PGDM (2016-18) Term - IV

END-TERM EXAMINATION
Finance Elective: Commercial Bank Management (CBM)
Time: 2 hours/Max Marks: 100/Mode: Closed Book/ Weightage: 40%

MODEL SOLUTION
[Part–A /Objective Questions–Conceptual Ability] [Answer in a few words.]

[Time 30 Minutes/Marks 40 x 1 = 40]

Q1. September 01, 2017 was the due date for payment of Term Loan Instalment by a borrower. Borrower failed to
pay the same on this due date and the default continued. On which date this loan would be classified as NPA?

My Answer is: Nov. 30, 2017

Q2. In the context of International Trade Finance, expand the word CIF.

My Answer is: Cost, Insurance & Freight

Q3. What does ‘R’ in RTGS stand for?

My Answer is: Real

Q4. In August-September 2015 RBI issued licences to open two types differentiated banks. Name them.

My Answer is: Payment Banks and Small Finance Banks

Q5. In a letter of credit there are two last dates. Name them.

My Answer is: Last date of Shipping (LDS) & Last Date of Negotiation (LDN-aka expiry/ validity of credit)

Q6. Name the type of LC where the exporter/beneficiary wants the undertaking of another bank in his country apart
from the undertaking of the LC opening bank.

My Answer is: Confirmed Credit

Q7. Name the parties in a bank guarantee (BG).

My Answer is: Creditor (Beneficiary)/Principal Debtor/Guarantor [Surety ie, the Issuing Bank]

Q8. A deferred payment guarantee (DPG) is a ---------- credit facility and a substitute for --------loan in order to
acquire a capital asset.

My Answer is: Non-fund based/Term Loan

Q9. Every bank guarantee contains a mandatory clause at the end. Name this clause.

My Answer is: Standard Limitation Clause

End-Term Examination – PGDM (2016 – 18) – Term IV: CBM – IMT Nagpur 1
Q10. Letter of credits issued by a bank are treated as ------------- in its balance sheet.

(a) Current liability (b) Current asset (c) Term liability (d) Contingent liability

My Answer is: D

Q11. When the bank guarantee (BG) applicant defaults and the beneficiary/creditor makes a claim on the BG
issuing bank, the bank is required to honour the claim. Should the bank obtain the consent of the BG applicant
before making payment to the beneficiary?

My Answer is: No

Q12. A contractor, executing a project with the National Highway Authority of India (NHAI), requests for advance
payment for execution of the project. In this case who will approach the bank for issuance of Advance Payment
Guarantee? NHAI or the Contractor?

My Answer is: Contractor

Q13. A loan account which remains in NPA category for a period of Not more than 12 months will be classified as -
-------- asset.

My Answer is: Sub-Standard

Q14. Expand UPI in the context of new payment technology.

My Answer is: Unified Payment Interface

Q15. Name the two types of commercial bills which arise out of trade transactions based on their tenor of payment.

My Answer is: Documents ag. Payment (DP) & Documents ag. Acceptance (DA)

Q16. Write the formula for computing the Capital to Risk Weighted Assets Ratio (CRAR).

My Answer is: Capital Fund [=(Tier I & Tier II Capital)]/Total Risk Weighted Assets (TRWA)

Q17. What are the three pillars of Basel II Capital Accord?

My Answer is: Minimum Capital Requirement (MCR), Supervisory Review Process (SRP) & Market
Discipline (MD)

Q18. Name the parties in a Letter of Credit (LC).

My Answer is: (1) LC Applicant/Opener/Buyer or Importer (2) LC Issuing Bank (3) Beneficiary/Seller or
Exporter (4) Intermediary Bank /Nominated Bank

Q19. Banks verify the CIBIL scores of home loan and other retail loan applicants. Expand CIBIL.

My Answer is: Credit Information Bureau of India Ltd.

Q20. Under Prudential Credit Exposure limits for the banks, what is the normal Group Borrower Limit (GBL) for a
bank?

My Answer is: 40% of the Bank’s Capital Fund

End-Term Examination – PGDM (2016 – 18) – Term IV: CBM – IMT Nagpur 2
Q21. In the context of international trade finance, expand ICC.

