Professional Documents
Culture Documents
Project Report PNB PDF
Project Report PNB PDF
By
Keshika Wadhwa
Enrollment No. 11BSP1431
1
A REPORT
ON
By
Submitted to:
2
CERTIFICATE OF APPROVAL
The following Summer Project Report titled "Analysis of Credit Administration Process
and Appraisal of Term Loan and Working Capital Financing Proposals " is hereby
approved as a certified study in management carried out and presented in a manner
satisfactory to warrant its acceptance as a prerequisite for the award of Post-Graduate
Diploma in Management for which it has been submitted. It is understood that by this
approval the undersigned do not necessarily endorse or approve any statement made, opinion
expressed or conclusion drawn therein but approve the Summer Project Report only for the
purpose it is submitted.
Summer Project Report Examination Committee for evaluation of Summer Project Report
Name Signature
3
ACKNOWLEDGEMENT
I am deeply indebted to my company guide, Mr. Anil Sharma (AGM), of Punjab national
bank for their valuable and enlightened guidance. They provided me with the opportunity to
learn in the bank and spare their valuable time to help me. He provided me with immense
opportunity to learn about the working at Credit Administration Department (CAD), HO.
A special thanks to my faculty guide, Prof. Monika Chopra who has been the chief facilitator
of this project and helped me enhance my knowledge in the field of banking sector.
I am also thankful to the employees of PNB for providing great support and help in
completion of the training. I am also highly thankful to Library staff of PNB who provided
me the study materials and helped me during training.
The learning during the project was immense and valuable. My work included the study of
various aspects of Credit Administration.
Regards,
Keshika Wadhwa
IBS-Gurgaon
4
ExecutiveSummary
Bank is the main confluence that maintains and controls the flow of money to make the commerce
of lending possible. Government uses it to control the flow of money by managing the CRR and
thereby influencing the inflation level. The functions of the banks include accepting deposits from the
public and other institutions and then to direct the deposits as loans and advances to parties for growth
and development.
However, bank uses their deposits to provide credit facilities to various companies. It should be noted
that there is always a limit on the amount of exposure, depending on the policies of the banks.
This project explains various credit facilities and policies followed by one of the most reputed bank in
the country, Punjab National Bank. Each bank has its own set of policies that must be followed
while sanctioning a loan and care must be taken that the money provided by the bank is being used up
for the intended purpose only. The task ranging from acceptance of loan proposal to sanctioning of
loan is carried out at Credit Administration Division of the bank. Moreover, each loan proposals fall
under powers of different levels depending on the size of the proposal.
Working here at PNB, I have learnt a lot of new things and have come across the practical
implementations of various financial topics read during the course.
The study is undertaken to understand the process of Term Loans sanctioning and project appraisal
carried out at PNB. With a developing economy and many multinational companies coming up, new
projects are being undertaken. These projects require huge amount of capital and thus banks come
forward to finance these projects depending on the feasibility of the project. PNB carries out an
extensive of the project and checks for it feasibility and if the project seems to be feasible, a decision
is taken. This process of carrying out the feasibility test of the project based on the financial position
of the company is called Project Appraisal.
The project also covers the most important aspect of a company, Working Capital. Gross Working
capital refers to the fund required for financing total current assets of a business unit. Net Working
Capital, on the other hand, is the difference between the total current assets and current liabilities.
This working capital is desired by the company for day to day operations and thus the company
5
approaches a bank for the financing of this requirement. PNB caters to most of the well known
companies of India and is the leading lender in the country.
Along with this, the project includes an Overview of the PMS Section at HO. Preventive Monitoring
System (PMS) is a post sanction credit-monitoring tool consisting of a number of signals/parameters
for evaluating the health of a borrower account on a continuous basis. It assigns numerical score to
each signal and denotes the health of an account based on indicators of past one year in a single
numerical value called PMS Index Score.
Further, the project also covers the Credit Risk Rating carried out at Risk Management Department
(RMD) of the bank. Rating is done in order to find out the capability or the willingness of the
company to pay its debt. PNB uses its own model to rate a company and this model is one of its kind
in the country. Depending on the type of project, a suitable model is chosen and based on financials of
the company and the track record of the management, rating is done. This rating also helps in
determining the rate of interest at which the loan should be given. Generally, a company with good
ratings is gives loan at a lower ROI since the risk involved is lower.
Working at PNB has proved to be fruitful for me and I wish learn a lot more things in the next phase
of training.
6
List of Tables
7
Contents
CERTIFICATEOFAPPROVAL....................................................................................................................3
ACKNOWLEDGEMENT.............................................................................................................................4
ExecutiveSummary.................................................................................................................................5
Listofabbreviations..............................................................................................................................11
1. AboutPunjabNationalBank.........................................................................................................12
2. CreditDivision(CD).......................................................................................................................15
3. RiskManagementDepartment(RMD).........................................................................................16
4. AboutProject................................................................................................................................17
4.1. ObjectivesoftheProject.......................................................................................................17
4.2. ScopeoftheStudy................................................................................................................17
4.3. Methodology.........................................................................................................................18
5. CreditFacilities..............................................................................................................................18
5.1. FundBasedFacilities.............................................................................................................19
5.2. NonfundBasedCredit..........................................................................................................20
6. TermLoansandWorkingCapitalLoans........................................................................................21
6.1. TermLoans............................................................................................................................21
6.2. WorkingCapitalLoans..........................................................................................................21
7. TermLoanAppraisal.....................................................................................................................22
7.1. FinancialEvaluation..............................................................................................................23
7.1.1. ReclassificationandRearrangementofBalanceSheetitems.......................................23
7.1.2. CostofProject&MeansofFinancing...........................................................................25
7.1.3. ProjectionsofSales,Profits,CashFlowsandBalanceSheet........................................26
7.1.4. CalculatingkeyFinancialRatios....................................................................................26
7.1.5. SensitivityAnalysis........................................................................................................27
7.2. TechnoEconomicViability(TEV)..........................................................................................28
7.2.1. TechnicalAppraisal.......................................................................................................28
7.2.2. EconomicViability.........................................................................................................28
7.2.3. FinancialViability..........................................................................................................29
7.3. RiskAnalysis..........................................................................................................................29
7.4. ManagementEvaluation.......................................................................................................30
8. WorkingCapitalFinancingAppraisal............................................................................................32
8.1. MethodsOfLending..............................................................................................................32
8.2. WorkingCapitalFinancingGuidelines..................................................................................33
8
8.2.1. TandonCommitteeRecommendations........................................................................33
8.2.2. ChoreCommitteeRecommendations..........................................................................34
8.2.3. NayakCommitteeRecommendations..........................................................................34
8.3. Datarequiredforassessmentofworkingcapitalrequirement............................................34
8.4. OtherDetails.........................................................................................................................35
9. Security.........................................................................................................................................35
10. Pricing........................................................................................................................................35
11. PostSanctionProcesses...........................................................................................................36
11.1. Ensuringenduseoffunds................................................................................................36
11.2. PreventiveMonitoringSystem(PMS)...............................................................................36
11.3. StockAudit........................................................................................................................37
11.4. MonitoringofWeakandIrregularAccounts....................................................................37
12. CASEI:TermLoanFinancing(ABCLimited)............................................................................37
12.1. Introduction......................................................................................................................37
12.2. Theloanproposal.............................................................................................................37
12.3. ManagementEvaluation...................................................................................................39
12.4. Presentproposal...............................................................................................................39
Existing..................................................................................................................................................40
12.5. CompliancetoExposureNorms........................................................................................40
12.7. FinancialEvaluation..........................................................................................................40
KeyFinancialsuptolastquarter............................................................................................................43
12.8. SECURITY...........................................................................................................................43
12.8.1. Primary..........................................................................................................................43
12.8.2. Collateral:......................................................................................................................44
12.9. Position of Account as on 22.03.2012 (Rs. In crs)..........................................................44
Limit......................................................................................................................................................44
Lastyear201011..................................................................................................................................44
12.10. COSTOFTHEPROJECT......................................................................................................45
12.11. Strengths&Weakness......................................................................................................46
12.12. RatioAnalysis....................................................................................................................47
12.13. SensitivityAnalysis:...........................................................................................................48
12.14. FUTUREPROJECTIONSANDCALCULATION......................................................................49
1. CASEII:WorkingCapitalFinancing(ABCTradersLtd.).................................................................50
1.1. CMADataAnalysisforWorkingCapitalFinancing................................................................61
9
1.2. WorkingCapitalLoanProposal.............................................................................................69
Existing..................................................................................................................................................71
9. PositionofAccountason13042011..........................................................................................74
2. ConclusionandRecommendations..............................................................................................76
2.1. Conclusions...........................................................................................................................76
2.2. Recommendations................................................................................................................79
3. References....................................................................................................................................81
10
Abbreviations
AGM Assistant General Manager
BG Bank Guarantee
CC Cash Credit
CMD Chairman and Managing Director
CO Circle Office
CRMD Circle Risk Management Department
CCA Core Current Assets
CAD Credit Administration Department
CD Credit Division
CARD Credit Audit Review Division
CASA Current Account/Savings Account
CRMC Credit Risk Management Committee
DSCR Debt Service Coverage Ratio
DER Debt-Equity Ratio
DTL Defered Tax Liability
DPG Deferred Payment Gurantee
DTA Deferred Tax Liability
BD Discount of Bills
ED Executive Director
FACR Fixed Asset Coverage Ratio
FB Fund Based
GM General Manager
HO Head Office
IRMD Integrated Risk Management Division
LCB Large Corporate Branch
LC Letter of Credit
LOC Letter of Credit
MC Management Committee
MPBF Maximum permissible Bank Finance
MCB Mid Corporate Branch
NWC Net Working Capital
NFB Non Fund Based
PMS Preventive Monitoring System
PF Provident Fund
PNB Punjab National Bank
RBI Reserve Bank of India
RMC Risk Management Committee
RMD Risk Management Division
TEV Techno-Economic Valuation
TL Term Loan
WC Working Capital
ZO Zonal Office
11
1. AboutPunjabNationalBank
Punjab National Bank (PNB) was established in 1894 and is the second largest government owned
and over all fourth largest bank in India. It has about 5100 branches across 764 cities and serves over
63 million customers. It has presence throughout the length and breadth of the country and offers a
wide variety of banking services that include corporate and personal banking, industrial finance,
agricultural finance, financing of trade and international banking. Among the clients of the bank are
multinational companies, Indian conglomerates, medium and small industrial units, exporters and
non-resident Indians. The large presence and vast resource base have helped the bank to build strong
links with trade and industry. The strength of the bank lies in its corporate belief of growth and
stability.
12
Net Profit 4433 4884
Deposit 312899 379588
Total Business 555005 673000
Source: Annual Results 2012
Table1: Financial Summary of PNB for Year 2011-12
Global Footprint
Backed by strong domestic performance, the Bank is planning to realize its global aspirations. Bank
continues its selective foray in international markets with presence in 9 countries, with 2 branches at
Hongkong, 1 each at Kabul and Dubai; representative offices at Almaty, Dubai, Shanghai and Oslo; a
wholly owned subsidiary in UK; a joint venture with Everest Bank Ltd. Nepal and a JV banking
subsidiary DRUK PNB Bank Ltd. in Bhutan. Bank is pursuing upgradation of its representative
offices in China & Norway and is in the process of setting up a representative office in Sydney,
Australia and taking controlling stake in JSC Dana Bank in Kazakhastan.
Punjab National Bank also maintains strong correspondent banking relationship with 200 leading
international banks all over the world. It enhances its capacities to handle transaction world-wide.
