Chapter 1 Objective & Importance of the Study

"Imparting greater vitality and growth impetus to the Micro, Small and Medium Enterprises (MSME) in terms of output, employment and exports and instilling a competitive culture based on heightened technology awareness." MSME is the most important employment-generating sector and is an effective tool for promotion of balanced regional development. These account for 50 percent of private sector employment and 30 to 40 percent of value-addition in manufacturing. It produces a diverse range of products (about 8000 odd items), including consumer items, capital and intermediate goods. However, the SMEs in India, which constitute more than 80 percent of the total number of industrial enterprises and form the backbone of industrial development, are as yet, in technological backwaters. These suffer from problems of suboptimal scales of operations and technological obsolescence. So, what these SMEs need today is primarily access to new technology. Poor financial situations and low levels of R&D, poor adaptability to changing trade trends, non-availability of technically trained human resources, lack of management skills, lack of access to technological information and consultancy services and isolation from technology hubs, etc. are some of the reasons why these SMEs are not being able to surge ahead. Small and Medium enterprises (SMEs) are the backbone of India's economy. They have to now work hard to get out of this impending scenario. There has to be a major change in policy on how they are operating. SMEs have to put in more effort on research and development (R&D) and on ways to use technology at par with the international standards. The primary objective of this study is to understand the appraisal process of the projects followed in SIDBI. The secondary objective of this study is to know about the various products and schemes offered by SIDBI to SME sector.

Chapter 2 Introduction

2.1 About SIDBI: Small Industries Development Bank of India was set up by an Act of Parliament, as an apex institution for promotion, financing and development of industries in small scale sector and for coordinating the functions of other institutions engaged in similar activities. It commenced its operations on April 2, 1990. SIDBI extends direct/indirect financial assistance to Small Scale Industrial units, assisting the entire spectrum of small and tiny sector industries on All India basis. SIDBI is the principal financial institution for Micro, Small and Medium Enterprises (MSMEs). The importance of holistic development of the MSME sector is significant due to its contribution in employment generation, balanced regional development and overall poverty reduction. This sector would continue to act as a catalyst to enable Indian economy to overcome challenges and encourage forward and backward integration. The Indian MSMEs, with their inherent strength and strong resilience, have weathered the global economic crisis as a result of timely and adequate policy support from Government of India and Reserve Bank of India. SIDBI would continue to ensure that adequate and timely credit and appropriate non-credit support is provided to the MSME sector directly and through banks, Micro Finance Institutions, state level institutions and national and international agencies. Its financial initiative is dedicated towards furthering long term sustainable and inclusive growth of the sector and thereby contributing towards Nation-building.

Mission:
To empower the Micro, Small and Medium Enterprises (MSMEs) sector with a view to contributing to the process of economic growth, employment generation and balanced regional development.
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Vision:
To emerge as a single window for meeting the financial and developmental needs of the MSME sector to make it strong, vibrant and globally competitive, to position SIDBI Brand as the preferred and customer-friendly institution and for enhancement of shareholders wealth and highest corporate values through modern technology platform.

Top Management:
Small Industries Development Bank of India (Amendment) Act, 2000 provides for a fifteen member Board of Directors. Out of these, central Government appoints/nominates eight directors comprising Chairman and Managing Director (CMD), two whole time directors, two Government officials and three experts (including one from state financial corporation) having special knowledge or professional experience. Out of the remaining seven, three directors are nominated by the three largest shareholding institutions, banks (e.g. Development Banks and/or public sector banks) and insurance companies (e.g. The General Insurance Corporation, the Life Insurance Corporation) owned or controlled by the Central Government., while four are elected by the public shareholders or can be co-opted by the Board. As of May 2011, there are thirteen directors including one CMD, two DMDs and two Government Directors. Shri Sushil Muhnot is the Chairman and Managing Director. Senior management team comprise of two Deputy Managing Directors, viz Shri. Rakesh Rewari and Shri. N.K Maini , and two Executive Directors, viz. Shri V. S. Rathore, Shri N. Raman.

