Bca PDF

Types of Borrowers
The law identifies a Legal entity as under…
Legal
Natural
Entities
Persons
(Non-
(Individuals)
Individuals)
Types of Borrowers on the basis of Legal status
Individuals Non-Individuals
1) Single 1) Sole Proprietor
2) Joint 2) Partnership Firm
3) Illiterates 3) Limited Liability Partnership
4) Differently Enabled 4) Private Limited Company
5) Paradhanashin Women 5) Public Limited Company
6) Minors 6) One Person Company
7) Insolvents/Lunatics 7) Trust, Association, Society, Club
8) Power of Attorney Holder 8) Self Help Group
9) Government / Local Bodies
Legal Formalities for a contract of loan - Agreement
 Loan process /Legal Formality differs depending upon type of
borrowers
 Minors, Insolvents & Lunatics are ineligible for Loans as they
are incompetent to enter into any contracts/ any contract with
them is not enforceable in court of law
 Non-Individuals, the borrowing powers are derived from the
bye-laws, resolutions, constitutional documents
 Before proceeding to processing of loan, we must know
whether the borrower is competent to borrow
 Before execution of loan documents, we must understand
the competency of the person to bind the entity and security
obligations.
Features of Individual Customers
Type of Individual Borrower specific Formalities
Single borrower Solely sings application / loan documents and responsible to repay loan
Joint borrowers All the joint borrowers to sign application / loan papers & are responsible to
repay loan jointly and severally
Illiterate borrowers  To sign a declaration that terms & conditions explained by bank officials in
his language / understood by him (needs a witness declaration)
 Thumb Impression to be duly attested in application / loan documents
Differently Enabled Blind- Application / Loan documents duly attested by person known to bank &
borrower borrower
Paradhanashin Verify Identity of borrower while execution of documents and establish
Women documents were executed with free consent (obtain witnesses, if necessary)
Power of Attorney Ensure POA is “Specific POA”, Verify specific authority to raise loan / to sign
Holder documents on behalf of principal, to receive disbursement / use the loan
proceeds
Examples of Individual Borrowers & Loans
Type of Individual Borrower specific Formalities
Single Borrower Salaried Employee, Self-Employed Professionals, Women Entrepreneur,
Senior Citizens, Small Business men
Joint Borrowers Father & Son jointly seeking Education Loan, Husband & Wife seeking
Housing loan Jointly
Illiterate Borrowers A farmer or an individual who cannot read or write, approaching you for a
loan
Differently Enabled A Person who is employed as Telephone Operator in an organisation

seeking Loan,
Paradhanashin Women who observes Purdha (usually Mohammeden & traditionally
Women Borrower Rajasthani) and seeking loan from Bank or offering her property as security
for the loan of her family members
Power of Attorney An NRI outside India has appointed one resident person as his agent to avail
Holder HL with you, through a Power of Attorney
Non-Individual Constituents
Sole Proprietor
Partnership Firm
Limited Liability Partnership
Hindu Undivided Family
Joint Stock Company
One Person Company
Trust, Association, Society, Club
Self Help Group
Government / Local Bodies
Sole Proprietor
 A business owned by an individual with

a trade name or his own name in case
of Professionals
 Individual is known as Sole Proprietor
 He takes all business decisions
 He should be major and competent to
enter in to contract
 Proprietor is solely responsible for all
business transactions / business results
( Profit/ Loss)
 For his business loans all his personal
properties are attachable
Sole Proprietor
 KYC – ID Proof of the Proprietor

 KYC – Residential address proof
 PAN Card of the Proprietor
 KYC – Business Entity – GST registration –
Profession Registration
 Local Body Municipal / Corn License – Shops &
establishment
 Tax Paid Accounts Financials
 Tax Paid bill of shop, if Owned
 Rent Agreement, if Rented
 Telephone Bills
Partnership Firm
 Two or more persons joining to carry business

 To share profit or loss
 An entity defined under Indian Partnership Act 1932
 Backed by a Partnership Deed signed by all Partners
 Deed specifies scope & other terms of partnership
 Deed specify who can open bank account
 Deed specify who will sign on behalf of company
 If not specified, all partners have to sign documents etc.
 All partners are personally liable for all business obligations
 Minors can be partners for only sharing profit but not
responsible for any liability arising out of partnership
Partnership Firm
 KYC of the Firm

 PAN Card of the Firm – (With Date of Incorporation)
 Partnership Deed – Verify
 Partnership Registration Certificate
 GST / Tax Registration
 Trade Licence – Shops & Establishments
 Income Tax Returns
 Tax Paid receipt of the business premises
 Rental Agreement of the Premises
 KYC of all Partners & Photos
 Address proof of all partners
 All Partners to sign loan documents
 Minor not to sign the loan documents
 Partnership with Limited Liability

 Under LLP Act 2008
 To be registered with Registrar of Companies
 Liability of the Partners limited to the extent of
their contribution
 LLP Agreement by all partners
 LLP Agreement contains scope of the
partnership, Rights & Liabilities of the partners
 Minimum 2 partners – Max – no limit
 Salient features of Company & partnership
 No Compulsory Audit (Unlike Companies)
 Liberalized regulations from ROC
 Certificate of Incorporation of LLP

 LLP Agreement of Partners
 KYC of the Firm
 PAN Card of the Firm – (With Date of Incorporation)
 Tax Paid receipt of the business premises / Rental
Agreement
 KYC of all Partners & Photos
 Address proof of all partners
 All Partners to sign loan documents
• A Legal Entity with perpetual existence
defined in Hindu Law
• Eldest member is named as ‘KARTHA”
• Kartha manages Business / Operates
account
• All other members of family are co-percenters
• On Death of Kartha, next eldest becomes
Kartha
• HUF ends when family property is partitioned
• Death/ Insolvency of any member, will not
affect the HUF.
• HUF Family properties are liable for the
advances of HUF
 HUL Letter to be signed by all
 Authorisation Letter to be signed by all
 Obtain Family Tree & update
 KYC documents of all Members of Family
 Kartha will sign the application / loan documents
 PAN Card of the HUF
 Tax Paid receipt of the business premises /
Rental Agreement
 KYC of all Co-Partners & Address
Joint Stock Company – Pvt & Public
 A group of people join to form company
 Legal entity as defined in Companies Act
 It is a perpetual business unit
 Members / Shareholders contribute in form of shares
& Shares are transferable
 Shareholders liability restrict to extent of their shares
 Formation requires legal formalities
 To be registered with Registrar of Companies
 Shareholders select Directors to manage the affairs
of the company & Board appoints Managing Director
 Uses Company’s common seal
 Has separate legal existence than that of
shareholders
Types of
Companies
Capital
Ownership
Holding
Other than
Private Public Govt
Govt
Item Private Ltd Public Ltd
Company Company
Min. Members 2 7
Max. Members 200 No Limit
Min. Directors 2 3
Transfer of With the Freely
Shares consent of
other share
holders
Raise capital No Yes
from Public
Important Documents
Memorandum of Articles of Board Resolution
Association Association
Defines objectives & Specifies internal To Open an Account
Powers of Company rules & regulations with the Bank
It is the charter of the Authorises to Borrow

company Specifies Authority
Board to function & Responsibilities of Authorise to offer
within scope of MOA Directors and other Security & create
stakeholders. charge on security
Company not liable
for transactions not Directors of Public Persons authorised to
specified in MOA Ltd Company can sign documents
not borrow beyond
Contains Clauses like the net worth of the To have companies
Name Clause, Address company. Common Seal
Clause, Object Clause,
Authorised Capital General Body
Clause Meetings
Bank to obtain and Verify
1) Certificate of Incorporation – CIN
2) Memorandum of Association
3) Articles of Association
4) Board Resolution to borrow & offer securities
5) PAN Card of Company
6) GST & Tax Registrations
7) Details of the present Directors – DIN
8) KYC of the Directors
9) Search Report from ROC
10) Audited Financial Statements – IT Returns
11) Annual Report of the Company
One Person Company
 Only Citizen of India / Resident Indian can form

only one “OPC” as single member/ shareholder
 To be registered as Pvt Ltd Co
 Can be only one Director – Max -15
 Sole Member can nominate a Resident Indian
as nominee
 OPC is exempt from:
 Holding Annual General Meeting
 Cash Flow need not be prepared under
Financial Statements
 Annual Returns can be signed by Director
instead of Company Secretary
One Person Company
Bank to obtain and Verify

1) Certificate of Incorporation – CIN
2) Memorandum of Association
3) Articles of Association
4) PAN Card of Company
5) GST & Tax Registrations
6) Details of the present Directors – DIN
7) KYC of the Directors
8) Search Report from ROC
9) Audited Financial Statements – IT Returns
10) Documents execution to include the One
Person
Trusts
 Established under Indian Trust Act 1882
 Donor/Author creates Trust for lawful activity for
benefit of beneficiaries
 Trust Deed specifies objectives of Trust
 Trust can be Private Trust (specific Individuals) or
Public Trust (General Public)
 Charitable Trusts to be registered with Commissioner
of Charities
 Donor/Author appoints a Trustee to carry out specific
activities
 Advances to trusts require application to be wetted by
the law department
 The purpose and documentation are case to case
basis
Trusts
Banker has to Verify
 Trust Deed / Power & Duties of Trustee
 Trust Registration Certificate / PAN
 Authority to Borrow in Trust Deed
 KYC Compliance of Donor/Author and Trustee
 Advances to trusts require application to be
wetted by the law department
 The purpose and documentation are case to
case basis
Associations / Clubs / Societies
 People joining together for a
common goal
 Co-op Societies to be registered
with Registrar of Societies
 Other Societies to be Registered
with Registrar of Assurance
 Bye-Laws contain rules &
regulations
 Office bearers appointed by
members
 Basically non-profit organisations
Associations Clubs Societies

 Apartment Residents  Sports Clubs  Housing Co-op
Association  Rotary Club Societies
 Association of Mutual  Delhi Gymkhana Club  Agriculture Producers
Funds in India  Cosmopolitan Club & Merchants Co-op
 Sugar Mill Owners  Mohan Bagun Football Societies (APMC)
Association Club  Credit Co-op Societies
 Chamber of Commerce  Officers’ Clubs  Consumer Co-op
 Telecom Regulatory Societies
Authority of India  Sports Association
 Aspects to be looked into while lending to Associations,
Clubs & Societies
 KYC compliance of office bearers / Authorised signatories
 List of office bearers with Address
 Registration Certificate
 Certified copy of resolution authorising borrowing /
Authorised Signatories
 PAN / Form60 of Office Bearers/ Authorised Signatory &
of Assn, Club, Society
 Borrowings can not be generalised
 Case to Case basis appraisal assessment documentation
TYPES OF BORROWERS
Thank you all …………

Understanding Balance Sheet
Building up of Balance Sheet
 A transaction statement will be appearing on the top
 A Format of Sources and Uses will appear at the bottom
 Write down the format in your Note Book
 You need to record the transaction statement in the format
 Do not total till completion of all 10 transactions
 When next entry appears, you have to update the entry in the same format
 After completion of all entries, you will be totaling both sides of the format
1) Praveen Started his business today and has invested Cash of Rs. 12,00,000
Liabilities – Sources of Funds Amount Assets – Uses of Funds Amount
Total Total
1) Praveen Started his business today and has invested Cash of Rs. 12,00,000

Capital Account of Praveen 12,00,000 Cash 12,00,000
Total 12,00,000 Total 12,00,000

2) Praveen Opens a Current Account with ICICI Bank and does an initial deposit of
Rs. 10,00,000 out of the Cash on Hand
Total 12,00,000 Total 12,00,000

2) Praveen Opens a Current Account with ICICI Bank and does an initial deposit of
Rs. 10,00,000 out of the Cash on Hand
CA with ICICI Bank 10,00,000
Total 12,00,000 Total 12,00,000

3) Praveen paid Rs. 60,000 to the owner of the building as Lease Deposit by
issuing a cheque of the ICICI Account (This will be refunded only after vacating)
Total 12,00,000 Total 12,00,000

3) Praveen paid Rs. 60,000 to the owner of the building as Lease Deposit by
issuing a cheque of the ICICI Account (This will be refunded only after vacating)
Lease Deposit 60,000
Total 12,00,000 Total 12,00,000

4) Praveen purchases Furniture of Rs. 1,50,000 for the shop and pays the amount
through cheque drawn on ICICI Bank
Total 12,00,000 Total 12,00,000

4) Praveen purchases Furniture of Rs. 1,50,000 for the shop and pays the amount
through cheque drawn on ICICI Bank
Furniture 1,50,000
Total 12,00,000 Total 12,00,000

5) Praveen purchased Stocks of Rs. 8,50,000 from different Wholesalers and paid
Rs.7,50,000 by issuing cheque of ICICI Bank and Rs.1,00,000 Cash
Furniture 1,50,000
Total 12,00,000 Total 12,00,000

5) Praveen purchased Stocks of Rs. 8,50,000 from different Wholesalers and paid
Rs.7,50,000 by issuing cheque of ICICI Bank and Rs.1,00,000 Cash
CA with ICICI Bank 40,000
Furniture 1,50,000
Stock 8,50,000
Total 12,00,000 Total 12,00,000

6) Praveen purchased Stocks of Rs. 3,50,000 from his well known Business firm
Swastik Enterprises on Credit Basis and promised to pay within one month
CA with ICICI Bank 40,000
Furniture 1,50,000
Stock 8,50,000
Total 12,00,000 Total 12,00,000

6) Praveen purchased Stocks of Rs. 3,50,000 from his well known Business firm
Swastik Enterprises on Credit Basis and promised to pay within one month
Creditors – Swastik Enterprises 3,50,000 CA with ICICI Bank 40,000
Furniture 1,50,000
Stock 12,00,000
Total 15,50,000 Total 15,50,000

7) Praveen purchased a Delivery Vehicle costing Rs.3.90 Lacs by availing a Auto
Loan of Rs. 3 Lacs from ICICI and paid the margin Rs. 90,000 Cash to the dealer
Furniture 1,50,000
Stock 12,00,000
Total 15,50,000 Total 15,50,000

7) Praveen purchased a Delivery Vehicle costing Rs.3.90 Lacs by availing a Auto
Loan of Rs. 3 Lacs from ICICI and paid the margin Rs. 90,000 Cash to the dealer
Capital Account of Praveen 12,00,000 Cash 10,000
Term Loan – ICICI Bank 3,00,000 Lease Deposit 60,000
Furniture 1,50,000
Stock 12,00,000
Motor Vehicle 3,90,000
Total 18,50,000 Total 18,50,000

8) Praveen availed a Cash Credit loan of Rs. 5.00 Lacs and purchased Stocks of
Rs. 4.00 Lacs by payment through CC and repaid Creditors 1.00 Lakh from CC
Furniture 1,50,000
Stock 12,00,000
Total 18,50,000 Total 18,50,000

8) Praveen availed a Cash Credit loan of Rs. 5.00 Lacs and purchased Stocks of
Rs. 4.00 Lacs by payment through CC and repaid Creditors 1.00 Lakh from CC
Cash Credit – ICICI Bank 5,00,000 Furniture 1,50,000
Stock 16,00,000
Total 22,50,000 Total 22,50,000

9) Praveen issued a cheque of Current account and his personal use Rs. 20,000
and did not want it to be reduced from his capital
Stock 16,00,000
Total 22,50,000 Total 22,50,000

9) Praveen issued a cheque of Current account and his personal use Rs. 20,000
and did not want it to be reduced from his capital
Stock 16,00,000
Drawings Account 20,000
Total 22,50,000 Total 22,50,000

10) Praveen made sales of Rs. 4,00,000 to Mahesh Stores and received cash of
Rs. 40,000 and the balance will be received after one month
Stock 16,00,000
Total 22,50,000 Total 22,50,000

10) Praveen made sales of Rs. 4,00,000 to Mahesh Stores and received cash of
Rs. 40,000 and the balance will be received after one month
Stock 12,00,000
Debtors – Mahesh Stores 3,60,000
Total 22,50,000 Total 22,50,000

Now let us take a look at the format …
Stock 12,00,000
Debtors – Mahesh Stores 3,60,000
Total 22,50,000 Total 22,50,000

Can you Classify the items under the headings
Capital Account (Net Worth) Fixed Assets
Term Liabilities Non-Current Asset
Current Assets
Current Liabilities
Miscellaneous Assets
Total 22,50,000 Total 22,50,000

Let us complete the liabilities first ….
Capital Account of Praveen 12,00,000

Term Loan – ICICI Bank 3,00,000
Current Assets
Current Liabilities
Creditors – Swastik Enterprises 2,50,000
Cash Credit – ICICI Bank 5,00,000
Total 22,50,000 Total 22,50,000

Now let us complete assets Side
Capital Account of Praveen 12,00,000

Term Loan – ICICI Bank 3,00,000
Current Assets
Current Liabilities
Creditors – Swastik Enterprises 2,50,000
Cash Credit – ICICI Bank 5,00,000
Total 22,50,000 Total 22,50,000

Now the Balance sheet is ready for Analysis
Capital Account of Praveen 12,00,000 Furniture 1,50,000
Current Assets
Current Liabilities Stock 12,00,000
Creditors – Swastik Enterprises 2,50,000 Debtors – Mahesh Stores 3,60,000
Cash Credit – ICICI Bank 5,00,000 CA with ICICI Bank 20,000
Cash 50,000
Total 22,50,000 Total 22,50,000
For Analysing a Balance sheet the Assets & Liabilities are
to be grouped as under….
Liabilities Assets
1 Capital & Reserves 1 Fixed Assets
2 Long Term Liabilities 2 Investments
3 Current Liabilities 3 Non-Current Assets
4 Provisions 4 Current Assets
5 Intangible Assets
6 Miscellaneous Assets
Total Total
Classify the following Liabilities for Balance Sheet Analysis
1 Sundry Creditors
2 Term Loan Instalments (payable after next 12 months)
3 Reserves and Surplus
4 Unsecured Loans
5 Income received in advance
6 Provision for Tax
7 9% Debentures
8 Term Loan Instalments (payable in next 12 months)
9 Share Capital
10 Outstanding Expenses
11 Provision for Dividend
12 Bank Borrowings for Working Capital
Classify the following Liabilities for Balance Sheet Analysis
1 Sundry Creditors Current Liabilities
2 Term Loan Instalments (payable after next 12 months) Long Term Liabilities
3 Reserves and Surplus Capital & Reserves
4 Unsecured Loans Long Term Liabilities
5 Income received in advance Current Liabilities
6 Provision for Tax Provisions
7 9% Debentures Long Term Liabilities
8 Term Loan Instalments (payable in next 12 months) Current Liabilities
9 Share Capital Capital & Reserves
10 Outstanding Expenses Current Liabilities
11 Provision for Dividend Provisions
12 Bank Borrowings for Working Capital Current Liabilities
Classify the following Assets for Balance Sheet Analysis
1 CA Bank balance @ ICICI Bank
2 Furniture & Fixture
3 Sundry Debtors
4 Cash in hand
5 Closing Stocks
6 Goodwill
7 Prepaid Expenses
8 Land & Building
9 Profit & Loss (not written off)
10 Vehicles
11 Deferred Revenue Expenditure
12 Patent & Trade Marks
13 Preliminary and pre-operative expenses
14 Fixed Deposits @ ICICI Bank
15 Plant & Machinery
Classify the following Assets for Balance Sheet Analysis
1 CA Bank balance @ ICICI Bank Current Asset
2 Furniture & Fixture Fixed Asset
3 Sundry Debtors Current Asset
4 Cash in hand Current Asset
5 Closing Stocks Current Asset
6 Goodwill Intangibles
7 Prepaid Expenses Current Asset
8 Land & Building Fixed Asset
9 Profit & Loss (not written off) Miscellaneous
10 Vehicles Fixed Asset
11 Deferred Revenue Expenditure Miscellaneous
12 Patent & Trade Marks Intangibles
13 Preliminary and pre-operative expenses Miscellaneous
14 Fixed Deposits @ ICICI Bank Investment
15 Plant & Machinery Fixed Asset
FORMAT OF BALANCE SHEET
Liabilities Assets
Capital & Reserves Fixed Assets*
a) Share Capital a) Land & Building
b) Reserves and Surplus b) Plant & Machinery
Long Term Liabilities c) Furniture & Fixture
a) Term Loan d) Vehicles
b) Debentures Investments
c) Unsecured Loans a) Statutory Deposits / Investment in Associates
Current Liabilities b) Deposits with the Bank
a) Sundry Creditors Current Assets
b) Bank Borrowings a) Cash in hand
c) Outstanding Expenses b) Bank balance
d) Income received in advance c) Sundry Debtors
e) Term Loan Instalments (payable in next 12 months) d) Prepaid expenses
Provisions e) Closing Stocks
a) Taxation Intangible Assets
b) Dividend a) Goodwill
b) Patent & Trade Mark
Misc. Assets
a) Preliminary and pre-operative expenses
b) Profit & Loss (not written off)
Total Total
Balance Sheet - Long Term Short Term Concept
Liabilities Assets
Net Worth
Fixed Assets
(Owned Funds)
Term Liabilities
Non-Current Assets
(Borrowed Funds)
NWC (Margin –WC)
Current Liabilities Current Assets
Long Term Funds
Short Term Funds

Thank you all …………………
Terminology, Trial Balance, Trading
Account, Profit & Loss Account
Objectives
 Explain Basic Terminologies in
Financial Statements
 Explain Trial Balance
 Explain trading account
 Explain profit and loss account
Basic Terminology – Goods Account is split as under….
Financial Term Explanation
Sales Account It represent out flow of goods and the amount of good sold. Includes Cash
sales as well as credit Sales. It will always have credit balance.
Purchases Account It represents in flow of goods and the amount of goods purchased.
Includes Goods purchased on cash as well as Credit basis. It will always
have Debit Balance.
Sales Returns It represents in flow of the returned goods by the customers. It will always
(Inward Returns) have Debit Balance.
Purchase Returns It represents outflow of the returned goods by the unit. It always have
(Inward Returns) credit balance
Opening Stock This account represents the value of stocks held at the beginning of the
financial year. This account balance will be transferred to trading account
at the year end
Closing Stock This account represents the value of stocks held at the end of the financial
year. This account balance becomes the opening stock account for the
succeeding year.
Basic Terminologies – Owner's Account
Capital The amount invested/brought by the owner/s/Promoters (proprietor,
partners, HUF, Ltd companies etc.) at the time of commencement (or
subsequently) for the business/industry
Share Capital The Capital in respect of Ltd companies is contributed by its share holders.
The capital is called Share Capital
Authorized share The maximum amount of share capital the company is authorized to raise.
capital (mentioned in Memorandum & registered with ROC)
Issued Capital Part of a company's authorized capital issued
Subscribed Capital Part of issued share capital subscribed by the share holders (this can not
be more than the issued capital)
Paid up capital The amount received from shareholders when a company issues its
shares.
Basic Terminologies – Owner’s Account
Accumulated The sum of retained profits/retained earnings. Also called profits ploughed
Profits backed into business as a part of capital.
Accumulated A loss (or losses) from previous years carried forward.
Losses
Reserves & A reserve is profits appropriated for a particular purpose (set up to
Surplus purchase fixed assets, pay bonuses, pay off debt etc.) Surplus is the
profits of the company retained.
Basic Terminologies – Assets – Tangible Properties
Land and Building Land is used for business such as Factory Land or shop premises.
Building is the Factory building or Shop Building. This asset will not be
there. If the premises is rented
Plant and Machinery Plant is heavy machinery such as Rice Mill Machinery / Lathe machine
which are fixed to ground. Machinery is portable.
Furniture & Fixtures Furniture are portable items. Fixtures are fixed to wall and ground such
as cabinets / Counters
Electrical Equipment's Generator/ UPS / ACs / Fans / Panel Boards etc -
Computer & Printers These are the computers and printers purchased by the business for
the business use.
Motor vehicles These are purchased for business use. Delivery Vans, Trucks and Cars
for the movement of executives of the business
Basic Terminologies – Receivables
Trade Debtors Total amount in respect of goods sold to the customer on credit and the
amount is not received from the customers
Bills Receivables The Debtors who have already signed bills of exchange and their balances
are shifted from open account to Bills Receivable account
Advance paid to Amount paid in advance to the suppliers before receipt/delivery of goods/
Suppliers services.
Balance held in Debit Balances (Customer Books) in Current Account / Cash Credit /
Bank Accounts Overdraft Account and Fixed Deposits are assets
Statutory Deposits Deposits held as Earnest Money Deposit with Water/Electricity/Telephone
Departments: Amount kept for availing the services as per the
requirements/ stipulations
Basic Terminologies – Payables
Trade Creditors Total amount in respect of suppliers who has supplied goods on credit and
payment is not yet made.
Bills Payable The Creditors to whom already signed bills of exchange are given and
their balances are shifted from open account to Bills Payable account
Advance Received Amount received in advance from the customers before selling the goods
from Customers & services.
Borrowings from Credit Balances (Customer Books) in Cash Credit / Over Draft / Bills
Bank Discounted.
Term Loans Term Loans are usually for long term for purchase of Fixed Assets such as
Land and Building, Plant & Machinery, Motor vehicles, Furniture & Fixtures
etc
Basic Terminologies – Expenses
Wages Paid Monetary compensation paid to employees for work done in
manufacturing goods.
Power & Fuel Electric and fuel expense incurred in the manufacturing / production
Expenses process.
Factory Expenses Such as Repairs and maintenance, Spares and Consumables
Electricity Expenses Expense incurred in the administration process (office and premises)
Traveling Expenses Expenses incurred for business travel by the Owner & Staff
Salaries Paid Monetary compensation paid to staff in the administration process.
Rent Paid Rent Paid for the Business premises such as Factory / Shop Rent paid
Printing & Stationery The business needs its own Bill books / Account Books / Invoices / Bills
Expenses of Exchange / Letter Head Pads / Stamps / Stationery items
Commission Paid Commission paid to Sales agents and Dealers
Basic Terminologies – Expenses
Interest Paid Interest paid on the Borrowings by the Business, Bank Loans
Discount allowed Discount allowed on early payments made on the Credit Sales
Bank Charges Paid Various charges paid to the Bank on collection of Bills / Cheques
Audit Fees Paid Audit Fees paid to the Auditors
Depreciation Reduction in the value of a long term usable asset due to wear and tear/on
account of usage/passage time
Insurance Paid Insurance premium paid for the Assets of the Business / Shipments
Tax Paid Tax Expense actually incurred and remitted to the tax authorities.
Basic Terminologies – Income Accounts
Commission Commission Received from the suppliers / Manufacturers on Sales /
Received Consignment Sales
Interest Received Interest received on Investments and Deposits invested in the Bank
on investments
Discount Received Discount received on the early payment of Credit Purchases
Profit on Sale of Profit on sale of Non-business assets will be treated separately by the
Assets business
Basic Terminologies – Prepaid, Outstanding
Outstanding Expenses which are incurred for the current period but not paid in the
Expenses current period
Prepaid Expenses Expenses paid in Advance for the future period
Prepaid Income Income Received in Advance pertaining to the future period
Outstanding Income earned during the current year but not received in the Current year
Income
Provision for TAX The tax of the current year usually finalised after audit of the accounts after
the year end, usually in the first quarter of the next year. Hence the amount
of Tax for the current year lies as unpaid. For this purpose, a provision is
made by treating as expenditure and setting aside amount for payment of
tax
Trail Balance
 Trail Balance is a jotting of all accounts in the ledgers with their balances
 Few accounts may have Debit Balances and few may be Credit Balances
 The total of all the Debit balances and Credit Balances should tally.
 If the total of Debit and Credit balances do not agree, then there is possibility
of mistakes in the Ledger posting, or totaling or omitting certain account
balances in the trail balance.
 Before proceeding to arrive at profits of the year, a trail will be made to check
whether all balances are correct and they are tallied, hence the jotting of all
balances is called a Trail Balance.
Trial Balance - Case study
Prepare Trial Balance of M/s. Sharma & Co. for the FY 2019-20
Sl Name of the Account Amount Sl Name of the Account Amount