Besides, bank has Rupee Drawing arrangement, with exchange companies in the Gulf. Bank is a
member of the SWIFT and 85 branches of the bank are connected through its computer-based
terminal at Bombay. With its state-of-art dealing rooms and well-trained dealers, the bank offers
efficient FOREX dealing operations in India. The bank has been focusing on expanding its operations
outside India and has identified some of the emerging economies which offer large economies which
offer large business potential. Bank has set up a representative office at Almaty, Kazakhstan w.e.f.
23rd October 1998.
New Initiatives
Initiatives are being taken to install Cash Deposit Machines in the branches which can provide a self
service terminal where customers can deposit cash which will be directly credited to their account on
real time basis.
Also, Self Service Pass Book Printer terminals are being installed in the branches and e-lobbies,
which would help the customers to get the passbook updated at their convenience. Thus, improving
day to day operational efficiency of the bank.
13
Organizational Structure
Fixed Deposit Schemes: Spectrum Fixed Deposit Scheme, Anupam Account, Mahabachat Schemes,
Multi Benefit Deposit
Scheme Credit Schemes- Housing Laons, Car finanace, Personal Loan, Credit Cards
Social Banking: Mahila Udyam Nidhi Scheme, Krishi Card, PNB Farmers Welfare Trust
Corporate Banking: Term Loan and Working Capital Financing, fund Based and Non-fund based
financing, Gold card scheme for exporters, EXIM Finance
Business Sectors: PNB Karigar Credit Card, PNB Kushal Udhai, PNB PRagati Udhami, , NB Vikas
Udhami, Cash Management Services
Other Services and Businesses: Locker Facilites, Senior Citizens Scheme, PPF Schemes and
Internet Banking , Mutual Fund Business, Gold Coin Business, Depository Services, Online Trading
Facility, Insurance Business, Merchant Banking etc.
14
2. CreditDivision(CD)
Commercial lending organization structure in PNB consists of Branches, Mid Corporate Branches
(MCBs), Large Corporate Branches (LCBs) and Head Office (CD). Credit Division (CD) looks after
the loan proposals which fall into the purview of GMs-HO/ED/CMD/MC/Board. Medium corporate
branches are headed by AGMs and LCB as DGM. Authority to handle loan proposals is distributed as
detailed below:
1) Loan proposals less than 35 Cr are dealt by MCBs and LCBs at their level and all other
proposals are referred to Circle Office which are finally handled at Head Office.
2) MCBs handle proposals between Rs.5 crore and Rs.25 crore at places where LCBs are also
located and loan proposals of Rs.5 crore and above at places where LCBs are not located.
LCBs will handle loan proposals above Rs. 25 crore.
3) CD at Head Office prepares finals proposals which are then placed before ED, CMD or MC as
per the quantum of proposals.
4) ED has authority to approve loan proposals less than 75 Cr. CMD approves proposals between
75 Cr and 100 Cr. Any proposal greater than need the approval of Management Committee.
The bank has introduced Grid/Committee system in credit sanction process wherein every loan
proposal falling within the vested powers of DGM and above is discussed in a credit committee which
on the merit of the case recommends the proposal to the sanctioning authority. Such committee have
been formed both at HO and ZO level, The credit committee at HO includes GM Credit and
CGM/GM-RMD. For credit proposals falling within the vested power of CGM/GM, the credit
committee at HO includes DGM/AGM/Chief Manager-CD and DGM/AGM/Chief Manager RMD.
The credit administration division is to be assisted by Risk Management Division (RMD) and
Industry desk for risk vetting and techno-economic feasibility of credit proposal.
15
3. RiskManagementDepartment(RMD)
Credit risk is the possibility of loss associated with changes in the credit quality of the borrowers or
counter parties. In a banks portfolio, losses stem from outright default due to inability or
unwillingness of a borrower or counter party to honor commitments in relation to lending, settlement
and other financial transactions.
PNB has an elaborate risk management structure in place. Credit Risk management structure at PNB
involves
Integrated Risk Management Division (IRMD)
RMD frames policies related to credit risk and develops systems and models for identifying,
measuring and managing credit risks. It also monitors and manages industry risks.
Circle Risk Management Departments (CRMDs)
Risk Management Departments at circle level are known as CRMD.
Their responsibilities include monitoring and initiating steps to improve the quality of the
credit portfolio of the Circle, tracking down the health of the borrowal accounts through
regular risk rating, besides assisting the respective Credit Committee in addressing the issues
on risk.
Risk Management Committee (RMC)
It is a sub-committee of Board with responsibility of formulating policies/procedures and
managing all the risks.
Credit Risk Management Committee (CRMC)
It is a top level functional committee headed by CMD and comprises of EDs, CGMs/GMs of
Risk Management, Credit, Treasury etc. as per the directives of RBI.
Credit Audit Review Division (CARD )
It independently conducts Loan Reviews/Audits.
The risk management philosophy & policy of the bank focuses reducing exposure to high risk areas,
emphasizing more on the promising industries, optimizing the return by striking a balance between
the risk and the return on assets and striving towards improving market share to maximize
shareholders value.
The credit risk rating tool has been developed with a view to provide a standard system for assigning
a credit risk rating to the borrowers of the bank according to their risk profile. This rating tool is
applicable to all large corporate borrower accounts availing total limits (fund based and non-fund
based) of more than Rs. 12 crore or having total sales/ income of more than Rs. 100 crore. The Bank
has robust credit risk framework and has already placed credit risk rating models on central server
based system PNB TRAC, which provides a scientific method for assessing credit risk rating of a
client. Taking a step further during the year, the Bank has developed and placed on central server
score based rating models in respect of retail banking. These processes have helped the Bank to
16
achieve fast & accurate delivery of credit; bring uniformity in the system and facilitate storage of data
& analysis thereof. The analysis also involves analyzing the projections for the future years.
4. AboutProject
4.1. ObjectivesoftheProject
1. To gain insights into the Credit Administration processes of the banks.
2. To understand the different types of credit facilities and credit delivery mechanisms provided
to industrial costumers viz. Overdraft, Cash Credit, Drawing Rights, Fund Based Credit, Non
Fund Based Credit etc.
3. To understand the methods available for risk vetting of lending proposals, risk assessment
models and the credit rating procedures used in Punjab National Bank.
4. To understand the appraisal process of Term Loan and Working Capital Financing proposals
5. To understand the factors affecting rate of interest levied viz. risk assessment, bank
guidelines, sectoral policies, business considerations etc.
6. To understand various norms like credit exposure limits etc., that influence credit disbursal
for various sectors, companies and business groups.
4.2. ScopeoftheStudy
This report covers:
7) Case Study describing actual appraisal of a Term Loan proposal, Corporate loan and a
Working Capital Financing Proposal
17
4.3. Methodology
In order to learn and observe the practical applicability and feasibility of various theories and
concepts, the following sources are being used:
Primary Sources of Information
1. Discussions with the project guide and staff members.
2. Banks Credit policy and related circulars and guidelines issued by the bank.
3. Research papers, power point presentations and PDF files prepared by the bank and its related
officials.
4. Study of proposals and manuals
5. Website of Punjab national bank and other net sources
5. CreditFacilities
Punjab National Bank provides different types of credit facilities according to the banking
norms and convenience of the clients. Different type of facilities provided can be classified as
below:
18
5.1. FundBasedFacilities
Fund based facilities are those in that require immediate outlay of funds towards the borrowing party.
Punjab National Bank provides following fund based facilties:
1. Overdrafts
Overdraft accounts are treated as current accounts. Normally overdrafts are allowed against the
Banks own deposits, government securities approved shares and/or debentures of companies, life
insurance policies, government supply bills, cash incentive and duty drawbacks, personal security etc.
Overdraft accounts should be kept in the ordinary current account head at branches.
2. Demand Loans
A demand loan account is an advance for a fixed amount and no debits to the account are made
subsequent to the initial advance except for interest, insurance premium and other sundry charges. As
an amount credited to a demand loan account has the effect of permanently reducing the original
advance, any further drawings permitted in the account will not be secured by the demand promissory
note taken to cover the original loan. A fresh loan account must, therefore be opened for every new
advance granted and a new demand promissory note taken as security.
Demand loan would be a loan , which is payable on demand in one shot i.e. bullet repayment.
Normally, demand loans are allowed against the Banks own deposits, government securities,
19
approved shares and/or debentures of companies, life insurance policies, pledge of gold/silver
ornaments, mortagage of immovable property.
4. Bill Finance
Bill finance are the advances against the inland bills are sanctioned in the form of limits for purchase
of bills (ODD) or discount of bills (BD) or bills sent for collection. Bills are wither payable on
demand or after usage period.
5.2. NonfundBasedCredit
While fund based credit facilities require immediate outlay of funds from the bank, non-fund based
facilities basically include the promises made by banks in favor of third party to provide monetary
compensation on behalf of their clients if certain situations emerge or certain conditions are fulfilled.
The non-fund based business is one of the main sources of bank income. Income is in the form of fees
and commissions as compared to interest income in case of fund based lending.
Non-fund based credit plays an important role in trade and commerce. The borrowing clients of banks
prefer to avail of the non fund based facilities mainly because:
a) The facility does not require immediate outlay of funds and therefore the cost of such funds
tend to be lower than the cost of fund based credit facilities.
b) A bank guarantee (BG) or letter of credit (LOC) issued by a bank on behalf of its client is an
off-balance sheet item in the books of clients, hence do not show up as debt or liability.
For the lending banks, cost of providing non-fund based facilities is significantly lower than the cost
of providing fund-based facilities.
Nevertheless, inherent risk associated with NFB credit facility are same as that attached with FB
credit proposals. In case of default, provision of funds becomes necessary. Also, NFB exposure is
facilities are not treated as off-balance sheet exposure and minimum capital adequacy need to be
maintained against the NFB exposures as well.
Assessment of Non Fund based facilities shall be subjected to the same degree of appraisal, scrutiny
as in the case of fund based limits because outstanding in these facilities are to be reckoned at 100%
for exposure purposes. Therefore, need based requirement of a borrower should be assessed after
20
reckoning the lead time, credit period available, source of supply, proximity of supplier, etc. in case of
LCs and industry practices and business requirements in case of LGs. The working of NFB
assessment is to be incorporated in the appraisal note. Further, while assessing non-fund facilities,
cash flow aspects should also be taken into account.
1. Bank Guarantees
BGs may be financial or performance in nature. In a financial guarantee, the issuing banks assumes an
usual credit risk which is the domain of the banks. However, issue of a performance guarantee
involved technical competency and managerial ability of a customer to ensure the performance of the
contract for which guarantee has been drawn. Issuing banks responsibility against the BG is absolute.
So proper appraisal needs to be done before issuing BG as it is the responsibility of the issuing bank
to honor its guarantee when invoked.
2. Letter of Credit
A document issued by a bank that guarantees the payment of a customer's draft; substitutes the bank's
credit for the customer's credit. It is an undertaking issued by bank on behalf of the buyer to the seller,
to pay for the goods and services, provided that the seller presents the documents which comply with
the terms and conditions stipulated in the LOC. All letters of credit are irrevocable, i.e., cannot be
amended or canceled without prior agreement of the beneficiary, the issuing bank and the confirming
bank, if any. It is different from BG in the sense that in case of LOC, the issuing bank does not wait
for the buyer to default, and for the seller to invoke the undertaking. While in BG, comes into play
only when the principal party (the buyer) has failed to pay its supplier.
6. TermLoansandWorkingCapitalLoans
6.1. TermLoans
Term loans are those loans that are lent for extended period of time majorly for the capital expenditure
by the firm. This is different from the short term loans which are mainly provided for meeting
working capital requirements and maintaining short term liquidity.
