities in the form of Pre-

Shipment Credit against firm order and or Letter of Credit and Post

shipment credit. Credit is available for procuring raw materials,

manufacturing the goods, processing and packaging the goods and

shipping the goods. Finance is provided in Indian or foreign

currency depending upon the need of the borrower.

Short Term Loan:

Bank provides Working Capital facilities to meet day-to-day

working capital needs and Term Loan for capex. However there

may be occasions where there is need of ad hoc or short-Term

finance for general corporate purposes, meeting temporary

mismatches in working capital or for meeting contingent expenses.

In such situations it provides Short Term Loans for tenure up to a

year to ensure that business runs smoothly.

Term Loan:

When there is need of long-Term funds for capex or capacity

expansions or plant modernization and so on. Keeping these

requirements in mind Bank provides Term Loans up to acceptable

tenor with suitable moratorium, if required, and repayment options

structured on the basis of customer‟s estimated cash flows. These

Loans are primarily secured by a first charge on the fixed assets

acquired through the Loan amount. Suitable collateral security is

also taken whenever required.

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Clean Bill Discounting:

Bank provides clean bill discounting facilities to fund receivables.

Bank discount bills or receivables and provide credit against that.

This facility is provided for a period of 3-6 months depending upon

the tenor of the bill.

LC Backed Bill Discounting:

Bank discount trade bills drawn under Letters of Credit issued by

reputed banks to fund receivables. This facility is provided for a

period of 3-6 months depending upon the tenor of the bill or Letter

of Credit.

Co-Acceptance of Bills:

Bank also provides co-acceptance of trade bills depending upon

the need of the borrower.

Credit Facilities against Guarantee or Stand By Letter of Credit

issued by Foreign Banks:

Various foreign companies set up subsidiary in India. Bank

provides funding to such companies against guarantees or SBLCs

of acceptable foreign banks.

Letter of Credit:

Apart from fund based working capital facilities Bank provides a

range of Non-Fund Based facilities such as Letter of credit, Bank

Guarantees, Solvency certificates, etc. Letter of Credit is provided

to meet trade purchases. These are generally provided for 3-6

months depending upon Trade cycle. Apart from this it provides

Import Letter of Credit for importing machinery or capital goods.

Such LCs are for tenure ranging from 1-3 years depending upon

the need of the borrower.

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Bank Guarantee:

Bank provides Bank Guarantee on behalf of its client to various

other entities such as Government, quasi govt bodies, corporate

and so on. it provides a range of guarantee such as Performance

guarantee, financial guarantee, EPCG etc. The tenure of Bank

Guarantee range from 1 year to 10 years depending upon the

purpose of the guarantee.

Solvency Certificates:

Bank also provides solvency certificate depending upon the need

of the borrower.

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CHAPTER-7

CASE STUDY- 1

Details of case study

Name M/s Dynemic Products Limited (DPL)

Constitution Public Limited Company

Office Address B- 301, Satyamev Complex-1, Opp. New Gujarat High Court,

S.G.Highway, Sola, Ahmedabad-380 060, Gujarat, India.

Line of activity Manufacturing of Food Colour Products

Sector Chemical and Chemical Products

Dealing with us New Connection

Incorporation 14th June 1990

Name of Directors Mr. Dashrathbhai Prahladbhai Patel (DIN : 00008160)

Mr. Rameshbhai Bhagwanbhai Patel (DIN : 00037568)

Mr. Hitendra Hargovinddas Sheth (DIN : 00037705)

Mr. Jagdishbhai Sevantilal Shah (DIN : 00037826)

Mr. Harishbhai Keshavlal Shah (DIN : 00037932)

Mr. Bhagwandas Kalidas Patel (DIN : 00045845)

Mr. Dixit Bhagwandas Patel (DIN : 00045883)

Mr. Shashikant Purshottambhai Patel (DIN : 00045957)

Mr. Vishnubhai Gangarambhai Patel (DIN : 00270413)

Mr. Shankarlal Baluram Mundra (DIN : 00388204)

Group Not a recognized group

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Brief Background:

The Company was incorporated on 14th June, 1990 as Private Limited

Company. The Name was subsequently changed to Dynamic Products

Limited on 31/12/1992. The Company was promoted with the objective of

carrying on the business of manufacturing S.P.C.P, the raw material for Food

Color, reactive & Raazole Dyes.

In the Year 2000 the company acquired the running business of M/s Safforn

Dye Stuff Industries and started manufacturing wide range of food colors at

the premises 3709/6, GIDC Estate, Ankleshwar having plot area of

admeasuring 3700 Sq.Mtr.

As the company aims to provide entire range qualitative and quantitative

service to food industry, as its Unit I. The company commenced

manufacturing of food colors namely Tratrazine in the year 2000-01. Both the

units at Ankleshwar are Ultra modern and have eco friendly plants with in

Rating External: Not done.

Internal: SME 3 (ABS 31.03.2009)

Associate Concern Dynemic Overseas (India) Private Limited

Dynemic USA Inc.

Share holding pattern As mentioned below

Share Price movement Listed on the BSE

Current Market Price – Rs.14.55/- (27.11.2009)

52 week high/low – Rs. 29.20 ( 22 Apr' 09) / Rs. 10.00 ( 16

Jan' 09)

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house testing facilities to control quality at every level of manufacturing. The

Company gained goodwill in the short span of time due to its quality product.

The company has well equipped state of art in house laboratory which

conduct test of every parameter of food color & Dye intermediates laid down

under national and international authorities. The Company exports its product

to around 41 countries worldwide. All these have led the company to acquire

and retain a status of largest manufacturer and supplier of food colors and

dye intermediates in India.

Qualitative Factors:

The Company has a pro-active Management and Promoters who have

hands on experience in manufacturing of Dyes Intermediaries and

Food Colors.

Profit making Company since last 13 years.

The company has to its credit an award for Indirect Export of Self

Manufactured Dyes for the year 2001-02 & 2002- 03 received by

Gujarat Dyestuffs Manufacturers‟ Association.

The company has obtained certificate of approval From Bureau Verities

Quality International (BVQI) for achievement of ISO 9001: 2000 quality

standards, the Company has also received certificate of approval from

Bureau Verities Quality International (BVQI) for achievement of

14001:1996 and 14001:2004 quality standards for both its units

satiated at Ankleshwar.

The company has also obtained HAACP Code: 2003 certificate of

registration from TQCS International (Group) Pty Ltd under food safety

programme for both its units situated at Ankleshwar

The company was awarded with trophy for export performance of more

than Rs. 6.00 & 8.00 Crore for Self

Manufactured Indirect Export of Dyes & inTermediates in the year

2002-03 by Gujarat Dyestuffs Manufacturers‟Asso

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Both the Units of the company are exporting Oriented Units and have

obtained the status of One Star Export House.