1 Sales 650 10 Opening stock 350
2 Investments in Bank FD 100 11 Capital 400
3 Interest received on Bank FD 10 12 Power and fuel Expenditure 50
4 Cash on Hand 10 13 Salary paid to staff 70
5 Commission received 20 14 General Reserve 70
6 Bank charges & interest paid 50 15 Term Loans from Bank 150
7 Purchases 500 16 Fixed Assets 300
8 Purchase Returns 20 17 Sundry Creditors for trade 50
9 Bank Overdraft Balance 130 18 Sundry Debtors 70
Do you remember the General Ledger Format?
 AED means Assets & Expenditure will

be Debit Balances only
 LIC means Liabilities & Income will be
Credit Balances only
Sl Name of the Account Debit (AED) Credit (LIC)
It is same as
General Ledger
Summary for Banks
and Trial Balance
for others
Total 1500 1500

Sl Name of the Account Debit (AED) Credit (LIC)
1 Sales 650
2 Investments in Bank FD 100
3 Interest received on Bank FD 10
4 Cash on Hand 10
5 Commission received 20
6 Bank charges & interest paid 50
7 Purchases 500
8 Purchase Returns 20
9 Bank Overdraft Balance 130
10 Opening stock 350
11 Capital 400
12 Power and fuel Expenditure 50
13 Salary paid to staff 70
14 General Reserve 70
15 Term Loans from Bank 150
16 Fixed Assets 300
17 Sundry Creditors for trade 50
18 Sundry Debtors 70
Total 1500 1500
Importance of Trail Balance
 The total of Debit Balances of all accounts should tally with the total of Credit
balance of all accounts
 Trail Balance includes the transactions that have already taken place during the year
 There may be few transactions pertaining to the financial year but might not have
been recorded as it has not been either paid or received. For example the rent of the
premises is 10,000 per month. But rent paid account is showing payment of
Rs.1,10,000/- only. This means the rent of the last month is not yet paid.
 Further, the business units must declare the closing stock as at the end of the year
which is not included in the trail balance.
 Any out standing expenditure or outstanding income may not be appearing in trail
balance.
 Trail Balance simply lists out the balances of accounts and they are totaled to
ensure they are tallied.
Thank you
Trading Account & Profit & Loss
Account
Objectives
 Explain trading account
 Explain profit and loss account
Recap from the previous session
 List out SIX accounts pertaining
to the Traded Goods /
Merchandise
 List out SIX accounts pertaining 1) Purchases
to the Traded Goods / 2) Purchase Returns
Merchandise (Turnover 3) Sales
Accounts)
4) Sales Returns
5) Opening Stock
6) Closing Stock
 List out TEN Expenditure
accounts in a business
 List out TEN Expenditure 1) Wages Paid
accounts in a business 2) Power & Fuel Expenses
3) Manufacturing Expenses
4) Salaries Paid
5) Rent Paid
6) Advertisement
7) Insurance Premium paid
8) Travelling Expenses
9) Commission Paid to Salesmen
10) Depreciation
 List out SIX or MORE Assets of a
Business
 List out SIX or MORE Assets of a 1) Land & Building
Business 2) Plant & Machinery
3) Furniture & Fixtures
4) Vehicles
5) Stock of Goods
6) Cash
7) CA with ICICI Bank
8) FD with ICICI Bank
9) Sundry Debtors
 List out SEVEN Liabilities of a
Business
 List out SEVEN Liabilities of a 1) Capital Account
Business 2) Reserves & Surplus
3) Loans from Friends & Relatives
4) Term Loan from KSFC
5) Cash Credit from ICICI
6) Trade Creditors
7) Outstanding Expenses
 List out SIX accounts that pertain
to the owners of the business
 List out SIX accounts that pertain 1) Capital Account
to the owners of the business 2) Drawings Account
3) General Reserve Account
4) Surplus in P&L Account
5) Accumulated Profits Account
6) Accumulated Losses Account
Let us discuss the following
 At the end of the financial year, If you are arriving profit or loss of a business
concern,
 Will their CA Balance at the Bank change?
 Will their Cash Account Balance change?
 Will their Sundry Creditors Balance Change?
 Will their Sundry Debtors Balance Change?
 Will their external liabilities Balance Change?
Arriving profit of loss for the financial year
 Every business unit has to follow the financial year pattern of April- March for
income tax purposes.
 All turnover accounts such as, Sales Account, Purchases Account, Sales returns
account, Purchase Returns account, Opening Stock account are to be closed as at
the end of every year.
 All income and expenses accounts are to be closed by transferring the balances to
the trading account or profit and loss account.
 The profit or loss computation is done in two stages.
 The first stage is called Trading account. All turnover account balances and certain
essential expenses account balances are transferred to this account.
 Expenses such as wages, carriage inward, manufacturing expenses are treated as
essential expenses and these account balances are transferred to trading account
Profit is calculated at two levels
 The first level is the trading account Trading

 The result of the trading account is Account
called Gross profit and will be
transferred to second level
 The second level is the Profit and loss Profit &
account Loss
Account
 The result of the profit and loss account
is called Net Profit
Trading Account
 Trading account provides summary of business’s trading activity during the
financial year.
 All information about goods bought, sold and returned has to be gathered together
in a statement called a trading account.
 All turnover accounts such as Sales, Purchases, Sales Returns, Purchase Returns,
Opening stock are merged in this account.
 Further the status of the stock as at the end of the year is also arrived and
accounted in this account.
 The net result of the trading account is called either Gross profit or Gross loss which
will be transferred to the profit and loss account
 For manufacturing concerns this account will be “Manufacturing & Trading account”
Trading Account Components
Turnover Accounts
 Opening Stock (The closing stock of the previous year)
 Purchases during the year (less Purchase returns)
 Sales during the year (less Sales Returns)
 Closing stock at the year end
Essential Expenditure for Manufacturing and Trading
 Wages Paid for manufacturing & processing
 Freight – Carriage inward on goods purchased
 Manufacturing Expenses
 Factory Power & Fuel expenses
 Factory Consumables and other manufacturing expenses
 Machinery maintenance expenses
Trading Account
TRADING ACCOUNT OF KOHINOOR TRADERS FOR THE YEAR ENDED 31-03-2020
Debit Amount Credit Amount
To Opening Stock 4,50,000 By Sales 62,50,000
To Purchases 37,48,000 Less Returns 2,02,000 60,48,000
Less Returns 1,24,000 36,24,000
To Wages 1,80,000
To Carriage inward 48,000
By Closing Stock 8,46,000
To P& L Account 25,92,000 By P& L Account
(Gross Profit (Gross Loss
Transferred) Transferred)
TOTAL 68,94,000 TOTAL 68,94,000
Closing Stock – Key factor of Profit
 Closing stock is the key factor and profit ascertainer
 By increasing the closing stock, the unit may increase
the profit or hide losses
 Closing stock should be valued at Cost price or market
price whichever is lower
 Units may follow different methods of closing stock
valuation such as
 FIFO – First in First Out method
 LIFO – Last in First out Method
 Simple Average Cost Method
 Weighted averages Method
Now … time to practical’s
 Time for your exercise is 10 minutes
 Name of several accounts will be displayed
 Identify Only those accounts to be transferred to Trading account
 Write down the name of those accounts you chose for trading account
 If you do not understand the name of the account,,, you may ask me
 After 10 minutes…. We will discuss the answers
 Identify where you went wrong and analyse why you went wrong
 Ask your doubts through unmute or chat
 Are you ready??????
Identify – the Accounts to be transferred to trading account
Account Name Account Name Account Name
Capital Account CA @ ICICI Bank Sales Returns
Machinery Account Purchases Account Office Expenses
Cash Account Factory Power & Fuel Printing & Stationery
Sales Account Reserves & Surplus Carriage (freight) inward
Salaries Paid Account Trade Debtors Trade Creditors
Opening Stock Account Interest Paid Account Travelling Expenses
Rent Paid Account Commission Received A/c Telephone Bills paid
Term Loan @ ICICI Account Wages Paid Carriage (freight) outward
Office Electricity Bills paid Furniture & Fixtures FD @ ICICI Bank
Advertisement Expenses Interest received on FD Closing Stock
Audit Fees paid Computers & Printers Vehicles - Delivery Vans
Loan from Manikchand Purchase Returns Cash Credit Loan - ICICI
Please remember …
 Trading Account is a ledger account
 Whatever you write in this account, the contra entries will go to the
respective account
 Suppose you are debiting Trading Account with “Purchases”, the Credit will
be in the purchases account and the purchases account balance gets closed
 Every entry you are making in Trading account is either closing an account or
altering the balance of an account or creating a new account
 For example, closing stock account may not exist in Trail Balance, when you
include in the Trading account on the credit side… the debit goes to a new
account called closing stock account
 Now from the previous example … identified accounts closed after
transferring to trading account
The Left out Accounts after transfer to trading account
Capital Account CA @ ICICI Bank
Machinery Account Office Expenses
Cash Account Printing & Stationery
Reserves & Surplus
Interest Paid Account Travelling Expenses
Term Loan @ ICICI Account Carriage (freight) outward
Advertisement Expenses Interest received on FD
Loan from Manikchand Cash Credit Loan - ICICI
Profit and Loss Account
 The Gross Profit or loss of Trading account is transferred to the Profit and Loss
Account
 Further all sales & administrative expenses accounts are transferred to the P&L A/c
 Finance Expenses such as interest Paid and Discount allowed are also transferred
to the profit and loss account
 Non-Operating income such as Interest income, Commission, discount received are
also transferred to the profit and loss account
 Any Outstanding expenditure, Prepaid expenditure, Outstanding income, Prepaid
income should also be properly accounted in profit and loss account
 Non cash expenses such as depreciation, write off of preliminary expenses are to be
properly accounted in the profit and loss account
 The net result of the P&L A/c is either Net profit or Net loss for the year
Components of Profit and loss account
 It begins with the net result of the trading account – Gross Profit or Loss
Administrative & Sales Expenses
 All Administrative expenses, Trading, Advertisement, Travelling expenses
 Salaries and allowances (+Outstanding – Prepaid)
 Rent (+ Outstanding – prepaid)
 Electricity and office maintenance expenses
 Discounts allowed and Discount Received
 Commission paid and Commission Received
 Insurance (less – Prepaid) Insurance will never be outstanding
Interest Expenses, Depreciation & Provisions
 Interest Paid and Interest Received
 Depreciation on Building, Plant & Machinery, Furniture & Fixtures etc
 Provision for Tax, if any
PROFIT & LOSS ACCOUNT of KOHNOOR TRADERS FOR THE YEAR ENDED 31-03-2020
To Trading Account (Gross Loss t/d) By Trading Account (Gross Profit t/d) 25,92,000
To Salaries Paid 5,40,000 By Commission Received 3,84,000
To Rent Paid 2,20,000 By Interest Income 42,000
To Electricity Bills Paid 1,20,000
To Telephone Bills Paid 7,200
To Advertisement 84,000
To Printing & Stationery 24,000
To Sales incentives 4,20,000
To Commission Paid 4,80,000
To Interest Paid 1,24,000
To Travelling Expenses 66,000
To Depreciation on Plant & Mach 85,600
To Depreciation on Furniture 15,200
To Provision for Income Tax 96,000
To Outstanding Rent 20,000
To Capital Account (Net Profit Transferred) 7,16,000 Capital Account (Net Loss Transferred)
TOTAL 30,18,000 TOTAL 30,18,000
Now … time to practical’s
 Identify those accounts that will be transferred to P&L account
 Write down the name of the accounts in your note book
 Ask your doubts through unmute or chat
Profit and Loss Account
 The statement showing the performance of an enterprise during a relevant
period with the amount earned, the expenses incurred and the profit made by
the enterprise is called a profit and loss account (P&L).
 In other words it depicts the Operational Efficiency or soundness of the
business.
 It is a summary of revenue earned and expenses incurred which ultimately
results in profit or loss of to the company.
Identify – the Accounts to be transferred to Profit & loss account
Reserves & Surplus
Reserves & Surplus
Loan from Manikchand Cash credit – ICICI Bank
Please remember …
 Profit & Loss Account is a ledger account
 Whatever you write in this account, the contra entries will go to the
respective account
 Suppose you are debiting Profit & Loss Account with “Salaries Paid”, the
Credit will in the “Salaries Paid Account” and the Salaries Paid account”
balance gets closed
 Every entry you are making in P&L account is either closing an account or
altering the balance of an account or creating a new account
 For example, Depreciation is transferring a part of the fixed asset to the P&L
Account, hence the fixed account is not closed but balance is changed
 Now from the previous example … identified accounts closed after
transferring to Profit and Loss account
Please remember …
 All outstanding expenditures & Income of the current year are to be
accounted in Profit & Loss Account
 All Pre-paid expenditure & Income of the next year are not to be taken in
Profit & Loss Account
 Depreciation is to be provided on the assets at the given rates of depreciation
 Any write-off of asset, loss or profit on sale of asset should also be accounted
in profit and loss account
Profit & Loss Account Analysis
 The P&L statement summarizes the
transactions which together result in a profit or
loss for a specific period of time.
 It reports the results of operations and indicates
areas contributing to profitability or otherwise of
the business enterprise.
 Analysis of profit & loss statements for a few
years may reveal desirable or undesirable
trends in the earning capacity of the enterprise.
 Banks study the P & L statement as it gives
them information on future expectations of
profit.
After transferring to P&L Account, still some accounts are left
Machinery Account
Cash Account
Reserves & Surplus
Trade Debtors Trade Creditors
Term Loan @ ICICI Account

Furniture & Fixtures FD @ ICICI Bank
Computers & Printers Vehicles - Delivery Vans

What should we do with the left out accounts?
We will learn it in our next

session
Thank you
Understanding Balance Sheet
Objectives
 Explain Balance sheet of a
Business undertaking
 Enumerate the various components
of Balance Sheet
 Appreciate how Balance Sheet
helps business decisions
Quick recap on our learning so far……..
Trail Balance
 Trail Balance is a jotting of all accounts in the ledgers with their balances
 Few accounts may have Debit Balances and few may be Credit Balances
 The total of all the Debit balances and Credit Balances should tally.
 If the total of Debit and Credit balances do not agree, then there is possibility
of mistakes in the Ledger posting, or totaling or omitting certain account
balances in the trail balance.
 Before proceeding to arrive at profits of the year, a trail will be made to check
whether all balances are correct and they are tallied, hence the jotting of all
balances is called a Trail Balance.
Arriving profit or loss for the financial year
 Every business unit has to follow the financial year pattern of April- March for
income tax purposes.
 All turnover accounts such as, Sales Account, Purchases Account, Sales returns
account, Purchase Returns account, Opening Stock account are to be closed as at
the end of every year.
 All income and expenses accounts are to be closed by transferring the balances to
the trading account or profit and loss account.
 The profit or loss computation is done in two stages.
 The first stage is called Trading account. All turnover account balances and certain
essential expenses account balances are transferred to this account.
 Expenses such as wages, carriage inward, manufacturing expenses are treated as
essential expenses and these account balances are transferred to trading account
Profit is calculated at two levels
 The first level is the trading account Trading

 The result of the trading account is Account
called Gross profit and will be
transferred to second level
 The second level is the Profit and loss Profit &
account Loss
Account
 The result of the profit and loss account
is called Net Profit
The Left out Accounts after transfer to trading account
Reserves & Surplus
Reserves & Surplus
Reserves & Surplus
After transferring to P&L Account, still some accounts are left
Machinery Account
Cash Account
Reserves & Surplus
Trade Debtors Trade Creditors
Term Loan @ ICICI Account

Furniture & Fixtures FD @ ICICI Bank
Computers & Printers Vehicles - Delivery Vans

Please remember …
 Few accounts are not transferred to the Trading or Profit & Loss Account
 These residual accounts are assets and liabilities of the firm as at the end of
the year
 These accounts will appear in Balance Sheet
 Further Any other account that has been created during the Process of
trading and profit and loss account will also appear in Balance sheet
 For example you have provided provision for Tax, this account was not there
in your Trial balance, but the credit goes to a new account, such accounts
appear in the Balance sheet.
 These accounts and their balances will be carried over to the next year as
opening Balances
The left out accounts after Trading and Profit & Loss Accounts
Liabilities Assets
Capital Account Cash Account
The name for the left
Reserves & Surplus CA @ ICICI Bank
out Balances
Term Loan @ ICICI Account Machinery Account statement is called
Trade Creditors Furniture & Fixtures “Balance Sheet”
Trade Debtors
Computers & Printers
Loan from Manikchand FD @ ICICI Bank
Cash Credit Loan - ICICI Vehicles - Delivery Vans
Please Remember….
 The balances in the left out accounts after profit and loss account might have
changed during the process of preparing trading and profit and loss account.
 During the process of preparing trading and profit and loss account, you have
closed certain accounts, your entries might have changed the balances of
certain accounts or you might have created new accounts too.
 Example – Sales account is closed as the balance is transferred to trading
account
 Example – Furniture account balance is changed to the extent of depreciation
provided in Profit and loss account
 Example – If you have taken closing stock on the credit side of the trading
account, (which was not there in trail balance), the debit might have gone to a
new account. So that account should be included in Balance Sheet
Balance Sheet
What is Balance Sheet?
 It is a statement of balances, depicting the state of
affairs or position of a business enterprise
 It is an aggregation of balances and it is as on a
particular date.
 It discloses the investment of funds made by the
enterprise on various classes or categories of assets
and the various sources from which funds have been
drawn to enable such investment.
 The liability side represents the sources from which
money is made available to the business and
asset side depicts the uses of the money
Trail Balance and Balance Sheet
Trail Balance Balance Sheet
 Prepared to check whether the total  Prepared to indicate Assets and

of all debit Balances are equal to liabilities of the business
the total of all Credit Balances undertaking as on a particular day.
 Usually prepared before Trading  Can be prepared on any day, but
and Profit and loss account usually after Trading and Profit and
 Will include Turnover accounts, loss account
income accounts, expenditure  Will include only Asset Accounts
accounts, Asset Accounts, and Liabilities Accounts.
Liabilities Accounts.
Analysis of Balance Sheet
Why does a Banker is

required to analyse the
Financial Statement of a
Borrower?
To decide on whether If the advance is to be

or not to extend the extended, what shall
Credit Facility to an be the amount of
applicant borrower advance
Components of Balance
Sheet
Liabilities
 Liabilities means the sources of funds the business
has received
 Business in treated as an independent entity under
double entry system
 The liabilities are basically 2 types
 Internal
 Owners funds such as Capital invested by them
 Reserves & Surplus pertaining to the owners
 External
 Long term borrowings (Debt) and
 Short term funds (current labilities)
Assets
 Assets are the uses of the funds. The funds
sourced as liabilities are being used in the
business in various assets
 These are owned by the business entity
 Some assets are of long term nature and
some are of short term nature
 Short tem assets are called Current assets
 Long term assets are called non-current
assets (fixed assets & investments)
 There may be miscellaneous assets where
the business might have spent the funds
Summary of a Balance Sheet
Liabilities Assets
Share Capital Fixed Assets
Reserves and Surplus Investments
Term/Unsecured Loans Current Assets
Current Liabilities Intangible & Misc. Assets
Provisions P & L Account (Debit)
Total Total
The liability side represents the sources from which money is made available to the
business and the asset side depicts the uses of the money.
Let us understand
each of the items of
Balance Sheet
Let us go from the liabilities side …….
Liabilities  Share Capital is owner’s funds held by the
Share Capital share holders
Reserves and Surplus  Authorised Share capital is the maximum
amount the company can raise from share
Term/Unsecured Loans
holders
Current Liabilities
 Issued is the offer made to the public for
Provisions investing in the Company
Total  Paid up Share Capital is the actual
amount that appears in the balance sheet
Liabilities  Subsidy received from the government
Share Capital  Development Rebate Reserve
Reserves and Surplus  Revaluation of fixed assets
Term/Unsecured Loans  Issue of shares at premium
Current Liabilities  General Reserves
Provisions  Surplus - The credit balance in profit and
loss account
Total
Liabilities  Term Loans are also Called Debt and
Share Capital they are for a longer period examples
are…
Reserves and Surplus
 Redeemable preference shares
 Debentures
Current Liabilities
 Deferred payment guarantees
Provisions
 Public Deposits(Repayable after 12
Total months)
 Term loans and unsecured loans from
friends, relatives, directors repayable over
a period of time
Liabilities  Current Liabilities are those repayable in a
short duration say within the financial year
Share Capital
 Bank Borrowings for Working capital
Reserves and Surplus  Term loan instalments falling due in next 12
Term/Unsecured Loans months
 Public deposits maturing within 12 months
Current Liabilities
 Unsecured loans, unless the repayment is on
Provisions deferred payment terms
Total  Sundry creditors
 Advances from dealers and customers
 Interest accrued but not paid
 Tax provisions
 Dividend declared and payable
Liabilities  Provisions are funds taken out from the
Share Capital earnings and kept aside for various
purposes such as
Reserves and Surplus
 Dividend payments
 Tax payments
Current Liabilities
 Bad Debts (Similar to NPAs in the Bank)
Provisions
 Provision for miscellaneous obligations
Total
Let us come to the asset side items
The components of fixed assets are: Assets
 Infrastructure like land & building Fixed Assets
 Plant and machinery Investments
 Vehicles Current Assets
 Furniture and fixtures Intangible & Misc. Assets
The method of computing depreciation P & L Account (Debit)
are:
Total
 Straight line method
 Written down Value Method
The components of investments are: Assets
 Shares and securities Fixed Assets
 Investment in associate companies Investments
 Fixed deposits with banks or finance Current Assets
companies Intangible & Misc. Assets
Note:
P & L Account (Debit)
 While analyzing balance sheet we can
Total
analyze the above mentioned
investments, if necessary.
 While fixed deposits with banks are
considered as current assets, the
investments in associate concerns are
treated as non current assets.
 Current Assets - Current assets are those Assets
which are reasonably expected to be
converted into cash during the operating Fixed Assets
cycle of the business. Examples are…. Investments
 Raw materials, work-in-progress, finished
Current Assets
goods, spares and consumables are called
as inventories. Intangible & Misc. Assets
 Sundry debtors and receivables < 6 months P & L Account (Debit)
is called as receivables.
 Advances paid to suppliers of raw materials
Total
 Cash and bank balances
 Interest receivables, Advance payment of
tax
 Others - such as Govt. securities, Bank
deposits ..etc.
The components of Intangible Assets are: Assets
 Goodwill Fixed Assets
 Trade mark
Investments
 Patents
Current Assets
Intangible & Misc. Assets
The components of Miscellaneous Assets are:
 Preliminary and pre-operative expenses* P & L Account (Debit)
 Deferred revenue expenditure Total
 P & L Account not written off
*Note: The outstanding balance to be written-

off every year by charging to P&L account.
If there is a Credit Balance in the Profit and Assets
loss account that will fall on the liabilities side
Fixed Assets
under Reserves and Surplus,
But if there is debit balance in Profit and loss Investments
account representing losses, it can not be Current Assets
deducted from the share capital, it may Intangible & Misc. Assets
continue on the assets side, till the company
makes sufficient profits to bring it back on the P & L Account (Debit)
liabilities side. Total
While calculating Tangible Net worth, this item