My Answer is: International Chamber of Commerce

Q22. Bank will refuse to pay a cheque which is more than ---- months old from its issue date?

My Answer is: Three

Q23. When a bank lends against the security of life insurance policy, what is the mode of charge creation on it?

My Answer is: Assignment

Q24. Which of the following is a non-fund-based credit facility?

A. Term loan B. Demand loan C. Co-acceptance of Bills D. Bill Discounting

My Answer is: C

Q25. ‘CAMELS’ is a type of Bank Rating System. In CAMELS, what does ‘L’ stand for?
My Answer is: Liquidity

Q26. Between hypothecation and pledge, where possession is transferred to the bank?

My Answer is: Pledge

Q27. Name the three types of risks for which banks are required to provide capital under Basel Capital Adequacy
Framework.

My Answer is: Credit Risk, Market Risk and Operational Risk

Q28. Write the formula for Receivables Turnover Ratio.

My Answer is: Credit Sales/Average Receivables

Q29. Following is Not a component of the Capital Cost of the Project (a) Raw Material Cost (b) Margin on Working
Capital (c) Preliminary Expenses (d) All of the above.

My Answer is: A

Q30. The documents to be verified to ascertain the purpose of loan/activity of a company is ------------

My Answer is: Memorandum of Association (MOA)

Q31. Expand NCLT in the context loan recovery.

My Answer is: National Company Law Tribunal

Q32. Expand MCLR.

My Answer is: Marginal Cost of funds based Lending Rate

Q33. Expand SLR in the context of banking regulation and state its current rate.

My Answer is: Statutory Liquidity Ratio & 20%

End-Term Examination – PGDM (2016 – 18) – Term IV: CBM – IMT Nagpur 3
Q34. Name the policy rate at which RBI lends to commercial banks and state the current rate.

My Answer is: Repo rate/6%

Q35. What takes care of bank’s unexpected losses?

My Answer is: Capital

Q36. Name the various loan assets under prudential accounting–asset classification norms.

My Answer is: Standard Asset/Sub-Standard Asset/Doubtful Asset/Loss Asset

Q37. What takes care of bank’s expected losses?

My Answer is: Provisions

Q38. What are the 3 components of MCLR?

My Answer is: Marginal Cost of Funds, Negative Carry Cost on a/c of CRR & Tenor Premium

Q39. BCBS defines one risk as “the risk of direct or indirect loss resulting from inadequate or failed internal
processes, people and systems or from external events”. Name this risk.

My Answer is: Operational risk

Q40. Bank’s investment portfolio is classified into 3 categories based on the purpose. Name them.

My Answer is: Held Till Maturity (HTM), Held For Trading (HFT) & Available For Sale (AFS)

Part B/Short Answer-Concept Check Questions (SA-CCQ)

[Time/Marks 3 x 2 = 6][Answer in a maximum of 4-5 sentences each.]

Q1. What are the various sources of non-interest income of a commercial bank? Why are they so important for a
bank?

My Answer is:

Sources of Non-interest income for the banks: Traditional Sources: Commission on Collection of
cheques & bills, Issues of DDs/BCs/other Funds Transfer or Remittance Services, LC/LG
Commission, Profits on foreign exchange business, Safe Deposit Locker Rent, Commission on Tax
Collection & Payment of Govt. Pensions, Commission on collection of utility bills/school fees,
Merchant banking services etc.

New/Non-traditional Sources: Para Banking services like commission on sale of life and non-life
insurance products, Mutual fund products etc.

End-Term Examination – PGDM (2016 – 18) – Term IV: CBM – IMT Nagpur 4
Because of severe competition, the spread or NIM of Banks is u/r strain/getting squeezed due to
upward pressure on average cost of funds and downward pressure on average yield on assets/loans.
In order to increase revenue and profit, all banks are giving more thrust on increasing non-int.
income. This helps in Economies of Scope, it’s a fee based/Non-fund based income and hence not
subject to int. rate volatility, regulatory capital requirement, no loan loss NPA provision.

Q2. Distinguish b/w working capital loans and term loans [w.r.t. their purpose, tenure, risk for the bank, source of
repayment etc.].