Manpower:
As on March 31, 2010, SIDBI had on its rolls a total of 1040 active full time staff comprising 867 Officers, 98 Class III staff and 75 Subordinate staff. Of the total staff as on
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March 31, 2010,187 belonged to Scheduled Castes (SCs), 71 to Scheduled Tribes (STs) and 127 to Other Backward Classes (OBC). The staff strength included 12 employees in Ex-servicemen and 17 employees in Persons with disabilities (PwD) categories. The strength of the women employees has gone up to 229 from 205 as at the end of previous year, thereby strengthening the Banks position as an equal opportunities employer. SIDBI has also been providing suitable platform to its human resources to widen their horizons of knowledge and experience by deputing its specialized manpower to various institutions. SIDBI had during the year, deputed officers to its various subsidiaries/associates and also to outside organizations like Rashtriya Mahila Kosh (RMK), United Nation Industrial Development Organization (UNIDO), etc. 2.2 Strategic Business Initiatives: The business strategy of SIDBI is oriented to provide financial support to MSMEs through different phases of economic cycles. At the same time, with its commitment to responsible banking and addressing the issues of climate change, SIDBI has integrated environment, energy efficiency and social standards with its activities in an increasing manner.
STRATEGIC BUSINESS INITIATIVES

Figure 1.1: Strategic Business Initiatives by SIDBI

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Responsible Financing: In order to upscale Energy Efficiency (EE) financing for the MSME sector, SIDBI contracted bilateral Lines of Credit from Japan International Cooperation Agency (JICA), Japan; KfW, Germany and French Development Agency (AFD), France. The Bank has launched awareness campaigns on EE measures in the energy intensive MSME clusters and has also provided technical support services to MSMEs for identifying EE technology/equipments. To promote investment in clean technologies, waste recycling and management in MSME units/clusters, the Bank availed a World Bank Line of Credit based on Environment and Social (E&S) standards. SIDBI has signed an MoU with Bureau of Energy Efficiency (BEE) for implementing EE measures among MSMEs in clusters. As part of its commitment to sustainable development, the Bank supported SME Rating Agency of India Ltd. (SMERA) to develop Green Rating Model for MSMEs. SIDBI has also signed an MoU with American India Foundation (AIF) to provide livelihood support to the low-income groups through a joint initiative called the Rickshaw Sangh Programme, under which the Bank sanctioned financial assistance of ` 50 Lakh to Bhartiya Micro Credit (BMC) under its Micro Credit Scheme for microfinance as well as for financing livelihood programmes. Customized Financing: SIDBIs business initiatives are strategized to develop tailor made, customized financial products to meet the diverse credit needs of the MSMEs. In order to augment greater credit flow to MSME sector, the Bank decided to provide all loans upto ` 100 Lakh without collateral and/or third party guarantee under the Credit Guarantee Scheme of CGTMSE.

SIDBI also created Risk Capital Fund to provide Risk Capital assistance to MSMEs in the form of Equity, Preference capital, Optionally Convertible Debenture, Optionally Convertible Debt, etc. During FY 2009-10, the Bank expanded the product range by introducing Subordinated Debt (SD). Sub-debt is quasi-equity type debt-based product, which is subordinated in repayment and security to senior loans. This product is helping MSMEs to leverage the same to raise additional debt to meet their growth requirements. Credit Risk Management: SIDBI has put in place a comprehensive Credit Risk Management system which is sensitive and responsive to various risks emanating from its business dealings. As a move towards compliance with BASEL II norms, SIDBI also initiated necessary steps for the implementation of the Integrated Risk Management System covering setting up of systems and software for Credit Risk Management, Market Risk Management and Operational Risk Management. Initiatives Relating To SFCs: In order to improve the operational and financial performance of State Financial Corporations (SFCs), the Bank has MoU with 12 SFCs. The financial position of 10 MoU SFCs registered improvement in the post-MoU period. The level of NPA has also registered a decline. Up-to-date Income Recognition and Asset Classifications (IRAC) norms have been issued to SFCs and their compliance thereto is being monitored. The MoU SFCs have switched over to accrual accounting. The Bank is also in the process of preparing a draft Loan Policy and Risk Management Policy for the adoption and use by SFCs. MSME Financing and Development: SIDBI is also implementing a multi-agency/multi-activity MSME Financing and Development Project (MSMEFDP). The primary objective of the Project is to meet both the demand and supply side concerns of MSMEs through a judicious blend of financial and non-financial services. The progress of the Project is quite noticeable and it has also
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received Merit Award from Association of Development Financing Institutions in Asia and the Pacific (ADFIAP) in 2010.