Term loans are provided for acquisition of fixed assets are to be repaid from the cash generated from
the operations. Credit delivery for term loans are broadly through two means: Fund based and Non
fund based. Fund based term loans like cash credit provided outright cash while non-fund based loans
like Deferred Payment Guarantee(DPG) where the liability to make payment crystallizes after the bill
again such guarantees are presented for payments.
Term loans are sanctioned for acquisition of fixed assets like land, building , plant/machinery, office
equipment, furniture-fixture and other capital expenditure like purchase of transport vehicles and
21
other vehicles, agricultural equipment etc. The term loan is a loan which is not a demand loan and is
repayable in terms of i.e. in Instalments irrespective of the period or the security cover.
Term loans are normally granted for the periods varying from three to seven years and under
exceptional circumstances beyond seven years. The term loans with remaining maturity period of
above 5 years shall not exceed 50% of the term deposits with remaining maturity period of above 5
years after taking into account the renewal of term deposits as per the past trend, as is being done for
ALM.
Since term loans are provided for a long tenure ensuring the viability of the project and sufficient
generation of cash over a the long tenor of the loan becomes critical. Detailed process of appraising
Term Loan proposals is given in next section.
6.2. WorkingCapitalLoans
Working Capital refers to the current asset holdings of the firm.Net working capital is the difference
between Current Assets and Current Liabilities. Working capital requirements depend on various
business specific internal factors like operating efficiency, technology employed and the level of
quality control.
Current Assets may further be classified in to two components:
i) A permanent Core Component
ii) Fluctuating Component
A manufacturing enterprise has to maintain a minimum level of inventory at any point of time below
which production could get impacted. This minimum level of current asset is called Core Current
Asset level. This would be constantly tied up in the business with changes in sales and activity level.
Fluctuating component is the portion above this level that is continuously changing due to changes in
demand, seasonality of product etc.
Businesses finance permanent core component through long-term sources of fund like equity or long
term loans. Fluctuating Component is financed mainly by availing the short term loans and other
credit facilities from the bank. Main focus here is to avoid overfunding or underfunding of the
operations. While over funding will amount to locking up of assets unproductively as idling cash or
inventories, at the same time under funding would seriously hamper the day-to-day operations and
pose a threat to the survival of the businesses. Hence it is critical to correctly determine the maximum
bank finance that should be provided. The process for this is explained in details in section 8.
7. TermLoanAppraisal
Prior to the sanctioning of a loan it goes through a well defined appraisal process where it is evaluated
on various parameters . Proper due diligence is followed to mitigate the risk of default and fraud
inherent in the lending process. The process followed is reviewed regularly to account for new
22
guidelines from the RBI and changes in banks credit policies. Various components of the appraisal
process are as detailed below:
7.1. FinancialEvaluation
It involves evaluation of financial statements of the borrowers to ascertain the financial health of the
company. Financial statements are rearrangement as described in detail below and rearranged
financial statements are used to ascertain the capital requirements, liquidity, long-term solvency, debt-
repayment capacity etc. of the business involved. Various components of financial evaluation are as
follows:
7.1.1. ReclassificationandRearrangementofBalanceSheetitems
Financial statements contain the information about the financial health of enterprise. Since different
applicants use different formats and classification of some of the items present in the balance sheet is
subjective, it becomes necessary to re-arrange the balance sheet items to achieve standardization.
Components of the balance sheet. are used in calculating ratios like Debt Equity Ratio (DER), Debt-
Service Coverage Ratio (DSCR), Current Ratio, Fixed Asset Coverage Ratio (FACR), Maximum
Permissible Bank Finance (MPBF) etc. There are guidelines from the RBI and Bank on the
permissible values of these ratios and relaxation permissible, if any. So proper rearrangement of
financial statements becomes critical in credit lending decision making.
Classification of items into various heads depends on the policies of the bank. For PNB Classification
of a particular liability as a current liability or long term liability etc. depends on the internal
guidelines of the Bank.
The reclassifications to be done as per the Banks/RBIs guidelines are detailed below:
Current Liabilities
Current liabilities include the known obligations to be within a year. These are classified as:
1. Short term borrowings including bills purchased and discounted excluding bank finance
2. Unsecured Loans
3. Public deposits maturing within the year
4. Sundry Creditors
5. Interest and Other Charges accrued but not due for payment
6. Advance/Progress Payments from customers
7. Deposits from dealers, selling agents etc.
8. Instalments of deferred payments, debentures, redeemable preference shares, long term
deposits payable within one year
9. Statutory Liabilities like provision for PF dues, Taxes etc.
23
10. Miscellaneous Current Liabilities like proposed dividends, liabilities for expenses, gratuity
payable within one year etc.
Current Assets
1. Cash and Bank balances
2. Investments in Govt./Trust Securities, for short term and fixed deposits with banks.
Investments in shares and debentures etc. should be excluded from current assets.
3. Recoverable arising out of sales.
4. Instalment of deferred receivable due within one year.
5. Raw material and consumable spares including that under transit. But slow moving and
obsolete items should be excluded from current assets and should be grouped as non-current
assets.
6. Stock in process, and finished goods( including goods-in-transit)
7. Advance payment for tax, prepaid expenses, advance for purchase of raw material and
consumables. But security deposit/tender deposit are classified as non-current assets
irrespective of their maturity.
8. Monies receivable from contracted sales of fixed asset during the next 12 months.
Treatment of Export Receivables
a. For calculating MPBF, the amount of export receivables may be excluded from the current
assets as need based limits for export receivables could be sanctioned and in respect of such
receivables borrowers are not required to bring in 25% by way of Net Working Capital.
b. Where an exporter desires, export receivable may be included in the total current assets for
arriving at MPBF, but the minimum stipulated NWC(i.e. 25% of total current assets) may be
reckoned after excluding the quantum of export receivables from the total current assets for
fixing up the post shipment credit limit.
24
Treatment of Redeemable Preference Shares
Preference shares redeemable within one year should be considered as current liabilities.
However, preference shares redeemable after one year should be considered as term
liabilities.
25
Debentures/ bonds issued by the company public issue or private placement
Public deposits
Unsecured loans from friends and relatives
Term loans (including deferred payment guarantees)
Lease finance
7.1.3. ProjectionsofSales,Profits,CashFlowsandBalanceSheet
Revenues during the tenor of the loan are estimated for the project, base on the Techno-Economic
evaluation and past performance. Revenue projection, in addition to the estimates of sales and other
expenses are used to generate projection of profits and cash accruals during the loan tenor. Similarly,
financing, repayment schedule etc. are used to arrive at balance sheet projections. Generally speaking,
a unit may be considered as financially viable, progressive and efficient if it is able to earn enough
profits not only to service its debts timely but also for future development/growth.
7.1.4. CalculatingkeyFinancialRatios
Current financials of existing operations, project funding information like sources of funds etc. and
future projections are used for calculating key financial ratios for a period of time. These ratios tell us
a lot about a unit's liquidity position, managements' stake in the business, capacity to service the debts
etc. The financial ratios which are considered important are discussed as under:
DER =
DER signifies how much the project is leveraged. For a project of private firm, equity capital is
brought in by promoter and hence lower the DER higher are the promoters stake in the project. DER
also vary from industry to industry. In capital intensive industries involving large capital investment,
DER is normally higher as compared to the other industries.
26
DSCR=
This ratio provides a measure of the ability of an enterprise to service its debts i.e. `interest' and
`principal repayment' besides indicating the margin of safety. The ratio may vary from industry to
industry but has to be viewed with circumspection when it is less than 1.5. This ratio shows the
relationship between cash generating capacity of the unit and its repayment obligation and indicates
whether the cash flow would be adequate to meet the debt obligations and whether there is sufficient
margin for the lending banker.
TNW/TOL=
This ratio gives a view of borrower's capital structure. If the ratio shows a rising trend, it indicates
that the borrower is relying more on his own funds and less on outside funds and vice versa.
Profit-Sales Ratio
PSR =
This ratio gives the margin available after meeting cost of manufacturing. It provides a yardstick to
measure the efficiency of production and margin on sales price i.e. the pricing structure.
7.1.5. SensitivityAnalysis
The sensitivity analysis is carried out by the bank in order to evaluate capacity of the project to absorb
shocks due to adverse movement in prices/ some other adverse developments and sustain financial
viability.
The viability of a project is dependent on various factors which include selling price, cost of raw
materials, cost of finance, availability of critical inputs and dependence on market like buyer/seller
market, other key technical parameters etc.
In the absence of any defined factors and its values for carrying out the sensitivity analysis, it has
been decided that a common 5% sensitivity factor on sale price/cost price of major raw materials
27
should be applied in appraisals of all the projects irrespective of the industry. However, 10%
sensitivity factor may be applied in highly volatile industries by assessing the expected volatility in
sale price/ cost price of major raw materials in future on case to case basis.
7.2. TechnoEconomicViability(TEV)
Techno Economic Valuation is mandatory for all the term loan proposals. Term loan proposals are for
the funding requirements for new business development and business expansion. Since, loans are to
repaid from the cash flow generated from the new business, it becomes necessary to ascertain the
feasibility of the project and economic viability. Assets created from the capital expenditure done
from the Term loan funds should have enough revenue generation potential so as to ensure the
servicing of the loan. It is also necessary to make sure that finances sought are indeed meant for
expenditure on the project and will not be deviated to capital markets and other activities. TEV
involves market potential studies, stage of business cycle, technology related inputs and cost
components including the reports on equipment/raw material suppliers, comparative study of similar
projects and preparation of financial models for the individual project. Financial evaluation described
in sub-section 7.1. is also a part of the TEV study.
7.2.1. TechnicalAppraisal
Technical appraisal focuses on the feasibility of the project. Various components of the projects are
evaluated for their technical soundness, cost expenditure on them and quality etc. some of the aspects
of the projects that are looked upon are as below:
a) Location and Site
b) Raw material
c) Plant & machinery, plant capacity and manufacturing process
d) Land
e) Building
f) Technology & process
g) Size of the plant
h) Power Supply
i) Water Supply
j) Labour supply
k) Implementation Schedule
7.2.2. EconomicViability
This has bearing on the earning capacity of the project and earnings are dependent on sales.
Therefore, the borrowers projection of sales should be assessed keeping in view the following
factors:
a) Demand and Supply position of the product and its substitutes;
28
b) Proposed selling price vis-a-vis prices of the competing products;
c) Quality of the product as against the quality of competing products
7.2.3. FinancialViability
Financial viability seeks to determine:
a) Whether cost of project and means of finance are realistic;
b) Whether project is capable of profitable operations;
c) Whether project is capable of generating adequate surpluses for servicing the debt and interest
and can take care of future organizational development;
d) Whether estimates of cost of production fully cover all items of expenditure;
e) Whether sources of finance are adequate;
f) Whether there is a reasonable basis for competitive profitable operations.
7.3. RiskAnalysis
PNB has elaborate risk management structure, process and procedures in place. Structure has been
already described in section 7.3. . For the appraisal of the loan proposals, RMD provides the risk
ratings for the client and project based in the patented internal models of the PNB that have been
developed based on statistical analysis of data. These models are placed on central server based
system PNB TRAC, which provides facility to assess credit risk rating of a client.