Marketing Strategy/Marketing arrangement

Strong and experience people are leading company‟s marketing department.

Company‟s total turnover is divided into:

Exports Sales

Local Sales

Exports Sales:

Company‟s 70% turnover is generated by way of exports sales.

Company has its own presence in all most all countries. The company

is exporting Food colors in Latin America, African countries, Middle

East, Far East, US and Europe. Almost all export customers are

dealing with company for many years.

Out of total exports turnover 60 to 70% percentage orders are repeated

orders and rest of the orders are new orders.

The Company has region wise Export Managers who can cater the

need of customers individually. Due to the quality and timely delivery of

the material the company have less competition from these countries.

Globally many countries have discontinued production of Dyes, Food

colors and Intermediates, new market has opened for Indian

manufacturer of Dyes and Intermediates. As Dynemic Products Ltd is

already a well recognized name in the field globally, it has more

opportunities to grab from growing International market.

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Local Sales:

In Local Market Company is doing marketing its Dyes & Intermediates

to the end customers.

The company is the largest manufacturer of S.P.C.P in India which

generating repeated order from the local customers.

Now, company is planning to market the food colors in small packing

through its dealers and distributors which cater the local needs.

Company is also planning to arrange marketing arrangement with soft

drink manufactures and pharmaceutical manufactures for food colors.

Proposal

for

Proposal for fresh sanction of credit facilities by way of take over

(with enhancement) from HDFC Bank

a) Sanction of Cash Credit Limit of Rs. 500.00 lacs for working capital

requirement ( take over of Rs. 500.00 lacs from HDFC Bank).

b) Sanction of Letter of Credit (Inland/Foreign) of Rs. 300.00 lacs for

working capital requirement as a sub-limit of cash credit limit (take

over of Rs. 300.00 lacs from HDFC Bank).

c) Sanction of EPC/FBD/FBP/PCFC/PSCFC of Rs. 500.00 lacs for

working capital requirement as a sub -limit of cash credit limit (take

over of Rs. 500.00 lacs from HDFC Bank).

d) Sanction of Corporate Loan of Rs. 200.00 lacs (take over of Working

Capital Term Loan of Rs. 200.00 lacs from HDFC Bank).

e) Sanction of LER limit of Rs. 25.00 lacs (equivalent to forward cover of

Rs.500.00 lacs).

f) Waiver of credit opinion report from existing bankers of M/s. DPL

(HDFC Bank) and group concerns of M/s. DPL i.e. M/s. Dynemic

Overseas (India) Limited based on justifications given in the proposal.

g) Concession in processing fees at Rs. 1.00 lacs against norm of

1.00%.

h) Permitting time of 30 days for completion of take over formalities with

HDFC and creation of mortgage by CMC.

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Existing &

Proposed

Facilities

(Rs. in lacs)

Type of Facility Existing

Limits

(HDFC)

Propose

d

+ Inc /

– Dec

Proposed

Limits

(Axis Bank)

Cash Credit Limit – Stock

cum Book Debt

500.00 -- 500.00

Corporate Loan 200.00 -- 200.00

EPC/FBD/FBP/PCFC/PSCF

C – As a sub limit of Cash

Credit Limit

(500.00) -- (500.00)

LC(Inland /Foreign) - As a

sub limit of Cash Credit Limit

(300.00) -- (300.00)

LER Limit (as a sub-limit of

CC limit)

(15.00) +25.00 +25.00

Total 700.00 +25.00 725.00

Purpose WC/LC/LER : To meet working capital requirements.

Corporate Loan : For NWC built up.

Tenor WC/LC/LER : 12 months.

Corporate Loan : 24 months from the date of first disbursement.

Repaymen

t

WC/LC/LER : On Demand.

Corporate Loan : 23 monthly instalments of Rs. 834000 each and last

instalment of Rs. 818000. Repayment to commence from December

2009.

Interest to be serviced as and when debited.

Security Primary Hypothecation of entire current assets (Pari

passu) of the company (Both present & future).

(Value as on 31.03.2009 is of Rs. 1326.42 lacs).

Hypothecation over Plant and Machinery (Pari

Passu) (Both present & future). (Value is of Rs.

1529.55 lacs as per empanelled valuer of Citi

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Bank).

Collateral Pari – Passu charge being shared by Citi Bank Limited

on following properties :

i. Factory Land and Building, Plant and Machinery at

Plot No. 6401,6415,6416, G.I.D.C., Ankleshwar,

Dist.Bharuch admeasuring 5664 sq.mts. standing in

name of M/s. Dynemic Products Limited.

ii. Office situated at B- 301,308,309,310 Satyamev

Complex-1, Opp. New Gujarat High Court,

S.G.Highway, Sola, Ahmedabad-380 060, Gujarat

admeasuring 4272 square feets standing in the

name of M/s. Dynemic Products Limited.

iii. Factory Land and Building, Plant and Machinery at

Plot No. 3709/6,3710/3,3710/1, G.I.D.C.,

Ankleshwar, Dist.Bharuch admeasuring 12290.80

sq. mts. standing in name of M/s. Dynemic Products

Limited.

Guarantee Personal Guarantee of :

Mr. B.K.Patel having net worth of Rs. 264.88 lacs

(approx.) as on 31.03.2009.

Mr. Ramesh B.Patel having net worth of Rs.

152.57 lacs (approx.) as on 31.03.2009.

Mr. Dashrath P.Patel having net worth of Rs.

257.89 lacs (approx.) as on 31.03.2009.

Mr. Shashikant P.Patel having net worth of Rs.

148.22 lacs (approx.) as on 31.03.2009.

Mr. Dixit B.Patel having net worth of Rs. 36.33

lacs (approx.) as on 31.03.2009.

Credit

enhancem

ent

Nil.

Interest

Rate

BPLR - 3.50% i.e. 11.25% p.a. with monthly rests (presently BPLR @

14.75%).

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LC

Charges

Bank‟s standard schedule of charges.

Processin

g fees

Rs. 1 lacs for the sanctioned facilities plus applicable taxes.

Banking

Arrangem

ent

Multiple with Citi Bank (Proposed).

Unit visit

The unit was visited Mr. Asim Bhaduri (VP – SME and Center Head), Mr.

P.C.Dash (AVP and SCO – SME) and Mr. Kuntal Bhatt (Manager and RM -

SME) on 13th November 2009 and the overall operations of the unit were

found to be satisfactory.

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Operational & Financial Analysis

(Rs. in lacs)

Particulars

31.03.07 31.03.08 31.03.09 31.03.10 31.03.11

(Actuals) (Actuals) (Actuals) (Proj.) (Proj.)