2.3 Associates:
Following are the associates of SIDBI: Credit Guarantee Fund Trust For Micro and Small Enterprises (CGTMSE) India SME Technology Services Limited (ISTSL) SME Rating Agency of India Ltd. (SMERA) India SME Asset Reconstruction Company ltd (ISARC)

Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE): Credit to micro and small enterprises sector is generally perceived as high risk lending, more so, when there is absence of any collateral. In order to encourage banks to lend more to this sector, Government of India and SIDBI have set up the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) in July 2000, to provide credit guarantee support to collateral free / third-party guarantee free loans up to Rs. 100 Lakh extended by banks and lending institutions for micro and small enterprise (MSEs) under its Credit Guarantee Scheme (CGS). India SME Technology Services Limited (ISTSL): India SME Technology Services Limited (ISTSL), set up in November 2005, provides a platform for MSMEs to tap opportunities at the global level for acquisition of modern technologies. ISTSL continues to pursue its strategy of rendering technical services for technology transfer and promotion of energy efficient, environment friendly technologies in the MSME sector. Efforts are being made to facilitate reduction in Green House Gases in the MSME sector.
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In order to strengthen and accelerate the process of technological modernization in the MSME sector, ISTSL has entered into partnership with various national and international organizations engaged in similar activities. ISTSL took up the project for implementing Energy Efficient technologies in Stainless Steel Re-rolling Cluster of Jodhpur, in association with KfW, Germany. The project is now being taken up for implementing Clean Development Mechanism (CDM) project by implementing Energy Efficiency measures, which are expected to generate CDM revenues, besides reducing the cost of fuel being consumed by the units. SME Rating Agency of India Ltd. (SMERA): SIDBI, along with leading public, foreign and private sector banks and Dun & Bradstreet Information Services India Private Limited (D&B), set up SME Rating Agency of India Ltd. (SMERA) in September 2005, as an MSME dedicated third-party rating agency to provide comprehensive, transparent and reliable ratings and risk profiling. India SME Asset Reconstruction Company Ltd (ISARC): India SME Asset Reconstruction Company Ltd (ISARC) is the country's first MSME focused Asset Reconstruction Company striving for speedier resolution of nonperforming assets (NPA) by unlocking the idle NPAs for productive purposes which would facilitate greater and easier flow of credit from the banking sector to the MSMEs. Set up in April 2008, ISARC's objective is to acquire NPAs and strive to maximize recovery value through innovative resolution methods. It also complied with the conditions stipulated by RBI while granting the Certificate of Registration as an ARC and became fully operational from April 15, 2009. 2.4 Subsidiaries: SIDBI has its two subsidiaries, namely: SIDBI Venture Capital Limited (SVCL) SIDBI Trustee Company Limited (STCL)
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SIDBI Venture Capital Limited (SVCL): SIDBI Venture Capital Ltd. (SVCL), set up in July 1999, is an asset management company. At present it is managing two venture capital funds, viz. the National Venture Fund for Software and Information Technology Industry (NFSIT) and the SME Growth Fund (SGF) for providing venture capital assistance to knowledge based MSMEs, especially in the areas of auto components, textiles, life sciences, clean technologies, retailing, light engineering, information technology, services etc. SIDBI Trustee Company Limited (STCL): SIDBI Trustee Company Limited was set up by SIDBI on July 19, 1999 to act as Trustee of National Venture Fund for Software and Information Technology industry (NFSIT). Now, it is also acting as Trustee of SME Growth Fund. The company has appointed SIDBI Venture Capital Limited (SVCL) to act as the Investment Manager to NFSIT and SGF.