This credit risk rating captures risk factors under four areas:
1. Financial evaluation (40%)
2. Business or industry evaluation (30%)
3. Management evaluation (20%)
4. Conduct of account (10%)
Cumulative weighted score is calculated and rating of the project/company is ascertained as per the
chart below:
Rating Description score obtained Grade
category
29
BB Average risk Between 57.50 60.00 BB+
Between 52.50 57.50 BB
Between 50.00 52.50 BB-
B Marginally Between 47.50 50.00 B+
acceptable risk Between 42.50 47.50 B
Between 40.00 42.50 B-
C High risk Between 30.00 40.00 C
D Caution risk Below 30.00 D
Some of the important risk rating models used in loan appraisals are summarized as below:
S.No. Credit Risk Rating Applicability
Total Limit Sales
1 Large Corporate Above Rs. 15 Cr. Above Rs 100Cr.
2 Mid Corporate Between 5 Cr.and 15 Cr. Between Rs 25 Cr
and 100 Cr
3 New Project Rating Above Rs. 5 Cr. Cost of Project
Models above 15 Cr
4 Entrepreneur New New Business et requiring finance b/w Cost of Project upto
Business Model 20 Lakh and 5 cr Rs.15 Cr
5 Credit Risk Rating model All Banks and Financial Institutions
for banks and FI
PNB also takes into account the ratings of the company/project from the independent credit rating
agencies like ICRA, CRISIL, Fitch, CARE etc. Rating history of the borrower is studied and any
degradation in the rating demands causal analysis. In some cases, final sanction is conditional upon
the completion of credit rating by external agencies.
7.4. ManagementEvaluation
Management is examined carefully and methodically during the credit appraisal.
Management evaluation entails:
a. Credit History of the Directors, Promoters etc
b. Professional, experience and qualification of the promoters, directors and top management
30
c. Reputation of the promotors in project execution
Credit history of the management and the company is sought from the centralized credit
databases like CIBIL, Equifax etc. Directors etc. should have positive credit reports and
should not be there in the list of wilful defaulters circulated by RBI etc. Credit history is also
sought from other banks where the company has accounts to find out any abnormal
behaviour. Moreover, credit history and account behaviour of the companies belonging to the
same business group (i.e. business houses) as the borrower is also taken into account. In case
the accounts of any unit belonging to a Group become irregular and the concerned promoters
do not co-operate with the Bank and Financial Institution to settle their dues, the Group will
not be provided accommodation from the Bank. According to the banks guidelines, financial
support for setting up of new ventures or expansion should not be extended to unit belonging
to a group which is willful defaulter or non cooperative so as to ensure that no amount lent to
a healthier unit of a group for its Working Capital requirements is transferred to another unit
within the group by reducing the Current Ratio of transferor unit. For identification of cases
of Promoter Groups/Companies for deterrent action, a coordinated approach be taken with
Banks and Financial Institutions. However, Industrial Units in Public Sector are to be kept
out of the purview of Group Approach.
7.5. CompliancetoExposureNorms
Exposure includes credit exposure (funded and non-funded credit limits) and investment
exposure (including underwriting and similar commitments) as well as certain types of
investments in companies. The sanctioned limits or outstandings, whichever are higher, shall
be reckoned for arriving at exposure limit. Further, nonfund based exposure is calculated at
100 percent of the limits or outstandings, whichever are higher. In case of fully drawn term
loans, where there is no scope for re-drawal of any portion of the sanctioned limits, the
outstanding shall be reckoned as exposure. However, in
the case of other term loans, the exposure shall be computed as usual i.e. sanctioned limits
or outstandings, whichever are higher.
Maximum Industry Exposure Limit
The bank has developed a model for fixation of industry wise credit exposure ceilings. The
model captures external factors like rating of industry by external agency, nature of industry
and its importance in economy as well as internal factors like level and trend of asset
31
impairment, exposure level and quality of exposure in the industry. This model provides
scientific assessment and corresponding exposure ceiling level to an industry. These limits
shall be reviewed on the basis of data analysis regularly. As the ceilings proposed are internal
ceilings to achieve diversified growth of portfolio and reduce portfolio concentration, it is
provided that the monitoring against such limits would be based on actual outstanding.
However, undisbursed term loan amounts in any industry shall also be monitored closely.
Further, the industry-wise exposures shall also be monitored closely by
Credit Division, HO to especially those industries which have reached trigger level of 85% of
exposure limit so that instances of breach of ceiling could be averted.
8. WorkingCapitalFinancingAppraisal
Appraisal of working capital financing proposals is mainly focussed on accurate assessment
of working capital needs of the business. Objective here is to avoid overfunding or
underfunding of the operations. Working capital assessment is widely researched topic and
has evolved over a time.
8.1. MethodsOfLending
i) Simplified method linked with turnover Simplified method based on turnover for assessing
working capital finance upto Rs.2 crore (upto Rs. 5 crore in case of SME units) shall
continue.
32
ii) MPBF System
Existing MPBF system with flexible approach is followed for units requiring working
capital finance exceeding the above-mentioned amount.
Cash Budget System shall be followed in Sugar, Tea, Service Sector, construction
activity, Film Production accounts etc.
8.2. WorkingCapitalFinancingGuidelines
8.2.1. TandonCommitteeRecommendations
This committee was formed in 1974 under the chairmanship of Shri P.L.Tandon for the
purpose of calculating the effective working capital requirement. It fixed norms for 15 major
industries and indicate the maximum permissible limits for inventory holdings. However,
deviations werent allowed to meet unforeseen conditions. The three methods suggested for
lending were:
MPBF: 75% of working capital gap( Total Current Assets Other Current Liabilities)
33
MPBF: 75% Total Current Assets Other Current Liabilities
Third Method of Lending: Under this method, the borrower's contribution from long
term funds will be to the extent of the entire CORE CURRENT ASSETS, which has
been defined by the Study Group as representing the absolute minimum level of raw
materials, process stock, finished goods and stores which are in the pipeline to ensure
continuity of production and a minimum of 25% of the balance current assets should
be financed out of the long term funds plus term borrowings.
MPBF: 75% [(Total Current Assets Core Current Assets) - Other Current Liabilities
Third method of lending was not accepted by RBI for practical implementation and
hence is of only academic interest.
8.2.2. ChoreCommitteeRecommendations
This committee streamlined the above guidelines further by stipulating annual review of
working capital credit limits above 50 lac. Also the bifurcation of cash credit into demand
loan and cash credit components has also been withdrawn.
8.2.3. NayakCommitteeRecommendations
Nayak committee recommended not to apply the norms for inventory and receivables. Rather,
the working capital limits shall be computed on the basis of a minimum of 20% of their
projected annual Turnover for new and existing units. Out of this, the borrower shall provide
1/5th of the estimated working capital requirement(5% of PATO) as margin money of
working capital.
The Bank has the policy of evaluating MPBF for those limits that exceed 2 crore and upto 5
crore, for limits less than 2 crore, the bank has a policy of following the simplified turnover
method.
8.3. Datarequiredforassessmentofworkingcapitalrequirement
For assessing the working capital needs of an organization, bank follows CMA (Credit
Monitoring Arrangement). It is required by banks and other financial institutions, to
introspect or study the minutes of balance sheet and other financial statements of a body
corporate for financing their projects. In other words it is the detailed explanation of the
balance sheet and other financial ratios of the firm or any other corporate.
The CMA includes analysis of following six documents:
i) Existing and proposed banking arrangements
34
ii) Operating statement
iii) Analysis of Balance Sheet
iv) Buildup of current assets and current liabilities
v) Calculation of MPBF (Maximum Permissible Bank Finance)
vi) Fund Flow Statement
8.4. OtherDetails
Assessment of PBF is most important part of Working Capital proposal evaluation. Working
Capital proposals do not require viability studies viz. TEV and Financial viability as
described in section 7.1. and 7.2. Apart from these differences Working capital financing
proposals are evaluated on similar lines as the term loan proposals and involve risk analysis,
management evaluation, compliance to exposure norms etc. as described in Section 7.
9. Security
All the loans are secured against the collaterals. During the loan appraisal process collateral are
valued for margin of safety requirements and valuation is verified. Type of banks claim on the
collateral i.e. mortgage, hypothecation, first pari-passu charge, lein etc is decided. In addition, the
terms and condition for maintenance of the collateral are laid down.
Further Guarantee is sought for the loan from the group holding company. This is known as Corporate
Guarantee. Sometimes personal guarantee is also sought from the Promoters in case of privately held
companies or partnerships. FACR is one critical financial ratio which is ascertained to ensure that
loans are adequately covered by fixed assets.
10. Pricing
Loan pricing which was earlier based on the BPLR (Benchmark Prime Lending Rate) regime has now
been administered under BR (Base Rate) regime as per the RBI directives. Under BR system banks
specify a base rate above which all the loans are priced. Base rate is revised from time to time as per
the leads of RBI review of interest rates that depends on the macroeconomic situations. At PNB
pricing of loans depends on following factors:
a) Credit Rating of the Client
Better the risk rating of a business lower is the spread (interest charged) over the base rate.
b) Nature of the business sector
Apart from the credit rating business sector to which a borrower belongs also effects the
pricing of the loan. For example pricing for a business in Food processing sector with credit
rating AA will be different from a business in Real estate sector having the same credit
rating AA.
35
c) Special Business Considerations and Competitive Pressures
In consortium financing, PNB have to keep the pricing in line with the other business
partners. Also due to competitive consideration and a view of garnering further business from
reputed clients discounts can be offered. Sometimes, there are special lending schemes for
various sectors having specific pricing guidelines.
11. PostSanctionProcesses
After the appraisal and sanctioning process, procedures for loan disbursal, legal
documentation and continuous monitoring of the loan implementation i.e. end-use, collateral
maintenance, financial health of the loanee etc. come into picture. Some of the important
processes are as described below:
11.1. Ensuringenduseoffunds
One aspect of the credit risk management and control is to ascertain the end use of the funds.
This is because the risk profile of a loan is directly related to its prospected use. For example ,
if a loan issued for purchase of machinery is diverted to real estate investment or say to
capital markets, then probability of its default increases considerably. Hence, it becomes
necessary for banks to monitor the usage of the loaned funds. Financial statement issued by
Chartered Accountants are analyzed to observe the spending of the funds. Moreover, PNB
has put in place guidelines and procedure to ascertain the use of funds through actual
inspection. Some of the illustrative measures that could be taken by the branches to ensure
end-use of funds are:
i) Meaningful scrutiny of quarterly progress reports/operating statements, balance sheets of
the borrowers;
ii) Regular inspection of borrowers assets charged to the Bank as security;
iii) Periodical scrutiny of borrowers books of accounts:
iv) Periodical visits to the assisted units;
v) System of periodical stock audit, in case of working capital finance;
11.2. PreventiveMonitoringSystem(PMS)
Bank has introduced Preventive monitoring system for large borrowal accounts. The system
is applicable to all borrowal accounts having sanctioned limits (FB plus NFB) above Rs. 1
crore. The model for PMS has also been placed in central server environment. This system is
a dynamic system for tracking the health and conduct of borrowal accounts to capture the
36
signals of early warning. Timely decision should be taken on the future course of action in
the borrowal accounts depending upon PMS rank.
11.3. StockAudit
Bank has a policy to conduct annual stock audit (including book debts) for all accounts with
fund based working capital limits of Rs.5 crore and above whether standard or NPAs. Annual
Stock Audit is compulsorily conducted in all accounts with risk rating B & below and
having fund based working capital limits of Rs. 1 crore and above.
11.4. MonitoringofWeakandIrregularAccounts
The bank has established systems for Inspection and control of its lending activity to ensure
that loan accounts are conducted in terms of sanction so as to have a sound credit portfolio.
Credit Division, HO monitors all weak and irregular loan accounts below standard category
having outstanding of above Rs.10 lac on monthly basis.
12. CASEI:TermLoanFinancing(ABCLimited)
12.1. Introduction
ABC Industries Limited (AIL) was incorporated in the year 20XX. It has established a unit
for manufacturing SPONGE IRON or DIRECTLY REDUCED IRON (DRI) with an installed
capacity of 100 TPD/30000 TPA. The company wants to avail loan for Ore Pelletising and
Benefication Plant.