My Answer is:

#1. Purpose of Loan: Working capital loans are for financing acquisition of current assets like
Inventories Financing (Pre-Sale Financing) and Receivables Financing (Post-Sale Financing).

Term loan for acquisition of Fixed Assets (Capital Expenditure) like Factory Land, Factory
Building, Plant & Machinery, Equipments/Misc. Fixed Assets etc.

#2. Loan Tenure: Working capital loans are for short tenure up to 1 year whereas term loans
for long tenure [3 years to 10/15/20 years]

#3. Risk for the Financing Bank: Term loans are more risky for banks compared to working
capital loans as term loan are extended for long tenures and capital investment decisions are
more risky and irreversible.

#4. Source of Repayment: Repayment of term loans are from incremental profit or surplus
cash flow generation from the project/business, whereas the source of repayment for working
capital loans are from the sale proceeds of current asset/realization of debtors.

Q3. State the different types of retail loan products of a bank. Why there is a conscious shift of strategy by all banks
from corporate lending to retail lending? Explain.

My Answer is:

Different types of Retail loan products of a bank:

• Auto Loans (Car Loans & Two-Wheeler Loans)

• Home Loans (aka Mortgage Loans)

• Credit Card Loans

• Gold Loans (Loans ag. Gold Jewellery)

• Educational Loans

• Personal Loans/Loans ag. Salary

End-Term Examination – PGDM (2016 – 18) – Term IV: CBM – IMT Nagpur 5
 • Loans for Consumer Durables

• Loan ag. Securities [Shares/Bonds/MF Units/Life Insurance Policies]

• Loan ag. Property (LAP)

• Loan ag. Bank’s own FDs

All the banks, be it PSU banks or private banks, there is a shift of focus from corporate lending to
retail lending. Retail loan book of most leading banks in public and private sector is a sizable portion
of their total loan book and the retail loan book is growing much faster compared to the corporate
loan book and the total loan book. Among the retail loan portfolio, the share of home loan is the
largest followed by auto loan.

Reasons for conscious shift of strategy by all banks from corporate lending to retail lending:

#1. Low Credit off take/demand from corporate sector on banks [to whom banks would love to
lend] is low due to a host of factors like [low investment demand for capex/opex very often due to
economic downturn, large companies bargain for lower lending rates, often raise funds directly from
domestic and international financial markets at lower rates through shares/bonds/CPs etc.] and as a
result Banks are flush with funds/have lot of liquidity.

#2. Changing Consumer Demographics/Burgeoning Middle Class Population and rising

consumerism: Growing middle class population, moderation of tax rates, increasing personal
disposable income coupled with rising consumerism due to cultural shifts have given a fillip to
demand for various consumer/retail loans for financing home, automobiles and consumer durables
and even holidays. So banks with huge lendable resources due to low loan demand from corporate
sector seize this opportunity to their advantage.

#3. Cheap and easy availability of credit: Low & falling interest rates in the economy coupled
with competition among bank and non-bank players has lowered the cost of credit and further made
availability of credit easy and convenient and customer friendly. This has increased the demand for
retail credit for Personal Loans, Auto Loans, Home Loans etc.

#4. Retail loans are more remunerative, because unlike large companies individuals have low
bargaining power for demanding lower interest rates, which more than compensates the banks for
the higher transaction costs of retails loans compared to corporate loans.

#5. Low incidence of NPA in retail loans and Diversification of loan book/credit portfolio
compared to Corporate loans: Huge amounts of loans get concentrated in a few big companies and
projects whereas the same amount can be distributed over a quite large number of retail loans
covering home loans, auto loans, education loans, loan ag. securities, gold loans, personal loans and
credit card loans etc. and thereby resulting in diversification of credit risk. The incidence of NPA
in retail loans so far is low compared to corporate loan portfolio.