2.5 Departments of SIDBI

Various departments perform functions which are indispensable for the working of the Bank. Following are the main functions performed by these departments: Administrative and Premises Department: Administrative department does the operations relating to employees. This department does the administrative settlement of claims. It handles the employees salary and payments. Employees loans are also managed by this department. Premises department works for the employees accommodation. It provides quarters to the employees for living. Planning and Budget Department:

This department does the planning work i.e. it plans that how the budget is to be allocated. The department allocates the target for branch for each financial year under each scheme of SIDBI. Fraud Management Cell: This department works against the fraud occurring in each financial year. It saves the Bank from the fraudulent activities taking place like credit fraud, etc. It also helps in saving the Bank from the fraud arising in cases of repayment of principal amount and interest thereof. Government Scheme Cell: In addition to its direct and indirect credit operations, SIDBI also plays a pivotal role in implementation of various schemes for MSME sector undertaken by the Government of India. Government Scheme Cell manages the various government schemes which are there for providing subsidy to those enterprises that satisfy the prescribed criteria. The schemes that are managed by this department are Credit Linked Capital Subsidy Scheme (CLCSS), Technology Upgradation Fund Scheme for Textile Industry (TUFS), Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE), Integrated Development of Leather Sector Scheme (IDLSS) and Scheme of Technology Upgradation/Setting (FPTUFS). Human Resource Development Department: Human resources department functions to give necessary impetus for the growth in the business of the Bank by providing the requisite manpower. It recruits the capable employees and also conducts the training programmes so that the employees work in the right manner. Credit Department: Credit department consists of two sub-departments, namely, Branch Office (BO) and Central Loan Processing Cell (CLPC). BO acts as the front office, concentrating
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up/Modernization/Expansion

of

Food

Processing

Industries

more on the business development/procurement functions. It concentrates on the due diligence of the promoters, obtains feedback on other stakeholders, does site visit, etc. After satisfying itself about the support worthiness of the proposal and broadly discussing the terms of sanction, BO forwards the case to CLPC. CLPC is the back office carrying out detailed appraisal and risk assessment of the proposals. CLPC aims at reducing turnaround time of the proposals and building up volumes using the technology platform, improving quality of appraisal and maximizing the productivity of the limited human resources of the Bank. Right to Information Cell: The Bank is implementing the Right to Information Act, 2005. This department sets the norms for the discharge of the functions of the Bank. The cell is fully empowered to take decisions as deemed fit by it for the effective implementation of the Act in the Bank. Asset Recovery Department: This department handles the cases relating to Non-Performing Assets (NPA) where recovery is due. An asset becomes non-performing when it ceases to generate income for the Bank. The objective is income recognition based on the record of recovery. SIDBI Foundation for Micro Credit (SFMC): This department focuses on creating a national network of strong, viable and sustainable Micro Finance Institutions (MFIs) for providing micro finance services to the economically disadvantaged people of India, especially women. It provides both funding and support to the micro finance sector through its various policies and credit plus programmes. Internal Audit Department (IAD): Internal audit of the Bank plays a pivotal role in strengthening Corporate Governance and complying with Management objectives to strengthen internal control and

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improve Risk Management. This department carries out Management Audit of Branch Offices (BOs)/Zonal Offices (ZOs)/Head Office (HO) Departments on a regular basis.. Hindi Department: The bank continued to make elaborate efforts for enhancing the usage of Hindi in its day-to-day work. This department issues all the documents in Hindi while all the letters received in Hindi were replied in Hindi alone. Officers/employees lacking a working knowledge of Hindi were nominated in certain classes under Hindi Teaching Scheme of the Government of India. Information Service Department (ISD): This department manages the information in the Banks database. It is helpful for creating database regarding privacy, technology and other information. Legal Department: This department has two main functions: operational and recovery. Former is concerned about formulating policies in compliance with the legal matters. Latter is concerned with advising the Branch Offices in the cases where legal matters have been involved.