(debit balance in P&L) is to be deducted from
the Capital & reserves
Summary of a Balance Sheet
Liabilities Assets
Share Capital Fixed Assets
Reserves and Surplus Investments
Term/Unsecured Loans Current Assets
Current Liabilities Intangible & Misc. Assets
Provisions P & L Account (Debit)
Total Total
Analysing Balance Sheet
Liabilities Assets
Capital Fixed Assets*
c) Unsecured Loans Current Assets
Current Liabilities a) Cash in hand
a) Sundry Creditors b) Bank balance
b) Bank Borrowings c) Sundry Debtors
c) Outstanding Expenses d) Prepaid expenses
d) Income received in advance e) Closing Stocks
e) TL Instalments (payable in next 12 months) Intangible Assets
Provisions a) Goodwill
a) Taxation b) Patent & Trade Marks
b) Dividend Misc. Assets
a) Preliminary and pre-operative expenses
b) Deferred Revenue Expenditure
c) Profit & Loss (not written off)
Total Total
*Note: Fixed Asset is Net Block (Gross Block – Depreciation)
Current Assets: A deeper understanding
Balance Sheet Analysis is critical in quantifying the Working capital requirements of
a company. Understanding Current Assets and Current Liabilities in Balance Sheet
is very important. Current Assets are those assets which can be converted into
CASH within the operating cycle, not later than the next 12 months. The examples
are:
 Raw materials, stock in process, finished goods, stores and consumables
(together called inventories)
 Sundry Debtors and bills receivable (not older than six months)
 Cash in hand/credit balance in bank current accounts
 Advance paid to suppliers of raw materials
 Interest receivable/advance tax paid
 Others, such as Bank deposits/Government securities, etc
Working Capital requirement depends up on……
 Working Capital Cycle Cash
 Availability of Credit on (Start)
Purchases Bank
Balance
Advance to
Suppliers
 Availability of funds with
the unit
 All Components in this Receivables Raw
Cycle are Current Assets Debtors Material
Work in
Finished
Process
Goods
Semi
Finished
Current Liabilities: Further understanding
Current liabilities are those financial commitments which should be settled
within the operating cycle, not later than the next 12 months. The examples
are:
 Sundry Creditors/bills payable
 Short term bank borrowings
 TL instalments payable in the next 12 months
 Advance received from customers
 Expenses outstanding, etc.
Contingent Liabilities
 The meaning of the word contingent is “may or may not happen”
 A liability which is not definite is contingent
 A Liability that may arise or that may not arise is a contingent liability
 Contingent are not part of the assets and labilities of the Balance sheet.
 But they are to be mentioned as foot note to the Balance sheet.
 Examples of contingent liability are
 Tax disputes or Other business related litigations
 Bills and cheques discounted with banks
 Claims against the company not acknowledged
 Liabilities under LCs, BGs issued by banks on behalf of the Firm(as the
bank may claim if required)
What are Non-Current assets?
 The Non-Current Assets are not to be financed by the
bank. The Banker has to be cautious to eliminate them
from the Current assets while he is financing working
capital of the unit. The examples of such non-Current
assets are ..
 Deferred receivables or overdue receivables (like
disputed amounts and over-due > 6 months)
 Non-moving stocks or inventory or unusable spares
 Investment or lending to associate concern
 Borrowing of the directors from the company
 Telephone deposits or ST deposits etc
Analysis of Balance Sheet
 Balance Sheet analysis not only to be quantitative but to be qualitative
 It is the financial position on a particular date. Minimum three years
Balance Sheet analysis would be more meaningful
 It is a mixture of facts, opinions and conventions
 While opinions are of the company’s management, the conventions are
practiced by the finance managers of the company.
 The valuation of the stock is done as per the opinion of the management
 Depreciation method may be changed to boost profit
 It may be silent on key personnel and staff turnover
 Marginal changes in the classification of certain items would lead to
different results.
Now … time to practical’s:
 Classify Into (a) Asset, (b) Liability, (c) Income or (d) Expenditure
Classify Into (a) Asset, (b) Liability, (c) Income or (d) Expenditure
No Name of the Account Classify Validate
1 Cash in Hand
2 Balance in CA with ICICI Bank
3 Term Loan availed from KSFC
4 Trade Debtors
5 Trade Creditors
6 Capital Account
7 Inventory - Stock of Goods
8 Plant & Machinery
9 Reserves & surplus
10 Furniture & Fixtures
11 Land & Building
12 Electrical fittings
13 Wages paid
14 Salaries Paid
15 Power and Fuel Paid
1 Cash in Hand Asset
2 Balance in CA with ICICI Bank Asset
3 Term Loan availed from KSFC Liability
4 Trade Debtors Asset
5 Trade Creditors Liability
6 Capital Account Liability
7 Inventory - Stock of Goods Asset
8 Plant & Machinery Asset
9 Reserves & surplus Liability
10 Furniture & Fixtures Asset
11 Land & Building Asset
12 Electrical fittings Asset
13 Wages paid Expenses
14 Salaries Paid Expenses
15 Power and Fuel Paid Expenses
1 Cash in Hand Asset Current Asset
2 Balance in CA with ICICI Bank Asset Current Asset
3 Term Loan availed from KSFC Liability Term Liability
4 Trade Debtors Asset Current Asset
5 Trade Creditors Liability Current Liability
6 Capital Account Liability Net Worth
7 Inventory - Stock of Goods Asset Current Asset
8 Plant & Machinery Asset Fixed Asset
9 Reserves & surplus Liability Net Worth
10 Furniture & Fixtures Asset Fixed Asset
11 Land & Building Asset Fixed Asset
12 Electrical fittings Asset Fixed Asset
13 Wages paid Expenses Trading A/c Expenses
14 Salaries Paid Expenses P& L Account Expenses
15 Power and Fuel Paid Expenses Trading Account Expenses
16 Commission Paid
17 Commission Received
18 Tax Paid
19 Bank interest received on FD’s
20 Bank interest paid on Term loan
21 Electricity charges paid
22 Advance paid to suppliers
23 Advance Received from the customers
24 Sales
25 Purchases
26 Plant and Machinery
27 Depreciation
28 Deposits in Bank FD
29 Rent Payable
30 Stock of Raw Material
16 Commission Paid Expenses
17 Commission Received Income
18 Tax Paid Expenses
19 Bank interest received on FD’s Income
20 Bank interest paid on Term loan Expenses
21 Electricity charges paid Expenses
22 Advance paid to suppliers Asset
23 Advance Received from the customers Liability
24 Sales Turnover Income
25 Purchases Turnover Expenses
26 Plant and Machinery Asset
27 Depreciation Expenses
28 Deposits in Bank FD Asset
29 Rent Payable Expenses
30 Stock of Raw Material Asset
16 Commission Paid Expenses P & L Expenses
17 Commission Received Income P & L Income
18 Tax Paid Expenses P & L Expenses
19 Bank interest received on FD’s Income P & L Income
20 Bank interest paid on Term loan Expenses P & L Expenses
21 Electricity charges paid Expenses P & L Expenses
22 Advance paid to suppliers Asset Current Asset
23 Advance Received from the customers Liability Current Liability
24 Sales Turnover Income Trading A/c Turnover Income
25 Purchases Turnover Expenses Trading A/c Turnover Expenses
26 Plant and Machinery Asset Fixed Asset
27 Depreciation Expenses P & L Expenses
28 Deposits in Bank FD Asset Non-Current Asset
29 Rent Payable Expenses Current Liability
30 Stock of Raw Material Asset Current Asset
31 Deposits received from dealer’s payable within one year
32 Sundry creditors
33 Advance received from Dealers repayable after one year
34 Term loan outstanding payable after 12 months
35 Ordinary share capital
36 General reserves
37 Trade creditors
38 Surplus in Profit and Loss Account
39 Provision for taxation
40 Debentures issued not maturing within one year
41 Short term borrowings from banks or outside sources
42 Unsecured loans repayable after 12 months
43 Bank borrowing for working capital
44 Term loan instalments payable within one year
45 Share premium account
31 Deposits received from dealer’s payable within one year Liability
32 Sundry creditors Liability
33 Advance received from Dealers repayable after one year Liability
34 Term loan outstanding payable after 12 months Liability
35 Ordinary share capital Liability
36 General reserves Liability
37 Trade creditors Liability
38 Surplus in Profit and Loss Account Liability
39 Provision for taxation Liability
40 Debentures issued not maturing within one year Liability
41 Short term borrowings from banks or outside sources Liability
42 Unsecured loans repayable after 12 months Liability
43 Bank borrowing for working capital Liability
44 Term loan instalments payable within one year Liability
45 Share premium account Liability
31 Deposits received from dealer’s payable within one year Liability Current Liability
32 Sundry creditors Liability Current Liability
33 Advance received from Dealers repayable after one year Liability Term Liability
34 Term loan outstanding payable after 12 months Liability Term Liability
35 Ordinary share capital Liability Net Worth
36 General reserves Liability Net Worth
37 Trade creditors Liability Current Liability
38 Surplus in Profit and Loss Account Liability Net Worth
39 Provision for taxation Liability Current Liability
40 Debentures issued not maturing within one year Liability Term Liability
41 Short term borrowings from banks or outside sources Liability Current Liability
42 Unsecured loans repayable after 12 months Liability Term Liability
43 Bank borrowing for working capital Liability Current Liability
44 Term loan instalments payable within one year Liability Current Liability
45 Share premium account Liability Net Worth
46 Fixed deposits with banks
47 Investment in subsidiary company
48 Advance paid to suppliers of Capital goods
49 Accumulated losses not written off
50 Obsolete or non-moving stocks
51 Finished goods
52 Loans and advances paid to Promoters, Partners, and Directors
53 Cash and bank balances
54 Deferred revenue expenses
55 Advance payment of taxes
56 Inter corporate loans and advances
57 Statutory deposits with Excise Duty or Electricity Board
58 Miscellaneous expenditure not written off
59 Goodwill
60 Fixed deposits with banks
46 Fixed deposits with banks Asset
47 Investment in subsidiary company Asset
48 Advance paid to suppliers of Capital goods Asset
49 Accumulated losses not written off Asset
50 Obsolete or non-moving stocks Asset
51 Finished goods Asset
52 Loans and advances paid to Promoters, Partners, and Directors Asset
53 Cash and bank balances Asset
54 Deferred revenue expenses Asset
55 Advance payment of taxes Asset
56 Inter corporate loans and advances Asset
57 Statutory deposits with Excise Duty or Electricity Board Asset
58 Miscellaneous expenditure not written off Asset
59 Goodwill Asset
60 Fixed deposits with banks Asset
46 Fixed deposits with banks Asset Current Asset
47 Investment in subsidiary company Asset Non-Current Asset
48 Advance paid to suppliers of Capital goods Asset Non-Current Asset
49 Accumulated losses not written off Asset Miscellaneous Asset
50 Obsolete or non-moving stocks Asset Miscellaneous Asset
51 Finished goods Asset Current Asset
52 Loans and advances paid to Promoters, Partners, and Directors Asset Current Asset
53 Cash and bank balances Asset Current Asset
54 Deferred revenue expenses Asset Miscellaneous Asset
55 Advance payment of taxes Asset Current Asset
56 Inter corporate loans and advances Asset Non-Current Asset
57 Statutory deposits with Excise Duty or Electricity Board Asset Non-Current Asset
58 Miscellaneous expenditure not written off Asset Miscellaneous Asset
59 Goodwill Asset Intangible Asset
60 Fixed deposits with banks Asset Current Asset
Thank you
BALANCE SHEET
Owner Introduces Capital into Business
Balance Sheet Of ABC Traders
Liabilities Assets
Capital 1000000.00 Cash/bank 1000000.00
Total 1000000.00 Total 1000000.00
The firm Buys a shop Rs 500000.00
Liabilities Assets
Capital 1000000.00 Shop 500000.00
Cash & Bank 500000.00
Total 1000000.00 Total 1000000.00
Customer buys Furniture & Fixture of Rs
2.00000 for Shop
Liabilities Assets
Capital 1000000.00 Shop 500000.00
Furniture Fix 200000.00
Cash & Bank 300000.00
Total 1000000.00 Total 1000000.00
Customer Buys Stock worth 3 Lakhs
Liabilities Assets
Capital 1000000.00 Shop 500000.00
Furniture Fixture 200000.00
Cash & Bank 0.00
Stock 300000.00
Total 1000000.00 Total 1000000.00
Customer Sells Goods Of 2 lakhs on cash and
50000 on credit
Liabilities Assets
Capital 1000000.00 Shop 500000.00
Furniture Fixture 200000.00
Cash & Bank 200000.00
Stock 50000.00
Debtors 50000.00
Total 1000000.00 Total 1000000.00
Customer takes bank loan of Rs 1lakh for buying a computer& ADDL Furniture
Liabilities Assets
Capital 1000000.00 Shop 500000.00
Bank TL 100000.00 Furniture Fixtures 250000.00
Computer & printer 50000.00
Cash & Bank 200000.00
Stock 50000.00
Debtors 50000.00
Total 1100000.00 Total 1100000.00
Customer purchases goods of 2 lakhs on credit
Liabilities Assets
Capital 1000000.00 Shop 500000.00
Bank TL 100000.00 Furniture Fixture 250000.00
Sundry Creditors 200000.00 Computer& 50000.00
Printers
Cash & Bank 200000.00
Stock 250000.00
Debtors 50000.00
Total 1300000.00 Total 1300000.00
Customer Deposits Rs 10000 for water connection
Liabilities Assets
Capital 1000000.00 Shop 500000.00
Bank TL 100000.00 Furniture Fixtures 250000.00
Sundry Creditors 200000.00 Computer &Printers 50000.00
Water deposit 10000.00
Cash & Bank 190000.00
Balances
Stock 250000.00
Debtors 50000.00
Total 1300000.00 Total 1300000.00
Customer Pays advance of Rs 50000 for raw material
Liabilities Assets
Capital 1000000.00 Shop 500000.00
Sundry Creditors 200000.00 Computer &printers 50000.00
Water deposit 10000.00
Advance Paid to 50000.00
supplier
Cash & Bank Balances 140000.00
Stock 250000.00
Total 1300000.00 Debtors 50000.00
Total 1300000.00
Customer Receives advance of Rs 60000 from purchasers & is sanctioned a CC of
Rs 500000/‐
Liabilities Assets
Capital 1000000.00 Shop 500000.00
Sundry Creditors 200000.00 Computer & Printers 50000.00
Cash Credit 500000.00 Water deposit 10000.00
Advance Received 60000 Advance Paid to supplier 50000.00
From Purchaser
Cash & Bank Balances 200000.00
Stock 750000.00
Debtors 50000.00
Total 1860000.00 Total 1860000.00
Liabilities Assets
Capital Fixed Assets*
c) Unsecured Loans Current Assets
Current Liabilities a) Cash in hand
a) Sundry Creditors b) Bank balance
b) Bank Borrowings c) Sundry Creditors
c) Outstanding Expenses d) Prepaid expenses
d) Income received in advance e) Closing Stocks
e) Term Loan Instalments (payable in next 12 months) Intangible Assets
Provisions a) Goodwill
a) Taxation b) Patent
b) Dividend c) Trade Mark
Misc. Assets
a) Preliminary and pre‐operative expenses
b) Deferred Revenue Expenditure
c) Profit & Loss (not written off)
Total Total
*Note: Fixed Asset is Net Block (Gross Block – Depreciation)

Business Credit
Non Financial Information
Learning Objectives
 Understanding Non-Financial Information
 Importance of Non-Financial Information
 Analysing Non-Financial Information in a Credit Decision
Types of Information
Non
Financial
Financial
Information
Information
Financial Information
 Financial information are relatively easy to obtain.
 We may seek various financial statements from the applicant such
as Profit & Loss Account, Balance Sheet, Cash Flow etc. for
minimum 3 years
 Statement of Account / Pass sheet of the accounts for specified
period. No dues / NOC from other financial institutions etc.
 These financial statements can be further processed to generate
data on business position, ratios and indicators.
 Bank has set benchmark Ratios / industrial level / Bank’s policy to
measure these ratios and financial indicators and analyse them.
 The source is known and our analysis becomes easier once
necessary information is gathered, mostly provided by the applicant
himself.
Non-Financial Information
The Non financial information is not precisely defined. The scope
and nature of information required and how deep to probe depends
on several factors, some of them are :
 Whether it is new customer or existing
 The type of customer – whether proprietor or a company
 Nature of Business – Whether Trader or Manufacturer and
whether indigenous or into Foreign Trade
 Whether fresh financial assistance required or is it for expansion
 The project outlay and the quantum of finance required
 Nature of Financial assistance required – Term Loan or Working
Capital limit or Non fund limits
 Security Comfort available
Introduction to Non-Financial Information
 Any financial assistance provided by Bank involve certain
risk, even if the loan is fully secured by collaterals or if the
applicant has sound net worth or in the higher income
group. Any probable risk for the borrower ultimately results
in risk for the lender too.
 Hence while processing a Credit proposal, whether a fresh
proposal or for additional or enhancement in limit, a
prudent Banker collects information from all possible
source about the applicant and about matters relevant to
the proposal. This helps in identifying the risk areas and in
mitigating the same.
Components of Non-Financial Information
Non-Financial information includes :
 Information about the Business
 Information about the applicant/s
 Information about all factors which effect the
applicant or the business.
Importance of Non Financial Information
 Both Financial and Non Financial information have to be taken in to account
for decision making on any loan proposal
 On processing a credit proposal, the following outcome to be clearly defined :
 Whether to lend or not
 If not, the reasons and validations to decline the proposal
 If yes,
 How much to lend
 How to lend – in what form – Fund Based / Non fund Based – Term
Loan / Working Capital
 How and when to recover
 What should be the terms and conditions, including security
 Monitoring aspects including submission of Financials, Stock
Statements etc.
The Quality and Quantity
 An integration of Financial and Non Financial
information would provide a clear picture in taking
the above decision. No individual factor or ratio or
parameter can be looked at in isolation.
 They are interconnected and a holistic approach
would result in a wise credit decision. Hence, both
Financial and Non Financial information to be
integrated and no credit decision can be based
solely on few financial parameters. If done, it would
not address all the risk factors.
Nature of Non Financial Information and source
 While we have seen that the scope and depth of non financial information
depends on various factors including whether new customer or existing and
the nature and quantum of financial assistance sought, some of the common
areas. The sources of Non-Financial Information are listed here.
Sources for Non Financial

Information
Field Market Opinion Financial

Interview Agencies
Inspection Sources Reports Reports
1. Interview Interview
 His background, including KYC  Business / Operating Cycle

details  Whether start up or existing business
 Educational background /  Market Opportunities & Competitors
experience in the field  Suppliers and availability of products
 Family background / Raw materials
 Succession plans for management,  Regulators including Government
especially considering the age. policy on this product / business
 Previous experience / standing  Licence, Clearance, Environment
 Networth outside business clearance etc.
 Nature of Business  Future plans and scope
 Product dealing with  Any relevant point
2. Feild Visit – Inspection Field
Inspection
A proper unit visit covering the entire premises, especially the factory workshop provides valuable
information on the working of the unit. Careful observation on the following areas are essential:
 Location of the unit – any adverse or hindering features like approach or connecting road, proximity to
market, safety, residential or industrial area, whether in sensitive area etc. Sales outlets etc
 Working of the unit – whether appears to be regularly working or is it stage managed for a visit
 Manufacturing process – Technical upgrades – whether latest technology in place,
 Number of workers – Skilled and non skilled workers – their apparent dedication and involvement
 Working of machinery – Whether too many idle machines, age and working of the machines
 Electricity – Availability, Alternate source like generators etc. Whether bills paid regularly.
 Inventory – Stock of Raw material, Work in progress, Finished goods, wastages etc.
 General upkeep – Reflects lot on the process, control and management of the unit
 Any other area which appears out of place need to be noted for discussion with the applicant.
3. Market Sources Market
Sources
 Market information is a very general word and its scope and requirement is
defined only by the nature and quantum of financial exposure sought.
 While for a small business firm, informal information from neighbours or
workers would be sufficient, for a large project, detailed information may be
essential.
 We need to be extremely careful while collecting market information,
especially from informal source like competitors, neighbours, workers etc.
and proceed without making our customer feel he is being investigated.
 Again common sense and prudence should prevail in identifying the proper
source, genuineness and authenticity of the information and appropriate use
of the same in the suitable place. Our focus should be in identifying potential
risk factors in the business of the applicant and in mitigating the same.
3. Market Sources – Continued Market
Sources
 Competitors : If the competitors themselves are our customers, it would be

helpful in gathering as much information as possible. We need to be
extremely careful to be discrete in this area. However, we also need to
identify or sense gossips / intentional mis-information / diversion etc.
 Suppliers and Customers : If not direct interaction with the Suppliers, we
could find who are the major suppliers and their repute, whether they are
paid in time etc. Similarly, who is our customer supplying to, whether our
customer is in their favoured list. Orders on hand, orders in pipeline, orders
under contract for long period etc. These can be integrated with marketing
strategy of our customer and their future plans.
 Employees / Workers : Casual interaction with the employees of the firm,
both during unit visit or when they visit bank for their personal needs can
bring out hidden information.
4. Opinion Reports – Feedback from Other Banks Opinion
Reports
 Formal opinion or feedback from other Bankers /
Agencies like Dun & Bradstreet etc. gives us clear
information about the past dealings of the
applicant.
5. Reports from Government / Agencies Agencies
 CIBIL Report
 RBI Caution List
 SAL of ECGC
6. Non financial information from Financial statements Financial
Reports
 The regulators have made disclosure norms very strict. The firm
has to disclose all relevant information in their financial
statements. Also, it is obligatory on the part of the Auditor to
disclose any relevant information in their report. Hence, the
financial statements provide valuable information for a Banker
while processing the credit requirements :
 Directors Report
 Auditors Report
 Off Balance Sheet items / Contingent liability not provided for,
including statutory dues like PF / Gratuity of employees, Tax
liabilities, utility dues like electricity etc.
Conclusion
 Each and every risk factor to be considered while processing a
loan proposal and accordingly, migratory steps to be taken. To
properly identify the risks, information from all areas relevant to
the credit proposal to be obtained and integrated with a holistic
approach. Considering the risk,
 We may sanction the loan as requested.
 We may reject the loan proposal itself.
 Or sanction the loan with certain conditions, which may have a
bearing on the Quantum of loan, Rate of Interest, Security
requirement, other monitoring terms and conditions etc.
 Hence the importance of both Financial and Non Financial
information
Questions ???
Thank You all ………………….
Analysis of Financial Statements
Financial Statements indicate……
 Profitability of the unit
 Borrowers Stake in the unit
 Various Assets held by the unit
 Liabilities / Borrowings of the unit
 Constitution of the unit
 Pattern of Capital held
 Financial Discipline of the unit
 Statutory existence of the unit
 Indebtedness of the unit
 Margin available for working capital
What Constitute Financial Statements
 Audited Operating statement (P&L Account)

 Audited Balance Sheet
 Audit Report – Form 3
 Annual Report in case of Corporates and TASC
 Projections / Projected Balance Sheet
 Factors emphasizing the Projections
 GST and Turnover Tax Returns
 Income Tax Returns
What is general rule of financial Discipline?
Long term sources to be utilized for holding

Long Term (Non Current) Assets
Short Term sources to be utilized for

holding Current Assets
Long term sources should leave a surplus

after funding Non-current assets to fund
margin requirement of current assets
What is long term & short term?
 An asset that can be
realized with in the financial
year is a short term asset
 A liability that has to be paid
with in the financial year is
a short term liability
 Short Term Assets &
Liabilities are called current
assets & current liabilities
Why financial Discipline?
 Measure the performance
 Consistency in Growth
 Long term existence
 Consistency in profitability
 Market Reputation
 Consistency in Share Price
Analysis of Financial Statements?
 Analysing the profitability of the Unit
 Analysing the Owner’s Stake
 Analysing the Lender’s Stake
 Analysing the financial requirement
 Analysing the movement of funds
 Analysing the financial discipline
 Analysing the intra-firm comparisons
 Analysing the inter-firm comparisons
(CRISINFAC, CMIE or Reliable source)
What are the tools for analysis?
 Ratio Analysis
 Fund Flow Statements
 Cash Flow Statements
 Inter-firm comparisons
 Intra-firm comparisons
 Consistency in share price
 Profits, Profitability & BEP Analysis
What is the importance of Ratio Analysis?
 Long-term solvency of the unit
 Short-term solvency of the unit
 Return on Investment in the
unit
 Turnover periods of current
assets
Terminology used in Ratio Analysis
Term Meaning
Equity Owners Funds which means the amount lying in
Share Capital as well as General Reserve, free
reserves and surplus account
Tangible Net Worth It means the Equity minus the intangible assets if
(TNW) any on the asset side such as Patents, Goodwill,
Preliminary Expenses, Accumulated losses, if any
Debt Debt means Long term borrowings of the unit
such as Term loans, Debentures the repayment of
which is not falling in the same financial year
TOL (Total Outside In Debt we did not include the short term
Liabilities) borrowings where as TOL includes all liabilities
(Debt + Current liabilities) or
(total of Balance sheet – Equity)
Term Meaning
Current Assets The assets that are going to be converted in to
Cash during the financial year. They are part of
all the stages of working capital such as Cash,
Bank Balance, Stock in any form (such as Raw
material, finished goods, Consumables), and
Sundry Debtors, Receivables, Bills Receivable,
Advance payments to suppliers, etc.
Current Liabilities The Liabilities which are to be paid in a short
period say within the financial year are Current
liabilities. The examples are Sundry Creditors,
Bills Payable, Advances received from
customers, short term borrowings from Bank
such as CC / OD etc
Term Meaning
Inventory Inventory is a term used for stock held in any
form such as Raw material, Work in process,
semi-finished goods, finished goods etc
Quick Assets All current Assets are realizable in a short period
but all are not post sale assets. The inventory is
yet to be sold. Hence, Inventory is removed from
current assets to arrive quick assets
Quick assets = Current Assets - Inventory
PBT The true efficiency of the unit lies in Profit before
(Profit Before Tax) Tax. Taxes may vary from year to year, or based
on turnover, or constitution. But the Profit Before
Tax indicates the Profit earned before
accounting or payment of Taxes. This will be a
standard parameter for inter-firm and intra-firm
comparison of performance
Term Meaning
PAT (Profit After Tax) PAT is the profit available for the unit after
payment of taxes. This may be used for
payment of dividend to the share holders or may
be added to free reserves as per the resolution
of the owners.
PBDIT PBDIT is used in calculating the cash profits as
(Profit Before the depreciation is not paid out. Further, the
Depreciation, interest is a financial obligation. Hence,
Interest and Tax) Depreciation, Interest and Tax is added back to
ascertain the cash accruals in the unit. Such
Profit which is arrived before depreciation and
interest and Tax is called PBDIT
What the Banker wants to know from the Ratios
Solvency Profitability
Repayable
Turnover
Ability
Financial Ratios
Solvency Profitability Turnover Repayment