12.2. Theloanproposal
37
GIST OF THE PROPOSAL
Sanction of TL III of Rs 100 crs for setting up Pelletizing and Beneficiation project at COP of
Rs 315.50 crs (debt component of Rs 195 crs ) at existing unit at abc district, AP. The door to
door repayment is 10 years.
38
a) Whether Sensitive Sector NO
Real Estate/Capital Market
b) Applicable Risk weight 150%
Consortium/Multiple Banking Sole Banker for working capital limit & existing TL. However
proposed term loan will be in participation with other Bank
Lead Bank NA
PNBs Share % Sole Banking
Date of application 03.01.2012
Date of last sanction & NBG in its meeting dated 21.01.2012 has approved expression of
authority/In Principle interest for consideration of term loan of Rs. 100 cr at the rate of
Consent 14.50% per annum i.e., BR + 3.25% + TP, with 50% concession in
upfront fee.
Customer ID No. BRB003528
Activity code (as per ladder) 7502
.
12.3. ManagementEvaluation
12.3.1. Promoters and Directors Profile
The company AIL. is a public limited company with 4 percent share holding with Promoter
of the Company.
Group Name
M/s ABC INDUSTRIES LIMITED
a. Constitution & constitution code Public Limited Company,36
b. Date of incorporation/ Establishment 11th March 2008
c. Dealing with PNB since 2008
d. Industry/Sector Steel Industry
e. Business Activity (Product)/ Existing Setup:
Installed Capacity. Sponge Iron -60000
TPA
Billets - 72000
TPA
Project under Implementation:
Sponge Iron -90000
TPA
Rolling Mill -90000
TPA
Captive Power Plant -16
MW
Proposed
Beneficiation
612000TPA
Pelletising
600000TPA
12.4. Presentproposal
39
In order to improve the efficiency of the kiln and quality of sponge iron ,the company
has now planning to install an Iron ore pelletizing unit & Beneficiation plant on the
existing land . This project is a major step towards backward integration and would
enable the company to become an integrated Steel plant as the Sponge iron and Steel
billets will be used as basic raw material for the rolling mill and the final product will be
produced from Iron.The installed capacity of Iron Ore Pelletizing and Beneficiation Plant
would be 6.00 lacs MTPA and 6.12 lacs MTPA respectively. The total cost of project is
Rs.315.50 cr with promoter contribution of Rs. 120.50 cr ie. 38% and debt component of
Rs. 195.00 cr. NBG in its meeting dt. 20.01.2012 has approved expression of interest for
considering of Term Loan limit of Rs. 100.00 crs @ 14.50 p.a. i.e. BR+3.25% + TP, with
50% concession in applicable Upfront fee.
a) Beneficiation Plant:
b) Pelletisation Plant:
Pelletising turns very fine grained iron ore into balls of a certain diameter, known as
pellets, which are suitable for blast furnace and direct reduction. The process of
pelletisation combines mixing of raw material, forming the pellet and a thermal
treatment baking the soft raw pellet to hard spheres.
Facilities Recommended :
(Rs. in Crore)
Nature Existing Proposed Secured/Unsecured along with
Fund Based the basis thereof
(As per RBIs guidelines)
CC(H) 30.00 Secured
30.00
Non Fund Based:
FLC/ILC/SBLC* 15.00 15.00 Secured
BG 1.00 1.00 Secured
Term Loan1 (O/s) 50.32 50.32 Secured
Term loan 2** 134.24 134.24 Secured
Term loan 3 - 100.00 Secured
Limit of credit exposure Nil Nil
on account of all
derivative products
TOTAL 230.56 330.56 Secured
COMMITMENT
*The Company has requested for approval of SBLC as in terms of its business model the
company plans to purchase the Raw Material at lower price than Market Price for which
supplier insist for SBLC/Bank Guarantee
**Term loan 2 amount not fully disbursed.
40
12.5. CompliancetoExposureNorms
Observations: Exposure to the group and company is within the prescribed norms
12.6. CreditRatingbyExternalAgencies
12.7. FinancialEvaluation
12.7.1. FinancialStatementAnalysis
41
Reserves and Surplus 13.50 43.52 97.65 91.54 121.89
excluding revaluation
resv
Misc. expenditure not 0.09 0.09 0.00 0.07 0.00
written off
Accumulated losses 0.00 2.80 0.00 4.09 0.00
Deferred Tax Liability/ 0.00 2.81 1.44 4.38 5.20
Asset
a) Tangible Net Worth 14.98 46.65 108.90 97.50 136.28
b) Investment in allied
concerns and Nil 3.16 Nil 3.16 3.16
amount of cross
holdings
c) Net owned funds/ 14.98 43.49 108.90 94.34 133.12
Adjusted TNW (a b)
Share application 8.20 0.00 0.00 2.83 0.00
money
Total Borrowings 13.30 78.66 115.38 131.12 232.02
Secured 12.79 77.54 115.38 129.87 217.02
Unsecured 0.51 1.12 0.00 1.25 15.00
Investments 0.00 0.00 0.00 0.00 0.00
Total Assets 37.23 128.96 235.26 279.16 384.85
Out of which net fixed 33.30 91.81 190.14 198.21 308.48
assets
Current Assets 3.93 33.81 45.12 77.60 70.81
Non current Assets 0.00 3.34 0.00 3.35 5.56
Net Working Capital 3.18 11.15 14.47 15.16 24.26
Current Ratio 5.24 1.49 1.47 1.24 1.52
Debt Equity Ratio 0.57 1.28 0.88 1.16 1.48
Term liability/ Adjusted 1.57 2.28 1.88 2.16 2.43
TNW
TOL/Adjusted TNW 0.61 1.76 1.16 1.78 1.82
Operating Profit/Sales Nil 0.14 0.14 0.0033 0.04
Long Term Sources 36.48 106.30 204.61 216.72 338.30
Long Term Uses 33.30 95.15 190.14 201.56 314.04
Surplus/ Deficit 3.18 11.15 14.47 15.16 24.26
Short Term Sources 0.75 22.66 30.65 62.44 46.55
Short Term Uses 3.93 33.81 45.12 77.60 70.81
Surplus/ Deficit (3.18) (11.15) (14.47) (15.16) (24.26)
42
Key Financials upto last quarter
(Rs. Crore)
Period Cumulative Corresponding % Accepted %age Remarks
ended position as position as at Change for the achievement
on last Dec10 current upto latest
quarter/ year quarter/HY/Q1
HY/Q1
ended Dec
11
Sales 99.89 62.13 60.78 148.33 *67.34 --
Other 0..0 0.00 0.00 0.00 0.00 --
Income
PBT 3.56 0.24 1483.33 5.59 63.68 --
PAT 2.46 0.16 1537.50 3.36 73.21 --
Reason: Sales during three quarter of current year are slightly lower than the proportionate
sales of 75 % of annual target for 2011-12 as during first quarter sales are generally low on
account of rainy season. During the corresponding period last year sales achievement was
56.38 % of the annual budget. The company has informed that during 1st half year the sale
achievement is lower in this industry on account of rainy season, particularly during first
quarter of financial year. The sales normally peaked in the last quarter of year, as during
2010-11 the company posted sales of Rs. 48.04 cr during last quarter which was 44% of
annual sales. The Company has achieved the sales of Rs. 31.68 cr during Jan & Feb 12. The
company has achieved total sale of Rs. 131.57 crs. till Feb 12 against the annual target of Rs.
148.33 cr. i.e 88.70 %.
12.8. SECURITY
12.8.1. Primary
For Term Loan: The term loan is secured by way of following charge over the block assets
both present and future .
43
(Rs inCr)
12.8.2. Collateral:
44
Any other income
such as Escrow
account fee, etc.
Total 238.24 13.72 5.76 19.17 8.05
12.10. COSTOFTHEPROJECT
Rs in crs
Sl. PARTICULARS BENEFICIATION PELLETIZIN Total
No PLANT G PLANT
.
MEANS OF FINANCE
In crs
Sl. PARTICULARS BENEFICIATION PELLETISING Total
No PLANT PLANT
1. Equity Share Capital 78.00 42.50 120.50
2. Term Loan from Banks 125.00 70.00 195.00
TOTAL 203.00 112.50 315.50
45
Pelletising Plant Mill & Power Plant)
Land & Site 1.40
2.65
1 Development 1.25
2 Buildings 36.14 27.19 63.33
3 Plant and Machinery 206.32 149.44 355.76
4 Misc. Fixed Assets 6.50 8.00 14.50
5 Contingencies 12.52 9.29 21.81
Preoperative 36.62
52.94
6 Expenses 16.32
Preliminary -
-
7 Expenses -
Margin Money for 16.00
22.51
8 Working Capital 6.51
Total Cost of the 315.50
533.50
Project 218.00
12.11. Strengths&Weakness
Strengths/Opportunities:
1. The promoters are highly experienced and have knowledge of Steel Industry
3. Rich Mineral Resources & Proximity to raw materials makes the transportation of raw
material easier and cheaper.
4. There are number of steel units are operating in the region. The availability of skilled and
unskilled labor is evident and easily available.
46
6. Weakness/Threats:
1. Endemic Deficiencies: Poor quality of some of the essential raw materials available
in India, e.g., high ash content of indigenous coking coal is adversely affecting the
productive efficiency of iron-making. As a result some of the raw materials have to be
imported, increasing cost.
Mitigant
As the Company are using imported Coal in their existing Plant and from the
proposed expansion of Beneficiation & Pelletisation Project, company will convert
low grade iron ore into high grade iron ore that will help the Company to get better
production at lower consumption of Coal.
2. Low Labor Productivity: In India the advantages of cheap labor get offset by low
labor productivity. Labor productivity in Indian companies such as SAIL and TISCO
is ~ 75 t/man year and ~100 t/man year, whereas for POSCO (Korea) and NIPPON
(Japan) the productivity values are 1345 t/man year and 980 t/man year.
Mitigant
3. Slowing Global Economy: Global economic recession has adversely affected the
demand for iron & steel products around the world. With slowing global economies
and uncertain economic climate in Europe with the advent of European debt crisis,
economic activity in these regions will slow down and contract, leading to low
demand from these major export markets for Indian manufacturers.
Mitigant
Indian economy is still growing comparative to European Country.
4. Price Sensitivity and Demand Volatility: The demand of iron & steel depends on
the end-user requirements. The traders tend to exhibit price sensitivity and buy when
there are at discounts. This volatility of price and demand often affects manufacturers
because of their inability to tune their production in line with the market demand
fluctuations.
Mitigant: The demand of iron & steel are increasing day by day, if any change in the
prices of raw material will not adverse effect towards demand & the party may
transfer the increase to the customers.