End-Term Examination – PGDM (2016 – 18) – Term IV: CBM – IMT Nagpur 6
Part C/Critical Thinking and Analytical Questions (CTAQ) [Time 34 minutes/Marks 24]
Q1. Suppose you are posted in the planning and strategy department of a commercial bank in their head office. Your
senior manager of the department has asked you to prepare a report on the key performance indicators of the bank
for the last 3 years to gauge the performance, profitability and productivity with your critical appraisal for
presentation to the top management committee. Enumerate the key parameters and important ratios you will include
under various heads covering among other things like business performance, operating efficiency, profitability, asset
quality and productivity etc. [8 to 10 sentences/Marks 2 x 5 = 10]

My Answer is: Data for the last 3 years

#1. Business Performance:

Parameters/Ratios:

a) Deposits & growth

b) Advances & growth

c) Total Business mix & growth

d) CASA deposits & growth

e) CASA ratio % = CASA Deposits/Total Deposits

#2. Operating Efficiency:

a) Non-Int. Income & growth

b) Non-Int. Exp. & growth

c) Cost to Income ratio (%) = Operating or Non-Int. Exp/[Net Int. Income + Non-Int.
Income]

d) Overhead Efficiency ratio = Non-Int. Income/Non-Int. Exp.

#2A. Vulnerability Ratios or Capital Risk Ratios or Solvency Ratios:

a) Tier I Capital

b) Tier II Capital

c) Total Capital Funds

d) CAR or CRAR [as per Basel 3 requirements]

End-Term Examination – PGDM (2016 – 18) – Term IV: CBM – IMT Nagpur 7
#3. Profitability:

Core Profitability Parameter/ratios:

a) Int. Income & growth

b) Int. Exp. & growth

c) Net Int. Income (NII) & growth

d) NIM (%) = NII/Avg. Earning Assets

Main Profitability Ratios:

a) AU (X) = Total Optg. Income (Int. Income + Non-Int. Income)/A

b) NPM (%) = PAT/Total Optg. Income (Int. Income + Non-Int. Income)

c) ROA (%) = PAT/A = NPM X AU

d) EM (X) = A/E

e) ROE (%) = PAT/E = ROA x EM

#4. Asset Quality:

a) Gross Credit & growth

b) Gross NPA & growth

c) NPA provisions & growth

d) Net NPA & growth

e) Net Credit & growth

f) GNPA ratio = Gross NPA/Gross Credit

g) NNPA ratio = Net NPA/Net Credit

h) Provision Coverage ratio (PCR) = NPA Provisions/Gross NPA

#5. Productivity:

Productivity Parameters/Ratios:

a) Avg. profit per employee = Net Income/Avg. no. of employees

End-Term Examination – PGDM (2016 – 18) – Term IV: CBM – IMT Nagpur 8
b) Avg. business per employee = Bus. Mix/Avg. no. of employees

c) Avg. profit per branch = Net Income/Avg. no. of branches

d) Avg. business per branch = Bus. Mix/Avg. no. of branches

Q2. Suppose you are working as the SME loan manger of a commercial bank. One borrower approached you for a
loan to purchase one equipment costing about Rs.25 lakh for his business. What type of loan you will consider for
him? State with the rationale. What are the papers/documents you will ask from him for considering the loan? What
relevant financial parameters or ratios you will analyse for appraising such loan? Explain with detailed formulas and
their appropriate benchmark values.

[Marks 1 + 1 + 5 = 7]

My Answer is:

a) What type of Loan to consider: Term loan as it is for acquisition of capital/fixed asset

b) Papers/Documents to be called for:

#1. Loan Application in the prescribed format

#2. KYC Details like [Proof Id, Proof of Address, Proof of Income (Financial statements for last 3
years and Projected Financial Statements for the duration of Term Loan), Purpose of Loan]

#3. Income Tax/Sales Tax Assessment Orders & Trade Licence

#4. Pro-forma Invoice or Quotation for the Equipment to be purchased from a reputed dealer

#5. Projected Profitability/Cash Flow Statement for the duration of the loan

c) Relevant Parameters/Financial Ratios for Bank’s Analysis for Loan Appraisal:

#1. Cost of the Project/Asset and Means of Finance

#2. Promoter’s Contribution & Debt-Equity Ratio: Debt-Equity Ratio = Total Debt/Equity =
TOL/TNW. A RATIO OF 2:1 IS NORMALLY ACCEPTABLE AND IN CASE OF SME CLIENTS
THIS COULD GO UPTO 3:1.

and Debt: Asset ratio = Total Debt/Asset and Solvency Ratio [aka TACR] = TTA/TOL = Total
Tangible Assets/Total Outside Liabilities = [TA – IA]/[CL + TL]. BENCHMARK IS 1.5.