Gross Sales 3231.12 3657.70 4911.20 6500.00 7500.00

Net Sales 3231.12 3657.70 4911.20 6500.00 7500.00

Net Sales Growth Rate % 12.79% 13.20% 34.27% 32.35% 15.38%

Operating Profit 227.49 313.80 261.62 621.29 729.97

Other Income 141.52 (5.36) 56.07 55.00 65.00

PBDIT 322.88 412.89 503.87 881.74 1018.09

Depreciation 47.94 50.62 96.12 110.94 107.00

Interest 47.45 48.47 146.12 149.50 181.12

PBT 369.01 308.44 317.69 676.29 794.97

PAT 266.95 184.99 190.03 446.42 524.76

Cash Profit 182.35 103.07 153.62 424.83 499.22

Operating Profit Margin % 7.04% 8.58% 5.33% 9.56% 9.73%

PBDIT Margin % 9.99% 11.29% 10.26% 13.57% 13.57%

PAT Margin % 8.26% 5.06% 3.87% 6.87% 7.00%

Paid up Capital - Equity 1132.84 1132.84 1132.84 1132.84 1132.84

Unadjusted TNW 2649.73 2707.33 2764.96 3078.84 3471.06

Unadjusted TOL 1109.42 1589.26 2331.73 2890.12 3094.44

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Rating The rating of the company as per SME Rating Tool comes to SME - 3 (ABS

31.03.2009). The segment wise scoring is as under:

Particulars Rating

Overall Scoring SME-3

Financial scoring SME-4

Business scoring SME-3

Management scoring SME-3

Industry scoring SME-3

Unadjusted TOL/ TNW 0.42 0.59 0.84 0.94 0.89

Adjusted TNW 2710.84 2725.68 2828.34 3237.48 3629.70

Adjusted TOL 1048.31 1570.91 2268.35 2731.48 2935.80

Adjusted TOL/ TNW 0.39 0.58 0.80 0.84 0.81

Interest Coverage 9.82 8.44 3.84 6.27 5.98

Current Ratio 1.76 1.34 0.94 1.13 1.24

DSCR 7.67 1.83 1.21 2.35 2.20

NOCF 105.69 230.12 654.38 (269.99) 149.24

Net Profit / NOCF 2.53 0.80 0.29 (1.65) 3.52

NOCF / Interest 2.23 4.75 4.48 (1.81) 0.82

NOCF / Financing Payments 0.08 0.13 0.29 (0.08) 0.04

Total Debt / NOCF (No. of

years)

1.17 0.78 0.60 (0.45) (0.00)

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CIBIL/RBI/ECGC Defaulters’ List/CA Verification/ Auditor Verification

Reference Check

Reference check was made through some of Bank‟s clients in the same line

of activity financed by Axis bank and the same was reported to be

satisfactory.

Analysis

a) The promoters of the company are having rich experience of more than

19 years in various Industries.

b) The proposed expansion of the company is having huge market

potentials.

c) The Company is the leader in Manufacturing and export of food

colours.

d) The overall credit rating of company is SME –3.

e) The business is 19 years old.

Particulars As of Date Position

RBI Defaulters list 31.12.2008 No match found.

ECGC Specific Approval List 31.07.2008 No match found.

CIBIL Defaulters List Satisfactory.

CA Verification (Auditor) 13.11.2009 Verified.

Auditor‟s Firm Verification 13.11.2009 Verified.

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f) The sale of the company has been showing an increasing trend

throughout the years under consideration. The sale of the company

was increased from Rs. 3231.12 lacs in FY06-07 (Aud) to Rs. 3657.70

lacs (Aud) in FY07-08 and further to Rs. 4911.20 lacs in FY08-09

(Aud).

g) Since the company is into Manufacturing of Food Colours, the net

margin normally remains between 5.00% - 9.00%. The net profit of the

company was decreased from Rs. 266.95 lacs in FY06-07 (Aud)

showing margin of 8.26% to Rs. 184.99 lacs in FY07-08 (Aud) showing

margin of 5.06%. However, the same was maintained at Rs. 190.03

lacs in FY08-09 (Aud) showing margin of 3.87% due to decrease in

margins in the chemical industry on account of raw material price

fluctuations worldwide. The same was an aberration. But, now the

industry is on revival and boom path. Considering the same, the

company has estimated the profit of Rs. 446.42 lacs for FY09-10 @

margin of 6.87%, which may be accepted.

h) The TOL/TNW of the company increased from 0.42 in FY06-07 (Aud)

to 0.59 in FY07-08 (Aud) and to 0.84 in FY08-09 (Aud). The company

has estimated TOL/TNW at 0.94 and 0.89 for FY09-10 and FY10-11

respectively on account of increased bank borrowings, which may be

considered comfortable.

i) The current ratio of the company was 1.76 in FY06-07 (Aud) which

decreased to 1.34 in FY07-08 (Aud) and which further plummeted to

0.94 in FY08-09 (Aud), on account of capex expansion which will be

completed in the current fiscal. The company has estimated its current

ratio at 1.13 and 1.24 for FY09-10 and FY10-11, which is reasonably

acceptable as regards to the liquidity position of the company.

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j) The NOCF is positive during FY 2008-09 (Aud) by Rs. 654.38 lacs.

NOCF is estimated negative in FY 2009 –10 at Rs. 269.99 lacs, as per

projected financials submitted by the company on account of increase

in stock and receivables which is keeping in line with the increase in

turnover and the holding levels are as per the industry practice.

k) The overall conduct of the account, repayment status etc. at Citi Bank

and HDFC is satisfactory.

l) The main director is dynamic and has rich experience of more than 20

years in his line of activity.

m) The company is a registered SSI unit.

n) Market reference of the company is satisfactory

o) The overall projected performance and financial of the unit are

satisfactory.

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CASE STUDY-2

Details of case study

Name Sankalp Recreation Pvt. Ltd. (SRPL)

Constitution Private Limited Company

Group Sankalp

Date of

Incorporation

05.02.2002

Name of

Directors

Mr. Kailash R. Goenka

Mr. Robin R. Goenka

Mr. Ramavatar R. Goenka

Registered Office “Sankalp Square”, Opp. Gurukul, Drive-in Road,

Ahmedabad – 350052

Ph.: 079-27499200 (F) 079-27499300

Proposed Hotel

Site

FP # 4, TPS # 45, Survey # 948, Near AUDA Garden,

Off. 100 ft. Road, Prahaladnagar, Near S. G. Highway,

Ahmedabad – 350051

Line of activity Existing: Restaurant / Franchisee income from

Restaurant

Proposed: Hotel/Hospitality

Dealing with us New Connection

Rating Internal: SME-2 (ABS 31.03.2009)

External: Not rated

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Brief Background

The “SANKALP” group is a chain of specialty theme based retail restaurant

outlets. SRPL has been incorporated on 05.02.2002. However, the group is

having its presence into the Hospitality business for more than two decades

and has their esteemed reputation in the market. The company has been

floated by the promoters Mr. Ramavatar Ranglal Goenka & his two sons Mr.