12.12. RatioAnalysis
Detailed projected profitability projections, balance-sheet, cash flow are as per Appendix
47
VII
12.13. SensitivityAnalysis:
48
Particulars 2012 2013 2014 2015 2016 2017
Installed Capacity (MT) ROLLING - 90000 90000 90000 90000 90000
Capacity Utilisation - 60% 70% 80% 80% 80%
Total Production(MT) ROLLING - 27000 63000 72000 72000 72000
Installed Capacity (MT) SMS 72000 72000 72000 72000 72000 72000
Capacity Utilisation 70% 80% 80% 80% 80% 80%
Total Production(MT) 50400 57600 57600 57600 57600 57600
Captive Consumption - 28485 66465 75960 75960 75960
Balance for sale 50,400 29,115 - - - -
Installed Capacity (MT) SI 60000 150000 150000 150000 150000 150000
Capacity Utilisation 70% 50% 74% 80% 90% 100%
Total Production(MT) 42000 75000 111000 120000 135000 150000
Captive Consumption 37800 43200 43200 43200 43200 43200
Balance for sale 4200 31800 67800 76800 91800 106800
Inst. Capacity (LACSMT)PELLETISING 6.00 6.00 6.00 6.00 6.00
Capacity Utilisation - - 70% 80% 90%
Total Production(Lacs MT) - - 4.20 4.80 5.40
Captive Consumption ( lacs MT) - - 1.80 2.03 2.25
Balance for sale ( Lacs MT) - - 2.40 2.78 3.15
Balance for sale in Crs - - 192.00 222.00 252.00
Total Sales Relisation 149.52 235.84 347.28 587.52 647.52 677.52
Add. Opening Stock 2.30 3.49 5.50 8.10 8.10 8.10
Less Closing Stock 3.49 5.50 8.10 8.10 8.10 8.10
Sales Realisation ( Net) 148.33 233.83 344.68 587.52 647.52 677.52
12.14. FUTUREPROJECTIONSANDCALCULATION
(Amt in Crores)
49
Net Current Assets 97.56 111.46 125.37 125.41 125.43 125.44 125.46
Net Sales / Receipts 336.00 384.00 432.00 432.00 432.00 432.00 432.00
Profit before tax 61.60 78.41 97.16 99.42 102.75 106.81 110.85
Profit after tax 40.86 52.01 64.45 65.95 68.15 70.84 73.52
Depreciation 14.94 14.94 14.94 14.94 14.94 14.94 14.94
Internal Cash Accruals 55.80 66.95 79.39 80.89 83.10 85.79 88.47
Debt Equity Ratio* 1.14 0.75 0.50 0.34 0.21 0.12 0.05
Total outside liabilities to 1.57 1.11 0.81 0.60 0.43 0.31 0.21
TNW
FACR 1.54 1.57 1.71 1.90 2.38 3.33 6.19
Pay Back Period - Years 4.20
DSCR - Average 2.33 Years
IRR 22.19%
50
Project as standalone
Profit after Tax 40.86 52.01 64.45 65.95 68.15 70.84 73.52 77.26 513.04
Depreciation 14.94 14.94 14.94 14.94 14.94 14.94 14.94 13.33 117.93
Amortisation of
expenses -
Interest on term loans 27.30 26.09 22.87 19.65 15.99 11.58 7.17 2.76 133.40
102.2 100.5
Total Inflows (A) 83.10 93.04 6 4 99.08 97.36 95.63 93.35 764.38
Outflows -
- Interest on term
loans 27.30 26.09 22.87 19.65 15.99 11.58 7.17 2.76 133.40
- Repayment of term
loan 0.00 23.00 23.00 23.00 31.50 31.50 31.50 31.50 195.00
Total Outlows (B) 27.30 49.09 45.87 42.65 47.49 43.08 38.67 34.26 328.40
DSCR (A/B) 3.04 1.90 2.23 2.36 2.09 2.26 2.47 2.72 2.33
Inflows
51
8 5 0 8 5 2 736.
52
Outflows -
DSCR (A/B) 2.91 1.81 2.12 2.24 1.99 2.15 2.35 2.84 2.24
Inflows
Profit after Tax 34.48 44.72 56.24 57.74 59.95 62.64 65.32 77.66 458.75
Depreciation 14.94 14.94 14.94 14.94 14.94 14.94 14.94 13.33 117.93
Amortisation of
expenses -
Interest on term loans 27.30 26.09 22.87 19.65 15.99 11.58 7.17 2.76 133.40
Total Inflows (A) 76.72 85.75 94.06 92.34 90.88 89.16 87.43 93.74 710.09
Outflows -
- Interest on term
loans 27.30 26.09 22.87 19.65 15.99 11.58 7.17 2.76 133.40
- Repayment of term
loan 0.00 23.00 23.00 23.00 31.50 31.50 31.50 31.50 195.00
Total Outlows (B) 27.30 49.09 45.87 42.65 47.49 43.08 38.67 34.26 328.40
DSCR (A/B) 2.81 1.75 2.05 2.16 1.91 2.07 2.26 2.74 2.16
52
DSCR-Rate of Interest increased by 1%
Outflows -
- Interest on term 27.9 24.5 21.0 17.1 12.4
loans 29.25 6 1 6 3 0 7.68 2.95 142.93
- Repayment of 23.0 23.0 23.0 31.5 31.5 31.5 31.5
term loan 0.00 0 0 0 0 0 0 0 195.00
50.9 47.5 44.0 48.6 43.9 39.1 34.4
Total Outlows (B) 29.25 6 1 6 3 0 8 5 337.93
DSCR (A/B) 2.86 1.84 2.16 2.29 2.05 2.22 2.45 2.96 2.30
Estimated Cost of Production (A+B+C+D+E) 211.8 241.3 270.9 271.9 272.2 272.6 272.9 273.3
Cost of Production 211.8 241.3 270.9 271.9 272.2 272.6 272.9 273.3
Administrative expenses 3.36 3.84 4.32 4.32 4.32 4.32 4.32 4.32
Selling & Distribution Expenses 6.72 7.68 8.64 8.64 8.64 8.64 8.64 8.64
Total Cost of Sales 221.9 252.9 283.9 284.8 285.2 285.5 285.9 286.3
53
Total sales Realisation- without Captive
consumption 336 384 432 432 432 432 432 432
EBITDA 114.1 131.2 148.1 147.2 146.9 146.5 146.1 145.7
Interest on Term Loans 27.3 26.09 22.87 19.65 15.99 11.58 7.17 2.76
Interest on Working Capital Loans 10.24 11.7 13.16 13.17 13.17 13.17 13.17 13.17
Total Finance Cost 37.54 37.8 36.04 32.82 29.15 24.74 20.33 15.92
Depreciation 14.94 14.94 14.94 14.94 14.94 14.94 14.94 13.33
Profit Before Tax 61.6 78.41 97.16 99.42 102.8 106.8 110.9 116.5
Provision for Tax 11.4 19.14 27.23 29.51 31.92 34.39 36.7 39.12
Deffered Tax 9.34 7.26 5.48 3.97 2.67 1.57 0.62 0.1
UNIT PROFIT AFTER TAX 40.86 52.01 64.45 65.95 68.15 70.84 73.52 77.26
54
- Inventories - - 51. 58. 66. 66. 66. 66. 66. 66.
42 72 04 08 10 11 13 15
- Receivables - - 50. 57. 64. 64. 64. 64. 64. 64.
40 60 80 80 80 80 80 80
- Loans and advances - - - - - - - - - -
Total current assets - - 101 116 130 130 130 130 130 130
.82 .32 .84 .88 .90 .91 .93 .95
Less : Current Liabilities - - 4.2 4.8 5.4 5.4 5.4 5.4 5.4 5.4
& Provisions 5 6 7 7 7 7 7 7
Net current assets - - 97. 111 125 125 125 125 125 125
56 .46 .37 .41 .43 .44 .46 .48
Bank Balance (Surplus) 5.1 4.3 16. 56. 104 162 224 278 334 392 451
3 5 00 75 .48 .88 .73 .98 .82 .39 .57
TOTAL ASSETS 55. 204 315 438 485 542 589 629 670 712 758
13 .35 .50 .87 .56 .92 .87 .19 .11 .75 .61
YEAR 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022
SOURCES OF FUNDS
Internal Cash Accruals - - - - - - - - - - -
Equity Capital /Warrants 30.1 54.23 36.15 - - - - - - - -
- Warrants/Others - - - - - - - - - - -
PBT with term interest added back - - 88.9 104.5 120 119.1 118.7 118.4 118 119.2
Depreciation and amortisation provision - - 14.94 14.94 14.94 14.94 14.94 14.94 14.94 13.33
Increase in term loans 25 95 75 - - - - - - - -
Increase in borrowings for Work. Cap. - - - 73.17 10.43 10.43 0.03 - - - -
Increase in current liabilities - - 4.25 0.61 0.61 - - - - -
Sale of Investments - - - - - - - - - -
Increase in Unsecured Loans - - - - - - - - - - -
TOTAL (A) 55.1 149.2 111.2 181.3 130.5 146 134.1 133.7 133.3 133 132.6
APPLICATION OF FUNDS
Capital expenditure 50 150 99.5
Preliminary Expenses - - - - - - - - - -
Increase in current assets - - - 101.8 14.51 14.51 0.04 0.02 0.02 0.02 0.02
Decrease in term loans - - - 23 23 23 31.5 31.5 31.5 31.5
Interest on term loan - - 27.3 26.09 22.87 19.65 15.99 11.58 7.17 2.76
Decrease in bank borrowings - - - - - - - - - -
Taxation - - 11.4 19.14 27.23 29.51 31.92 34.39 36.7 39.12
Decrease in Unsecured Loans - - - - - - - - - -
Decrease in current liabilities - - - - - - - - - -
TOTAL (B) 50 150 99.5 140.5 82.74 87.62 72.2 79.42 77.49 75.38 73.39
Op. Bal. of Cash & Bank Balances - 5.13 4.35 16 56.75 104.5 162.9 224.7 279 334.8 392.4
Net Surplus (A-B) 5.13 -0.77 11.65 40.75 47.73 58.4 61.85 54.25 55.84 57.57 59.17
Cl. Bal. of Cash & Bank Balances 5.13 4.35 16 56.75 104.5 162.9 224.7 279 334.8 392.4 451.6
55
Break Even Point (Project as standalone)
Years
(As on
31st 201 201 202
March) 2012 2013 2014 2015 6 2017 2018 9 0 2021 2022
A)
OUT
FLOW
Increas
e in
Fixed 150.0 99.5
Asset 50.00 0 0 - - - - - - - -
Net
Worki
ng 101. 14.5 14.5
Capital - - 82 1 1 0.04 0.02 0.02 0.02 0.02
150.0 99.5 101. 14.5 14.5
Total 50.00 0 0 82 1 1 0.04 0.02 0.02 0.02 0.02
B)
INFLO
W
Cash
Accrua 55.8 66.9 79.3 80.8 83.1 85.7
ls - 0.00 0.00 0 5 9 9 0 9 88.47 90.59
Divide - - - - - - - - - - -
56
nd
(added
back)
Interest
added 27.3 26.0 22.8 19.6 15.9 11.5
back - - 0 9 7 5 9 8 7.17 2.76
Modva
t - - - - - - - - - - -
83.1 93.0 102. 100. 99.0 97.3
Total - - - 0 4 26 54 8 6 95.63 93.35
Net of
inflow
-
outflo
w
- - -
(B-A - 150.0 99.5 18.7 78.5 87.7 100. 99.0 97.3
) 50.00 0 0 2 3 5 50 7 5 95.62 93.33
- - -
Net - 150.0 99.5 18.7 78.5 87.7 100. 99.0 97.3
amount 50.00 0 0 2 3 5 50 7 5 95.62 93.33
Add :
5% of
Fixed
Assets 9.08
Add :