End-Term Examination – PGDM (2016 – 18) – Term IV: CBM – IMT Nagpur 9
#3. Break Even Point and Margin of Safety:

1. BEP IN QUANTITY OR UNITS: TOTAL FIXED COST/(CONTRIBUTION PER UNIT) =

TOTAL FC/(SP-VC) PER UNIT

OR BEP IN UNITS = (FIXED COST/TOTAL CONTRIBUTION) X EXP. PRPDUCTION IN

UNITS IN THE YEAR

2. BEP IN REVENUES OR RUPEES : BEP IN UNITS X SALE PRICE PER UNIT

OR BEP IN RUPEES = (FIXED COST/TOTAL CONTRIBUTION) X EXP. SALES REALISATION

IN THE YEAR

BEP IN TERMS OF INSTALLED CAPACITY OR CAPACITY UTILISATION (BEPCU) = (FIXED

COST/TOTAL CONTRIBUTION) X EXP. CAPACITY UTILISATION (%) IN THE YEAR

 A PROJECT WITH LOW BEP IS GENERALLY PREFERRED FOR FINANCE

MARGIN OF SAFETY (MoS) CAN BE COMPUTED IN 3 WAYS:

#1. ABSOLUTE MoS = ACTUAL OR PROJECTED SALES – BEP SALES.

#2. RELATIVE MoS RATIO = (ACTUAL OR PROJECTED SALES – BEP SALES)/(ACTUAL OR

PROJECTED SALES) = 1 – BEP SALES/ (ACTUAL OR PROJECTED SALES). HIGHER MoS IS
BETTER.

#3. MARGIN OF SAFETY IN INSTALLED CAPACITY (%).

 THE CUSHON NEEDS TO BE HIGHER IF THE BUSINESS IS MORE SUSCEPTIBLE TO

ECONOMIC/BUSINESS CYCLES AND MORE USE OF FINANCIAL LEVERAGE AND THE
POSITION OF THE BUSINESS IN THE INDUSTRY IS WEAK. HIGHER THE MoS, STRONGER
IS THE UNIT.

#4. DEBT REPAYING CAPACITY AND DEBT SERVICE COVERAGE RATIO (DSCR) :

 DSCR MEASURES THE CASH FLOW ABILITY OF THE FIRM TO MEET ITS DEBT SERVICE
BURDEN.

 (I) FUNDS OR CASH FLOW AVAILABLE FOR DEBT SERVICING = PAT + DEPRECIATION +
OTHER NON-CASH EXP. + INT. ON TL (II) DEBT SERVICE BURDEN OR COMMITMENT = TL
ANNUAL INSTALMENT + TL INTEREST. THUS DSCR IS CALCULATED AS A RATIO (I/II).

 BENCHMARK FOR DSCR GENERALLY IS AVERAGE 2 FOR THE PROJECT PERIOD/TERM

LOAN DURATION BUT IN NO YEAR IT SHOULD FALL BELOW 1.5.

End-Term Examination – PGDM (2016 – 18) – Term IV: CBM – IMT Nagpur 10
Q3. Describe the mechanism of a letter of credit (LC) by means of a flow chart (diagram) with neatly labeled
sequential steps. How does an LC work as a credit enhancement device for an importer and credit risk mitigant for
an exporter. Explain.