Kailash Goenka and Mr. Robin Goenka. The Founder of this chain Mr.

Ramavtar Goenka, ventured in to the business in 1981 with the opening of its

flagship restaurant at Ashram Road, Ahmedabad, India and there has been

no looking back since then. Knowing the South Indian cuisine very well, he set

up the theme-based restaurant in Ahmedabad and got an overwhelming

response.

It has been the culmination of inherent desire to give customer an innovative

specialty brand that gave birth to Sankalp Restaurant. With over forty highly

profitable outlets and a large loyal customer base to boast off, the group is all

set to launch into international market with its brands and food product

exports merchandising too.

Proposal Details

Proposal Sanction of Term Loan of Rs. 1500.00 lacs for Hotel Project

Sanction of one-time Foreign Letter of Credit (capex) facility of Rs.

150.00 lacs (as a sub-limit of Term Loan) for import of

machineries/equipments

Sanction of Buyer‟s Credit (capex) Limit of Rs. 150.00 lacs in lieu of

Foreign L/C (capex) as a sub-limit of Term Loan

Sanction of LER limit of Rs. 7.50 lacs (equivalent to forward cover

exposure of Rs. 150.00 lacs) as a sub-limit of Term Loan

Concession in Interest Rate and Processing Fees

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Existing

&

Proposed

Facilities

(Rs. in lacs)

Type of Facility Existi

ng

Limits

Proposed

Limits

+ Inc /

– Dec

Term Loan Nil 1500.00 +1500.00

Foreign L/C capex (as a sub-limit of

TL)

Nil (150.00) + (150.00)

Buyer‟s Credit (as a sub-limit of TL) Nil (150.00) + (150.00)

LER limit equivalent to forward cover

of Rs. 150.00 lacs (as a sub-limit of

TL)

Nil (7.50) +(7.50)

Total Nil 1500.00 +1500.00

Purpose For construction of 3-star Hotel

Tenor 82 months (including moratorium period of 16 months)

Repayment to start from April 2011

Repayme

nt

i) 12 monthly instalments of Rs. 9.50 lacs each (April 2011 to March

2012)

ii) 12 monthly instalments of Rs. 22.00 lacs each (April 2012 to March

2013)

iii) 12 monthly instalments of Rs. 25.00 lacs each (April 2013 to March

2014)

iv) 12 monthly instalments of Rs. 28.00 lacs each (April 2014 to March

2015)

v) 12 monthly instalments of Rs. 31.25 lacs each (April 2015 to March

2016)

vi) 6 monthly instalments of Rs. 18.50 lacs each (April 2016 to

September 2016)

Interest to be serviced separately as and when debited.

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Security & Guarantee

Primary EM of Land & Building at the Project Site located at FP # 4, TPS # 45,

Survey # 948, Near AUDA Garden, Off. 100 ft. Road, Prahaladnagar,

Near S. G. Highway, Ahmadabad – 51 (Projected Cost Rs. 15.07

crores)

Hypothecation of entire movable fixed assets at the Project Site

(Projected Cost Rs. 7.06 crores)

Collateral Nil.

Guarantee Personal guarantee of the directors of the company. The net worth details

are as under:

(Rs. in crores)

Name of the Director Net Worth

Mr. Kailash R. Goenka 4.61

Mr. Robin R. Goenka 3.03

Mr. Ramavatar R. Goenka 2.18

Total 9.82

Unit visit

The proposed site of the hotel project of the company was visited by Mr. Asim

Bhaduri (Vice President - SME), Mr. P. C. Dash (AVP/SCO - SME) and Mr.

Nishant Sharma (AVP/SSO - SME) and the same was reported satisfactory.

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Proposed Project

SRPL has been incorporated as a Private Limited Company with main object

of business of running hotel in all its aspects, lodging and boarding and to run,

manage, acquire, control, own, purchase, hire the same including restaurant,

café, tavern, refreshment-room, lodging-house keepers etc. The company has

proposed to set up a three star hotel with 96 rooms at S.G. highway.

The project is located at one of the best locations and in the newly developed

area of Ahmedabad City. This is situated at “Sankalp Hotel” Near AUDA

Garden, Off 100 ft. Road, Prahaladnagar, S.G.Highway, Ahmedabad -

380051. This area is the fastest developing area in the city and is surrounded

by various business office premises, residential plots, various restaurants and

other commercial complexes. Ahmedabad Railway Station is just 20 mins

from the Hotel and International Airport is almost 30 mins from the location.

Company‟s main purpose of the hotel is to encourage the corporate people

who come for the business purposes. Hence the location of the project is

ideal & the company wants to be a part of the growing popularity of this area.

COST OF PROJECT Rs. in Crores

A Land & Building 9.01

B Civil Construction and Civil Finishing 6.06

C Furniture & Fixtures 5.49

D Plant and Machinery 1.57

E Preliminary and Pre-operative Cost 2.11

F Contingencies 0.76

TOTAL 25.00

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Against the total cost of project of Rs. 25.00 crores, the company has

1requested for Term Loan assistance of Rs. 15.00 crores. Hence, the margin

to be brought in by way of promoters‟ contribution would be 40% of the total

CAPEX for the proposed hotel project of the company by way of share

capital/premium and unsecured Loans.

Operational & Financial Analysis

MEANS OF FINANCE

A Equity Share Capital / Premium 3.00

B Unsecured Loans 7.00

C Term Loan 15.00

TOTAL 25.00

Particulars 31.03.08 31.03.09 31.03.10 31.03.11 31.03.12

(Aud) (Aud) (Est) (Proj) (Proj)

Net Sales / Receipts 483.62 489.64 609.00 1333.00 2386.00

Operating Profit 63.32 85.68 143.84 476.00 916.00

Other Income 12.80 0.51 0.00 0.00 0.00

PBDIT 76.12 86.19 143.84 476.00 916.00

Depreciation & Amortisation 7.56 7.49 12.00 121.00 216.00

Interest & Financial Charges 4.98 7.59 39.00 146.00 247.00

Profit Before Tax (PBT) 63.58 71.11 92.84 209.00 453.00

Profit After Tax (PAT) 46.63 48.96 64.84 136.00 295.00

Cash Accruals 54.19 56.45 76.84 257.00 511.00

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Share Capital 1.00 1.00 201.00 301.00 301.00