100%
of
Curren
t
Assets 582.52
- - - - - - - -
- - -
- 150.0 99.5 18.7 78.5 87.7 100. 99.0 97.3
Total 50.00 0 0 2 3 5 50 7 5 95.62 684.92
22.19
I.R.R %
ADD DIVIDEND - - - - - - - -
57
0.0 55.8 66.9 83.1 85.7
NET INFLOW 0.00 0 0 5 79.39 80.89 0 9
CAPITAL COST OF
THE PROJECT 299.50
Years 2013 2014 2015 2016 2017 2018 2019 2020 2021
120.0 195.0 195.0 172.0 149.0 126.0
Term Loan 0 0 0 0 0 0 94.50 63.00 31.50
120.0 195.0 195.0 172.0 149.0 126.0
Total Debt 0 0 0 0 0 0 94.50 63.00 31.50
Equity Share and 120.5 120.5 120.5 120.5 120.5 120.5 120.5 120.5
prem. 84.35 0 0 0 0 0 0 0 0
Deffered Tax - - 9.34 16.60 22.08 26.05 28.72 30.29 30.91
157.3 223.2 291.4 362.2 435.7
Reserve & Surplus 0.00 0.00 40.86 92.86 1 6 1 6 8
- - - - - - - - -
120.5 170.7 229.9 299.9 369.8 440.6 513.0 587.1
Total Equity 84.35 0 0 6 0 1 4 5 9
Debt Equity Ratio 1.42 1.62 1.14 0.75 0.50 0.34 0.21 0.12 0.05
Net Fixed Assets 284.56 269.61 254.67 239.73 224.78 209.84 194.90
Years 2013 2014 2015 2016 2017 2018 2019 2020 2021
Debt 120. 195.0 195.0 172.00 149.00 126.0 94.50 63.00 31.50
58
00 0 0 0
Bank
Borrowing - 0.00 73.17 83.60 94.03 94.06 94.06 94.06 94.06
Current Lia. - 0.00 4.25 4.86 5.47 5.47 5.47 5.47 5.47
Unsecured
Loans - - - - - - - - -
120. 195.0 272.4 225.5 131.0
TOL 00 0 3 260.46 248.50 3 194.03 162.53 3
Profit After Tax 40.86 52.01 64.45 65.95 68.15 70.84 73.52
Depreciation 14.94 14.94 14.94 14.94 14.94 14.94 14.94
Intt. on Term
Loan 27.30 26.09 22.87 19.65 15.99 11.58 7.17
Total 83.10 93.04 102.26 100.54 99.08 97.36 95.63
Intt. on Term
Loan 27.30 26.09 22.87 19.65 15.99 11.58 7.17
Interest
Coverage
Ratio 3.04 3.57 4.47 5.12 6.20 8.41 13.34
59
Term Loan Repayment Schedule
60
13. CASEII:WorkingCapitalFinancing(ABCTradersLtd.)
13.1. CMADataAnalysisforWorkingCapitalFinancing
This section illustrates how the company asking for working capital financing prepares CMA
data. This involves analysis of balance sheet and calculation of maximum permissible bank
finance. This CMA data is prepared using the balance sheet and the profit and loss account in
the annual report of the company.
61
iv) Direct labour 1183.16 1289.45 1377.46
(Factory wages and salaries)
v)Other mfg. expenses 3.36 2.81 5.00
vi)Depreciation 1449.97 1389.10 1454.94
vii)SUB TOTAL 21080.72 23669.81 27480.72
viii) Add :Opening stock 670.13 414.29 565.04
in process
Sub total 21750.85 24084.10 28045.76
ix)Deduct :Closing stock 414.29 565.04 684.04
in process
x) Cost of production 21336.56 23519.06 27361.71
xi) Add Opening stock of 879.64 486.62 481.11
finished goods
xii) Less Closing stock 486.62 481.11 679.09
of finished goods
xiii)SUB TOTAL(Total cost 21729.58 23524.57 27163.73
of sales)
6. selling,general and 1495.94 1516.44 1639.20
administrative expenses
7. SUB TOTAL 23225.52 25041.01 28802.93
8. Operating profit before -22.18 1770.76 2336.73
Interest
9. Interest 1565.93 1490.89 1610.06
10. Operating profit after -1588.11 279.87 726.66
Interest
11. (i) Add other non
operating income
(a) Waste sales 0.00 0.00 0.00
(b) Export incentive 0.00 0.00 0.00
(c) Insurance claim 0.00 0.00 0.00
(d) Interest 0.00 0.00 0.00
(e) others 0.00 0.00 0.00
sub total (income) 0.00 0.00 0.00
(ii) Deduct othe non
operating expenses
(a) quota expenses
(b) loss on sale of fixed asset
(c) Prior period adjustment
(d)
sub total (expenses) 0.00 0.00 0.00
(iii) Net other non
operating income\exp 0.00 0.00 0.00
12. Profit before tax/loss -1588.11 279.87 726.66
{10 + 11 (iii)}
13. Provision for taxes -2.11 0.23 138.84
Provision for defeered tax liability -281.19 87.46 19.31
14. Net profit/loss (12-13) -1304.81 192.18 568.51
15. (a) Equity dividend paid-amt 0.00 0.00 0.00
(Already paid+B.S.provision)
(b) Dividend rate (on p.shares only)
16. Retained profit (14-15) -1304.81 192.18 568.51
17. Retained profit/loss profit (%age) 100.00 100.00 100.00
62
Form III: Analysis of balance sheet
This form gives a detailed analysis of the balance sheet of the company. The balance sheet
contains two important parts assets and liabilities. However, while talking about working
capital assessment, we are basically interested in Current assets and current liabilities.
Current Assets are those assets for the companies that are reasonably expected to be
converted into cash within one year during the normal course of business. Current assets
include cash, account receivables, inventories, short term investments, prepaid expenses and
many others as explained in the form. These assets are used for the main activity of the
business and must be kept at certain reasonable level for the efficient working of the business.
For example, cash can be used to purchase raw materials from which finished goods can be
manufactured. These current assets are very necessary for day to day operations of the
company.
Current Liabilities are the companys debts or obligations that are due within one year.
They appear on the balance sheet and include many important items such as short term debt,
sundry creditors, provisions for taxation, dividend payable, advances from customers and
installments of term loans.
These liabilities are obligations that must be fulfilled within one year and form an important
part of working capital since these are the short term sources of funds. The form gives a
detailed analysis of current assets and current liabilities which can be used to calculate the
working capital requirements as shown in form V of CMA data.
63
provisions (due within 1 yr)
(Specify major items)
Interest accrued but not due 66.37 68.03 65.00
Commission payable 123.11 132.88 130.00
Others 359.31 417.66 425.00
capital creditors 0.00 0.00 0.00
Sub-total (B) 1678.99 3044.66 3478.99
10. Total current liabilities 7558.30 10187.92 11751.23
(total of 1 to 9 excld 1(iii)
11. TERM LIABILITIES
12. Preferance shares 1729.80 1904.80 1854.80
(redeemable after one year)
13. Term loans (excld instalments 12067.56 10670.11 9856.03
payable within one year)
14. Deferred Payment Credits
(creditors for capital items)
(excluding instalments due 229.48 223.75 312.50
within one year)
15. Others- Capital Creditors & provisions 388.04 166.08 200.00
16. Other term liabilities 90.44 98.86 200.00
17. TOTAL TERM LIABILITIES 14505.32 13063.60 12423.33
18. TOTAL OUTSIDE LIABILITIES 22063.62 23251.52 24174.56
(item 10 plus item 17)
19. Ordinary share capital 2129.20 2129.20 2129.20
20. Capital Subsidy 0.00 0.00 0.00
21. Deferred Tax Liability 68.94 156.40 175.71
22. Other reserves (excluding 1479.10 1462.85 1450.35
provisions) Share Premium
23. Surplus(+) or deficit(-) in -1610.85 -1418.67 -850.16
Profit & Loss account
23a. Others ( 0.00 0.00 0.00
24. NET WORTH 2066.39 2329.78 2905.10
25. TOTAL LIABILITIES 24130.02 25581.30 27079.66
31/3/2009 31/3/2010 31/3/2011
ASSETS AUDITED AUDITED ESTIMATES
CURRENT ASSETS
26. Cash and Bank Balances 70.95 21.44 21.44
27. Investments(other than long 0.00 0.00 0.00
term Investments)
(i) Government & other trustees
Securities
(ii) Fixed deposits with banks
28. (i) Receivables other than 1936.86 2172 2625.18
deferred & exports (including
bills purchased and discounted by
banks)
Local Sale 1936.86 2172.00 2625.18
(ii) Export receivables 1387.80 1125.44 1244.52
29. Instalments of deferred receivables
within one year
30. Inventory 4049.74 6367.75 7718.44
(i) Raw materials (including
64
stores & other items used in the
process of manufacture)
a) Imported 0.00 0.00 0.00
b) Indigenous 2908.78 5055.42 6055.31
(ii) Stocks-in-process 414.29 565.04 684.04
(iii) Finished Goods 486.62 481.11 679.09
(iv) Other consumables spares
a) Imported 67.32 83.52 75.00
b) Indigenous 172.73 182.66 225.00
31. Advance to suppliers of raw 93.84 322.55 150.00
materials & stores/spares
32. Advance payment of taxes 17.45 26.40 25.00
33. Other current assets 888.75 1307.71 1265.00
(specify major items)
cst/export incentive receivables 179.96 470.75 415.00
Other 708.79 836.96 850.00
Prepaid Exp. 0.00 0.00 0.00
34. TOTAL CURRENT ASSETS 8445.39 11343.29 13049.59
(Total of 26 to 33)
35. FIXED ASSETS
36. Gross Block (land & building 26809.06 26746.43 27993.43
machinery, work-in-process)
36. Depreciation to date 11242.18 12625.67 14080.61
37. NET BLOCK (35-36) 15566.88 14120.76 13912.82
OTHER NON-CURRENT ASSETS
38. Investments/book debts/advances/ 117.75 117.25 117.25
deposits which are not Current
Assets
39. Non-consumables stores & spares 0.00 0.00 0.00
40. Other non-current assets 0.00 0.00 0.00
TOTAL OTHER NON
41. CURR.ASSETS 117.75 117.25 117.25
42. Intangible assets (patents, 0.00 0.00 0.00
goodwill, prelim, expenses, bad/
doubtful expenses not provided for
etc.)
43. TOTAL ASSETS (34+37+41+42) 24130.02 25581.30 27079.66
44. TANGIBLE NET WORTH (24-42) 2066.39 2329.78 2905.10
45. NET WORKIG CAPITAL 887.08 1155.37 1298.36
[(17+24)-(37+41+42)]
The above table shows the calculation of net working capital for XYZ Limited the working
capital requirements for 2011 is Rs 1298.36 lacs and for the next year, it is Rs 1428.60 lacs.
The next form shows the various holding levels of current assets which is very important
from bankers point of view. The banker verifies these various holding periods and compares
it with the peers and previous years so as to get to know the acceptable level. This can be
very important in working capital assessment.
65
Form IV: Comparative statement of current assets and liabilities
This form explains the operating cycle of the company. Operating cycle forms an integral
part of the companys business and helps in understanding the health of the business.
The figures in brackets in the form indicate these stated parameters and can be used to
calculate the operating cycle.
The company analyzes these parameters comparing it with previous years to understand the
trend, check whether the values are reasonable or not and to finally know the health of the
business. It must be noted these values can be in days or months.
ANALYSIS OF CURRENT
ASSETS AND
LIABILITIES
31/3/2010 31/3/2011 31/3/2012
A. CURRENT ASSETS - - -
Raw materials (including
1. stores
& other items used in the
process
of manufacturing)
a) Imported
Amount 0.00 0.00 0.00
b) Indigenous
Amount 2908.78 5055.42 6055.31
b) Indigenous
Amount 172.73 182.66 225.00
66
4. Finished Goods 486.62 481.11 679.09
Months' cost of sales 0.27 0.25 0.30
67
b) Dividend payable 0.00 0.00 0.00
c) Instalments of TL.DPG
and 684.43 1075.27 1664.08
public deposits
d) Redemption of Pref.
Shares due within year 0.00 0.00 0.00
e) Other current liabilities
and 548.79 618.57 620.00
Provisions
14. TOTAL 1678.99 3044.66 3478.99
The months cost of sales or holding period is compared with previous years so as to
understand the working capital requirements. There has not been enough variation for the
company and the holding level seems reasonable.