Ratios Ratios Ratios Ratios
Return Return Debt Interest

Short
Long Term on on Inventory Debtors Service Service
Term
Solvency Equity Invest Turnover Turnover Coverage Coverage
Solvency
ment Ratio Ratio
Solvency
Long Term Profitability
Short Term
Turnover Repayable
Activity Ability
Let us focus on ………..
Solvency
Short Term
Repayable
Turnover
Ability
Long Term Solvency (Gearing Ratios)
Debt Equity Ratio TOL / TNW Ratio
 Debt / Equity  Total Outside Liabilities /
 Ideal is 2 or Below for trading Tangible Net worth
units and 3 or below for  Ideal is 3 or Below
MSME units  TNW means Owners Funds
 Debt means Long Term  TOL means Total of Balance
Borrowings sheet – TNW
 Equity means Owners Funds
Long
Term
Solvency
Short Term Solvency (Liquidity Ratios)
Current Ratio Liquidity Ratio
 Current Assets / Current  Quick Asset / Acid Test /
Liabilities Liquidity ratios
 Ideal is 1.33 or above  Liquid Assets / Current
 1.33 indicates 25% margin in Liabilities
Current assets  Ideal is 1 or above
 1.25 indicates 20% margin in  Liquid Asset means Current
Current Assets Assets – Inventory
 Indicates the level of liquid
assets in relation to current
Liabilities
Short
Term
Solvency
Profitability
Solvency Owners &
investment
Repayable
Turnover
Ability
Profitability Ratios
Return on Owners Funds Return on Investments in
Business
 Also called Return on Equity  Also called Yield on Long term
 PAT *100 / Equity Funds Sources
 Return here means Profit After  PBIT *100 / Debt + Equity
Tax  Return means Profit Before
 Indicates the Return on the Interest & Tax
Owners Funds  Investment means all long term
 Equity means owners funds Sources including capital
 Equity includes all types of  Indicates Profit Before Interest &
share capital & Reserves Tax as an yield on the Long
term Funds
Profitability
Turnover Repayable
Activity Ability
Turnover Ratios
Inventory Turnover Ratio Debtors Turnover Ratio
 Average Stocks * 365 / sales  Average Debtors * 365 / sales

 Average Stock means stocks  Average Debtors means
generally carried Receivables generally held
 If Opening Stock & Closing  If Opening Debtors & Closing
Stocks are available Debtors are available
 Average Stock= (Op.Stock +  Average Debtors = (Op.
Cl. Stocks)/ 2 Debtors + Clg. Debtors)/ 2
 Indicates one roll out time of  Indicates average collection
stocks period of Debtors
Turnover
Activity
Repayable
Turnover
Ability
Ratios to assess Repayment Capacity
Debt Service Coverage Ratio Interest Service Ratio
 PBDIT / (Interest+ Installments  PBDIT / Total Interest

per annum) obligations
 Interest means interest on  Ideal is 2 or above
Term Loan only  Interest means interest on all
 Ideal is 1.75 or above Borrowings such as term loans,
 Compares Cash Generation to working capital, unsecured
interest & Installments loans etc
repayment obligaitons  Compares Cash Generation to
interest repayment obligations
Repayable
Ability
Ratios & Credit Rating
 Ratios play a significant
role in credit rating of
the accounts
Risk
 Ratios indicate the Risk
perception to the
lending Bank Price
 Pricing is also linked to
Credit Rating
 Banks Loan Policy Plan
indicates the Bench
Marks & ceilings for the
various ratios
Thank you
Analysis of Financial Statements
Financial Statements indicate……
 Borrowers Stake in the unit
 Various Assets held by the unit
 Liabilities / Borrowings of the unit
 Constitution of the unit
 Pattern of Capital held
 Financial Discipline of the unit
 Statutory existence of the unit
 Indebtedness of the unit
 Margin available for working capital
What Constitute Financial Statements
 Audited Operating statement (P&L Account)
 Audited Balance Sheet
 Audit Report – Form 3
 Annual Report in case of Corporates - TASC
 Projections / Projected Balance Sheet
 Factors emphasizing the Projections
 GST and Turnover Tax Returns
 Income Tax Returns
What is general rule of financial Discipline?
Long term sources to be utilized for

holding Long Term (Non Current) Assets
Short Term sources to be utilized for

holding Current Assets
Long term sources should leave a surplus

after funding Non-current assets to fund
margin requirement of current assets
What is long term & short term?
 An asset that can be realized with in the
financial year is a short term asset
 A liability that has to be paid with in the
financial year is a short term liability
 Short Term Assets & Liabilities are called
current assets & current liabilities
 Long-term assets, also called noncurrent
assets, are resources that have a useful
life of longer than one accounting period
and are not intended to be converted into
cash quickly, less than a year, to fund the
current business operations.
Why financial Discipline?
 Measure the performance
 Consistency in Growth
 Long term existence
 Consistency in profitability
 Market Reputation
 Consistency in Share Price
Analysis of Financial Statements?
 Analysing the profitability of the Unit
 Analysing the Owner’s Stake
 Analysing the Lender’s Stake
 Analysing the financial requirement
 Analysing the movement of funds
 Analysing the financial discipline
 Analysing the intra-firm comparisons
 Analysing the inter-firm comparisons
(CRISINFAC, CMIE or Reliable source)
What are the tools for analysis?
 Ratio Analysis
 Fund Flow Statements
 Cash Flow Statements
 Inter-firm comparisons
 Intra-firm comparisons
 Consistency in share price
 Profits, Profitability & BEP Analysis
What is the importance of Ratio Analysis?
 Long-term solvency of the unit

 Short-term solvency of the unit
 Return on Investment in the unit
 Turnover periods of current assets
Term Meaning
Equity Owners Funds which means the amount lying in Share Capital as
well as General Reserve, free reserves and surplus account
Tangible Net Worth (TNW) It means the Equity minus the intangible assets if any on the asset
side such as Patents, Goodwill, Preliminary Expenses,
Accumulated losses, if any
Debt Debt means Long term borrowings of the unit such as Term loans,
Debentures the repayment of which is not falling in the same
financial year
TOL (Total Outside In Debt we did not include the short term borrowings where as
Liabilities) TOL includes all liabilities
(Debt + Current liabilities) or
(total of Balance sheet – Equity)
Term Meaning
Current Assets The assets that are going to be converted in to Cash during the
financial year. They are part of all the stages of working capital
such as Cash, Bank Balance, Stock in any form (such as Raw
material, finished goods, Consumables), and Sundry Debtors,
Receivables, Bills Receivable, Advance payments to suppliers,
etc.
Current Liabilities The Liabilities which are to be paid in a short period say within
the financial year are Current liabilities. The examples are
Sundry Creditors, Bills Payable, Advances received from
customers, short term borrowings from Bank such as CC / OD
etc
Term Meaning
Inventory Inventory is a term used for stock held in any form such as Raw
material, Work in process, semi-finished goods, finished goods
etc
Quick Assets All current Assets are realizable in a short period but all are not
post sale assets. The inventory is yet to be sold. Hence,
Inventory is removed from current assets to arrive quick assets
Quick assets = Current Assets - Inventory
PBT The true efficiency of the unit lies in Profit before Tax. Taxes may
(Profit Before Tax) vary from year to year, or based on turnover, or constitution. But
the Profit Before Tax indicates the Profit earned before
accounting or payment of Taxes. This will be standard parameter
for inter-firm and intra-firm comparison of performance
Term Meaning
PAT (Profit After Tax) PAT is the profit available for the unit after payment of taxes.
This may be used for payment of dividend to the share holders
or may be added to free reserves as per the resolution of the
owners.
PBDIT PBDIT is used in calculating the cash profits as the depreciation
(Profit Before Depreciation, is not paid out. Further, the interest is a financial obligation.
Interest and Tax) Hence, Depreciation, Interest and Tax is added back to ascertain
the cash accruals in the unit. Such Profit which is arrived before
depreciation and interest and Tax is called PBDIT
Repayable
Turnover
Ability
Financial Ratios
Solvency
Profitability Ratios Turnover Ratios Repayment Ratios
Ratios
Return on Interest
Long Term Short Term Return on Inventory Debtors Debt Service
Invest Service
Solvency Solvency Equity Turnover Turnover Coverage
ment Coverage
Ratio
Ratio
Illustration to understand the Ratios
Balance sheet as at 31st March (Rupees in Lakhs)

Liabilities 2019-20 2020-21 Assets 2019-20 2020-21
Capital 120 120 Net Fixed Assets 290 250
General Reserve 40 80 Inventory 105 155
Term Loan - KSFC 240 210 Trade Debtors 130 150
Cash Credit - ICICI 90 110 Advance to suppliers 25 30
Trade Creditors 80 90 Cash& Bank Balance 20 25
Total 570 610 Total 570 610
Operating Statement (Profit & Loss Account) for the years 2019-20 2020-21
Net sales 1240 1860
Less – Cost of goods sold 1040 1560
Gross Profit 200 300
Less – Selling & Administrative Expenses 110 185
Operating Profit 90 115
Add – Other income 15 20
PBDIT 105 135
Less - Depreciation 35 40
PBIT 70 95
Less – Interest Paid 25 30
PBT 45 65
Tax 20 25
Net Profit (PAT) 25 40
Solvency
Short Term
Turnover Repayable
Activity Ability
Solvency
Short Term
Repayable
Turnover
Ability

Total 570 610 Total 570 610
Long Term Solvency (Gearing Ratios)
Debt Equity Ratio TOL / TNW Ratio
 Debt / Equity  Total Outside Liabilities / Tangible

 Ideal is 2 or Below for trading units Net worth
and 3 or below for MSME units  Ideal is 3 or Below
 Debt means Long Term  TNW means Owners Funds
Borrowings  TOL means Total of Balance sheet
 Equity means Owners Funds – TNW
 For the illustration it works out to  For the illustration it works out to
1.50 (240/160 for 2019-20) and 2.56 (410/160 for 2019-20) and
1.05 (210/200 for 2020-21) 2.05 (410/200 for 2020-21)
Long
Term
Solvency

Total 570 610 Total 570 610
Short Term Solvency (Liquidity Ratios)
Current Ratio Liquidity Ratio
 Current Assets / Current Liabilities  Quick Asset / Acid Test / Liquidity

 Ideal is 1.33 or above ratios
 1.33 indicates 25% margin in  Liquid Assets / Current Liabilities
Current assets  Liquid Asset = Current Assets –
 1.25 indicates 20% margin in Inventory (Ideal is 1 or above)
Current Assets  Indicates the level of liquid assets
 For the illustration it works out to in relation to current Liabilities
1.65 (280/170 for 2019-20) and  For the illustration it works out to
1.80 (360/200 for 2020-21) 1.03 (175/170 for 2019-20) and
1.03 (205/200 for 2020-21)
Short
Term
Solvency
Profitability
Solvency Owners &
investment
Repayable
Turnover
Ability

Total 570 610 Total 570 610
Net sales 1240 1860
PBDIT 105 135
PBIT 70 95
PBT 45 65
Tax 20 25
Return on Owners Funds Return on Investments in Business
 Also called Return on Equity  Also called Yield on Long term

 PAT *100 / Equity Funds Sources
 Return here means Profit After Tax  PBIT *100 / Debt + Equity
 Indicates the Return on the Owners  Investment means all long term
Funds Sources including capital
 Equity means owners funds. Equity  Indicates Profit Before Interest &
includes all types of share capital & Tax as an yield on the Long term
Reserves Funds
 For the illustration it works out to  For the illustration it works out to
15.62% (25/160 for 2019-20) and 17.50% (70/400 for 2019-20) and
20.00%.(40/200 for 2020-21) 23.17%.(95/410 for 2020-21)
Profitability
Gross Profit Ratio Net Profit Ratios
 Gross Profit *100 / Sales  Net Profit *100 / Sales

 Gross profit as available from the  Net Profit as available from the
Trading Account Profit and loss account
 Sales is net sales (Sales – sales  Sales is net sales (Sales – sales
returns) returns)
 This Ratio indicates the turnover  This Ratio indicates over all
efficiency of the unit operating efficiency of the unit
 For the illustration it works out to  For the illustration it works out to
16.13% (200/1240 for 2019-20) and 2.02% (25/1240 for 2019-20) and
16.13%.(300/1860 for 2020-21) 2.15%.(40/1860 for 2020-21)
Profitability
Turnover Repayable
Activity Ability

Total 570 610 Total 570 610
Net sales 1240 1860
PBDIT 105 135
PBIT 70 95
PBT 45 65
Tax 20 25
Turnover Ratios
Inventory Turnover Ratio Debtors Turnover Ratio
 Average Stocks * 365 / sales  Average Debtors * 365 / sales

 Average Stock means stocks  Average Debtors means
generally carried Receivables generally held
 If Opening Stock & Closing Stocks  If Opening Debtors & Closing
are available, Average Stock= (Op. Debtors are available, Average
Stock + Closing Stocks)/ 2 Debtors = (Op. Debtors + Closing
Debtors)/ 2
 Indicates one roll out time of stocks  Indicates average collection period
 For the illustration it works out to of Debtors
31d (105*365/1240 for 2019-20)  For the illustration it works out to
30d (155*365/1860 for 2020-21) 38d (130*365/1240 for 2019-20)
Turnover 29d (150*365/1860 for 2020-21)
Activity
Repayable
Turnover
Ability

Total 570 610 Total 570 610
Net sales 1240 1860
PBDIT 105 135
PBIT 70 95
PBT 45 65
Tax 20 25
Ratios to assess Repayment Capacity
Debt Service Coverage Ratio Interest Service Ratio
 PBDIT / (Interest+ Installments per  PBDIT / Total Interest obligations

annum)  Ideal is 2 or above
 Interest means interest on Term  Interest means interest on all
Loan only Borrowings such as term loans,
 Ideal is 1.75 or above working capital, unsecured loans
 Compares Cash Generation to etc
interest & Installments repayment  Compares Generation to interest
obligations repayment obligations
 For the illustration it works out to  For the illustration it works out to
1.91 (105/55 for 2019-20) and 4.20 (105/25 for 2019-20) and
2.25 (135/60 for 2020-21) 4.50 (135/30 for 2020-21)
Repayable Assumed TL Installments are 30
Ability Lakhs per annum
Ratios & Credit Rating
 Ratios play a significant role in
credit rating of the accounts
 Ratios indicate the Risk Risk
perception to the lending Bank
 Pricing is also linked to Credit
Rating Price
 Banks Loan Policy indicates
the Bench Marks & ceilings for
the various ratios Plan
Thank you
Business Credit
Business Loans Group
BLG - Relationship Manager
Business Loan Group
 MSME sector plays a vital role in the economic growth of
the nation. MSMEs are complementary to large industries
as ancillary units. The sector contributes significantly to the
socio-economic development of the country and job creation
with a low capital investment
 Recognizing the importance of the sector, Govt. of India and
RBI have mandated banks to be sensitive towards the
financial needs of this sector and provide timely finance.
 Keeping this in mind, ICICI Bank offers a host of innovative
products and services which are customized to meet the
evolving financial needs that can make all the difference to
the bottom line of SMEs.
Business Loan Group
 Business Loans Group (BLG) is a part of the Self-Employed
Segment (SES)
 The group provides Working capital and Term Loan facilities
up to ₹20 crores to MSME customers through dedicated
Business Banking Branches.
 The lending is done under various pre-approved programs
and a few cases on a standalone basis. Various tailor made
credit facilities are available to the borrowers.
 The credit facilities are provided in Indian currency as well as
foreign currency.
MSME Act 2006
MSME
Classification
Micro Small Medium

Enterprises Enterprises Enterprises
Revised Definition of MSME Development Act – July – 2020
Micro enterprise, where the Small enterprise, where the Medium enterprise, where
investment in plant and investment in plant and the investment in plant and
machinery or equipment machinery or equipment machinery or equipment
does not exceed one crore does not exceed ten crore does not exceed fifty crore
rupees and turnover does rupees and turnover does rupees and turnover does
not exceed five crore not exceed fifty crore not exceed two hundred
rupees; rupees; and and fifty crore rupees.
ICICI Bank products under BLG Group: Term Loan
 Designed to enable entrepreneurs to keep pace with

emerging technologies, take up capacity expansion
and make long-term capital investments whether in
plant and machinery or commercial assets.
 Composite loans comprising of working capital and
term loans provided for meeting all financial needs.
 Flexible repayment tenure
 Collateral Free Term Loans also available (up to Rs.
2 crore) under CGTMSE scheme
ICICI Bank Products under BLG Group
GST Business Loan
Insta OD
Loans for New Entities
Collateral Free Loans
Loans without Financials
Finance to Importers & Exporters
Insta-Secured Overdraft Facility
Loans for Merchant Establishments
Customized solutions
Working Capital Facilities
Easy Business Loans
Supply Chain Finance

GST Business Loan
GST Business Loans
 Overdraft facility against self-occupied Insta OD
residential/ commercial/ industrial Loans for New Entities
property
 Property up to ₹ 20MN based on Goods
and Services Tax (GST) returns. Loans without Financials
Aassessment is simple based GST Fin to Importers & Exporters
returns. No financial documents required
Insta-Secured OD Facility
Loans for Merchant Estab
Easy Business Loans

GST Business Loan
INSTA OD
 INSTA OD is an online lending platform which Insta OD
cater to your working capital requirements and
provide instant disbursement within a few clicks. Loans for New Entities
 OD facility with minimal documentation basis
banking transaction with no financial documents
requirement Loans without Financials
 OD up to Rs. 25 Lakhs for ETB / NTB customers
Fin to Importers & Exporters
and up to Rs. 50 Lakhs to ETRG Customers
 Paperless processing and Instant Disbursement Insta-Secured OD Facility
for ETB customers Loans for Merchant Estab
 Instant Sanction for NTB customers,
disbursement post account opening Customized solutions
 The facility can be accessed through Corporate
Internet Banking or Insta BIZ App
 ICICI Bank Website for existing customers of Easy Business Loans
ICICI Bank Supply Chain Finance
 For new to bank customers, it can be availed
through ICICI Bank Website or your nearest ICICI
Bank Branch
GST Business Loan
Loans for New Entities
 The initial period is most difficult for a Insta OD
new business start-up. An entrepreneur Loans for New Entities
can get working capital, cash credit
facility and other loans after just a year of
operations. Loans without Financials
 These Business Loans products are Fin to Importers & Exporters
specially designed to finance
Manufacturing, Retail, Wholesale,
Trading (Import/ Export) and service Loans for Merchant Estab
industries. Customized solutions
Easy Business Loans

GST Business Loan
 An entrepreneur can get cash credit and Insta OD
term loan through a government-backed Loans for New Entities
CGTMSE loan up to ₹2 crore
 Small businesses need loans to grow,
but may not always have the requisite Loans without Financials
collateral. Fin to Importers & Exporters
 This is a Collateral free facility specially Insta-Secured OD Facility
designed under the Credit Guarantee
Fund Trust for Micro and Small
Enterprises (MSE's). (CGTMSE) scheme Customized solutions
of SIDBI and Ministry of Small and Working Capital Facilities
Medium Enterprises as defined under
MSMED Act, 2006. Easy Business Loans

GST Business Loan
 Business loans based on past Insta OD
transaction history. Loans for New Entities
 Customers can get loans based on their Collateral Free Loans
past transaction history up to ₹10 million
without the requirement of audited Loans without Financials
financials. Fin to Importers & Exporters
 Facility available in the form of overdraft Insta-Secured OD Facility
and non-fund based facilities
Easy Business Loans

GST Business Loan
Finance for Importers & Exporters
 An importer can get a Letter of Credit Insta OD
besides other working capital facilities. Loans for New Entities
An exporter gets export credit for Pre-
Shipment and Post-Shipment finance.
 Borrowers can get loans in foreign Loans without Financials
currency (export credit and buyers credit) Fin to Importers & Exporters
for reducing forex risk and lower
borrowing costs
Easy Business Loans

GST Business Loan
Insta-Secured Overdraft Facility
 it is an Online lending platform to cater to Insta OD
the working capital requirements by Loans for New Entities
providing a secured overdraft facility up
to ₹10 million
Easy Business Loans

GST Business Loan
Loans for Merchant Establishments
 This is a Funding to Retailers and Insta OD
Merchant Establishments based on Loans for New Entities
Credit card swipes.
 New merchant establishments (6-month
vintage) can also be funded with certain Loans without Financials
conditions Fin to Importers & Exporters
Easy Business Loans

GST Business Loan
Customized Solutions
 These are loans to match specific needs. Insta OD
 Manufacturing Units / Contractors / Loans for New Entities
Servicing Units Collateral Free Loans
 They are tailor-made loans for SMEs.
Easy Business Loans

GST Business Loan
Working Capital facilities
 ICICI Bank also offers facilities like Cash Insta OD
Credit and Overdraft (OD) to help meet Loans for New Entities
working capital requirements including for
seasonal cash flow issues
 Stock as well as Bill finance Loans without Financials
Easy Business Loans

GST Business Loan
EASY Business Loans
 ICICI Bank offers working capital finance Insta OD
by leveraging property. Loans for New Entities
 Bank offers easy loan for all your working
capital requirements, like Cash Credit,
Overdraft, Letter of Credit (LC), Bank Loans without Financials
Guarantee (BG), Foreign Exchange Fin to Importers & Exporters
facilities, Gold Metal Loans, and Loan
against Mutual Funds.
Easy Business Loans

Supply Chain Finance - ICICI launched a unique and first of its GST Business Loan
kind digital B2B ecosystem platform “Digital Financial and Supply Insta OD
Chain Platform”. This enables corporates to seamlessly connect
with their supply chain network constituents (Dealers/Vendors/other Loans for New Entities
MSME) digitally to do day-to-day business transactions, Collateral Free Loans
payments/collection and avail of channel financing from ICICI Bank
at a click of the button. Main features are Loans without Financials
 One-stop digital solution for dealers and vendors for business Fin to Importers & Exporters
and banking transaction
 Dealers and vendors can track order, payments, avail of digital Insta-Secured OD Facility
financing and transact with corporate and the bank
 Digital and paperless process that facilitates supplier and dealer
financing from ICICI Bank. Customized solutions
 Digital procurement and purchase order management enables
efficient corporate supply chain management, monitoring and Working Capital Facilities
controls
Easy Business Loans
 Enables corporates to optimize their payables and receivables
 Instant payment, collections and reconciliation of transactions Supply Chain Finance
 Integrate with Enterprise Resource Planning (ERP) to ensure
automation of transaction updates
 Access banking services seamlessly on a single platform
Benefits of BLG to customers
1) Fast processing  De-centralised operations for fast
processing and quick availability of loans
2) Convenient Documentation process to offer ease and flexibility
3) Dedicated and exclusive relationship managers to provide
complete financial solutions
4) Attractive Pricing  Low-interest rates and commission
charges
5) Priority sector clients  Attractive pricing offered for
customers under priority sector lending
6) Fast and easy renewals with less documentation
7) Easy Accessibility  Leverage on anywhere banking services
through 5000 plus branch network
Role of Relationship Managers
1) Relationship Managers are responsible for maintaining

good relations with clients by individually looking after
their banking needs
2) They are assigned a group of high net worth (HNI) clients
and they have to make sure that the clients stick to
the Bank and new businesses are generated.
3) The role of a BLG RM would be to acquire Self Employed
Segment customers and maintain their relationship.
4) To acquire the SES customer, it is essential to understand
the business model of the customer and their requirement.
Role of Relationship Managers….Continued
5) Based on the business requirement, RM needs to do a

proper assessment of the limits as per the various
programs.
6) Ensure stability of income from existing set of clients and
explore avenues for new income generation from existing
as well as new clients
7) Add value to the client and stay ahead of the competition
by structuring and implementing innovative deals in
working capital, term loan and project finance
8) Use credit knowledge and knowledge of various products
for deal structuring
Role of Relationship Managers…..Continued
9) Manage relationship with the customers by increasing the

book size
10) Manage trade finance, general blog operation for cash
management services i.e., working capital cycle of the
company
11) There are various internal channels through which leads
for BLG would be provided – ETRG, Wealth, Mortgage,
Mapped Branches, PB, etc
Role of Relationship Managers…..Continued
12) The RM needs to closely interact with all the lead providers
and get the lead fulfilled.
13) Post acquiring the customer, RM needs to regularly monitor
the account and deepen the relationship by increasing the
wallet share through cross-selling of other products.
14) RM has to get all the accounts renewed every year.
15) Achieve individual targets and grow account profitability,
while maintaining a high service standard and compliance
Skills and Competencies required for RM
 Ability to negotiate deals, along with the ability to interact

with people at various levels of the organization and outside
environment
 Strong sales and relationship management skills
 Ability to identify key issues in complex problems/