Reserves & Surplus 74.64 123.59 188.43 324.43 619.43

Misc. Exp. Not W/off 0.00 0.00 0.00 0.00 0.00

Tangible Net Worth (TNW) 75.64 124.59 389.43 625.43 920.43

USL as Quasi Equity 0.00 0.00 139.20 139.20 139.20

Adjusted TNW 75.64 124.59 528.63 764.63 1059.63

Total Term Liabilities (TTL) 30.20 11.00 1646.80 2192.80 1846.80

Total Outside Liabilities (TOL) 156.95 169.30 1848.80 2579.80 2497.80

Net Sales Growth % 0.31% 1.38% 22.44% 118.88% 78.99%

PBDIT Margin % 15.74% 17.60% 23.62% 35.71% 38.39%

PAT Margin % 9.64% 10.00% 10.65% 10.20% 12.36%

ROCE 64.78% 58.04% 6.06% 12.00% 24.08%

TOL / TNW 2.07 1.36 5.10 4.35 2.86

Adj. TOL / TNW 2.07 1.36 3.50 3.37 2.36

TTL / TNW 0.40 0.09 4.59 3.73 2.16

Adj. TTL / TNW 0.40 0.09 3.12 2.87 1.74

Current Ratio 1.60 1.42 1.51 1.44 1.52

Current Ratio w/o TL inst. 1.60 1.52 2.41 2.80 3.24

Interest Coverage Ratio 15.29 11.36 3.69 3.26 3.71

Net Operating Cash Flow (NOCF) (49.39) 51.87 77.57 300.00 650.00

Net Profit / NOCF (0.94) 0.94 0.84 0.45 0.45

NOCF / Interest (9.92) 6.83 1.99 2.05 2.63

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Rating

The rating of the company as per SME Rating Tool comes to SME-2 (ABS

31.03.2009). The segment wise scoring is as under:

Particulars Rating

Overall Scoring SME-2

Financial scoring SME-3

Business scoring SME-2

Management scoring SME-2

Industry scoring SME-4

CIBIL/RBI/ECGC Defaulters’ List

The name of the company and its directors are not appearing in CIBIL/RBI‟s

defaulter/willful defaulter list as of 31.12.2008 (latest available). The name of

the company and its directors are not appearing in ECGC‟s defaulter list as of

31.07.2008 (latest available)

NOCF / Financing Payments (0.28) 0.23 0.26 0.50 0.59

Total Debt / NOCF (No. of years) (0.61) 0.21 4.11 7.31 2.84

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Analysis

a) The company belongs a recognized group named SANKALP, who has

created a niche in the hospitality sector.

b) The group is having its presence since 1981 and has emerged as a

reputed name since inception. The promoters of the company have rich

experience in their line and belong to a resourceful family.

c) The promoters are having sound entrepreneur skills to acquire

business opportunities to scale new heights.

d) The sales/receipts of the restaurant/franchisee business (existing) of

the company were increased from Rs. 483.62 lacs in FY07-08 to Rs.

489.64 lacs in FY08-09. The company has achieved the sale of Rs.

373.74 lacs (Restaurant income of Rs. 300.25 lacs and Franchisee

income of Rs. 73.49 lacs) upto 30.09.2009 against the estimated sale

of Rs. 609.00 lacs (Restaurant income of Rs. 484.00 lacs and

Franchisee income of Rs. 125.00 lac) for the year 2009-10, which

indicates around 61% achievement of the estimated sales/receipts for

the year 2009-10 and can be considered reasonable.

e) The net profit of the existing business of the company was increased

from Rs. 46.63 lacs (NP margin of 9.64%) in FY07-08 to Rs. 48.96 lacs

(NP margin of 10.00%) in FY08-09. The PBDIT of the existing activity

of the company was increased from Rs. 76.12 lacs (PBDIT margin of

15.74%) in FY07-08 to Rs. 86.19 lacs (PBDIT margin of 17.60%) in

FY08-09

f) The TOL/TNW of the company remained at 2.07 in FY07-08 and 1.36

in FY08-09. The TOL/TNW of the company has been estimated at 5.10

for FY09-10 considering the Loan Against Property of Rs. 420.00 lacs

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taken for existing business and the proposed Term Loan disbursement

of Rs. 1000.00 lacs during the current FY09-10.

g) The current ratio of the company remained above the benchmark level

at 1.60 in FY07-08 and 1.42 in FY08-09. The same has been estimated

at 1.51 for FY09-10 considering the existing business activity of the

company during 2009-10. While considering the existing as well as

proposed business activity of the company, the current ratio has been

projected at 1.44 for FY10-11 and 1.52 for FY11-12.

h) The net operating and all ratios pertaining to NOCF were positive in

FY08-09. The same have been estimated to be positive from FY09-10

onwards.

i) The company has shown a consistent growth since its inception and

financials of the company are satisfactory.

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CASE STUDY 3

Details of case study

AApppplliiccaanntt DDeettaaiillss

1 Name of the

Applicant

M/S. Vishesh Distributors Pvt. Ltd. (New Relationship)

2 Registered

Office

Showroom

(Fragrances)

Showroom

(Airtel)

Godown

(Beverage)

Contact Details

401, Kalasagar, Behind Ratnamani Complex, Jodhpur Cross

Road, Satellite, Ahmedabad - 380015

F/101, Swagat Plaza I, Bopal Amli Road, Bopal, Ahmedabad.

M: 9898052002

19, Rudra Square, Judges bunglow cross road, Bodakdev,

Ahmedabad.

M: 9898052616

Sola Timber Market, After Sola Over Bridge, Behind

Mahindra Showroom, Sola, Ahmedabad.

M: 9898052041

Tel. No. 079-26747999

Mobile: 9898052001 (Ketan Shah)

E-Mail: [email protected]

3 Constitution Private Limited Company

Directors:

1. Mr. Ketan P. Shah (ACPPS7169H)

2. Mr. Pankaj C. Shah (ACYPS5908B)

3. Mrs. Dhara K. Shah (AMFPS2018F)

4. Mrs. Pina P. Shah (APAPS7788E)

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Company PAN No. AABCV2348Q

4 Date of

Establishment

Certificate of incorporation No.

U51229GJ2001PTC39423, Dated 17.04.2001

Gujarat Sales Tax Registration No. 24074300543,

dated 01.07.2002

Import Export Code No. 0807004081, dated

24.05.2007

5 Nature of

Business

Distributorship of Pepsi products, Airtel, Levi‟s Struss

Signature

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Brief Background

M/S. Vishesh Distributors Pvt. Ltd. Is a private limited company, held by close

family members. The company was established in year 2001.

The group has been engaged in distribution of branded company products like

Pepsico beverage products, Airtel, Levi‟s Struss Signature, Amul, TATA,

fragment shop, etc.

The group was earlier distributor for companies like Himalaya, Wipro, Godrej,

Parker, Parle, Adani & Lays.