[1 Chart & 2-3 sentences/Marks 5 + 1 + 1 = 7]

My Answer is:

LC MECHANISM/Diagram:

LC MECHANISM
1 Purchase Order
Exporter/Beneficiary
Importer /LC
5
In USA
Applicant in INDIA Shipment of Goods
L/C (Letter of Credit) Application

Shipping Documents & Time Draft

L/C Notification

2
4 6

3 L/C ISSUED

LC Issuing Bank
7 Shipping Documents & Time Draft American Bank
(Importer’s Bank in (Exporter’s Bank)
Draft Accepted (B/ACreated)
INDIA) Advising Bank

LC as a credit enhancement device for an importer:

a) LC improves/enhances the credibility of the importer/buyer to buy on credit and also helps to
finalise difficult contract with the seller on the basis of the superior credit of the LC issuing bank

b) Eases financial position of the buyer/importer since no need of advance payment to the
seller/exporter

LC as credit risk mitigant for an exporter:

End-Term Examination – PGDM (2016 – 18) – Term IV: CBM – IMT Nagpur 11
a) LC protects the exporter/seller against importer’s default/credit risk. In LC based transaction
the exporter takes a credit risk on the buyer’s bank [which is a better risk compared to the buyer]
rather than on the buyer.

b) With LC the exporter is absolved from the botheration to know in detail of the exchange control
regulations of the importer’s country and is also insured to some extent by changes in such
regulations.

Part D/Numerical and Computational Questions (NCQ) [Time 50 minutes/Marks 30]

[Write the formula, a few intermediate steps and then the final answer.]

Q1. The following information relates to the loan portfolio of a bank as on 30/06/2017:

Nature of Loan Asset Amount (Rs. in Crores) before

Provision

Standard Asset 76,000

Sub-Standard Asset : (3,000)

Secured Exposure 2,000

Unsecured Exposure 1,000

Doubtful Asset : (2,000)

up to 1 year 1,200

1 – 3 years 500

above 3 years 300

Loss Asset 200

Additional information:

(i) Standard asset carries a provision of 0.40%

(ii) The proportion of security available for the doubtful assets is 70%, 40% and 20% for the three
categories respectively.
Based on the above information, answer the following questions:

[Time 10 minutes/Marks 6 + 2 = 8]

(i) Calculate the provisioning requirement of the bank as on 30/06/2017.

My Answer:

End-Term Examination – PGDM (2016 – 18) – Term IV: CBM – IMT Nagpur 12
 Suggested Solution
 Calculation of Provisioning Requirement :

Asset Class/Amount Provisioning Rate Provisioning Requirement

Standard Asset/76,000 0.40% 304
Sub-Standard Asset/3,000
Secured Exposure/2,000 15% 300
Unsecured Exposure/1,000 25% 250
550
Doubtful Asset/2,000 Unsecured
Portion/100% 1200(0.30*1+0.70*0.25)
Up to 1 year/1,200 Secured Portion/25% = 570
1 – 3 years/500 Secured Portion/40% 500(0.60*1+0.40*0.40)
Above 3 years/300 Secured Portion/100% = 380
300(0.80*1+0.20*1)
= 300
1,250
Loss Asset/200 100% 200
Total Provision Required 2,304
Out of which 2,000
NPA Provision

(ii) Calculate the Net NPA/Net Credit ratio.

My Answer: NNPA ratio = Net NPA/Net Credit = [Gross NPA – NPA Provisions]/[Gross Credit
– NPA Provisions] = [5,200 – 2,000] /[81,200 -2,000] = 3,200/79,200 = 4%

End-Term Examination – PGDM (2016 – 18) – Term IV: CBM – IMT Nagpur 13
Q2. The following information has been summarised after due analysis by a Loan Appraisal Manager of a
Commercial Bank in respect of a loan applicant. You have joined the bank as a Trainee Loan Manager. You are
asked to assess the Working Capital needs of the borrower and answer the following questions. N.B. If the
available NWC is more than the minimum NWC required, take the available NWC.

Amount in Rs. Lakhs

Accepted Projected Gross Sales for the next Year 4800

Raw Materials Purchased and Consumed P.a. 2,880

Cost of Production and Sales p.a. 3,840

Stores and Spares consumed p.a. 180

Other Current Assets 130

Available NWC 500

Holding Periods In months

Raw Materials 2.00

Work in Progress 0.50

Finished Goods 1.00

Receivables 1.50

Stores and Spares 6.00

Credit Purchase 1.50

Based on the above information, answer the following three questions :

[Marks 2 + 4 + 2 = 8]

End-Term Examination – PGDM (2016 – 18) – Term IV: CBM – IMT Nagpur 14
 (i) Calculate the Permissible Bank Finance (PBF) for the borrower assessed under the
Turnover method (Nayak Committee).