assignments and analyze those to make effective decisions
 Ability to have a firm grasp of the processes and make
changes in system to improve performance
 Credit Knowledge: To assess the company’s financials (i.e.
loss, rating, PAT (profit after tax) etc. of the company)
Summary
 Business Loans Group (BLG) is part of the Self Employed
Segment (SES) providing Working capital and Term Loan facilities
up to ₹20 crores to MSME customers
 Business loans can be sanctioned in both INR as well as foreign
currency.
 Relationship Managers are responsible for maintaining good
relations with clients by individually looking after
their banking needs
 Post acquiring the customer, RM needs to regularly monitor the
account and deepen the relationship by increasing the wallet share
through cross-selling of other products.
Thank you all ………….
Types of Credit Facilities
Learning Objectives
At the end of this session, you will be able to learn
 Meaning of Business Loans
 Classification of Credit to Business
 Various types of Credit facilities to Business
 Meaning of Fund Based and Non fund based
Facilities
Business Loan – Meaning of Credit
 It is providing Financial resources, such as granting of a
loan, by the creditor/lender to the needy debtor/borrower.
 Here the debtor does not reimburse/repay the lender
immediately.
 Thus, debt is created, and debtor arranges either to repay
or return those resources at a later date.
Need for Credit
 Individuals:  Business: New set up and
 To acquire an asset – Ex: Expansion
home, car etc.,  To build up capacity in the form of
 To meet personal expenditure fixed assets namely - land and
– Ex: holiday, marriage, building, plant and machinery and
education etc. other fixed assets or
 To meet day-to-day business
operations - working capital needs
Classification of Credit based on modes
Funding Method of
Security Term
Option Delivery
Short
Secured Fund BP/BD
Term
Overdraft
Medium
Unsecured Non-fund /Cash
Term
Credit
Long Business
Term Loan(BL)
Classification of Credit based on Security
Secured Loans Unsecured Loans
 Secured loans are loans secured  In case of unsecured Loans there is
by charging an underlying asset no charge on any asset or property.
or property, which may be existing Such loans are granted purely on the
or acquired out of the bank credit worthiness and the personal
liability of the borrower. Examples
finance, such as:
are ..
 Residential house
 Personal Loans,
 Motor car
 Temporary OD facility
 Factory building and machinery
 Credit Card.
 Stock of goods
 Shares and bonds
Classification of Credit based on Funding
Fund Based facilities Non–Fund-Based Facilities
 These are characterized by an  Essentially, banks assure a third
immediate or stage wise outlay of party to provide monetary
funds, for example compensation on behalf of their
customers in case of default. There
 Cash Credit/Overdraft is no immediate outlay of funds. Ex.,
 Bill Finance, and  Bank Guarantee (BG)
 Term Loans.  Letter of Credit (LC)
 Deferred Payment Guarantee
(DPG).
Term Loans for Business
 Term loan is normally, medium- or long-term Term
finance extended by banks and other term
lending financial institutions.
 Extended for acquisition of fixed assets like Short
Term
machinery, equipment, construction of building,
purchase of vehicle etc.
Medium
 Secured by primary security and some times by Term
collateral security.
 Sanctioned for various terms
Long
 Repayable in instalments - EMI: Quarterly, Half Term
yearly, bullet repayment
 Normally 25% Margin is insisted on.
Classification of Credit based on method of Delivery
Classification of Credit Facility: Based on
Term
Short-term loans Medium-term loans Long-term Loans
Normally repayable within Normally repayable over a Repayable over a period of
one year. period of two years to less seven years and above.
Cash credit is an example than seven years. Long term loans are
of short-term loan, which is Common examples of generally taken for projects
subjected to annual review medium-term loans are with heavy outlay and
and renewal. personal loan, machinery longer payback time.
Another example of short- loan and car loan. Home loan and project
term loan is an over draft loan are well-known
facility. examples of long-term
loans.
Working Capital Finance for Business
 Business needs working Capital Finance Method of
Delivery
 Bill Purchase and Bill Discounting are specific
post sale finance.
 Cash Credit is pre-sale finance for the current BP/BD
Assets. This is limit based finance.
 Overdraft is both a pre-sale as well as post sale Overdraft
finance. This is limit based finance /Cash
Credit
 Business loans are multipurpose finance and
repayable in installments
Business
Loan
Classification of Credit based on tenure of Credit
Classification of Credit Facility: Based on
Term Bill Purchase & Bills Cash Credit & Over Draft Business Loans
Discounted Limits These are multipurpose
Normally these are post It is a running account loans for business
sale credit facility. facility under which, the The purpose of these loans
The Bank purchases the bank approves a limit and may be to acquire fixed
Demand Bills and the borrower utilizes the assets, renovation as well
Discounts the Usance Bills facility up to the sanctioned as working capital margin.
of the Borrowers and pays credit limit.
The tenure ranges from
immediate funds to the Intended to meet working short term to long term
borrower for facilitating capital needs generally
working capital needs of secured by Stocks & Book The loans are repayable in
the unit, Debts instalments as per the
terms of sanction
Cash Credit Limit
 It is a running account facility under which, the bank approves a limit and the
borrower utilizes the facility up to the sanctioned credit limit.
 Intended to meet working capital needs generally secured by Stocks & Book
Debts
 The drawings from the cash credit account are linked to the level of stocks
and debtors available with the unit.
 The unit has to submit stock/inventory/receivable statements as per the
terms of sanction at monthly/quarterly intervals based on which maximum
permissible amount referred to as “Drawing power” (DP).
 The unit will be permitted to draw up to the DP or the Sanctioned Limit
whichever is lower
 Repayments would be out of sale proceeds.
Overdraft Limit
 This facility is generally provided to meet the unexpected business requirements in case
of a business entity or to an individual customer.
 An overdraft is a credit facility with an approved limit that is linked to the unit’s
business account.
 The borrower can overdraw from the account, beyond the credit balance, up to the
amount of the approved limit. It is a running account where both deposit and withdrawal
is permitted within the limit sanctioned. .
 An overdraft facility is an assistance given by the bank for short periods.
 At the end of the approved period, the facility may be renewed depending upon the need
and satisfactory conduct of the account.
 Interest is payable on the actual amount drawn and would be debited to the account at
monthly intervals.
 The facility can be clean (unsecured) or secured against securities like Bank deposits,
fully paid up Shares or any approved securities.
Bill Purchased & Bill Discounted
 The sales transactions happen either on a cash basis and or credit basis.
 The payment terms depend upon the industry practices, the value of business
connection and other market factors.
 There would be a time lag between the sale of goods/services and the receipt of
payment.
 To meet such Gaps and to continue the business operations, many times
business entities request banks to extend finance against the document of title to
goods.
 This type of credit facility is referred to as bill finance and or post-sale finance.
 The bills could be Demand Bills where the purchaser of goods is required to
make payment of the bills on presentation of the documents.
 In the case of Usance Bills the supplier allows the purchaser a certain credit
period to pay the bills.
 The banks purchase demand bills and discount usance bills.
Particulars Bills Purchased Bills Discounting
When the bank extends finance on a Bill of There are bills which are payable after a certain
Definition Exchange drawn on demand basis, it is called credit period. (Usance). Bank lending against such
Bills Purchase. Usance bills are called Bills Discounting.
Interest is charged for a notional period initially The banks deduct the interest for the credit period
as it may be difficult to know the exact date of upfront and release the balance amount to the
Interest payment at the time of purchase. On borrower. Since the interest is collected upfront ,it
realization, interest is recovered for the actual is called Discount and the process is called
number of days. Discounting of bills.
It is considered as secured finance in view of

the fact the documents are routed through The facility is considered as unsecured because,
another bank/correspondent bank and the the goods are released to the buyer on his
Type of
document of title to goods is released only on acceptance of the documents. As they will be
finance
payment by the buyer. In case of default, bank received on the due date, there is a chance of
has recourse to the goods which are in transit default by the buyer on the due date.
and in the possession of the transporter.
Liquidation Self- liquidation Finance Self- liquidation Finance.

Noting and
Required to be done before filing of suit. Required to be done before filing of suit.
protesting
Export Finance
 It is a fund-based working capital facility designed to meet the requirements of
business entities engaged in export business at a concessional rate of interest.
 Pre-shipment credit (Packing Credit): Packing credit is nothing but pre-sale
finance extended to exporters to execute the order received from overseas buyers.
The entity should have IEC (Import Export Code) issued by the RBI before entering
the export/import business.
 Post shipment credit: This facility is extended after shipment of goods until the
realization of export proceeds. Once the goods are shipped on board, the related
documents like Bill of Lading (called shippers bill) are submitted along with other
documents like invoice, etc., to the bank for availing the finance pending receipt of
payment from the overseas buyer
Non-Fund Based Facilities
 Non fund facilities is a type of facility that does not involve any
immediate outlay of funds.
 The banks facilitate the borrower to procure goods from the supplier or
receive an advance payment from the buyer/Govt Departments by
assuring the beneficiary (supplier/buyer) that the borrower would honour
the commitments.
 The bank acts as a guarantor for the execution of the contract.
 The bank’s liability arises only when the borrower (applicant) fails to
meet the obligations.
Letter of Credit - Meaning
 An undertaking by the issuing Bank
 At the request and on behalf of the applicant
(Buyer, Customer)
 To Pay the seller for the goods and services
supplied or rendered
 Provided that the terms and conditions
stipulated in the Letter of Credit are fulfilled as
per Article 2 of Uniform Customs and
Practices for Documentary Credits (UCPDC)
Letter of Credit – Explanation
 When a business entity desires to purchase raw
material/machinery from a seller (domestic/ overseas)
on credit basis, seller generally demands an
assurance for payment since the buyer may be a
stranger to him and may not trust him for payment on
supply of goods.
 In such a scenario, buyers/importer’s bank will extend
a facility called Letter of Credit (LC) which is a non-
fund-based facility guaranteeing payment to the
seller, subject to fulfillment of the terms of LC. Using
this facility, the business entity can purchase goods
without making immediate payment. This facility also
does not block funds of either importer or bank
Bank Guarantee
 Bank Guarantee (BG) is a contract to perform
the promise or discharge the liability of a third
person in case of default.
 Banks issue both Performance and Financial
guarantees on behalf of the customer after due
evaluation of creditworthiness and capacity of
the customer to execute the contract. If the
customer fails to perform the work as per the
contract, it will result in default and the
guarantee may be invoked – This, in turn, will
result in the bank making the payment having
issued the guarantee.
Parties to a Bank Guarantee
1) Applicant - The person at whose request the
guarantee is issued.
2) Beneficiary - The person to whom the BG is
issued and who can enforce it if a default
occurs.
3) Guarantor (Issuing Bank) – The institution
who undertakes to discharge the obligations if
the applicant defaults
Note – Unlike LC, there are no other Banks

involved in Bank Guarantee
Working Capital
Assessment
Learning Objectives
At the end of this topic, you will be able to explain
 The concept of working Capital
 Working Capital Cycle
 Different methods of Working Capital Assessment like
 Operating Cycle method
 PR Nayak Recommendations on working Capital
Assessment (Projected Turn over method)
 Projected Balance Sheet method
(Tandon Committee Norms)
 Cash Budget Method
Business Overview
 Business activities
can be broadly
classified as:
 Manufacturing
 Trading
 Services
Manufacturing Trade Services
Business Overview
The business models in each case are different, so are their operating
models. It is important to understand the needs of each sector to
uncover lending opportunities. One should have a thorough
understanding of the business enterprise with the following key
information:
 Business Phase (Start-up, Emerging)
 Business Entity Size (Turn over)
 Industry Sector (MSME, Corporates – Manufacturing, Trading or
Services – B2B, Etc.)
 Geographic Location (Originate from)
 Market Area (Domestic – Local / National or International)
 Technology Level (High or Low Tech)
 Market Orientation (Response to market conditions)
Funds required for a business
Fixed Assets Current Assets
Working Capital
Term Loans
Pre-Sale Credit Post-Sale Credit
Cash Credit Bill Purchase /

Discounts
What is the purpose of working capital finance
What is Pre-Sale Finance What is Post Sale Finance
 To procure Raw Material  Advances against open account
 To pay for wages and manufacturing sales / Debtors
expenses  Purchase of Sight Bills
 To Process the Raw material and  Discounting of usance Bills
Convert the work in process to  Advances against bills sent for
Finished Goods collection
 To pay for storage of finished goods  CMS Collections
 To pay for selling and administrative  Receivable Management
expenses
What is working Capital ?
 Working Capital is the amount of money Cash
(Start)
required to meet the day-to-day needs of the
Bank Advance to
business. Balance Suppliers
 Providing timely & adequate Working Capital

to a unit ensures that, the business entity will
have enough cash to pay toward expenses Receivables
Debtors
Raw
Material
like purchases, processing, packing, and so
on, as they become due.
 Ensure continuity of business activity. Finished Work in
Process
Goods
Working capital is employed in those assets which are Semi
traded by the unit to generate profits, for example, raw Finished
material, semi-finished goods, and finished goods, sundry
debtors, and so on so that the operating cycle rolls out on a
continuous basis
Factors that Influence Working capital requirement
 Nature of Activity
 Operating Cycle
 Operating Efficiency
 Volume of Sale
 Terms of purchase & sale (Availability of Credit
on purchase or providing credit on sales)
 Seasonal Fluctuations
 Availability of raw materials
 Holding level of Current Assets and Current
Liabilities
 Time required for transportation of raw
materials form the suppliers, that is, Lead Time
Factors that determine working capital cycle
 Lead time in procuring Raw Material Lead
 Holding period of Seasonal Raw Material Time
 Advance payment for procuring Raw material
 The processing period of the Raw Material Process
 The holding of Consumable Stores & Spares
Time
 The processing period for converting in to Finished goods

 The time of holding the finished goods Holding
Time
 The pattern of sales – Cash Sales or Credit Sales
 The time given for realization of Credit sales
Collection
In Addition we must also know Time
 The credit allowed by suppliers of Raw material
 The time lag in payment of manufacturing expenses
Sources of funding Working Capital Requirement
 Own Contribution – Liquid Surplus
(Excess of long term funds over the long
term uses)
 Creditors – withholding someone’s money
Margin Creditors
(buying Raw material & purchases on
Credit Basis)
 Bank Finance – Borrowing for Working
Capital (Pre-Sale as well as Post-sale
Bank Finance
finances)
Methods of Financing working Capital
 Reserve Bank of India has allowed
freedom to the Banks to adopt any Operating Projected
method except in case of MSME Cycle Turnover
units with some relaxations Method Method
 There are four methods of

working capital assessment:
 Projected Turnover Method, Projected
Cash
Balance
Budget
 Operating Cycle Method Sheet
Method
Method
 Projected Balance Sheet
Method
 Cash Budget Method.
Operating
Understanding Working Capital Requirement Cycle
Method
Particulars Figures
Sales during the year Rs. 8,00,000
Cost of Production during the year Rs. 6,00,000
Length of Operating Cycle 3 months
Number of Cycle in a year * 12 months / 3 months = 4 Cycles
Working Capital Required = Cost of Production per year
No of Cycles per year
Working Capital Requirement is 6,00,000
4
Working Capital Required amount Rs. 1,50,000
Any change in cost of production or Change in the working capital cycle period will
change the working capital requirement of the unit
Operating
How to compute Operating Cycle Period? Cycle
Method
 In the earlier example it was given that the operating cycle

was 3 months
 Now think how was this period computed?
 All of you respond with your contributions to the question.
 Can this period of 3 months be same for every business?
 Op-Cycle for a vegetable vendor who buys in the morning
and sells by evening
 Op-Cycle for a Air Cooler manufacturer who sells only
once in a year
 To compute operating cycle what all data you need ?
Operating
Let us take an example Cycle
Method
 The average time of procuring raw material after advance

payment is 15 days
 The average holding time of raw material in stock is 15 days
 The average processing time of the raw material in to finished
goods is 10 days
 The average stocking period of finished goods is 20 days
 The average time extended for the buyers to pay is 30 days
Compute within how many days of Cash investment in Raw

material will the unit get back cash from the buyers?
Are you able to understand the concept of “Operating Cycle”

Operating
Operating Cycle Cycle
Method
Collection
Cash Advance
Period -30
Payment 15
days
Days
Sundry Raw
Debtors Materials
Stocking Stocking
Period Period 15 Days
20 Days Finished Stock in
Goods Process
Conversion
Process 10 Days
Total number. of days required for
one cycle = 90 days
Operating
Time to think and guess and estimate …… Cycle
Method
Examples of Operating Cycle
Business Guess
Op-Cycle
1. Vegetable vendor
2. Road side Dhaba hotel buys provisions once in a week
3. Provision Store holds one month Stock & sells on one month credit terms
4. Medical Store with cash sales but stock turnout once in 3 months
5. SSI supplying bulbs to Automobile industry with 45 days credit
6. AC Manufacturer - manufactures full year & sells in summer only
7. Contractor who has taken construction of bridge in 2 years without
advance or part payments on progress basis
Operating
Case let on Operating Cycle Method Cycle
Method
Case let – Question Answer
 M/s Excel Industries engaged in  The level of sales
manufacturing and selling of FMCG  The raw materials required and the lead
products approaches you for working time for transportation of the raw materials
capital facilities.  RM holding period to ensure continuous
 They have submitted their financial production
statements for the last three years and  The processing period
projected for the next year.  Finished goods holding period
 You are required to calculate WC  The period of credit extended by the unit
requirement on Operating Cycle method.
on their sales
What information you may need?
 Other operative expenses during this
period
 The period of credit available on purchases
Operating
Cycle
Assessment of the WC Requirement – Excel Industries Method
Annual Particulars Holding Amount Held in

Figures norms Current Asset
60,00,000 Raw Material 1 month
30,00,000 Manufacturing & Operating Expenses
Processing Period ½ month
90,00.000 Cost of Production (Finished goods) 1 month
120,00,000 Sales Credit allowed on Sales 1 month
Total of Current Assets (GWC)
120,00,000 Purchases (Credit available) ½ month
Working Capital GAP
6,25,000 Margin available with the unit Min – 25%
Working Capital Limit MPBF
Operating
Cycle
Assessment of the Working Capital Requirement – Excel Industries
Method

60,00,000 Raw Material 1 month 5,00,000
Processing Period ½ month
Working Capital GAP
Operating
Cycle
Method

Processing Period ½ month 3,75,000
Working Capital GAP
Operating
Cycle
Method

90,00.000 Cost of Production (Finished goods) 1 month 7,50,000
Working Capital GAP
Operating
Cycle
Method

120,00,000 Sales Credit allowed on Sales 1 month 7,50,000
Working Capital GAP
Operating
Cycle
Method

Total of Current Assets (GWC) 23,75,000
Working Capital GAP
Operating
Cycle
Method

120,00,000 Purchases (Credit available) ½ month 2,50,000
Working Capital GAP
Operating
Cycle
Method

Working Capital GAP 21,25,000
Operating
Cycle
Method

6,25,000 Margin available with the unit Min – 25% 6,25,000
Operating
Cycle
Method

6,25,000 Margin available with the unit Min – 25% 6,25,000
Working Capital Limit MPBF 15,00,000
We finished operating Cycle method….. Now next
Projected
Operating Turnover
Cycle Method Method
Projected
Cash Budget
Balance Sheet
Method
Method
Projected Turnover Method Projected
Turnover
Method
 Assess the WC needs both as per Operating Cycle
Method and P R Nayak Committee or Projected
Turnover Method
 Ensure that the Projected Annual Turnover is
reasonable and achievable by the unit, and further,
the estimated growth, if any, over the previous year,
is realistic.
 The GST returns filed with the statutory authorities
may be useful in this regard. Look more closely at
any projection, say beyond 15–20% of the previous
year actual or current year estimates.
 Advise the unit to route all their transactions through
the account.
Projected Turnover Method – Nayak Committee Method
1) Applicable to Small Enterprises(SE) where the Projected
fund-based working capital needs of the unit is INR Turnover
Method
5 crores and below
2) Minimum Permissible Bank Finance (MPBF) at
20% of the Projected Annual Turnover (Sales)
3) The Minimum Working Capital Requirement of the
enterprise at 25% of the Projected Annual Turnover
4) Minimum Margin Contribution by the owners at
5%and Bank Finance 20% (of the Projected
Annual Turnover)
Projected
Turnover
How to treat the margin under Turnover Method Method
 The Margin to be deducted from the Working Capital
requirement as under case
a) Margin available with the unit traced from the previous
Balance sheet (Liquid Surplus or Net Working Capital-
NWC)
b) Minimum Margin of 5% of the Projected Annual
Turnover,
 then the higher of the two (a or b) is the Margin
contribution.
 As the assessment depends on the turnover/output, the
reasonableness of the projection should be satisfied
Projected
Turnover
Compute the WC Requirement under PTM Method
 As per the audited financials of
Swastik Industries, we had the Particulars Amount Details
following information A Projected Annual Turnover
1) Sales Rs. 185 Lakhs B Minimum Working Capital
2) NWC – Margin for WC is needs 25% of Item (A)
Rs. 15 Lakhs C Less: Minimum Margin
contribution at 5% of (A)
 They are Projecting annual
Actual margin available
Turnover of Rs. 200 Lakhs for
Higher of the above
the current year
D Working Capital Finance (B-C)
 Compute the WC finance as
per Projected annual turnover
method
Projected
Turnover
following information A Projected Annual Turnover 200,00,000
1) Sales Rs. 185 Lakhs B Minimum Working Capital
Higher of the above
the current year
method
Projected
Turnover
1) Sales Rs. 185 Lakhs B Minimum Working Capital 50,00,000
Higher of the above
the current year
method
Projected
Turnover
Rs. 15 Lakhs C Less: Minimum Margin 10,00,000
Actual margin available 15,00,000
Higher of the above
the current year
method
Projected
Turnover
Higher of the above 15,00,000
the current year
method
Projected
Turnover
Higher of the above 15,00,000
the current year
D Working Capital Finance (B-C) 35,00,000
method
We finished two methods….. Now next
Projected
Operating Turnover
Cycle Method Method
Projected
Cash Budget
Balance Sheet
Method
Method
Projected Balance Sheet Method – Tandon Committee
 This method is adopted in larger units. Method is established on the
operating cycle but the Current Assets are extracted from the Projected
Balance Sheet submitted by the Borrower. This is supplemented to
computing each current asset on the time norms.
 Similarly, the current labilities are extracted from the projected Balance
Projected
Sheet instead of computing from purchases and time norm of payment
Balance Sheet
 The NWC – Margin available with the unit is extracted from the audited Method
Balance sheet of the previous year
 The competency of the assessment lies in proper classification of
Current assets and current liabilities
 Tandon Committee has suggested 3 methods of assessing working
capital. But Reserve Bank of India has implemented only Method-1 and
Method-2
 Let us understand Method-1 and Method - 1 Method – 2
Method-2 of Tandon committee Projected
 Under Method-1, the margin of 25% is Current
insisted on the Working capital Gap Assets
 Under Method-2, the margin of 25% is Less OBB
insisted o the Current Assets Projected
 If actual margin available with the unit is Current
more than the minimum margin of 25%, Liabilities
the actual margin should be deducted WC Gap
 Let us work out MPBF for a unit with CA Less
1200 Lakhs, CL of 600 Lakhs By Margin
applying method-1 and method-2 25% on
 The MPBF reduces from 450 (Method-1) WC Gap
to 300 (Method-2)
OBB in Tandon committee means Current Liabilities Other than Bank
MPBF
Borrowings
Method-2 of Tandon committee Projected 1200
 Under Method-1, the margin of 25% is Current
insisted on the Working capital Gap Assets
 Under Method-2, the margin of 25% is Less OBB 600
insisted o the Current Assets Projected
 If actual margin available with the unit is Current
more than the minimum margin of 25%, Liabilities
the actual margin should be deducted WC Gap 600
 Let us work out MPBF for a unit with CA Less 150
1200 Lakhs, CL of 600 Lakhs By Margin
applying method-1 and method-2 25% on
 The MPBF reduces from 450 (Method-1) WC Gap
to 300 (Method-2)
MPBF 450
Method-2 of Tandon committee Projected 1200 Projected
 Under Method-1, the margin of 25% is Current Current
insisted on the Working capital Gap Assets Assets
 Under Method-2, the margin of 25% is Less 600 Less
insisted o the Current Assets Projected Margin
 If actual margin available with the unit is Current 25% on
more than the minimum margin of 25%, Liabilities CA
the actual margin should be deducted WC Gap 600 Balance
 Let us work out MPBF for a unit with CA Less 150 Less OBB
1200 Lakhs, CL of 600 Lakhs By Margin Projected
applying method-1 and method-2 25% on Current
 The MPBF reduces from 450 (Method-1) WC Gap Liabilities
to 300 (Method-2)
MPBF 450 MPBF
Method-2 of Tandon committee Projected 1200 Projected 1200
 Under Method-1, the margin of 25% is Current Current
insisted on the Working capital Gap Assets Assets
 Under Method-2, the margin of 25% is Less 600 Less 300
insisted o the Current Assets Projected Margin
 If actual margin available with the unit is Current 25% on
more than the minimum margin of 25%, Liabilities CA
the actual margin should be deducted WC Gap 600 Balance 900
 Let us work out MPBF for a unit with CA Less 150 Less OBB 600
1200 Lakhs, CL of 600 Lakhs By Margin Projected
applying method-1 and method-2 25% on Current
 The MPBF reduces from 450 (Method-1) WC Gap Liabilities
to 300 (Method-2)
MPBF 450 MPBF 300
We finished three methods….. Now next
Projected
Operating Turnover
Cycle Method Method
Projected
Cash Budget
Balance Sheet
Method
Method
Cash Budget Method
 The cash budget method was introduced in the banking system based on the
recommendations given by Kannan Committee.
 This is also called cash deficit financing method. This method is used to
finance seasonal activities, Project finance.
 Cash Budget is a forecast of receipts and payments of an enterprise, drawn
at short intervals of time, for example, monthly, quarterly, and half-yearly.
 So, Cash Budget is a projection into future that is drawn for a specific period
 This reduces the risk of underfinancing or over financing.
 The shortage/deficit of cash at any point of time will be the Bank finance
required to supplement the gap.
Case let on Cash Budget Cash Budget
Method
 Brigade Builders are project builders. They build apartments
and sell them. The cost of the entire project is Rs 1600 lacs and
expected returns are cash inflow is Rs 1800 lacs.
 The project may take six months for completion.
 As per the agreement the buyers who booked to buy the
apartments shall keep on paying the amounts in phased
manner.
 We have advised Brigade Builders to submit the Cash Budget
so as to enable us to fix the maximum amount as limit and the
drawing powers on month wise basis.
 Let us see the Cash budget submitted by them in the next slide
Cash Budget – Brigade Builders
Particulars April May June July Aug Sept Total
A Opening Cash & bank 15 -65 -165 -290 -450 -410
B Collections form Buyers 100 200 200 200 300 800 1800
C (A+B) Total Receipts 115 135 35 -90 -150 390 1800
1 Payment for material 100 150 150 165 85 50 700
2 Payment for wages 30 100 100 120 100 50 500
3 Administrative expenses 50 50 75 75 75 75 400
D Total Payments 180 300 325 360 260 175 1600
(C-D) Closing Cash & Bank -65 -165 -290 -450 -410 215
They may have highest shortage of Rs. 450 Lakhs in the month of July. We can
sanction a limit of Rs. 450 Lakhs. Documents and security shall be availed for Rs. 450
Lakhs. Where as the Drawing power will be subject the actual shortage in the
respective month. By the end of September, the amount of loans is to be recovered
and account should be closed.
Any Questions??
Non-Fund Based Credit Facilities
Learning Objectives
At the end of this session, you will be able to learn
 Meaning of Non Fund Based Facility
 Features of Non Fund Based facilities
 The various types of Non Fund based facilities
 Meaning and types of Non fund Facilities
 Assessment of LC and BG
Classification of Credit based on Funding
Fund Based facilities Non–Fund-Based Facilities
 These are characterized by an  Essentially, banks assure a third
immediate or stage wise outlay of party to provide monetary
funds, for example compensation on behalf of their
customers in case of default. There
 Cash Credit/Overdraft/Export is no immediate outlay of funds. Ex.,
Credit
 Bank Guarantee (BG)
 Bill Finance, and  Letter of Credit (LC)
 Term Loans.  Deferred Payment Guarantee
(DPG).
 Non fund facilities is a type of facility that does not involve any
immediate outlay of funds.
 The banks facilitate the borrower to procure goods from the supplier or
receive an advance payment from the buyer/Govt Departments by
assuring the beneficiary (supplier/buyer) that the borrower would honour
the commitments.
 The bank acts as a guarantor for the execution of the contract.
 The bank’s liability arises only when the borrower (applicant) fails to
meet the obligations.
Letter of Credit Bank Guarantee