Now, due to strong marketing channel, the company is also entered in

agreement with Levi‟s signature for distribution of garments to their outlets &

franchises in all over the Gujarat. Further the company is also having 14

commercial vehicles for distribution activities.

.

Present Proposal

To meet the increasing business demand for the various distribution schemes,

the company has requested for the OD limit of Rs. 180.00 lacs. by takeover of

existing LAP from HDFC Bank & also requested to allow the Cash credit limit

of Rs. 55.00 lacs from Vijaya Bank. The company wants to expand their

existing business activity by enhancing working capital limit for smooth

business operation.

Purpose of

loan

For General Business Purpose

Limits

Proposed

OVERDRAFT - Rs. 180.00 lacs

Rate of

Interest

Validity of

Limits

BPLR –2.50% i.e. 12.25% p.a. with monthly rests. (Presently BPLR

is at 14.75% p.a.)

12 months only subject to review every year.

Security

Details

Primary Security: NIL

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Collateral Security:

Equitable Mortgage of following properties:

1. Residential flat situated at 401, Kalasagar Appartment,

Opp. Star India Bazaar, Jodhpur, Satellite, Ahmedabad,

belonging to Mr. Ketan P. Shah (Director). Estimated

market value Rs. 80.00 lacs.

2. Shop at 101, 1st floor, Swagat Plaza I, Near Bopal Amli

road, Bopal, Ahmedabad, belongs to Mrs. Dhara K. Shah

(Director). Estimated market value Rs.41.00 lacs.

3. Shop at 19, 1st floor, Rudra Square, Near Bodakdev

police chowki, Bodakdev, Ahmedabad, belongs to Mr.

Ketan P. Shah (Director). Estimated market value Rs.

80.00 lacs.

4. Shop at 9-10, Ground floor, Sukriti Annexie, Near

Prernatirth Bunglows-2, Satellite, Ahmedabad, belongs

to Mr. Ketan P. Shah (Director). Estimated market value

Rs. 100.00 lacs.

Total market value of above properties is Rs. 301.00 lacs (Approx).

Guarantee: Personal guarantee of:

1. Mr. Ketan P. Shah (Director & property holder).

2. Mrs. Dhara K. Shah (Director & property holder)

3. Mr. Pankaj C. Shah (Director)

4. Mrs. Pina P. Shah (Director)

PDC’s:

Two PDC‟s for the entire overdraft limit each dated 3 months and 9

months from the date of first disbursement.

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Processing

Fees

0.75% of the limit sanctioned plus applicable taxes (Non-

refundable)

Documentation As per bank‟s extent guidelines.

Risk

Associated

The company is facing competition from the other distributors in the

market.

Risk mitigates The above risk factor is mitigated as below:

1. Directors of the company, are having 10 years of rich

experience in the field of distributorship

2. The company is frequently offering promotional schemes to

its retail distributors

3. The company is having diverse clientele base in the market.

Unit Visit The company has been visited by Mr. N. Ramachandran (AVP-

SME), Ms. Disha Badani (Executive-SME), Mr. Nirav Ayer

(Executive-SME), on 04.02.2010:

Overall visit was found satisfactory.

Login Fees Rs. 5000/- plus applicable taxes (Non refundable)

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Defaulter List Whether the names of the borrower or any of the promoters/directors

appear(s) in: -

RBI defaulters List: No (The firm name and directors are not featuring in

RBI Defaulters‟ List as of 31.03.2009 - Latest Available).

ECGC defaulter List: No

CIBIL:

Credit card repayment record of Director Mr. Ketan P. Shah:

In CIBIL of Mr. Ketan, it is observed that one credit card account from

Standard Chartered Bank, with overdue amount Rs. 0.43 lacs, was

observed written-off. However, Mr. Ketan has submitted that it was a due

of Rs. 1100/-. Due to non - receipt of bill on time, there was interest

charge levied on the actual amount.

He, subsequently paid the actual amount, but not the interest amount,

which as on date has become overdue of Rs. 43,723/- with interest

charge.

The director has also filed a case against SCB regarding the same, to the

“Consumer Education & Research Society” and it is in process till date.

The director has submitted the copy of the relevant documents to our

bank.

However, considering below facts, we may consider the Credit Card

written-off status as acceptable:

1. The borrower is having satisfactory repayment track record of CC,

LAP & term loan with HDFC Bank & Vijaya bank.

2. Relevant documentary proofs available for CIBIL case.

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Credit Score

(Enclosed Credit

Scoring Sheet)

Parameters Present Score

(ABS – 31.03.09)

Financial 36.00

Non – Financial 30.00

Overall 66.00

Rating SME 3

(Acceptable)

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Performance details

Particulars 31.03.2007 31.03.2008 31.03.2009 31.03.2010 31.03.2011 31.03.2012

Audited Audited Audited Estimated Projected Projected

Sales 1273.31 1032.33 884.53 1125.00 1475.00 1525.00

Other Income 23.49 32.39 30.33 30.00 30.00 30.00

Total Income 1296.80 1064.72 914.86 1155.00 1505.00 1555.00

PBDIT 23.44 28.59 31.58 45.27 50.54 52.29

Depreciation 3.78 6.38 6.58 6.91 6.91 6.91

Interest 12.92 17.55 18.94 28.61 30.63 30.63

Interest &

remuneration to

Directors 4.80 2.40 2.50 2.75 3.00 3.25

PBT 1.94 2.26 3.56 7.00 10.00 11.50

PAT 1.68 2.03 2.40 5.00 7.00 8.00

PBT Margin % 0.15 0.21 0.39 0.61 0.66 0.74

Cash Accruals 5.46 8.41 8.98 11.91 13.91 14.91

TNW(Unadjusted) 13.44 14.01 15.95 37.96 44.96 52.96

Unsecured Loans

from friends &

relatives 38.94 56.25 95.46 78.46 78.46 78.46

TNW (Adjusted) 52.38 70.26 111.41 116.42 123.42 131.42

TOL(Adjusted) 183.99 148.91 127.13 250.71 259.41 260.79

TOL(Unadjusted) 222.93 205.16 222.59 329.17 337.87 339.25

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TOL/TNW(Unadjust

ed) 16.59 14.64 13.96 8.67 7.51 6.41

TOL/TNW(Adjusted) 3.51 2.12 1.14 2.15 2.10 1.98

Debtors 64.97 45.88 71.60 117.19 153.65 158.85

- Less than 6

months 64.97 45.88 71.60 117.19 153.65 158.85

- More than 6

months 0.00 0.00 0.00 0.00 0.00 0.00

Debtors holding (in

days) 18.62 16.22 29.55 38.02 38.02 38.02

Current Ratio 1.61 1.70 2.26 1.33 1.37 1.43

Current Asset 187.52 160.33 185.98 328.10 350.71 367.00

Current Liabilities 116.30 94.37 82.16 246.72 255.42 256.80

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Analysis

a) The group has been engaged in distribution of branded company

products like Pepsico beverage products, Airtel, Levi‟s Struss

Signature, Amul, TATA, fragment shop, etc.

b) Key promoter and pioneer of the company is Mr. Ketan P. Shah.,

engaged in the distribution activities since last more than 10 years.

c) He has gained good knowledge and skill especially in the field of

marketing aspects. He is handling total business affairs with sound

business and management policy.

d) The company had registered sales of Rs. 1273.31 lacs in FY. 2006-07,

Rs. 1032.33 lacs in FY. 2007-08 and sales of Rs. 884.53 lacs in FY.