Sl. # Items of Working Capital Amount/Rs. in lakhs

a. Accepted Projected Gross Sales for next FY 4800

b. 25% of the accepted Projected Sales as Working 1200

Capital Gap (a * 0.25)
c. 5% of the accepted projected Sales as minimum 240
borrower’s margin or minimum NWC required (a *0.05)
d. Available NWC in the System 500

e. b - c 960

f. b - d 700

g. Permissible Bank Finance (PBF)

(b – c) or (b – d) to be decided in consultation with
the borrower
h. In this case as per question, PBF is (b – d) 700

End-Term Examination – PGDM (2016 – 18) – Term IV: CBM – IMT Nagpur 15
 (ii) Calculate the Working Capital Gap

Working Capital Components Holding Period Cost per month/ Total investment/
(1) in months (2) Rs. in lakhs (3) Rs. in lakhs (4 =
2 * 3)

Raw Materials (RM) 2.00 240 480

Work-in-progress (WIP) 0.50 320 160

Finished Goods (FG) 1.00 320 320

Receivables 1.50 400 600

Stores & Spares/ Consumables 6.00 15 90

Other Current Assets (OCA) --- --- 130

Total Current Assets (TCA) 1,780

Less : Other Current 360

Liabilities (OCL)/

1. Creditors for Purchases 1.50 240 360

(Trade Creditors)

2. Creditors for Expenses --- --- ---

(Other Creditors)

Working Capital Gap (WCG) 1,420

End-Term Examination – PGDM (2016 – 18) – Term IV: CBM – IMT Nagpur 16
 (iii) Calculate the Working Capital Requirement (aka Maximum Permissible Bank Finance
or MPBF) for the borrower under Tandon II method of lending (aka Holding Period
Method or MPBF II method).

Working Capital Gap (WCG) 1,420

Margin or NWC / 500

Minimum Required
(25% of TCA as per Tandon or 445
MPBF II method)

Available in the System : 500

Whichever is higher : 500

Maximum Permissible Bank 920

Finance (MPBF) = WCG – NWC

Q3. Mr. X, a salaried person, approaches IBHFL Ltd., a housing finance company, for sanction of a Home Loan.
The all inclusive cost (including stamp duty & registration etc.) of a new ready-to-enter flat, he wants to buy, is
Rs.50,00,000/-. IBHFL stipulates a maximum loan to value ratio (LTV) of 80%, i.e., minimum borrower’s margin
required is 20% of the cost of the house. Borrower’s age at the time of application is 45 years and his retirement age
is 65 years. Borrower’s current gross monthly salary is Rs.80,000/-. IBHFL has a policy of maximum loan
instalment to (gross) income ratio (IIR) 60% and maximum loan term of 25 years including the maximum initial
moratorium or loan holiday period of 18 months, wherever applicable. In case of ready-to-enter house or flat,
IBHFL does not grant any repayment holiday. IBHFL has a policy of granting maximum loan duration to an
applicant matching with his retirement age, but not beyond. The applicant, Mr. X, wants to avail maximum possible
loan amount and maximum permissible loan repayment term. Mr. X wants to avail the fixed rate home loan which is
currently 12% p.a. Interest on home loan is charged/compounded monthly.

You are the Home Loan Appraisal Manager at IBHFL. Calculate the maximum home loan amount (to nearest lakh)
that can be granted to Mr. X based on the above information.

[Marks 1 + 3 + 1 = 5]

[(N.B. : PVIFA (12%, 10) = 5.650, PVIFA (1%, 120) = 69.701, PVIFA (12%, 15) = 6.811, PVIFA (1%, 180)
=83.322, PVIFA (12%, 20) = 7.469, PVIFA ( 1%, 240) = 90.819]

My Answer:

End-Term Examination – PGDM (2016 – 18) – Term IV: CBM – IMT Nagpur 17
#1. Parameter 1 based on cost & margin, i.e., LTV: Property Cost is Rs.50,00,000/-. Maximum
LTV ratio as per IBHFL norm is 80%. So maximum possible loan amount is: Rs.50,00,000/- * 0.80 =
Rs.40,00,000/-.