Need for Letter of Credit
 Trade Transactions take place across the Globe
 The seller expects that the payment for the goods supplied is to be made immediately on
shipment of the goods in his country
 It may not be possible for the buyer to pay immediately. Also, the trade practices in the
market may force the seller to extend credit.
 Under the said circumstances, the seller looks for some assurance or promise by an
institution for payment in case of default by the buyer.
 The buyer looks for an acceptable channel for the movement of documents of title to goods
and someone to assure the seller of payment.
 The buyer also desires to get the goods as per the specifications and terms of contract.
 LC facilitates meeting these requirements of both buyer and seller. Thus, it promotes
domestic and international trade.
Banks became a trustee for the buyer as well as seller
 It Assured payment to the Exporter
 It assured goods to the importer
 It became the trust worthy mediator
 It took the money from the buyer
and held with it
 It gave a letter to the seller
guaranteeing payment for goods on
receipt of complying documents,
 It has the secured communication
channel viz., SWIFT for
communicating the assurance to the
beneficiary
Meaning of Letter of Credit
Letter of Credit is defined as;
 At the request and on behalf of the Applicant
(buyer/ importer)
 To pay the beneficiary (seller/supplier / exporter) a
certain sum of money
 for the goods supplied or services rendered by the
beneficiary
 Provided the terms and conditions stipulated in the
Letter of Credit are complied with.
Article 2 of Uniform Customs and Practices for Documentary

Credits (UCPDC) gives definitions of various terminologies used
in a Letter of Credit.
Letter of Credit
Contract – Agreement
Exporter Importer
Seller Buyer
Documents
Documents
Payment
Applies
LC Advise
Payment
LC
Payment
Documents
Advising Issuing
Bank Sends LC though SWIFT Bank
Letter of Credit - Meaning
 At the request and on behalf of the applicant
(Buyer, Customer)
 To Pay the seller for the goods and services
supplied or rendered
 Provided that the terms and conditions
stipulated in the Letter of Credit are fulfilled as
per Article 2 of Uniform Customs and
Practices for Documentary Credits (UCPDC)
Salient Features of LC
Letter of credit is a non Fund Facility, an instrument of settling payments
Based on a sale contract/agreement between buyer & seller
Sophisticated and popular Instrument/method of payment used worldwide
An undertaking by the bank on behalf of the buyer to make payment to the seller
Payment upon compliance of T & C and submission of documents mentioned in

LC
Provides complete Financial Security to the Seller

Parties to a Letter of Credit
Party Description
Applicant Buyer who applies to issuing bank to open LC
Beneficiary Seller on whose name LC is opened
Issuing Bank Applicants bank that opens LC
Beneficiaries Bank Seller’s Bank
Advising Bank Bank in the seller’s country that advises authenticity of credit by the
issuing bank
Confirming Bank A Bank, other than the LC issuing bank that undertakes to honor or
negotiate, a complying presentation of documents by the beneficiary of
the LC without recourse to the beneficiary.
Negotiating Bank Beneficiary’s bank or bank nominated by the issuing a bank to

pay/negotiate complying presentation.
Reimbursing Bank Bank that reimburses the negotiating bank

Appraisal of Letter of Credit: Points to be considered
Integrity and creditworthiness of the applicant
Financial strength and solvency of the unit
Profitability of the business activity
Projected financial and liquidity indicators of the unit
Projected cash flows to ensure payment of the bills on the due date
LC Appraisal – Overview
 The need for LC may be one-time for a one-off transaction, for example,
import of machinery. OR
 The request for LC may be recurring or repetitive with continuing
requirement, for example, import of raw material for production of goods.
 In both the cases,
 Appraise and submit the proposal to the sanctioning authority for
appropriate sanction.
 Obtain sanction
 Complete the documentation formalities
 Issue LC
 Follow up for payment on the due date
LC Appraisal – Overview
 LC for purchase of raw material, either in the domestic or international
market, is a part of working capital finance.
 If the LC is required on recurring or repetitive basis, it is always better to
obtain approval from competent authority on a sanctioned limit within
which the branch can open any number of LCs like a running account.
 In such cases, branch has to obtain documents executed by the
borrower for the entire limit and create necessary charges on the
securities depending on the type of the borrower.
 When a limit is sanctioned, there is faster opening of the LCs, which
saves time of going to the sanctioning authority each time an LC is
applied for.
 Separate LC application is to be obtained for opening of each LC, as the
terms & conditions, last date of shipment etc will be different for different
LCs.
LC Appraisal for Purchase of Machinery or Fixed Assets
 If the LC is required for purchase of machinery or fixed assets to facilitate the

production requirements:
 Consider the cost of the machinery or the fixed asset
 Ensure availability of the margin contribution as per the Loan Policy and the
sources of margin.
 Estimate future profitability on account of this addition
 Check whether the unit will be capable of meeting the LC obligations on the due
date.
 If the cost of the machinery is too high, it may not be possible for the unit to pay
the entire amount of the bills in one instalment; otherwise, it will add to the profits
and improve the business levels.
 The bank may also explore the possibility of considering Term Loan (TL) for
purchase of machinery or fixed assets.
LC Appraisal for Purchase of Raw Material
 Where the LC is required on a regular basis for purchase of raw materials,

appraise the LC limit on the lines similar to working capital limits:
• Ensure that the limit is sufficient to facilitate the procurement of materials to
support continuous production.
• Check the requirement is met first out of the borrower’s own sources like own
funds, and loans and market credit, that is, trade credit etc.
• Exclude stocks under LC for which payment is yet to be made by the customer,
while calculating the Drawing Power for fund-based working capital facilities
against inventory extended to the unit.
• Conduct proper analysis of cash flow to ensure that the unit is capable of
meeting the LC bills on the due date.
• Ensure that the stocks procured under LC opened by the bank, but not paid by
the party, are not used as security for other credit facilities availed.
Computing LC Limit
1.Annual purchase of raw material  Important 5 factors are to be

considered for computing
requirement of LC Limit.
2. Annual purchases of raw materials
under LC  The sum of 3,4 & 5 is called
Purchase cycle
3. Lead time from opening of LC to
shipment of the goods  The cycle commences with the
placement of order and ends
4. Transit period for the goods to arrive with payment for goods
at the Godown of the buyer
5. Credit or Usance period extended by

the seller
Process of computing LC Limit
 The simple formula for computing LC Limit

 LC Limit = Purchase Cycle * Purchase under LC
365 Days or 12 months
Example
1. Time taken from placement of order to shipment 10 days
2. Transit period to reach the buyer’s place 20 days
3. Usance period or credit period available or extended by the seller 3 months
4. Total Purchase cycle = 1+2+3 4 Months
5. So if the annual purchases under LC is INR 600 lakhs
6. The LC Limit = 600 X 4 Months/12 Months INR 200 lakhs
Letter of Credit Bank Guarantee

Introduction
 Business entities enter into commercial transactions with other businesses.
 The relationship between them may be of a buyer-seller, principal-agent or
Contractee-contractor.
 While the Letter of Credit acts as a good tool to minimize the risk of non-
payment to the seller, risks of non-performance are a major challenge in the
case of principal-agent or Contractee-contractor relationships.
 Instances of non-performance have a commercial impact for the Principal or
the Contractee.
 In such situations, one contracting party seeks to mitigate the risk of non-
payment and or non-performance on the part of the other contracting party.
 They look for an intermediary(mostly banks) to protect the interest of both
parties on mutually acceptable terms.
 To meet this kind of needs of the customers, banks extend Bank Guarantee
facility
What is Bank Guarantee?
 Bank Guarantee (BG) is a contract to
perform the promise or discharge the
liability of a third person in case of
default.
 A Bank Guarantee is a contingent
liability in the books of the Bank.
Parties to a Bank Guarantee
 Applicant (The Contractor): This is the
Principal Debtor, who is the Bank
person/entity at whose request the
guarantee is issued.
 Beneficiary (The Contractee) : This is Bank
the person/entity to whom the BG is Guarantee
issued and who can enforce it if default
occurs.
Applicant Beneficiary
 Issuing Bank (Applicant’s Bank) :This
is the person/entity who has issued the
BG and who undertakes to discharge
the obligations if the applicant defaults
Features and requirements for a BG
Purpose and Amount of BG are to be specific
Definite expiry date
No onerous clauses
Subject to Stamp duty
Standard Indemnity clause restricting bank’s liability to the BG amount
Margin ranging from 15% to 25% by way of fixed deposit and or cash towards BG
Advantages of Bank Guarantee
Advantages
For the Beneficiary For the Applicant

1) Security of receiving 1) Cost Savings (only the
relevant funds if their risk margin is paid, not the
business partner (bank price of funds)
guarantee applicant) fails 2) Positive effect on
to meet it’s obligations company Cash-flow
2) Closure of Contract 3) Obtain a deferral on the
under more favorable payment of financial
conditions obligations
Types of Bank Guarantees
Financial Guarantee
Advance Payment Guarantee
Deferred Payment Guarantee
Inland Bank Guarantee
Foreign Guarantee
Bid Bond Guarantee
Performance Guarantee
Types of Guarantees
Financial Guarantee
 Financial Guarantee
 Banker undertakes a Financial Liability Advance Payment
Guarantee
 BG remains in Existence for the Definite
Period, on the Expiry no claims will be Deferred Payment
Guarantee
entertained by the bank
 Where under Contract, Cash-Security Inland Bank Guarantee
Deposit / Earnest Money deposited for
due Performance, it is usually stipulated Foreign Guarantee
that in lieu of these, customers may
furnish BG of equivalent Amount
Bid Bond Guarantee
Types of Guarantees
Financial Guarantee
 Advance Payment Guarantee
 Covers the amount of the down-payment Advance Payment
Guarantee
of Importer to Exporter
 Provides security to Importer if Exporter Deferred Payment
does not deliver under the terms of the Guarantee
contract, the amount of the down-
payment would be retrievable Inland Bank Guarantee
Foreign Guarantee
Bid Bond Guarantee
Types of Guarantees
Financial Guarantee
 Deferred Payment Guarantee
Advance Payment
 Covers payment of deferred receivables Guarantee
in pre-determined instalments
Deferred Payment
 Banker guarantees that his customer will Guarantee
make payment of the specified amount,
in certain Instalments and on specified Inland Bank Guarantee
dates
 Stipulates liability of Banker does not Foreign Guarantee
exceed Total of Principal + Interest
Bid Bond Guarantee
Types of Guarantees
Financial Guarantee
 Inland Guarantee
Advance Payment
 Executed between parties in India Guarantee
 Transaction is domestic
Deferred Payment
 For bonafide trade transactions Guarantee
Inland Bank Guarantee
Foreign Guarantee
Bid Bond Guarantee
Types of Guarantees
Financial Guarantee
 Foreign Guarantee
Advance Payment
 Issued in foreign currency Guarantee
 to beneficiaries outside the country
Deferred Payment
 for overseas obligations of the Applicants Guarantee
 Issued via SWIFT through Correspondent Inland Bank Guarantee

Banks
 A Counter BG is issued by the Applicant’s Foreign Guarantee
bank favouring the correspondent bank
who in turn would issue the final BG Bid Bond Guarantee
 Covers transactions both in India and
outside Performance Guarantee
Types of Guarantees
Financial Guarantee
 Bid Bond Guarantee
 Required to bid for a tender to submit along Advance Payment
Guarantee
with the tender
 Indicates a genuine interest of the customer Deferred Payment
Guarantee
towards the Tender Process
 On opening of Tender, BBG gets liquidated, Inland Bank Guarantee
if the client is not awarded the contract
 If the client secures the Tender, furnishes
certain obligations to commence the project. Foreign Guarantee
 On defaults, the party that awards the tender

can enforce the BBG Bid Bond Guarantee
Types of Guarantees
Financial Guarantee
 Performance Guarantee
 Permits the beneficiary to draw on the Advance Payment
Guarantee
Guarantee if the applicant fails to perform
according to the terms of the contract Deferred Payment
 Banker DOES NOT undertake to perform the Guarantee
customer’s obligations in case of any failure
or default Inland Bank Guarantee
 Obligations of a highly Technical nature, may
not be possible for the banker to fulfil them
 The purpose of obtaining a PG is to fix the Foreign Guarantee
Financial or Monetary Liability upon the
banker in the event of default or failure in Bid Bond Guarantee
Performance of the Obligations undertaken
by applicant
Documents Required and Laws Governing Bank Guarantee
Documents Required Laws Governing
 Customer Request Letter  RBI / FEMA

 Soft copy of BG Text  Guidelines/notifications on issuance
 Copy of Contract, if any. of guarantees under FEMA by RBI
 A Covering Schedule with details  Master circular on Guarantees
regarding Operative Account, issued by RBI in July 2015.
Customer - ID, Limit - ID (if the client  Indian Contract Act
has sanctioned limit)  Uniform Rules on Demand
 IE Code for Foreign Bank Guarantees (URDG 758)
Guarantee
Appraisal & Assessment of Bank Guarantee
BGs may result in

Due diligence is
BGs are subject to actual financial loss
required as in the
NPA and capital on account of
case of fund-based
adequacy norms. invocation and default
facilities.
by the applicant
Process of Appraisal & Assessment of BG
 Evaluate the purpose
 Check records of BG issued previously and
invocation, if any.
 Check current balance of BG already issued, if any.
 Check margin and counter guarantee.
 Assess financial strength and business levels.
 Evaluate collateral security.
 Check whether the BG is to be issued once or on a
regular basis.
 Where the customer requires BGs on a regular basis, it
is always better to sanction a BG Limit. Appraise and
assess BG Limit as follows:
 Obtain sanction for the entire limit from the
appropriate sanctioning authority.
 Complete the documentation for the entire sanctioned
limit, including creation of charges depending on the
type of borrower.
 Issue BGs as and when required by the customer by
ensuring sufficient margin availability.
 Assess BG Limit where the BG is on regular and
repetitive basis.
 Conduct a quantitative assessment of the guarantee
requirements of the customer
 Obtain following information
1) Number of Guarantees required
2) Total amount of guarantees to be issued
3) Expiry date or period of guarantee to be issued
4) Expected renewal of guarantees already issued
5) Cancellation of the guarantees that are already
issued
Appraisal of BG Limit – Example
 M/s ABC Enterprises Pvt Ltd requests for a BG Limit of INR 15 crores for
the following purposes:
 Participate in tenders of National Highways Authority of India
 Timely supply of food items to Department of Defence Research and
Development
 Advance payment with BSNL to lay the optical fibre lines
 Retention Money on the work done toward road development and
maintenance allotted by the Government of India
 Note:
 Other details are furnished by the customer or are to be obtained in
discussion with the customer.
 The unit can bring sufficient Cash Margin or collateral.
Computation of BG Limit
Sl. Particulars Number Rs. In Crs
No.
1 BGs outstanding at the beginning 25 10
2 Number of tenders expected to be participated in 10 10
3 Number of tenders where allotment is expected 5 8
4 Number of BGs issued that are expiring during the year 5 5
5 Number of BGs expiring but requested for renewal 3 2
6 Limit assessed (Item Nos. 1+3-4+5) NA 15
Hence, a BG Limit of INR 15 Crs as requested can be considered.
Summary
 LCs & BGs are non–fund-based business for banks
 LCs & BGs lead to expansion of customer base
 BGs are generally issued in lieu of Security Deposit,
Earnest Money Deposit, Advance Payment, and so on.
 Issuing Bank’s responsibility is absolute.
 LCs & BGs add to non-interest income of the bank.
 Funds are not involved upfront in case of non–fund-based
business.
 BG must be for a specific amount and a specific period.
 Banks generally avoid issuing unsecured guarantees.
 RBI prudential norms put a cap on the total amount of
unsecured guarantees a bank can issue.
Business Loans Group
Different Overdraft Products
Insta OD Unsecured Insta OD Unsecured
INSTA OD is an online lending platform which cater to
your working capital requirements and provide instant
disbursement within a few clicks. Insta OD Unsecured
• Overdraft up to Rs. 15 Lakhs for existing customers

and 10 Lakhs for new to bank customers FDOD
• Pay Interest on the utilized amounts

• Paperless processing GST Business Loans
• Instant Disbursement for existing customers
• Instant Sanction for new to bank customers,
disbursement post account opening Select OD
• Minimal documentation
• No Collateral required
Merchant OD
• No commitment charges
• No prepayment/foreclosure charges
Insta OD Secured Insta OD Unsecured
Insta-Secured Overdraft Facility is an Online lending
platform to cater your working capital requirements by
providing secured overdraft facility. Insta OD Secured
• Online processing
FDOD
• Instant sanction of overdraft facility
• Pre-qualified offers
• No financial documents required GST Business Loans
• Secured Overdraft from 1.5 Mn up to Rs 10 million
• Collateral in the form of immovable property and Select OD
liquid securities like FD
• Interest depends on amount(Upto 4 Mn & beyond
Merchant OD
Insta OD Unsecured
FDOD
Insta OD Secured
 For limit up to 10 crores

 Available to Current account Holders: FDOD
Proprietorship/Individual
 Limit up to 90% of FD value
GST Business Loans
 OD against self FD under the same customer ID
 Elimination of physical documents
 Standard Pricing Select OD
Merchant OD
Insta OD Unsecured
GST Business Loans

Insta OD Secured
• Easy and simplified product, overdraft up to ₹ 20.00
million
• Simple assessment norms on the basis of GST FDOD
returns
• 20% of sales declared in GST return
• No financial documents required GST Business Loans
• Avail Overdraft against self-occupied residential/
commercial/ industrial property
Select OD
Merchant OD
Insta OD Unsecured
Select OD provides an instant overdraft facility for a

Insta OD Secured
specific purpose, whether to pay GST or tax
payments. Bank offers OD facility for each of these
purposes.
FDOD
 Pre-approved overdraft up to Rs 15 lakh for existing
customers
 Pay interest on the utilized amount
GST Business Loans
 Paperless processing
 Instant disbursement for existing customers
 Minimal documentation Select OD
 No collateral required
 No commitment charges
Merchant OD
 No prepayment/foreclosure charges
To ensure the Merchant Ecosystem is well Insta OD Unsecured
supported, for their Ad-Hoc requirement,
ICICI Bank offers Unsecured Overdraft to
Insta OD Secured
registered Merchants.
• Pre-approved overdraft up to Rs 25 lakh, FDOD
for existing customers

• Pay interest on the utilised amount GST Business Loans
• Instant Limit setup for existing customers
Select OD
• No collateral required
• No commitment charges
Merchant OD
• No prepayment/foreclosure charges
Thank you all ………….
Business Credit
Type of Credit Facilities
Term Loans
Means of Financing Business
• A business entity – either manufacturing, trading, or
service enterprise, requires funds toward two basic
requirements:
1. To meet the day-to-day business requirements like
purchase of raw materials, payment against expenses,
payment to suppliers, and so on called as WORKING
CAITAL
2. To meet the cost of purchase of fixed assets like
machinery, construction of building, and so on, which
facilitates running and improving the business
provided through Term Loan
• The customer themselves take care of the above needs to
some extent and/or they may seek the support of lenders
to meet these requirements.
Term Loan – Features
 It is a fund based facility for acquisition of fixed assets like
machinery, equipment, construction of building, purchase
of vehicle etc.
 Fixed assets facilitate expansion or improving the
business.
 Sanctioned for various terms, normally, medium or long-
term
 Generally secured, except personal loans and some
variants of education loans.
 The primary security is the asset created out of bank
finance. some times by collateral security.
 Repayable by monthly/quarterly/half yearly instalments as
per cash flow/pattern of income
 Normally 25% Margin is insisted upon.
 Payment is made directly to the supplier to ensure proper
utilisation (end-use) of the funds and avoid incidents of mis
–utilisation.
Term Loan – Features
 If the asset creation, like construction of building, takes place
in stages, the loan is released in stages as per the progress.
 The repayment commences after completion or installation
of the machinery. As there are some teething problems or
issues initially for producing the goods using the new installation,
the repayment may not commence immediately.
 A certain period of time called moratorium (holiday) is given for
repayment depending on the type of activity and income
generation.
 Bank’s funds are blocked for a long period of time.
 Term Loan facility requires more care and caution, like in case of
any fund based facilities, duly studying the cashflows for
repayment of the principal and interest.
Term Loan – Purpose:
The purpose may be to expand the business, improve the efficiency etc.;
 Ascertain that the Term Loan will result in
 Improvement of business
 Improvement in profits of the business, or facilitates cost
control and improvement in quality
 Generate profits sufficient to repay the loan within the
repayment period
 Help the unit in increasing the reserves and to take care
of future needs
 The aim is to recover the bank’s loan as per the
repayment schedule, with the loan to remain as a
standard asset in the books of the lending bank.
Key Elements of Term Loan Finance
Technical Economic
Viability Feasibility
Financial Managerial
Viability Ability
Technical Viability
 Industry – Scope opportunities
 Technology – Domestic or imported
Technical Economic
 Cost & Life of the Machinery Viability Feasibility
 Transportation Costs of inputs & outputs
 Product Mix and by-products
 Opportunities for upgradation – Opportunity &
Cost Financial Managerial
Viability Ability
We have also to assess the locational advantages of
the unit with specific reference to
 Availability of Basic infrastructure
 Availability of Skilled labour
 Availability of Power & Water etc
 Availability of Servicing facilities
Economic Feasibility
 It refers to the earning capacity of the activity
 Earnings depends upon the turnover/sales
Technical Economic
 Economic Feasibility involves a careful analysis of Viability Feasibility
 The market for the borrower’s products
 The prospects of growth in the market in the long run
 The expected level of increase in the profits
 The future prospect of the business Financial Managerial
 Price for all the factors of production Viability Ability
Economic Viability refers to the study of the improvement
of the following aspects of the borrowing unit:
 Cost of Production, Price for the Consumers
 Market share – Existing & Proposed
 Profits – Existing & Proposed
Financial Viability
Financial Viability is to analyse the financial health of the unit to
ensure that:
 The estimated cost of the asset to be created is reasonable Technical Economic
 The borrower is capable of bringing the stipulated margin & Viability Feasibility
sources of margin money
 The estimated earning and operating cost are realistic and
achievable
 If it is a new unit or project: Financial Managerial
 Ascertain Break-Even Point (BEP) Viability Ability
 Compute Debt Service Coverage Ratio (DSCR)
 Impact of the Loan on TOL/TNW
 Sources of Margin money
 We have to go through Audited financial statement and
estimates and projections for the entire period of loan. (We
may non insist for small businesses)
Financial Viability – Break Even Point
Break-Even Point
The point at which total revenues are equal to total cost
Purpose: Technical Economic
1) To analyse when the unit will be able to cross the BEP Sales Viability Feasibility
2) To ascertain time taken to cross the BEP point of Sale
3) To ensure the sales will remain above BEP continuously
4) To establish the alternate plans in case of adverse situations
5) To determine if the earnings are sufficient for repayments
Financial Managerial
In case of an existing unit, to ensure that the unit: Viability Ability
1) Will not slip to Break Even or below BEP
2) Will continue to function above Break Even
3) Will maintain adequate margin of safety
Financial Viability – DSCR
Debt Service Coverage Ratio
Debt means the term loan to be considered by the Bank
DSCR is computed to establish Technical Economic
 The ability of the unit to Service the Debt Viability Feasibility
 The ability of the unit to service the interest
 To plan the loan repayment period
 To plan the loan amount and margin
 DSCR is computed as under; Financial Managerial
Viability Ability
*Cash Accruals + Interest on Term Loan

Term Loan Annual Installments + Interest on Term Loan
 Cash Accruals is = Profit after Tax + Notional or non-

cash expenditure like Depreciation
Managerial Competency
Information on the basis of the basic principles of
credit, namely, the five Cs of credit:
Technical Economic
1) Who is the borrower? Viability Feasibility
2) What is their experience in the line of activity?
3) What is their qualification?
4) What is the second line of management ?
5) What is their market standing? Financial Managerial
6) What is their integrity and credit worthiness? Viability Ability
Information Required for Appraisal of a Term Loan
• Cost of the project or the asset to be created