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2.6 ORGANISATION CHART OF SIDBI:

Board of Directors

Chairman & MD (Shri Sushil Muhnot)

Deputy Managing Director

Executive Directors

New Delhi, Coordination, Support Services & Policy advocacy for MSME sector

Head Office,
Lucknow Operations & Services

SME Development Centre, Mumbai Operations & Services

Subsidiaries & Associate Organizations

Zone (6), Branches (103)

SVCL STCL CGTMSE ISTSL SMERA ISARC

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Chapter 3

Literature Review

3.1 Indian SME: An Overview: Small and Medium Enterprises play a very important role in socio-economic development of our country on account of their inherent advantages like low capital requirement, high employment generation, decentralization of industrial activity, utilization of locally available resources and widening of entrepreneurial base. This sector is the second largest manpower employer after agriculture in our country. A wide range of products from simple traditional crafts and consumer goods to highly sophisticated products like micro-processors, mini computers, electronic components, electro-medical devices, etc. are manufactured by small and medium enterprises. They make significant contribution in increasing exports, in addition to satisfying domestic demand for several items. 3.2: Micro, Small and Medium Enterprises: In accordance with the provisions of Micro, Small & Medium Enterprises Development (MSMED) Act, 2006, which came into being from October 2, 2006, the Micro, Small and Medium Enterprises (MSME) are now classified in two classes and have shifted focus from industry to enterprise. Manufacturing Enterprises: The enterprises engaged in the manufacture or production of goods pertaining to any industry specified in the first schedule to the industries (Development and regulation) Act, 1951. The Manufacturing Enterprise is defined in terms of investment in Plant & Machinery. Service Enterprises:

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The enterprises engaged in providing or rendering of services and are defined in terms of investment in equipments. The limit for investment in plant and machinery / equipments for manufacturing / services enterprises, are as under:

Enterprise Category Services (Investment in Equipments) Manufacturing (Investment in P&M)

Micro Enterprises Upto ` 25 Lakh Upto ` 10 Lakh

Small Enterprises Upto ` 500 Lakh Upto ` 200 Lakh

Medium Enterprises Upto `1000 Lakh Upto ` 500 Lakh

Figure : Category of Micro, Small & Medium Enterprises

Guidelines for Calculation of Value of Plant & Machinery for MSME Status: In calculating the value of plant and machinery for reckoning the SME Status, the original price thereof, irrespective of whether the plant and machinery are new or second hand, shall be taken into account. In calculating the value of plant and machinery, the following shall be excluded: the cost of equipments such as tools, jigs, dies, moulds and spare parts for maintenance and the cost of consumable stores; the cost of installation of plant and machinery; the cost of research and development equipment and pollution control equipment; the cost of generation sets and extra transformer installed by the undertaking as per the regulations of the State Electricity Board;
15

the bank charges and service charges paid to the National Small Industries Corporation or the State Small Industries Corporation; the cost involved in procurement or installation of cables, wiring, bus bars, electrical control panels (not those mounted on individual machines), oil circuit breakers or miniature circuit breakers which are necessarily to be used for providing electrical power to the plant and machinery or, for safety measures;

the cost of gas producer plants; transportation charges (exclusive of sales tax and excise) for indigenous machinery from the place of manufacturing to the site of the factory; charges paid for technical knowhow for erection of plant and machinery; cost of such storage tanks which store raw materials, finished products only and are not linked with the manufacturing process; and cost of fire fighting equipments. In the case of imported machinery, the following shall be included in calculating

the value: import duty (excluding miscellaneous expenses as transportation from the port to the site of the factory, demurrage paid at the port); the shipping charges; customs clearance charges; and sales tax.

Service Sector Project Definition Adopted By SIDBI: The project cost limit for service sector projects would be considered upto Rs.250 crore with Bank's assistance to individual projects being restricted to Rs.50 crore. Both capital expenditure and working capital requirements of the concerns in these sectors may be considered for financing. In the infrastructure area, financing of sound social / urban infrastructure projects like inter-state bus terminus, warehousing complexes, floriculture / horticulture / vegetable auction houses, etc. may be considered.