2008-09.

e) The company is having Airtel distributorship, under which it was selling

prepaid mobile cards also. This business was with high turnover and

low margin basis. The company has closed that prepaid card section in

year 2007. Further to this company was having TATA‟s distributorship,

which was closed in the mid of the year 2009 & hence, there was

decline in sales during past 3 years. Current year, company has

entered into new agreement with Levi‟s Signature, through which it is

expecting turnover of Rs. 50.00 lacs every month.

f) The company has booked net profit (PBT) of Rs. 2.26 lacs during FY

2007-08 as against Rs. 1.94 lacs of FY 2006-07, registering Y-o-Y

growth of 16.50%. During FY. 2008-09, the net profit of the company

increased to Rs. 3.56 lacs.

g) Despite of decrease in turnover of the company, profitability is on

increasing trend. Also, PBDIT of the company is at quite higher level of

Rs. 31.58 lacs for the FY 2008-09 & Rs. 28.59 lacs for the FY 2007-08,

which can be considered as satisfactory.

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h) The company has been marginally increasing its TNW (unadjusted) Y-

o-Y basis i.e. from Rs. 13.44 lacs in FY. 2006-07 to Rs. 15.95 lacs in

FY. 2007-09. The TNW for the FY 2009-10 is estimated at higher side

of Rs. 37.96 lacs, mainly due to ploughing back of entire profit and

infusion of fresh capital by directors with decrease in unsecured Loans

from directors. .

i) The current ratio of the company for FY 2007-08 has been 1.70 & at

2.26 for FY 2008-09. The current ratio estimated for FY 2009-10 is 1.33

times, mainly on account of proposed credit limit of Rs. 180.00 lacs

from our bank and the same may be considered as satisfactory.

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CASE STUDY 4

Details of case study

Name of the

Applicant

Suchi Wires (New Relationship)

Work Office Address

Residence Address

Contact Details

189, G.I.D.C. Estate, Por-Ramangamdi, Dist. Vadodara-391243

Deep Jyoti-2, Block No. 404, 405, Opp. Gujarat Tractor,

Vishwamitri, Vadodara.

0265-2645431, 3098431

0265-2831649 (O)

M: 9824034470 (Rajendrabhai)

Constitution

Proprietorship Firm

Proprietor: Mr. Rajendra

Vallavhbhai. Patel

PAN: ACSPP2512N

Date of Establishment

31.01.1992

(GST Registration No.

24691601368)

(SSI Registration No.

240191100480, dated

07.06.2007)

Nature of

Business

Manufacturer of HB (Half hard bend) & MS (Mild stone) wires

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Brief Background

M/s Suchi Wires is a proprietorship firm established in year 1992. Mr.

Rajendra Vallabhbhai Patel is a proprietor of the firm.

Firm is mainly engaged in the business of manufacturing of iron wires, cutting

& stretching it into different sizes according to customers‟ requirements.

The proprietor was working with administrative department of school in his

initial career before 20 years. Proprietor then started trading in wires with

friends at small level, on seeing the business potential, he decided to

establish the business in the name of Suchi Wires.

The proprietor is Commerce Graduate & aged about 51 years. He started

business in year 1992 and having experience of around 17 years in the same

line of business.

Mrs. Niyati Patel (sister of the proprietor) manages administrative work related

to the business. Mr. Kalpesh Patel (Brother-in-law of the proprietor) looks

after the technical support. The proprietor looks after the finance & overall

management.

There are 16 workers in the firm, working in 2 shifts a day.

Applicant purchases wires of different diameters & then processes it through

different machines to stretch them and prepare wires of particular diameter &

size, as per the requirements/specifications of the clients.

To prepare the wires according to customers requirement, work processes

like wire drawing, cutting, bending etc. are performed. Iron wires are used in

making grill of fridge back, table fan cover, stapler pins, u-pins, etc.

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Major Suppliers of the applicant are:

National Small Industries Corporation Ltd. (Ahmedabad)

Shanti Fintrade Ltd. (Raipur)

Roundwell Steel Corporation (Ahmedabad)

Shree Vinayak Steels (Billimora)

Major Buyers of the applicant are:

Gandhi Special Tubes Ltd. (Halol)

Vijay jyot Seats Pvt. Ltd. (Halol)

Lalit Engineers (Vadodara)

Almonard Pvt. Ltd. (Vadodara)

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Present Proposal

Purpose of

Loan

Working capital limit

Limits

Proposed

CC limit of Rs. 50.00 lacs.

Rate of Interest

& Validity of

Limits

BPLR-2.25% i.e. 12.50% (BPLR at present is 14.75%)

12 months only subject to review every year.

Security Details

Primary: Hypothecation of current assets of the firm.

Collateral:

A) Equitable mortgage of following properties:

1. Factory premise of Suchi Wires situated at Plot No. 428,

GIDC, Ramangamdi, Por, Vadodara. Property belongs to

Mr. Rajendra V. Patel (proprietor) & approximate market

value of the property is Rs. 45.00 lacs.

2. Residential property situated at Deep Jyot-2, Block No. 404

& 405, Opp. Gujarat tractor, Vshwamitri, Vadodara. The

property belongs to Mr. Rajendra V. Patel (proprietor) &

approximate market value of the property is Rs. 15.00 lacs.

B) Hypothecation of fixed assets of the firm.

Guarantee:

Personal guarantee of:

1. Mr. Rajendra Vallabhbhai Patel (Proprietor)

2. Mr. Kalpesh Patel (Brother-in-law of the proprietor)

Visit to the

location of Firm

The unit of the firm was jointly visited by Mr. N Ramachandran

(AVP-SME), Mr. Sachin gupta (Deputy Manager-SME) & Mr.

Sameep Buch (Manager-Axis Sales) on 12.10.2009.

Overall conduct of the business was found regular. The visit was

satisfactory.

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Processing

Fees

1.00% of sanctioned CC limit, plus applicable taxes (non-

refundable).