68
6. Item 3 minus item 4 5686.43 6819.44 8283.41
7. Item 3 minus item 5 6563.75 8218.53 9936.31
8. Maximum permissible bank finance
(lower of 6 or 7) 5686.43 6819.44 8283.41
9. Excess borrowings representing
shortfall in NWC
It must be noted that the bank can only provide company with 75% of working capital gap
and not more than that.
13.2. WorkingCapitalLoanProposal
FB 22.35 21.00
NFB 1.35 1.35
69
Rating from External Agency Facility Rating Date of Rating Remark
(The external rating should be rated rating Agency s
mapped to the internal rating)
Not yet done. Long BB 30-08- Care
Term 2011
Short PS4 30-08- Care
Term 2011
Whether Agriculture/Retail/ Others
SME/Others (Please specify)
a) Whether Sensitive Sector NO
Real Estate/Capital Market
b) Applicable Risk weight
100%
Consortium/Multiple Banking Consortium
Lead Bank BOI
PNBs Share % Existing 30% Proposed 22.06%
Date of application 20-03-12
Date of receipt of application at 20-03-12
BO/CO/HO
Date of last sanction &authority 05-01-2011, ED
Customer ID No. 100502671
Activity code (as per ladder) 6502
2. Borrowers Profile
70
4.A Facilities Recommended :
(Rs. in Crore)
Nature Existing Proposed Secured/Unsecured along with
Fund Based the basis thereof
(As per RBIs guidelines)
CC(H)/PC 11.10 11.10 Secured
WCDL - -
FOBP/FOUBP/CCBD 3.90 3.90 Unsecure/secured
BD(LC) with in (1.00) 1.00) Secured
FOBP/FOUBP
Others(outside PBF)
FOBP/FOUBLC 5.55 4.20 Unsecured
Standby PC/PCFC 1.80 1.80 Do
Fund Based Ceiling 22.35 21.00
Non Fund Based
ILC/FLC
ILG/ FLG
Non Fund Based Ceiling 1.35 1.35
Corp Loan(OS) I 3.30 3.30 Secured
Term Loan(OS) II 4.90 4.90 Do
Limit of credit exposure on
account of all derivative
products
TOTAL COMMITMENT 31.90 30.55
Other income is on account of scrap sales, interest received from buyers and Misc. Income.
During the year 2010-11, the company earned other income of Rs. 1.81 crores and has estimated /
projected the same at 1.00 crores for the current year and next year respectively. Considering the
level of operations of the company, the estimates/projections appear reasonable and may be accepted.
71
PROFITABILITY
The company recorded net profit of Rs. 1.92 crores for the year 2010-11 on a sales turnover of
Rs. 266.30 crores (Net Profit/sales ratio: 0.72%) against estimated net profit of Rs. 0.11 crores
and sales turnover of Rs. 243.07 crores. The company has surpassed all the estimates. In the
previous year (2010-11), company has crossed their break even point and registered profit of Rs.
1.92 crores. In the current year company has estimated profit of Rs. 5.69 crores and projected net
profit of Rs. 10.37 crores for the year 2012-13.
The company has identified that out of its three divisions i.e. spinning, weaving and denim,
denim division being a value addition is performing better as compared to other divisions. The
company therefore is going to increase its denim capacity by 50% and the same will be
operational from 1/1/2012. OBC have already sanctioned Rupee Term Loan of Rs. 8.50 crores.
The pay back period is three years for the additional investment in denim division.
The company has further informed that it is continuously trying to improve its productivity,
efficiency, and net realization and reducing its cost by regular training of its personnel, changing
product mix, developing new markets etc. There are efforts are reflected in the performance.
In view of the above, we may accept profitability estimates / projections submitted by the
company.
CURRENT RATIO
Year Current Ratio
2008-09 (Audited) 1.19
2009-10 (Audited) 1.11
2010-11 (Audited) 1.11
2011-12 (Estimated) 1.11
2012-13 (Projected) 1.12
The current ratio of the Company as on 31.03.2011 was at 1.11 as against estimates of
1.12, submitted at the time of last review so the current ratio as on 31.03.2011 was more or
less as per the estimates only. It is pertinent to mention that the current ratio of the
company has been below the banks benchmark of 1.33 in earlier years also. The reasons
explained by the company are:-
a) The company has incurred losses during the year 2008-09 & 2009-10 resulting in
reduction in NWC.
b) Increase in repayment of Term loans as majority of terms loan instalments are going
to commence from the year 2011-12 only. Term loan installments falling due within
one year are shown as part of Current Liabilities as per details given below :-
72
As on Amount Repayments
(Rs. In Crores) during
31.03.08 3.32 2009-10
31.03.09 6.84 2010-11
31.03.10 10.75 2011-12
31.03.11 16.64 2012-13
31.03.12 20.57 2013-14
Current ratio is estimated at 1.11 and 1.12 as on 31.03.2012 & 31.03.2013 respectively.
Therefore, treatment of term loan installments falling due within one year as current liabilities is
affecting current ratio. However, despite of above constraints, company has been regular in meeting
its obligation towards servicing of interest on WCFBL and interest and installments of corporate loan
availed at our end.
In view of the above, we may accept lower estimated / projected current ratio of 1.11 as on
31.03.2011 and 31.03.2012 respectively.
The Debt Equity ratio was 11.05 as on 31.03.2010 and 10.70 as on 31.03.2011 (as against 10.83
estimated at the time of last review). The higher DER is attributed to losses incurred by the company
during the year 2008-09 & 2009-10 which has resulted in erosion of TNW. DER is estimated at 8.85
and projected at 6.09 as on 31.03.2012 and 31.03.2013 respectively in view of improved profitability
and repayment of term loan.
8. SECURITY
A. Primary
o 1st pari-passu charge on existing and future current assets of the company which has been
created by execution of Joint documents by the consortium on 08-02-2012 for Rs 92.50
for the consortium and charge registered with ROC on 11.02.2012.
o 1st pari-passu charge on existing and future fixed assets of the company has been
created on 22-01-09 on the IP at plot No SP-2/1(A) &SP -2-2 at NKP industrial
Area , Distt Alwar Raj (leasehold land measuring 160,000 sq mts) as confirmed
by IFCI for our Corp loan of Rs 6.00 crs and TL of Rs 6.20 crs.(charge registered
on 26-02-09)
73
B. Collateral
i) Personal /Corporate Guarantee
(Rs. In crs)
Name of Relation Net Worth IP Date of
Guarantor with borrower confidential report
Prev. Present Prev Present Prev. Present*
31.3.10 31.3.11 .
Sh. XXX CMD 0.65 0.78 - - 17-08-10 .
M/s. KP Ltd. Group Co 12.75 12.80 -- -- 17-08-10 .
Second charge on the above mentioned IPs at Neemrana Raj. for present enhanced
working capital limits as per our sanction dated 5.1.2011 has since been created on
25.03.2012.
74
Justification for working capital sanction
Weak nesses
1. Increasing competition from new entrants and existing exporters.
Mitigant: In view of good standing of the Co, it is capable of meeting the competition.
2. Being agricultural commodity, supplies / prices at times are affected by weather / climatic
conditions. This may affect profit margins.
Mitigant long experience of the Co enables it to withstand such adversities. Company
purchases cotton during crop season and is having experience in hedging against adverse
movements.
Recommendations:
In view of the above we recommend for sanction of the following limits
75
(Rs. in crs)
Limits Existing proposed
TL 1&2,Rs 8.20 1&2, Rs 8.20
WC (FB) 22.35 21.00
NFB 1.35 1.35
Total/ 31.90 30.55
Ceiling
14. ConclusionandRecommendations
14.1. Conclusions
Lending is more of an art than an exact science. Taking perfect lending decision requires
understanding the business of the company and analyzing it from multiple perspectives.
While attempt is made to infuse objectivity in the appraisal, sound lending decision involves
taking subjective view of the proposal. This is where experience and judgement of the
appraiser play a key role.
Since banks lend the funds deposited by the general public with expectation of safety and
security the lending decisions taken by banks primarily focus on the safety of funds. Risk
aversion and risk diversion are the main parameters in bank lending.
To remain viable, a bank must earn adequate profit on its investment. This calls for adequate
margin between deposit rates and lending rates. In this respect, appropriate fixing of interest
rates on both advances and deposits is critical. Unless interest rates are competitively fixed
and margins are adequate, banks may lose customers to their competitors and become
unprofitable.
To mitigate risk, banks lend to a diversified customer base. Diversification should be in terms
of geographic location, nature of business etc. If, for example, all the borrowers of a bank are
concentrated in one region and that region gets affected by a natural disaster, the bank's
profitability can be seriously affected.
Banks achieve diversification by specifying strict exposure norms that limit the exposure to a
particular industry, business group and company.
Term loan appraisal mainly focuses on the viability of the project and its ability to generate
enough cash to service the debt over the tenure of the loan.
76
Appraisal Working capital financing proposal is focused on ascertaining the working capital
requirements of the fund. Over funding will lead to operational inefficiencies while under
funding could impact the normal operation.
Different industries possess different challenges in WC assessment as, the WC cycle vary
from industry to industry.
Post sanction processes that include monitoring of accounts, ensuring end-use of funds etc.
are as critical as pre-sanction appraisal process for the security of funds.
In general terms, the project is likely to receive favorable consideration and detailed appraisal
is taken if:
The project is rejected without detailed appraisal if it has some of the following features:
o Promoters are reported to have indulged in illegal and anti social activities.
o Industry to which a particular unit belongs has low priority or is included in the
negative list in govt. guidelines.
o Location of the proposed unit has apparent disadvantages eg far removed from
sources of raw materials.
77
o Second hand equipment to be acquired is too old and will not have trouble free
residual life
o There is no certainty that utilities like power, water will be available by the time the
project needs them.
78
14.2. Recommendations
1. More stress should be placed on collateral valuations. Since term loans are advanced
for diverse category of businesses, sector expert should be roped in for collateral
valuations.
5. Due to increased activism and regulatory crises like that with spectrum
allocation, mining leases, land acquisitions issues, environmental
considerations etc. viability of otherwise sound projects is threatened. Social,
political and economical risks should also be taken into consideration while
deciding project viability. Evaluation of these risks should be made
mandatory in TEV report. In addition, while assessing the risk rating for a
particular project, these factors must be taken into account.
79
through the cash flows. With short term perspective, a profitable firm may not
be good for lending purpose if it do not generate enough cash to service the
debt. Cash flow based computation of working capital requirement has also
been recommended by the RBI for assessment of working capital
requirement. Cash flows factor in the past trends and also take into account
the company specific factors
8. As described above a profitable firm is not necessarily also good for lending
purpose in short term. Firm may be generating good accounting profits but
there could be serious liquidity problems. To identify these issues, NWC to
Sales ratio could be calculated while appraising working capital financing
proposals. Ideally this ratio should be around 8% - 12%. If NWC to Sales
ratio is less then it means that business is growing too fast without building an
adequate backup in the form of NWC also there are chances of serious
liquidity problems and company is relying more on short term funds.
10. Forward looking statements with respect to sales, profitability etc. provided in
the DPR and other reports submitted by the company should be treated with
caution. Market analysis, demand analysis, sales projections etc. should be
evaluated on with prevailing norms. Earlier performance and trend analysis
could be used to ensure objectivity in forward looking statements.
80
References
1. Mukherjee, DD (2010), Credit Appraisal Risk Analysis & Decision Making, Jain
Book Depot
5. Martin, J. P. and Cendrowski, H. (2010), Financial Statement Fraud and the Lending
9. Hale, Roger H.H. (1983), Credit Analysis-A Completer Guide, John Wiley & Sons
Inc., NewYork
11. Chatterjee, A. (1978), Bank Credit Management (How to Lend Effectively), Suneja
Publishing Corporation, Delhi
81