3.3 SIDBIs Schemes of Assistance:

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The business of SIDBI is bifurcated mainly into two streams, viz., direct credit and indirect credit. Under direct credit, the major business lines comprise core project/equipment finance, working capital type assistance in the form of working capital term loan, marketing finance, export finance, receivable finance, direct discounting of bills (equipment), infrastructure finance, securitization and resource support. Indirect credit comprises of Refinance to State Level Institutions (SLIs) and banks, financial support by way of short term loan to SLIs/banks and bills rediscounting. The Bank caters to the both short-term and long-term financial requirements of MSMEs through its various Schemes of Assistance. Further, SIDBI continues to extend the Nodal Agency services to the Government of India for schemes sponsored by various Central Ministries for encouraging implementation of modernization and technology upgradation by manufacturing units in the MSME sector. Direct Credit Scheme: This scheme consolidates the erstwhile schemes of direct assistance to SSIs viz., Project Finance Scheme, Equipment Finance Scheme, Working Capital Term Loan/ Short Term Loan, Foreign Currency term loan, vendor development scheme, marketing assistance schemes and assistance to service sector projects. Following diagram shows the various products offered by SIDBI under Direct Credit Scheme (DCS):

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Direct Credit Products of SIDBI

Fund Based

Non-Fund Based

TERM LOAN

PCS GUARANTEE LETTER OF CREDIT RECEIVABLE FINANCE

WORKING CAPITAL

RISK CAPITAL

WCTL

TOP UP

Figure: Direct Credit Products of SIDBI Fund Based Scheme: Fund based schemes are those schemes under which the fund is allotted directly to the customer. Term loan, working capital, risk capital, etc. are the products that come under fund based scheme. Term Loan: SIDBI provides term loan directly to entrepreneurs for financing the project. There are various purposes for assigning term loan, viz., expansion, diversification, modernization, purchase of additional machinery / equipment, etc. Parameters for Term Loan under DCS:

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Parameters Eligible borrowers / projects

Norm under the scheme SME/Service sector project with project cost upto 250 crore

Minimum / Maximum loan amount

Minimum- ` 50 Lakh (in case of new unit) and `25 Lakh (In case of existing unit) Maximum- ` 50 crore (In case of service sector project).

Debt Equity Ratio (taking unsecured loan as equity) Minimum Promoters' contribution

2:1 for the company as a whole

New projects - 33% (lower contribution upto 25%) could be accepted in respect of existing well performing companies / firms. Others - 25% (minimum)

Overall Asset Coverage

1.4 for new units 1.3 in other cases

RAM rating Rate of Interest Period of loan / limit

Investment grade: CR1 to CR5 Based on internal rating linked to PLR Minimum 6 months to maximum 8-10 years for term loan (including moratorium of not exceeding 18 months).

Upfront fee (non refundable)

1% of the term loan sanctioned at the time of issue of LoI.

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Working Capital: A unit needs working capital funds mainly to carry current assets required for its operations. Proper assessment of funds required for working capital is essential not only in the interest of the concerned unit but also in the national interest to use scarce credit according to production requirements. With a view to have proper assessment of working capital requirements, the concept of Maximum Permissible Bank Finance (MPBF) was introduced. The renewal of Banking facilities shall be valid for one year from the date of Letter of Intent subject to periodical review. Parameters for Working Capital under DCS: Norm as per Banks guidelines

Financial/ Other parameters

TOL/TNW

Not to exceed 4:1 (can be accepted upto 5:1 on case to case basis by respective sanctioning authority)

Current Ratio Interest Coverage

1.33 (can be relaxed to 1.10 on merits) Minimum interest coverage (projected) of 1.5 times

Overall Asset Coverage

Minimum overall asset coverage of: 1.3 for existing companies 1.4 for new projects

Combined Rating

Proposals with internal risk rating between CR1 to CR5 (RAAA to RA- in CART) are considered as investment grade i.e. suitable for extending credit facilities.