• Means of Finance
• Sources of margin money
• Cost of production and estimates of profitability
• Cash flow estimates
• Details about the suppliers
• Proforma Invoice or the quotation
Note: We need to obtain a project report and

validate the projections
Let’s Focus on the Financial Tools
Debt Service
Break Even
Coverage
Point
Ratio
Concept of Break Even
 The revenues of the Commercial Activities
should be in a position to pay out the
expenditure and leave a surplus as profit
for the owners & investors in the activity
 The Break even concept will indicate the
exact level of production or sales where
the unit breaks even
 Break even means where the revenues
are just enough to pay the expenditure
 A No profit No Loss proposition
Concept of Costs
 What are Fixed Costs
The Costs which are to be incurred irrespective of the
level of production within the installed capacity are
called Fixed Costs. They do not vary with production /
Output. (Rent, Depreciation, Licenses, Maintenance,
Interest on Term Loan, Administrative Expenses, etc)
 What are Variable Costs
The Costs which vary directly in relation to the
production are variable costs. They vary with the
production in a definite proportion.(Raw Material,
Consumables, Direct Labour, Carriage, Interest on
Working Capital etc)
Presumptions in BEP Analysis
 Costs are to apportioned in only two categories
such as Fixed Costs & Variable Costs
 Fixed Costs are assumed to be stagnant for a
given production capacity
 Variable costs are varying definitely in proportion
to the Sales / Revenues
 Contribution for BEP analysis is defined as the
surplus revenues after meeting variable cost
(similar to Gross Profit)
Diagrammatic presentation of Break Even Analysis
SALES
R
e
v
e TC
n
u
e
BEP
VC
s
&
C
o FC
s
t
s
Technique of Break Even
 Break Even is the Point where Sales / Revenues
are just equal to meet Total Cost (VC+FC)
 Break Even is the Point where Contribution (Sales –
VC) is enough to meet the Fixed Costs
 BEP can be arithmetically calculated either in Units
or Volume of Sales
 BEP in Units = Fixed Costs / Contribution per unit
 BEP in Volume of Sales = Units * Selling Price
 Margin of safety % of present sales above BEP
= (Sales – BEP Sales)*100/ BEP Sales
Derive & Analyse
 Fixed Costs of a unit are Rs.2,00,000/-  BEP in units = FC / Contribution per
 Variable Costs are Rs.12/- per unit unit
 Selling price is Rs.20/- per unit  2,00,000/8 = 25,000 units
 What is the Break even Level in  BEP Sales = 25,000 x 20 = 5,00,000
units?  Margin of Safety = (Sales – BEP
 What is the Break even level in Sales) x 100 / BEP Sales
Rupees?  (7,50,000 – 5,00,000)*100/ 5,00,000
 If Actual sales of the unit are Rs.  2,50,000*100 / 5,00,000
7,50,000, then the % of margin of  50% above the BEP
safety
Let’s Focus on the Financial Tools
Debt Service
Break Even
Coverage
Point
Ratio
Elements of Term Loan Appraisal : Debt Service Coverage ratio
 DSCR aims at knowing whether the
unit will be able to service the
Amount of
installments of Debt and interest on Profit after
Amount of
the debt Depreciation
Tax
 For computing the DSCR, we need to
have the data of four important
aspects
Amount of
DSCR = (Cash Accruals + Interest on Amount of
 Instalments
Interest on
Term Loan) / (Instalment of Term of Term
Term Loan
Loan
Loan + Interest on Term loan)
Cash Accrual = Profit after Tax + Non-cash Expenditure (Depreciation)

Example
Data
Term Loan = INR 5,00,000 PAT = INR 3,16,000
Annual Interest (I) = INR 54,000 Depreciation(DEP) = INR 80.000
Annual Instalment (AI) = INR 1,26,000
Calculation
Answer:
Example
Data
Term Loan = INR 5,00,000 PAT = INR 3,16,000
Annual Interest (I) = INR 54,000 Depreciation(DEP) = INR 80.000
Annual Instalment (AI) = INR 1,26,000
Calculation
DSCR = (PAT+ Dep + Interest on Term Loan) / (Instalments + Interest)
DSCR = (3,16,000 + 80,000 + 54,000) / (1,26,000 + 54,000) = 2.5
Answer: 2.50
Implication: For every INR 1 of repayment, the cash accrual is INR 2.50 and
hence, covered by more than two times of the installment amount, which is a
healthy position.
Mutual Benefit of Term Loans
Benefits to borrowers Benefits of term loan to the banks
 Enables asset creation for the  Bank can deploy their Funds for a
business longer period, resulting in continued
 Simple, Streamlined Application interest/income generation.
Process, Fast Approvals  The term loans are fully secured,
 Lower interest rates. hence safety of the loan is ensured.
 Flexibility in repayment  The loans are repaid in fixed
 Taking Term Loan and making timely instalments, the bank can do the
repayment boost Credit Score better Fund Management
 Eligible for Government incentives
under specific sectors
Summary
1) Term Finance/Loan is a fund-based facility to acquire capital assets & enable the
borrowing unit to meet the expansion plans and achieve increased sales volumes.
2) Capital investments generate revenue for the business unit over a long period
3) Since the repayment of loans are spread over a long period, They are subject to
fluctuations in market conditions and hence need a careful analysis
4) Appraisal of the Borrower must provide insights on the honesty and integrity of the
borrower, market standing and managerial competence.
5) Appraisal of the project covers technical, commercial and financial appraisal of the
project.
6) The repayment program depends upon the frequency of income generation and
adequacy of income to cover both interest and installment obligations.
Business Loans
Business Loans
Documentation
Learning Objective
At the end of this topic, the learners will be able to explain
 Types of documents (Pre sanction and Post sanction)
 Meaning of Documentation
 Need for Documentation
 Process of renewal
 Importance of Periodical Valuation of securities
Documents in two Stages
Post
Pre-Sanction Post Sanction
Disbursement
Need for Pre-Sanction Documents
Pre sanction documents enable to
 Know the Constitution of the applicant Pre-
 Establish the Credit worthiness of the applicant
Sanction
 extract the non-financial information on the applicant
 understand the financial behaviour of the applicant
 Appraise and process the proposal
 Know the financial requirement of the business
 Plan the funding pattern
 Establish the collaterals, their values and acceptability
 Schedule the repayment program
Illustrative List of Pre-sanction documents
Constitution – Appraisal Assessment
 Term Ln. Application complete in all respect  Detailed Project report for the term loan
 KYC documents of the Business / Owners  Balance sheet, Trading and profit & loans
 Entity documents of the business unit account for previous years, estimate for the
(Partnership deed, Certificate of Inc., MOA, current year and projections for the future
AOA, Board resolution etc.) years
 Copy of the PAN card / GST Regn.,  Funds flow & Cash flow statements
 Sources of funding Margin money
 Regulatory clearances / approvals  Pro-forma invoice of the Fixed assets /
 Income tax and GST returns Estimate of Project etc.
 Copy of the directors’ /auditor’s report  Details of collateral security / title deeds /
 CIBIL report/Credit Rating reports search reports
 Proposed Schedule of repayment
etc./CERSAI/ROC Search reports etc.
Post Sanction Documents – Features
 Sanctioning a loan is a legal agreement between the Bank and the borrower
 All necessary Term Loan Agreements and Sanction letters are to be executed by
the authorised signatories. The common seal affixing in respect of companies
 Legal formalities such as Stamp duty and registrations are to be complied
 The documents should create a charge on the asset financed by the Bank
 The charge created shall depend on the type of security offered and the borrower
 The schedule of assets financed should be part of the loan agreement
 Banks obtain documents & create security charges over the assets financed, to
have legal recourse to recover the dues by selling the assets in case of any
default by the borrower.
 The banker must be familiar with the different kinds of securities and the creation
of charges over the assets financed by the Bank besides follow up of the
advance.
Benefits of Documents to the Bank
Documents help banks
 To identify the borrower.
 To identify the security.
 To create a valid and effective charge over the securities.
 To produce the documents as evidence acceptable to a court of law.
 To know the terms and conditions of the facility sanctioned.
 Preventing fresh charge on the security
 Specifying the period of limitation
 Filing of the suit and enforcing the claims
 Safeguarding the bank’s funds
Execution of Documents by Different Constituents
 Individual: A single borrower can singly execute the documents in his personal capacity and along with other
people, execute the documents jointly.
 Hindu Undivided Family (HUF): Kartha of HUF can sign individually and on behalf of the H.U.F. All the major
co - parceners in their personal capacity and guardians of the minor co - parceners on behalf of the minors.
 Partnership Firms: All the documents should be executed by all the partners in their capacity as partners and
also individually.
 Limited liability Partnership (LLP): LLP is to be signed by the designated partners in their capacity as
Managing Partners on behalf of the firm; they should have been authorised by the Resolution of LLP.
 Companies: Authorised officials subject to provisions of its Articles of Association and resolution of its Board of
Directors.
 Co - operative Societies: Authorised officials subject to provisions of its bye - laws and resolution of the
Managing Committee.
 SHG: Authorised persons as per the resolution by the members and / or as per the inter - se agreement.
Post Sanction Documents – Features
• Document is a written statement that is admissible in
the court as an evidence.
Post
• Documentation is process of obtaining documents. Sanction
• The document brings a legal relationship between the
borrower/guarantor
• Documents also establish certain rights and
obligations to concerned parties
• Documents are the primary source of evidence in
case of any dispute
• Any lacuna in the documentation will affect the interest
of the banker and may extinguish the right of recovery
of the dues
Post Sanction Illustrative list of Documents
a) Promissory Note
b) Term Loan agreement Post
c) Hypothecation agreements Sanction
d) Mortgage of the primary security and collateral
security(adequately stamped)
e) ROC intimation to registrar of companies in case of Companies
f) Guarantee agreement if the guarantee is offered.
g) Copy of the Term Loan sanction letter duly acknowledged by
borrower with his full signature and date, where all the terms
and conditions for the Loan sanctioned is stipulated.
Any other documents as per procedure in vogue.
Process flow for documentation
Bankers have to ensure safety of advance while lending. Therefore, a bank
carries out a series of activities to ensure the safety of monies lent
Post
 Due Diligence: Due Diligence is a careful and systematic investigation Sanction
of new and existing customers is a key part of these controls. Bankers
have to know the technical feasibility, economic/commercial viability
of the project/business which they are financing.
 Field Visits: Unit visit or field investigation helps the banks to:
 Meet the promoters & get an insight into the affairs of the company
 Know the level of operations
 Evaluate the security
 CBIL Verification: to know the repayment history
 Verifying with CERSAI to existence of any prior charge
 CPCS & De-dup check
What is Documentation ?
 Documentation is a process of execution of the security documents(Like
Demand Promissory Note, Assignment, Hypothecation Deed, Pledge
deed, mortgage deed etc.) properly according to the provision of law. Post
 In spite of due diligence at the time of sanction, banks run the risk of Sanction
default either on account of a dispute between the lender and the
borrower/guarantor or the inability to repay their liabilities for some
reason or other.
 In such situations, Documents establish legal relationship between the
borrower/guarantor and the banker Documents also establish certain
rights and obligations to the parties.
 Documents prove as primary evidence of the lending transaction
between the lender and the borrower.
 Ultimate recovery of dues depend upon security documents serving as
evidence which alone will provide legal protection
Precautions in Documentation
1) Select appropriate set of documents in tune with the type of credit facility
and charge to be created
Post
2) Document should be completed in one sitting, in the same handwriting
Sanction
and in the same ink. Fill in all the details and duly authenticate. Do not
leave any blank spaces.
3) Ensure that the documents are properly stamped as per the stamp act of
respective states and according to the category of documents
(Hypothecation/agreement/mortgage all attract different stamp duty in
different states)
4) Documents to be executed by legally competent and duly authorized
persons and their authority is properly verified wherever required.
Documents should be signed by the borrowers in full in the same style
5) In case of the illiterate borrower, a remark should be made if he has put
his left thumb or right thumb impression
6) Corrections, insertions, additions, alterations, cuttings,
overwriting's, erasing, etc. is to be avoided. If at all these
Post
are present, they should be authenticated by the Sanction
borrowers under their full signature
7) Each page of the agreement/document is to be signed by
the executant/borrower
8) Date and place of execution should be mentioned
properly.
9) The document should not be double dated
10) Keep a copy of the sanction letter duly acknowledged by
the borrower along with the documents
11) Documents should be executed in the presence of the
bank officials
Post
12) Documents to be registered wherever required under Sanction
law(Registrar, ROC, CERSAI etc.)
13) In case of facilities sanctioned to companies, the charge
created should be duly noted with Registrar Of
Companies (ROC, Form CHG-1)
14) If the executants are not conversant with the language of
the documents, the contents may be fully explained by an
official of the bank to him in the language which he
understands; an endorsement to that effect to be signed
by the executants and the official
Post Disbursement Compliance – Limitation
Limitation Period
 It is the time limit within which the parties to the legal agreement can take action in a court of law to
enforce legal rights.
 There is no limitation period for Right of Lien or Set off and Sale of Pledged securities.
Examples of Period of Limitation

 A demand promissory note: 3 years from the date of DP note
 A bill of exchange payable at sight or upon presentation: Three years when the bill presented
 A usance bill of exchange: 3 years from the due date
 A guarantee: 3 years from the date of invocation of the guarantee. It is 30 years if the beneficiary is
a government.
 A mortgage-enforcement of payment of money: 12 years from the date money sued becomes due
 Borrower abroad: Extends to the period of stay abroad
 Limitation Period for Overdrafts & Term Loans
 The period of limitation for recovery of outstanding dues in an overdraft
or cash credit account is three years from the last credit made by the
borrower in the account with the proof of credit voucher signed by him
available with the bank.
 In case of a term loan account, the limitation in respect of each
instalment will be three years from the due date of payment and the
limitation period will be from the last date on which the last instalment is
payable from which three years will be available.
 The limitation period can be extended in the following manners
 Acknowledgement of Debt
 Part payment
Acknowledge of Debt
 Letter of acknowledgement of debt obtained before the expiry of limitation period
extends the limitation period.
 A fresh period of limitation will run from the date of the acknowledgement.
 The acknowledgement binds only those persons who have signed it.
 In case of joint debts, if all the borrowers do not sign the acknowledgement, the
advance will be recoverable only from those who have signed it.
 In case of guaranteed debts, the signature of the guarantor shall also be obtained
on the acknowledgement. The acknowledgement obtained after the advance has
become time barred, shall not be valid for extension of the period for limitation.
Essentials of Acknowledgement of Debt
The acknowledgement must comply with the following
requirements to extend the period of limitation. It must be:
1) In writing
2) signed by the borrower;
3) addressed to the lender (Bank)
4) bearing revenue stamps of appropriate value.
Part Payment:
 Part repayment of the loan made by the borrower himself or his duly
authorized agent, before the expiry of the documents also extends the
limitation period.
 Evidence of such payments should be in the handwriting or under the
signature of the borrower or his authorized agent.
 In case of joint debts, part payment by any of the borrowers shall revive
the debt against all who were originally liable.
Post disbursal Documents – Limitation
Reviving time-barred debts:
If a bank fails to initiate legal action before the expiry of the limitation period,
then it cannot do so subsequently. Such a loan is called a time-barred debt –
the bank is barred by time from taking legal recourse. Still, some remedies are
available.
 A time-barred debt can be revived under Section 25(3) of the Indian contract
Act, 1872 only by a fresh promise in writing and duly signed by the borrower
or authorized agent.
 If the court is closed when the limitation period ends, then the suit can be
filed after the court reopens.
Recap of leaning
In this you have broadly learnt
 Banks obtain security documents to be in a position to take legal action
if required
 Different types of documents are obtained for different types of facilities
 Limitation period is the maximum time within which one has to avail
legal remedies for recovery of dues
 Various documents executed by the borrower carry different limitation
periods
 The limitation period can be extended by following methods prescribed
by limitation Act, like obtaining acknowledgement of debt before the
document gets time barred
Business Loans
Term Loan Disbursement
Learning Objectives
At the end of this learning Unit, learners will
be able to understand
 To understand the methods of
disbursement for various types of facilities
 Precautions to be taken during and after
disbursement
 Ensuring proper utilization
Term Loan Disbursement – Points to remember
1) The disbursement of a loan depends on the whether the asset will
be created in one or multiple stages
2) Term Loan Disbursal generally takes place in stages as per the
progress of the project.
3) At each stage of implementation or installation, the asset that has
been already created is inspected to verify proper utilization of
earlier disbursements
4) Owner’s margin to be ensured before disbursement
5) Wherever possible the loan is directly disbursed to the
dealer/builder/seller/supplier as the case me by way of demand
draft /RTGS/ NEFT and not to the account of the borrower with a
few exceptions.
6) Request the supplier to send the final invoice and stamped receipt.
7) Insurance cover to be arranged for the asset created with Bank
clause for the full value of the assets.
8) If the assets are created in stages, insurance for the value of the
assets created is obtained accordingly
9) Ensure that the assets created or installed match with the
description contained in the Proforma invoice or quotation given at
the time of sanction of loan.
10) Seek clarification in case the location of the assets is different
from the location informed or conveyed to the bank and the
reasons for the same.
11) The customer has been advised to display “Hypothecated to
_____Bank” in a prominent position of the unit.
12) Periodic inspections are conducted to ensure the availability of
the asset and maintenance of the assets.
13) The insurance policy is kept in force always
Term Loan Disbursement Cycle
Sanction of
Loan
Process to Release of
continue till First
full loan Instalment
This procedure is adopted to
ensure that loan amount
sanctioned to the borrower is
Verification of Verification of
end use end use
used only for the purpose for
which it is sanctioned.
Further
Disbursement
Any Questions??
What is Risk ?
 Risk is the existence of uncertainty resulting in
either financial loss or physical pain or both. Risk is
the probability of loss that may arise due to
uncertainties.
 This possibility of loss can come from events which
can be expected or from events which cannot be
expected. In financial investment parlance, risk is
defined as the probability of losing the
principal/capital amount.
Can we avoid Risk?
 Risk is certain, only the timing & its

impact is uncertain
 Risk always result as a consequence
of activities or non-activities
 Risk is an integral part of our lives &
exists everywhere
 Risk and reward go hand in hand
Features of Risk
• Not Possible
Can we eliminate Risk
• Risk is inevitable
• Not Possible
Should we avoid Risk?
• Risk & Remuneration
Can we transfer Risk • Not Absolutely
Can we reduce or Share • Yes by outsourcing

Risk ? • Insurance
Features of Risk
 Risk avoidance means not performing or not taking
up any activity that could carry risk. Avoiding the risk
means, losing out on an opportunity or potential profit
that taking the risk may yield.
 Risk sharing is defined as “sharing with another party
the burden of loss or the benefit of gain, from a risk and
the measure to reduce the risk” Consortium lending
and insurance are examples for risk sharing.
 Risk reduction involves reducing the severity of the
impact or loss or the likelihood of the loss from
occurring. (Cash Loading in ATMs)
What is Risk Management?
Monitor &
Identify Measure Mitigate
Control
External Factors - Risk Drivers
Identify the
external factors
that expose the
Bank to risk
7
External Factors – Risk Drivers
Miscreants
Natural
Borrowers
Calamities
Counter Capital
Parties Banks Market
Interest Stock
Rates Market
Forex
Market
Internal Factors – Risk Drivers
Identify the
internal factors
that expose the
Bank to risk
9
Internal Factors – Risk Drivers
Technology
Poor
Liquidity
Proactive
Poor Capital
Banks
Planning Adequacy
Systems &
Staff
Control
No
Provisions
Types of Risks
Types of Risk
Non-Financial Financial
Business Strategic Credit Market Operational

Risk Risk Risk Risk Risk
Non financial Risks
Business Risk:
Non-Financial
 It is the risk that banks assume willingly
to create a competitive advantage & add
value for shareholders (ICICI prudential)
 It includes technological innovations, Business Strategic
marketing & product design. Products Risk Risk
designed may become obsolete by
technological advancement
 Replacing Door to door banking with
internet driven Banking and apps
 A bank with a pulse on the market and
driven by technology and high degree of
customer focus, could be relatively
protected against this risk.
Non financial Risks
Strategic Risk: Non-Financial

 It emanates from a fundamental
shift in the economy or political
environment. Business Strategic
Risk Risk
 Ex: FEMA - FDI & FII,
Nationalization of banks &
Privatisation of Business (BSNL
Lost its business)
 Strategic risk affects the entire
industry & are much more difficult
to manage
Types of Financial Risks Drivers
External Forces
Market Risk
Market Conditions
External Forces
Credit Risk
Counter Parties
Internal Forces
Operational Risk
People Process
14
Financial Risks – Credit Risk
Operational
Credit Risk Market Risk
Risk
CREDIT RISK
 Credit risk occurs when customers default or fail to comply
with their obligation to service debt, triggering a total or
partial loss
 The primary cause of credit risk is poor credit management &
unwillingness/incapability of the borrower to repay the debt
 Ex: Mr. Baldev borrowed Rs.25 lakhs for improvement of his
business from your Bank. It is to be repaid in monthly
instalments over a period of 5 years. Here risk of default in
repayment of the loan is a credit risk for the Bank.
Financial Risks – Credit Risk
Operational
Risk
Main Causes of Credit Risk

 Inadequate appraisal
 Over reliance on collateral
 Over emphasis on group decision making
 Lack of proper communication
 Lack of data integrity
 Faulty/In-adequate credit rating system
Financial Risks – Market Risk
Operational
Risk
MARKET RISK
 Banks invest in securities. It faces the possibility of market
risk when the market value of investments moves adversely.
 Adverse movement of Value and Yield on investments
 Adverse movement of Forex Rates (Overnight the huge
Nostro Balance value comes down in INR)
 Fall in interest rates on Loans and advances (Old FDs
continue at contracted rate yielding to loss)
 Controlling market risk means that variations in value of
portfolio to be kept within approved boundary/tolerance limits
Operational
Risk
Market Risk can further be classified into

1) Exchange risk,
2) Interest rate risk,
3) Equity risk and
4) Commodity risk
Operational
Risk
1) Exchange Risk:
The movements in currencies dealt with give risk to foreign
currency risk. Foreign exchange rates relate to changes in
assets & liabilities labeled in foreign currency. Volatility of
exchange rate result in adverse movements of rates giving
rise to foreign currency risk
2) Interest Rate Risk:
Market driven/RBI regulations driven changes give rise to
interest rate risk. This will impact the yield on advances &
cost of deposits
Operational
Risk
3) Equity Price Risk:

Stock prices are volatile which makes investment in equity
risky. Stock prices may move on account of General Market
Risk or risks specific to equity
4) Commodity Risk:
Commodity prices are strongly dependent on demand & its
supply and its volatility depends on market liquidity,
transaction cost, nature of commodity (perishable or non-
perishable).
Operational
Risk
OPERATIONAL RISK
 Operational risk can be described as failed systems,
processes, people, technology & natural disasters
 Operational risk is the result of various human and/or
technical errors
 At technical level, it exists due to deficiency or malfunctioning
of information system
 It is caused due to lacunae in monitoring/reporting /rules &
regulations
Operational
Risk
Causes of Operation Risk
People Process
External
System
Events
Operational
Risk
People
Risk due to acts of the
employees (Intentional Or
unintentional People Process
Frauds by Employees
External
Human Errors by Employees System
Events
Non Compliance to maker

Checker
Loss due to Ignorance of

employees
Operational
Risk
Process
Risk resulting from inadequate
or failed internal processes.
People Process
Loss on account of non-
existence of a process
(process gaps)
External
credit of amount to incorrect System
Events
beneficiary accounts
Payment of compensation
due to error of the bank
Operational
Risk
System – Technology Failures - malfunctions

Risk resulting from system
failure or system obsolescence.
People Process
Software / Hardware
External
Virus System
Events
Malfunctions – mistakes ATM
Interest Calculations
Operational
Risk
External events
Risk resulting from events outside
of a bank’s direct or indirect control
People Process
Natural Disasters - Calamities
Terrorism Vandalism Riots