Login Fees Rs. 5000/- plus applicable taxes, to be taken upfront (Non -

refundable)

Defaulter List Whether the names of the borrower or any of the

promoters/directors appear(s) in:

RBI defaulters List: No (The firm name and proprietor‟s name are

not featuring in RBI defaulters list latest available of 31.12.2008)

ECGC defaulter List: No

CIBIL: Satisfactory

Credit Scoring

Credit Score

(Enclose Credit

Scoring Sheet)

Rating

SME 2

Parameters

Score

(ABS 31/03/2009)

Financial 28.00

Business & Management 42.78

Industry 11.14

Overall 81.92

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Performance details

Particulars 31.03.2007 31.03.2008 31.03.2009 31.03.2010 31.03.2011

Audited Audited Audited Estimated Projected

Sales 119.73 204.49 431.02 568.57 625.43

Other Income 1.06 1.69 3.39 4.08 4.9

Total Income 120.79 206.18 434.41 572.65 630.33

PBDIT 3.91 5.16 11.13 21.04 22.80

Depreciation 0.52 1.23 1.31 1.18 1.06

Interest 0.11 0.22 1.27 5.47 5.48

PBT 3.28 3.71 8.55 14.39 16.26

PAT 3.28 3.71 8.55 14.39 16.26

PBT Margin % 2.72 1.80 1.97 2.51 2.58

Cash Accruals 3.8 4.94 9.86 15.57 17.32

TNW(Unadjusted) 20.63 26.27 34.08 46.96 61.72

Unsecured Loans

from friends &

relatives 16.50 19.90 76.03 68.53 66.53

TNW (Adjusted) 37.13 46.17 110.11 115.49 128.25

TOL(Adjusted) 26.89 27.98 64.05 80.95 83.95

TOL(Unadjusted) 43.39 47.88 140.08 149.48 150.48

TOL/TNW(Unadjusted) 2.10 1.82 4.11 3.18 2.44

TOL/TNW(Adjusted) 0.72 0.61 0.58 0.70 0.65

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Debtors 22.08 33.74 74.13 94.76 104.24

- Less than 6 months 22.08 33.74 74.13 94.76 104.24

- More than 6 months 0.00 0.00 0.00 0.00 0.00

Debtors holding (in

days) 67.31 60.22 62.78 60.83 60.83

Current Ratio 1.40 1.44 1.77 1.66 1.76

Current Asset 37.76 43.57 113.59 134.55 147.88

Current Liabilities 26.89 30.36 64.05 80.95 83.95

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Analysis

a) The market reputation of promoter is satisfactory.

b) Firm has achieved sales of Rs. 204.49 lacs in FY. 2007- 08 and Rs.

431.02 lacs in FY. 2008-09, this is more than double of the last year.

Firm has submitted estimated sales of Rs. 568.57 lacs for FY 2009-10,

against which firm has achieved sales turnover of Rs. 235.70 lacs till

31st October 2009, which is 41.45 % of estimated sales.

c) Profitability of the firm is also showing increasing trend y-o-y bases.

Firm has achieved PBT of Rs. 3.71 lacs in FY 2007-08 & Rs. 8.55 lacs

in FY 2008-09. Profitability has also rose in line with increase in sales

of previous financial year. PBDIT of the firm is also on increasing trend,

which can be considered as satisfactory.

d) Net worth of the firm is increasing y-o-y bases, with plough back of the

profit in the business. Unadjusted gearing of the firm is on higher side

for FY 2008-09 mainly due to higher side of creditors at particular point

in March 2009. In March 2009, proprietor submitted that purchase of

raw material was at better price & the suppliers also allowed credit

period. Hence, the creditor base was on higher side.

e) Debtor‟s level of the firm is average 60 days for all the past 3 years.

Proprietor has submitted that average payment duration is 60 days

maintained in the business. Debtors maintain regularity in payment,

which can be considered as acceptable.

f) The Current Ratio of the firm has been on higher side, above the

benchmark level of 1.33 for all the past 3 years. Current ratio for FY

2007-08 was 1.44 & for FY 2008-09 was at 1.77. Estimated ratio is

1.66 for FY 2009-10. Although, it has been maintained above the

benchmark level, which can be considered as acceptable.

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CHAPTER 8

FINDINGS

Credit appraisal is done to check the commercial, financial & technical

viability of the project proposed its funding pattern & further checks the

primary or collateral security cover available for the recovery of such

funds

Credit is the core activity of the banks & important source of their

earnings which go to pay interest to depositors, salaries to employees

& dividend to shareholders

Credit & risk go hand in hand

In the business world risk arises out of:-

Deficiencies / lapses on the part of the management

Uncertainties in the business environment

Uncertainties in the industrial environment

Weakness in the financial position

Bank‟s main function is to lend funds/ provide finance but it appears

that norms are taken as guidelines not as a decision making

A banker‟s task is to indentify/assess the risk factors/parameters &

manage/mitigate them on continuous basis

The Credit Appraisal process adopted by the bank take into account all

possible factors which go into appraising the risk associated with a loan

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These have been categorized broadly into financial, business,

industrial, management risks & are rated separately

The assessment of financial risk involves appraisal of the financial

strength of the borrower based on performance & financial indicators

The norms of the bank for providing loans are not stringent, i.e. even if

a particular client is not having the favorable estimated and financial

performance, based on its past record and future growth perspective,

the loan is provided.

By providing various schemes of loans, Axis bank tries to cater to the

financial requirements of almost all the types of SME units.

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CHAPTER 9

CONCLUSION

Finance management is the backbone of any organizations and hence

yields a number of job options ranging from strategic financial planning

to sales.

From the study of Credit appraisal, it can be concluded that credit

appraisal should therefore be based on the following factors, the same

are applied at Axis Bank:

Financial performance

Business performance

Industry outlook

Quality of management

Conduct of account

Axis Bank loan policy contains various norms for sanction of different

types of loans. These all norms do not apply to each & every case.

Axis Bank norms for providing loans are flexible & it may differ from

case to case.

Usually, it is seen that credit appraisal is basically done on the basis of

fundamental soundness. But, after different types of case studies, our

conclusion was such that credit appraisal system is not only looking for

financial wealth. Other strong parameters also play an important role in

analyzing credit worthiness of the firm/company.

In all, the viability of the project from every aspect is analyzed, as well

as type of business, industry, promoters, past records, experience,

projected data and estimates, goals, long term plans also plays crucial

role in increasing chances of getting project approved for loan.

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BIBLIOGRAPHY

Web Sites:

www.bankersindia.com

www.wikipedia.com

www.rbi.org.in

www.Axis Bank.com

www.indianbankassociation.com

Books:

“Credit and banking” By: K. C. Nanda

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