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Margin on stocks of raw material, Receivables / book debts, WIP, finished goods, etc. Debtor days Rate of Interest Period of Limit Upfront fees/processing fees Annual Review/renewal charges

Normally should not be less than 30% but may be relaxed up to 25% on selective basis by sanctioning authority. Not to exceed 90 days Based on internal rating linked to PLR upto 1 year from date of sanctioned 0.50% of the limit sanctioned 0.25% of the limit sanctioned

Working Capital Term Loan: With a view to minimize the hardships faced by the SSI units in mobilizing working capital requirements, a new direct finance scheme viz. WCTL Scheme for providing working capital assistance was introduced. WCTL may be provided to: new SSI units; SSI units already assisted by SIDBI; existing well-run SSI units; well run SSI units graduating out of small scale sector. The intention in introducing this scheme is not to substitute the primary role of commercial banks as providers of working capital but to help SSI units in starting their commercial production and upscaling of operations without difficulty. While scouting for business, it shall be ensured that only well run SSI units which are facing working capital problem or enhancement of working capital from the banks shall be considered for support from SIDBI.

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Top up scheme: While the appraisal process for direct loans has been fairly stabilized, it has often been noticed that customers approaching for repeat financial assistance under direct assistance also have to go through the same process of appraisal as applicable for new customers. Since the existing customers already have a track record with the Bank, it should be possible to follow a simpler appraisal process and take a quick decision. A need has therefore been felt for quite some time for devising a simplified appraisal format for processing additional/top up loan requirements of existing customers.

Non-Fund Based Scheme: Non-Fund based schemes are those schemes under which the fund is not provided directly to the customer. Bank guarantee is an example of non-fund based scheme. Bank Guarantee: Bank Guarantees are provided on behalf of the industrial concerns which come under small scale industries or service sector units. Bank guarantees are of three types: Financial guarantee Performance guarantee Deferred payment guarantee

Financial Guarantee: The guarantees which are given to secure loan transactions or financial obligations, whereby, the guarantor (the Bank) undertakes to make payment to the Beneficiary within the limits of a stated sum of money in the event of default by the Customer to pay / repay in accordance with the terms and conditions of a contract between the Beneficiary and the Customer. In case of invocation of financial guarantee, it is obligatory on the part of the Bank to pay to the Beneficiary without demur the amount of guarantee. Only when
22

the Bank has received an order of restraint/injunction from a competent/appropriate court, the Bank can withhold payment under guarantee. Till the court case is decided, the liability of the Bank under guarantee will continue. Indicative list of Financial Guarantees is as under: Guarantee in lieu of earnest money/tender deposit etc. Guarantees for payment of determined liabilities towards tax, excise duties, custom duties, octroi, etc. Guarantees issued towards disputed liabilities Guarantee as Payment security for gas supply, electricity supply, etc.

Performance Guarantee: The guarantees which are given to secure the performance of contract not involving loan transactions or financial obligations. Indicative list of Performance Guarantees is as under: Guarantee for performance of Plant & Machinery upto the agreed level of capacities Guarantee for performance relating to supply of material as per agreed specification/quantity within the stipulated time schedule. Guarantee for performance of any other works contract including guarantee in lieu of retention money under a contract. Deferred Payment Guarantee: These guarantees are issued on behalf of the Customer towards payment of purchase consideration of any equipment / machinery in installments spread over 5 to 10 years to ensure payment to Beneficiary (supplier of the equipment/machinery). Indicative list of DPGs is as under:
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Guarantee for securing payment of purchase consideration of any equipment/ machinery in installments.

It may be noted that for classifying the guarantees, the contents of the guarantee to be issued and also the contract entered into between the Customer and the Beneficiary are required to be gone through carefully.

*************************

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Chapter 4 Research Methodology

For studying the project appraisal of Small & Micro Enterprises that are the clients of SIDBI, the best method is to study the live case studies which have been appraised and assessed by its managers. So, I chose Case Study Based Research for accomplishing the project objective. To gain the initial insight into the research of the appraisal process, my methodology involved studying and analyzing about twenty live project appraisal cases. The cases included the appraisal of term loan, working capital, working capital term loan and bank guarantee. The data used for the research work was secondary data. Secondary data is the data that has been already collected by and readily available from other sources. Secondary data can also be divided into two parts: internal secondary data and external secondary data. Internal, or in-house data, is secondary information acquired within the organization where research is being carried out. So, my project is based on internal secondary data which has been collected from the CLPC, CZO department of SIDBI. All the information thus mentioned here are a combination of secondary data, observation and a firsthand account of the information provided by the concerned authorities.