#2. Parameter 2 based on Repayment capacity, i.e., Maximum permissible EMI & Maximum
possible loan repayment term:
Maximum possible EMI is: Maximum IIR * Gross Monthly Income = 0.60 * Rs80,000/- = Rs.48,000/-

Normal maximum home loan term is 25 years including the repayment holiday period, if any.
Borrower’s age at the time of application is 45 years and retirement age is 65 years, by which loan
should be fully repaid as per IBHFL policy. Borrower wants to avail maximum possible loan term and
loan amount. So the maximum permissible loan term is 65 – 45 = 20 years or 240 months. Loan
carries an int. rate of 12% p.a. compounded monthly, i.e., int. rate per month is 1%. Based on the
maximum EMI of Rs.48,000/- (annuity = A or PMT), maximum loan term of 240 months and int. p.m.
of 1%, we can calculate the maximum loan that can be granted based on repayment capacity. That is
the PV of the annuity, PVAn = (PMT or A) * PVIFA (1%, 240) = 48,000 * 90.819 = Rs.43,59,312/-
(approximately).

Maximum Eligible loan limit: Lower of parameter 1 or parameter 2.

So the maximum eligible loan amount is (as per parameter 2) Rs.40,00,000/-

End-Term Examination – PGDM (2016 – 18) – Term IV: CBM – IMT Nagpur 18
Q4. Here is the extract of the Projected Profitability Statement of M/s Finecast Pvt Ltd., a Term Loan applicant for
the bank.

(Figures in Rs. ‘000s)

Year 1st Year 2nd Year 3rd Year 4th Year 5th year

Projected Sales 22500 27000 31500 36000 36000

Total Variable Costs 17250 20745 24258 27960 28042

Total Fixed Costs 6180 5372 4871 4661 4345

Net Profit or PAT - 930 883 1442 2027 2168

Term Loan 1000 1000 1000 1000 1000

Instalment

Term Loan Interest 750 600 450 300 150

Depreciation 2520 1672 1131 781 551

Preliminary Exp. 100 100 100 100 100

Written off

Based on the above information, answer the following three questions :

[Time 15 minutes/Marks 2 + 1 + 6 = 9]

(i) Calculate the Break Even Point (BEP) in terms of Sales Revenue for the year 4.
My Answer:

BEP in terms of Sales Revenue for Yr. 4 = (Fixed Cost/Total Contribution) * Expected Sales =
Rs.208,70,000/-

(ii) Calculate the Margin of Safety ratio for the year 4.

My Answer:

Margin of Safety (MoS) = (Proj. Sales – BEP Sales)/Proj. Sales = (36000-20870)/36000 =

42.03% ~ 42%

(iii) Calculate the Debt Service Coverage Ratio (DSCR) for the loan proposal for years 3, 4 and 5.
My Answer:
DSCR = Funds available for Debt Servicing/Debt Service Burden = (PAT + Deprn. + Prelim.
Exp. w/off + TL Int.)/(TL Inst. + TL Int.)

End-Term Examination – PGDM (2016 – 18) – Term IV: CBM – IMT Nagpur 19
 Item Yr. 3 Yr. 4 Yr. 5

PAT 1,442 2,027 2,168

Depreciation 1,131 781 551

TL Interest 450 300 150

Preliminary 100 100 100

Exp. W/Off

Funds 3,123 3,208 2,969

Available for
Debt
Servicing (I)

TL Instalment 1,000 1,000 1,000

TL Interest 450 300 150

Debt Service 1,450 1,300 1,150

Burden (II)

DSCR = 2.154 2.468 2.582

(I/II)

(DSCR)Yr. 3 = 2.15, (DSCR)Yr. 4 = 2.47, (DSCR)Yr. 5 = 2.58

********************** THE END *************************

End-Term Examination – PGDM (2016 – 18) – Term IV: CBM – IMT Nagpur 20