External
System
Events
Hacking Skimming Phishing
Fire Theft
Regulatory Provisions to provide for Risks
 The RBI requires all banks to maintain a minimum Capital
Adequacy Ratio (CAR) of 10.875%, including Capital
Conservation Buffer (9% + 1.875% as on 31.03.2021).
 CAR is the ratio of a bank’s capital to its risk. It is a measure of
a bank's capital expressed as a percentage of a bank's risk
weighted credit exposures. This ratio is used to protect the
depositors and promote the stability and efficiency of financial
systems around the world.
 CAR is computed as: Capital Funds / RWA
 Capital Funds include Tier 1 Capital + Tier 2 Capital
 RWA refers to Risk Weighted Assets to include all financial
assets weighted at the risk factors given by RBI
 So the point to remember is Financial risk impacts CAR.
 All the banks are required to hold capital towards credit risk,
market risk and operational risk.
Thank you all
Business Credit – Credit Risk Analysis
Learning Objectives
 Understanding Credit Risk Management
 Proactive approach to mitigate the Credit Risk
 Internal Rating of Borrowers
 External Rating of Borrowers
 Risk Based Pricing
Credit Risk
 Credit risk is the risk bankers face when the borrowers do
not repay the loan or service the interest as per agreed
terms.
 A bank should assess and manage credit risk proactively
 Bankers need to take precautionary roles before
advancing loans to customers.
 It is important that the borrower is rated not only at the
time of giving the loan but also during the entire period of
the loan.
 Bankers go through the process of pricing the loan based
on the risk involved in the exposure.
Credit Risk Assessment & Analysis
Credit Risk Assessment
 Credit risks are assessed to ensure overall ability of the
borrower to adhere to the original contractual terms of loan
repayment. Normally every lender looks for higher returns on
the Loans given and hence will look forward to ensure that
the investment made are safe and earn a very good return.
Credit Risk Analysis?
 Credit risk analysis is the procedures by which a lender
organization will determine a potential borrower’s credit or
default risk. This is a multi-step process.
Importance of Credit Risk Management
 Credit risk management is important to a bank or
financial institution because it allows them to minimize
their losses.
 Every time a bank gives a loan, Bank is exposed to
default risk.
 The bank must weigh the possibility of profits versus the
risk of defaults.
 They do this by gathering as much information as
possible about the borrower (CIBIL / Field investigation
etc.)
 Risk management refers to more than just procedures
for granting a loan. It aims at measuring the risk and
possibility of hedging it by various aspects such as
provisions, reserves, credit risk insurance.
Assessment of Risk
 Assessing the risk is done in several ways like the
points-based system, personal appraisals by trained
risk-assessors or by departments for credit-risk
assessment of loan-customers.
 The safe investment is considered when ratings show
an AAA, AA or A rating. These ratings undergo a
continuous updating by credit-risk rating agencies like
CRISIL, CARE, ICRA, Fitch, Moody’s Investor
Services etc.
 Risk and reward (Risk-Return Matrix) go hand in
hand. When bankers aim to earn higher interest
margins, they may venture in to giving away risky
loans. But, when the risks are too high, the creditors/
banks/financers may also decline to offer loans.
Assessment of Risk
 Banks will prefer a good credit rated borrower
and offer lower interest rates to them. Similarly,
bonds with good rating gives less yield whereas
low ratings normally offer better returns and are
for risk-preferring investors.
 The thumb rule here is thus better credit ratings
for borrowers attract lower interest rates. Credit
analysis is thus the method used to assess the
creditworthiness of the borrower, organization,
business or bond-issuer. It implies the ability and
evaluation of the borrowing person or company
to honour repayments of its financial obligations.
The reading of the financial audited statements
of bigger companies is used for rating credit-
worthiness.
Credit Scoring
 Credit scoring is done for retail loans for
individual borrowers. A credit score (in
distinction to a credit rating) is a numeric
evaluation of an individual's
creditworthiness, compiled by a credit
bureau or consumer credit reporting
agency
 Lenders use credit scores to evaluate the

potential risk posed by lending to
individual borrowers and to mitigate
losses due to bad debt. Lenders also use
credit scores to determine who qualifies
for a loan, at what interest rate, and what
credit Limits.
Credit Scoring
 In India, there are four credit information companies
permitted by the Reserve Bank of India. Along with
Credit Information Bureau of India Limited (CIBIL),
Equifax, Experian and CRIF High Mark are the
Credit Information Companies that deal with credit
data.
 Although all the four credit information companies

have developed their individual credit scores, the
most popular is CIBIL credit score. The CIBIL credit
score is a three-digit number that represents a
summary of individuals' credit history and credit
rating. This score ranges from 300 to 900, with 900
being the best score. Generally, a credit score of 750
and above is considered as a good score.
Credit Scoring Process
 According to RBI guidelines, banks check
with CIBIL (Credit Information Bureau India
Limited) before approval of any loan
application or credit request. Lending to a
borrower is judged upon two parameters:
 Payment Abilities (through analysis of
financial data) and
 Payment Patterns (through analysis of
credit repayment history).
 Credit scoring is done by the banks based
on predefined parameters relevant to Credit
risk, and finally, a single score derived. The
score so arrived will give an indication of
the degree of risk involved.
Credit Scoring Process
 The compilation of credit score should be
at cheaper costs and greater speed
 While banks arrive at the credit risk factor

through their own credit score models,
credit bureau scores kept as the
benchmark for taking credit decisions.
 Pricing is done based on the internal credit

score of the bank. However, if the credit
score of the bank varies widely with that of
the credit bureau scores, banks review
their credit score to take a final decision.
Credit Rating
 Credit rating is an evaluation of creditworthiness of a
corporate borrower. Credit rating by a bank is detailed
financial analysis, based on the borrower’s financial
history and specifically relating to the ability of the
corporate borrower to meet debt obligations. Credit
ratings expressed in alphabets, alphanumerical or
numerical and suffixed with a positive or negative symbol.
 Proper identification and measurement of credit risk are

very important for effective credit management. The first
step in credit risk management is the process of properly
evaluating the borrower, not only at the time of lending
but also regularly during the course of a continued
relationship.
Credit Rating
 Bankers evaluate the borrowers, and the outcome of
these evaluations is generally a credit rating assigned
to the borrower. These grades reflect the degree of
risk associated with the borrower. Credit ratings help
banks to categorize and quantify credit risk.
Quantifying credit risk is not an exact science, and
there is no single universally applicable approach or
metric for doing so.
Types of Credit Rating
 The credit ratings are graded, and each
grade linked to the amount of risk involved
and thereby, the interest rate charged.
Higher the risk, higher the pricing and vice-
versa. There are two types of Credit Ratings External Internal
1) External Credit Rating by External
Agencies and
2) Internal Credit ratings by establishing
an internal Model of Rating
Types of Credit Rating
 There are two main reasons for rating a borrower
internally.
 To find out the creditworthiness of the borrower
and
 To price the product given to the borrower, i.e., to
factor the risk premium (rate of interest charged
on the loan/advance).
 External Credit Ratings are required by the banks
for the provision of capital as per Basel Norms.
Internal Credit Rating
1
 As per RBI guidelines, all credit exposures of a bank
2
has to be rated for risk. Banks must have specific
3
definitions, processes, and criteria for assigning
4
exposures to grades within a rating system. The
5
ratings must be a meaningful differentiation of risk.
6
 The grades used in the internal Credit Risk rating 7
System should represent the default risks associated 8
with exposure and thereby enabling the top 9
management/decision making authority in taking a
decision of sanctioning the loan or not.
 The Credit Rating Framework should reflect the
regulatory requirement on asset classification.
Internal Credit Rating Model
1
 The Rating Scale can be 9 layered, with levels 1 to 5
2
representing various grades of acceptable credit risks.
3
Levels 6 to 8 represent various grades of unacceptable
4
credit risk associated with credit exposure. Level 9 is
5
the Default Risk.
6
 The rating scale should be in a position to define the 7
pricing and other terms and conditions associated with 8
credit exposure. 9
 Credit rating framework should be uniform for all
manufacturing industries. However separate CRF may
be created for certain industries like real estate,
venture capital business, etc.,
Three Parameters of Rating
 Corporate borrowers are rated on three broad
parameters
 Financial Risk Manage Busines
Financial s
 Business Risk and ment
 Management Risk
 Every bank has its own model for rating their
corporate borrowers based on their risk appetite, risk
profile of the borrowers, etc.,
 Credit rating differs from bank to bank. Banks prefer
to keep the model of credit rating confidential.
 The bank's internal ratings are derived using rating
tools that are based on a combination of expert
judgment and statistical modelling
Two sides of Internal Rating Coin
As per RBI guidelines, banks are required to assign credit
ratings across all their credit activities. The internal rating is
based on a two-tier rating system.
 Obligor (Borrower) Rating: Representing the probability
of default by the borrower in repaying its obligation in the
normal course of business, the obligor (borrower) rating
can be easily mapped to a default probability bucket.
 Facility Rating: Takes into account transaction-specific
factors to determine the loss parameters in the event of
default, and represents the severity of loss of principal
and/or interest on any business credit facility.
External Credit Rating Agencies (CRA)
 Under the Basel framework, banks adopt two
broad methodologies to measure their credit
Internal
risk capital charge for regulatory purposes, Standardized Rating
viz., Approach Based
Approach
 Standardised Approach (SA) and
 Internal Rating Based (IRB) Approach.
Of the two approaches, SA is simpler and
easy. The role of external CRAs assumes
significant importance with respect to credit
risk regulatory capital charge under SA of the
Basel framework.
Rating agencies approved by RBI
 For Domestic Companies - As per RBI
Guidelines, the Banks have identified
Domestic Overseas
Domestic Credit Rating Agencies such as
CARE, CRISIL, ICRA, India Ratings and
SMERA for rating domestic companies.
 For Overseas Companies - Agencies such

as INFOMERICS, FITCH, Moody’s and S&P
for rating Overseas companies. These
ratings are required for computing Risk-
weighted Assets and provision of capital.
Comparable and Uniform Approach
 To ensure standardization of rating symbols and
definitions, all Credit rating agencies have to
adopt common rating symbols and definitions.
 There are two types of ratings.
 Long Term ratings
 Short-term ratings
The ratings are linked to a relative risk weight for
providing capital as per Basel norms. (Capital to
Risk Weighted Assets)
Example - Illustration
 Anandan lives in Bangalore. He goes to a local bank in the hope of getting a
loan to get his small business off the ground. He already has an account at
the bank but no credit cards. He has availed Home Loan from a different
Bank. He has been dealing with the Bank for the last 2 years and now he
wants to expand his business and since he could not personally fund the
project, he has sought financial assistance.
 The Bank has a good opinion about him and has no reason to attribute any
ulterior motive to his character. As part of the bank’s loan procedures, the
Credit officer at the bank did credit check on Anandan. He now requests for
concession in rate of interest too for the proposed loan
 How do you think bank goes about analysing the risk involved and how
would bank price the loan request?
Thank You
Maintaining Asset Quality
Early Warning Signals
Learning Objectives
 At the end of this topic learners will
be able to explain the concept and
meaning of
 Importance of asset quality
 Importance of timely recovery
 Meaning of Early Warning Signals
 Classification of EWS
 Financial EWS
 Non-Financial EWS
Importance of Asset Quality
 RBI guidelines on IRAC (Income Recognition & Asset
Classification) Norms have to be complied by Banks
 In general, an Account where the default is more than
90 days, then such account shall be classified as
Non-Performing Asset
 The Banks are not allowed to recognize income from
such accounts
 Further, Banks have to set aside their profit as
provision for such NPA Accounts
 NPAs are doubled edged swords (in fact, it’s 3
dimensional as we are also required to maintain more
capital on such accounts). On one hand they cease to
generate income and on the other hand they take
away the income generated by other assets towards
provisions
What should be done to ensure Asset Quality
 Maintaining Asset Quality is a continuous process.
 Any indication of a threat to recovery, however minor
it may be, has to be identified as and when it occurs
and suitable action to be taken to safeguard the
interest of the Bank.
 During the process of monitoring, we get signals
from various sources and forms, indicating a threat
to recovery.
 Such threats could affect immediate recovery, or it
could be potential threat.
 These indications are called Early warning signals
 Based on these EWS, corrective action is to be
taken to ensure that the loans do not go bad.
Types of Early Warning Signals
Non
Financial
Financial
Early Warning Signal Sources
Sources of
Early
Warning
Non
Financial
Financial
Signals
Signals
Transactions Behavior of
Movement
in the the
of Funds
Account Customer
EWS Signals form – Transactions in the Account
X Debits are not revealing purchases & trade payments

X Sales are not routed though the account
X Frequent return of cheques issued by the Borrower
X Frequent return of cheques deposited by the Borrower
X Account going irregular frequently
X Interest on the working capital not serviced in time
X Installments of Term loans are not repaid in time
X Bills Purchased / discounted from borrower are returned
unpaid
X No funds to recover the amount of returned bills
EWS Signals form – Movement of funds
X Frequent inflow of funds coming from other banks for

payment of interest / installment of loan
X High value RTGS remittances sent to unrelated parties to
business
X Diversion of funds to other business or for personal
consumption purposes or creating personal assets.
X Frequent request by the borrower for adhoc facilities
X Cheques are being issued to non-suppliers of goods ‘
services
X The cheques deposited were not issued by his buyers.
EWS Signals form – Behavior of the Borrower
X Borrower not submitting the Stock Statement / List of Debtors

X Borrower not submitting Audited Financials
X Borrower avoids visit to Bank
X Borrower postpones field visit to shop / factory / Godown
visits on flimsy ground
X Borrower not submitting the required data for Renewal of
Working capital finance
X Borrower not submitting the invoices of machinery financed
X Borrower avoids eye contact while interacting
EWS – Non-Financial Signals
X Raid by Income Tax/ Sales Tax/Excise.
X Fake KYC documents / Submission of Fake/ forged documents
X Cheating & forgery/ Fake Title deeds in Mortgage Loan..
X Quotations from unauthorized dealers or suppliers/ vendors
who are not dealing in the line of business.
X Frauds in Housing loans/ Mortgage Loans
X Frauds in Vehicle Loans
X Siphoning of funds by opening accounts in the name of reputed
builder/dealer/supplier
X Fraudulent removal of pledged stock/ disposing of
hypothecated stock without knowledge of bank
EWS – Market Sources & Reputation
Market Sources and Reputation of the Borrower & unit is required
on concurrent basis. It is not just pre-sanction process.
 The CIBIL Data is to be obtained periodically during the currency
of loan to ensure that the borrower maintains financial discipline
 Intra-firm comparison and inter-firm comparison on various
parameters
 The share price of the corporates indicates the financial stake
 The Annual reports of the Corporates are to be obtained to know
the plans of the company and the resolutions at the General
Body Meetings
 External Rating of the Borrower in Case of Aggregate advances
exceeding Rs. 5 Crores
What should be done when EWS are noticed
 Firstly, Banker should ensure the reasons and decide action plan
 Branch has to visit the customer place and ascertain the facts
 If the borrower has diverted funds for his personal use, then we
can offer him other products of personal requirements instead of
diverting business funds
 Branch should take appropriate steps to ensure safety of Bank
funds
 The action should be taken on top priority without delay
 Any delay may lead to depletion of assets and dilution of security
 The Branch has to seek guidance from RO /the law department
 In the instances of Forgery / frauds / fake title deeds it attracts
criminal proceedings against the borrower
Tacking Collaterals - Valuation & Encumbrance Certificates
 It has to be ensured that the security is intact by obtaining
periodical valuation certificates during review and renewal
of the account
 The collaterals inspection is to be diarized and should be
done to ensure the ownership and possession
 Encumbrance Certificate have to be obtained periodically to
ensure that the property does not bear any other
encumbrances
 Stock audit is to be conducted in case of the collaterals, the
value of which can not be easily assessable by the staff
 Surprise inspection of the units and collaterals is essential
In this topic, we have understood……
Early warning Signals:
 Need for maintaining asset quality
 Importance of timely recovery
 Meaning of Early Warning Signals
 Classification of EWS
 Examples of Financial EWS
 Examples of Non-Financial EWS
Business Loans
Income Recognition, Asset

Classification and Provisioning
Norms
Learning Objective
At the end of this topic, the learners will be able to explain
1. On completion of this unit, you will be able to:
2. Define non-performing assets
3. Explain income recognition
4. Explain asset classification norms
5. Define provisioning norms
Introduction
 Banks primary functions are (i) Accepting deposit from public & (ii) Giving
Loans to needy
 Interest on advances is the major income for the Bank
 RBI stipulates that Bank can show Interest income as profit only if it is
actually recovered from borrower
 Hence banks have to ensure timely recovery of advances as per repayment
terms
 If the Installment / interest of a loan, is not recovered by bank within 90 days
from its due date, the advance becomes Non-Performing Asset.
 Income Recognition and Asset Classification stipulated by RBI implies that
income booked by Bank should be from the assets fulfilling the norms set for
the asset classification.
Non-Performing Assets
 Any asset ceases to generate interest

income for the Bank when it becomes
NPA
Reasons for becoming an NPA
Reasons
for NPA
Non-
Financial
Financial
Reasons
Reasons
Fund Non-Fund
Based Based
Non-Performing Assets Financial
Financial Reasons – Fund Based Limits Reasons
1) Term Loan : where the interest and /or installment of principal

remains overdue for more than 90 days
Fund
2) Cash Credit / Overdraft : if the a/c is treated as out of order Based
3) Bills Purchased / Discounted : if the bill remains overdue for more
than 90 days
4) Short Duration Crop Loans : when an installment of
principal/interest remains overdue for two crop seasons. E.g. paddy
crop
5) Long Duration Crop Loans: when installment or the interest remains
overdue for one crop season. E.g. sugarcane
Note: ‘Crop season’ for each crop means the period up to harvesting of the
crops raised, as determined by the State Level Bankers’ Committee in each
state.
Non-Performing Assets Financial
Reasons
NPA Due to Financial Reasons – Non-Fund Based Limits
 In the case of non-fund-based limits, exposure in crystallized
transactions (LC/BG/DPG devolvement) should be included Non-Fund
in total exposure. In fact, when LC/BG/DPG is devolved, the Based
contingent liability is getting converted into actual liability and
overdue period starts from this day.
Letter of Bank
Credit Guarantee
Non-Performing Assets Non-
Financial
Reasons
NPA Due to Non-Financial Reasons
An Account may also be categorized as NPA on technical/ non-financial
grounds in the following cases:
1) An account where the regular/ad-hoc limit has not been renewed
within 180 days from the due date/date of sanction/ad-hoc sanction.
2) DP arrived at based on more than 3 months old stock statement
would be deemed as irregular. Such accounts will slip to NPA status
after 90 days, computed from 3 months of the date of the last stock
statement.
NPA Concepts
Out of Order Past Due / Overdue
1) An account is treated as out of order if the 1) An amount is overdue if it is not paid on
outstanding balance remains continuously in the due date.
excess of the sanctioned limit/drawing power (DP) 2) Past due applies to Term Loans / Bills etc
for 90 days. the payment of Principal or instalment is
2) In cases where the outstanding balance in the overdue
principal operating account is less than the Limit 3) If any amount is Overdue or Past due, it
/ DP, but there are no credits continuously for
results in the account being classified as
90 days as on the date of the Balance Sheet OR
Non-Performing Asset
3) The credits are not enough to cover the interest
debited during the same period, these accounts
should be treated as out of order.
IRAC Norms on Income Recognition
 Income recognition has to be objective and based
on the record of recovery. Income from an NPA is
recognized/booked only when it is actually
received (Not on an accrual basis).
 Income on performing assets only can be
recognized on an ‘accrual basis.’
 Banks should not charge and take the income
account interest on any NPA on an accrual basis.
IRAC Norms on Income Recognition
 If any advance (including BP/BD) becomes NPA,
the entire interest accrued and credited to the
income account in past periods should be reversed
if the same is not realized.
 In respect of NPAs, fees, commissions, and so on
should cease to accrue in the current period;
accrued but uncollected items of past periods
should be reversed.
Asset Classification
Sub
NPAs are classified into three categories: Standard
1) Sub Standard Asset
2) Doubtful Asset and Doubtful
NPA
Asset
3) Loss Asset
Loss Asset
These classifications are done
based on
 The period for which the asset
has remained as NPA; and
 Realizability (recoverability) of
the dues
Sub-Standard Asset
 Assets which have remained as NPA for a period of NPA
less than or up to twelve months.
 It has well-defined credit weaknesses that jeopardize Sub Standard
the liquidation of the debt.
 It is possible that the banks will sustain some loss, if Doubtful Asset
deficiencies are not corrected
 Sub Standard Assets are further classified as Secured Loss Asset
Exposure and Unsecured Exposure.
 Secured exposure is exposure in accounts fully
covered with appropriate security.
 All clean loans and loans with the security of not more
than 10% are to be categorized as “unsecured
exposure”.
Doubtful Asset
 These are those assets which have remained in NPA NPA
status for a period of more than 12 months.
 Doubtful assets are further classified as DA1, DA2, DA3 Sub Standard
 DA1: Doubtful status for up to one year in DA
category Doubtful Asset
 DA2: Doubtful status for one year to three years in DA
category Loss Asset
 DA3: Doubtful status for more than three years in DA
category
 Doubtful assets have all the weaknesses of substandard
assets. Additionally, the weaknesses make collection or
full realization highly questionable and improbable.
 Doubtful assets can further be bifurcated into a secured
portion and unsecured portion for making provisioning.
Loss Asset
 A Loss Asset is one, where the bank or the NPA
internal or external auditors or the RBI inspection
has identified the loss but the amount has not Sub Standard
been written off wholly.
 Such an a/c is treated as uncollectable and of Doubtful Asset
such negligible value that its continuance as a
bankable asset is not warranted although there Loss Asset
may be some salvage value.
NPA – Basic Guidelines
1) NPA status of EMI Loans is to be determined based
on the nonpayment of EMIs.
2) Categorization as NPA is done Party/Borrower-Wise
and not account/facility wise.
3) Categorization of consortium advances, is done based
on the record of recovery in individual Banks.
4) Categorization of Sub Limits to be done based on the
record of recovery in the main a/c.
5) Loan against NSCs, IVPs, KVPs and LIC policies are
treated as Standard subject to availability of Margin.
6) NPA norms are applicable for Advances against
gold ornaments, Govt. Securities
7) If the account slips to NPA status, charging of
interest has to be stopped till it is recovered.
8) Income from NPA accounts cannot be recognized
on an accrual basis but only on a cash basis. This
direction of RBI is called as “INCOME
RECOGNITION”.
9) If the NPA account is regularized, say by payment
of overdue, submission of the stock statement,
renewal of expired limit, etc., the accounts can be
treated as performing assets (PA).
10) However, upgradation should not be done through
recovery out of TOD or fresh facilities
11) If recovery is in danger due to erosion in value of the security
less than 50% of the value assessed at the time of the last
inspection /or non availability of security /OR fraud by
borrowers, the assets should straight away be classified as
doubtful or loss assets.
12) If the realizable value of the security is less than 10% of the
outstanding, the asset is straight away classified as a loss
asset.
13) In the case of loans with a moratorium become overdue only
after the due date for payment of interest, if not paid
14) The suit filed and DICGC/ECGC/CGTMSE claim lodged
accounts are to be classified as NPAs.
15) The Net worth of borrower/ guarantor should not be considered
for Asset Classification.
Provisioning for Non-Performing Assets
What is Provisioning
 The provision for bad debts is an estimation of
potential losses that a bank might experience due to
the non-payment of dues by its borrowers.
 In other words, provision is an estimated amount
that may be lost and is treated as an expense on the
Bank’s P&L.
 The minimum amount to be provisioned is governed
by RBI guidelines.
 Varying on the stage of NPA, the sector and
whether the loan is secured or an unsecured,
different percentage of provisions have been
stipulated by the RBI.
Types of Provision
 Specific provision is a provision that the bank makes

against individual NPA accounts.
 Floating provision is not against any particular
account but on the entire advances portfolio. Banks
make general/floating provisions against standard
advances.
 Floating provision can be used only for contingencies Specific Floating
under extraordinary circumstances.

 Rates of Provision varies from 0.25% to 100 %
depending on asset class, sector, security etc.
RBI – Provision Coverage Ratio
 As per RBI norms, the Provision Coverage Ratio

should be a minimum of 70% of Gross NPA
including Floating Provision.
 It may happen that the provisioning (gross)
exceeds the usual NPA provisioning requirements.
 The excess amount is called Counter-Cyclical
Provisioning Buffer which can be used by banks for
making specific provisions against NPAs during
periods of system-wide downturn, with prior
approval of RBI.
Willful Defaulter
 Default is considered to be willful on account of any of the
four reasons
1) The unit has defaulted in meeting its payment/repayment
obligations to the lender even when it has the capacity to
repay.
2) When funds are mis-utilized and diverted
3) When the funds are siphoned off
4) When the unit has disposed of security offered to bank
without the knowledge of the bank
 The identification of willful defaults should be made, while
keeping in view the track record of the borrowers and should
not be decided on the basis of isolated transactions/incidents.
 The default to be categorized as willful must be intentional,
deliberate, and calculated.
Willful Defaulter
 A wilful defaulter is one who has not paid the

loan back, despite the ability to repay it.
 The RBI has been initiating lot of effort to

ensure that wilful default should not adversely
affect the health of the banking system.
 Lenders should be capable of identifying such

wilful default and initiate immediate recovery
steps.
Impact of NPA on Banks
 The account stops earning interest for the bank
 The interest is debited to the account (income already
charged), but not collected is to be reversed.
 Provision to be made for the account for the probable loss
which impacts profitability of the bank
 The funds of the bank are blocked. They cannot be
profitably deployed
 Recovery efforts take a lot of time and cost resources,
which the bank could have otherwise deployed for
profitable purposes.
 Bank’s capital adequacy is impacted due to erosion in profit
and addition of RWA depending on the asset class.
Summary
 Income from an asset is treated as income only when the same
is recovered. Income is not recognized on an accrual basis but
on a recovery basis.
 When interest/installment is not recovered within a period of 90
days, the account will be treated as non-performing assets.
 There are three types of non-performing assets; Substandard
asset, Doubtful asset, and Loss asset.
 Provisioning is setting aside a portion of an asset (including
standard asset) out of the profit of the bank for meeting any
possible loss.
 Provisioning is made depending upon the category of NPA;
higher the provision as the asset deteriorates in its category.

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Types of Borrowers

The law identifies a Legal entity as under…

Differently Enabled A Person who is employed as Telephone Operator in an organisation

 A business owned by an individual with

 KYC – ID Proof of the Proprietor

 Two or more persons joining to carry business

 KYC of the Firm

 Partnership with Limited Liability

 Certificate of Incorporation of LLP

It is the charter of the Authorises to Borrow

 Only Citizen of India / Resident Indian can form

Bank to obtain and Verify

Associations Clubs Societies

Thank you all …………

Liabilities – Sources of Funds Amount Assets – Uses of Funds Amount

Liabilities – Sources of Funds Amount Assets – Uses of Funds Amount

Total 12,00,000 Total 12,00,000

Total 12,00,000 Total 12,00,000

Total 12,00,000 Total 12,00,000

Total 12,00,000 Total 12,00,000

Total 12,00,000 Total 12,00,000

Total 12,00,000 Total 12,00,000

Total 12,00,000 Total 12,00,000

Total 12,00,000 Total 12,00,000

Total 12,00,000 Total 12,00,000

Total 12,00,000 Total 12,00,000

Total 15,50,000 Total 15,50,000

Total 15,50,000 Total 15,50,000

Total 18,50,000 Total 18,50,000

Total 18,50,000 Total 18,50,000

Total 22,50,000 Total 22,50,000

Total 22,50,000 Total 22,50,000

Total 22,50,000 Total 22,50,000

Total 22,50,000 Total 22,50,000

Total 22,50,000 Total 22,50,000

Total 22,50,000 Total 22,50,000

Term Liabilities Non-Current Asset

Total 22,50,000 Total 22,50,000

Term Liabilities Non-Current Asset

Total 22,50,000 Total 22,50,000

Term Liabilities Non-Current Asset

Total 22,50,000 Total 22,50,000

Long Term Funds

Short Term Funds

Sl Name of the Account Amount Sl Name of the Account Amount

 AED means Assets & Expenditure will

Total 1500 1500

 The first level is the trading account Trading

Term Loan @ ICICI Account

Computers & Printers Vehicles - Delivery Vans

We will learn it in our next

 The first level is the trading account Trading

Term Loan @ ICICI Account

Computers & Printers Vehicles - Delivery Vans

 Prepared to check whether the total  Prepared to indicate Assets and

Why does a Banker is

To decide on whether If the advance is to be

*Note: The outstanding balance to be written-

While calculating Tangible Net worth, this item

*Note: Fixed Asset is Net Block (Gross Block – Depreciation)

Sources for Non Financial

Field Market Opinion Financial

 Gross Profit 100 / Sales  Net Profit 100 / Sales