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Chapter 5 Phases of Project Appraisal

Project appraisal is the process of evaluating salient features of feasibility analysis, techno-economic analysis, design & network, input analysis, financial analysis and social cost-benefit analysis. It comprises appraisal of:

Project objectives Project organization Administrative / management Technical & Managerial set-up Project demand potential Project technology Project design Project time-profile Project non recurring and recurring recourse requirement Project financial feasibility Project social cost-benefit profile

5.1 Loan Application and its Processing

SIDBI generally considers different loan application form for different assistances/schemes. The customer is required to submit duly filled application form along with the supporting documents as per the prescribed format. The form is sufficiently comprehensive and covers all-important aspects of a project. It is so designed that an analysis of the information therein should enable SIDBI to judge the viability of the project. The loan processing includes the following steps:

5.1.1 Pre-sanction formalities

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After the receipt of the application, the applicants should be informed about the deficiencies, if any, in the documents / information submitted, in writing at the earliest, preferably within 3 working days. Interaction with relationship manager

Submit loan application

Loan appraisal

Loan approval

Disbursement

Monitoring

Figure: Loan sanctioning process

Pre-sanction Site Visit

A pre- sanction site visit may be invariably taken during the course of appraisal particularly with reference to site location, approach, transport facilities, utilities and local regulatory norms. The report may be submitted as per the prescribed format. Visit reports are an important part of assessment/ monitoring procedure and to avoid any misinterpretation in this regard, the respective reports should be annexed to the detailed appraisal note and suitable mention of the same be also made in the note.
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Checking of Caution Advice, Wilful Defaulters list issued by RBI, Wilful Defaulters list on CIBIL website etc.
Caution Advice The information relating to serious irregularities committed in the conduct and operations of the accounts relating to certain companies/ firms/concerns and their group concerns, along with names and addresses, their directors/ partners/ proprietor, is being advised to BOs / ZOs by way of Caution Advice (CA). Therefore verification is done by way of CA before considering any application for assistance. In addition to above, the following lists are to be verified before considering any application for assistance: RBI Wilful Defaulter list ( ` 25 lakh & above) RBI Defaulter list ( ` 1 crore & above) CIBIL Wilful Defaulter list ( ` 25 lakh & above) CIBIL Defaulters list ( ` 1 Crore & above) List of Terrorist Individuals and/or organizations Specific Approval list of ECGC (in case of export units) CIBIL consumer & commercial reports

Care may be exercised while considering assistance to a borrower and its promoters, directors/ partners or any group/ associate concern whose name appears in any of the lists. No fresh / additional facilities should be granted to the listed wilful defaulters.

5.1.2 Detailed Project Appraisal

On the basis of the completed application form and other related documents, a detailed appraisal of the project may be carried out in Central Loan Processing Cell

28

(CLPC) covering various areas viz Promoters/ Management, Technical, Financial and Commercial and a report prepared as per the specified format: For term loans upto Rs.10 lakh - CARTt For term loans from Rs.10 lakh to Rs.50 lakh to existing profit making unit - CART available on Citrix; For term loans between Rs. 50 lakh to Rs.200 lakh CART Version 1.2 available on Citrix; For term loans more than Rs.100 lakh - Detailed appraisal note

Detailed Modalities of CLPC Arrangement are as under

After scouting for new business proposals and ascertaining the prima facie eligibility the case would be assigned by the BO In-charge to an officer who would become the Relationship Manager (RM) for the case. The RM would act as an important link between the customer, CLPC team and the concerned sections of the branch. He would guide the customer right from filling up the application form till the final disbursement of the loan. The RM would ensure that the loan application form submitted to SIDBI is duly filled in and all the relevant documents as per the checklist are attached such that the application is able to provide at the very first instance all the required information for detailed appraisal. The application may be obtained in two sets. One set of the application papers should be retained at the branch for future reference and the other set forwarded to CLPC. The RM should also verify the photocopies of all important documents obtained with the original. The RM / BO would also carry out due diligence on the promoters and obtain feedback on the other main stakeholders viz consultants, technical collaborator, architects, suppliers of major machinery items etc as per the extant guidelines. Pre- sanction site inspection and submit a report as per the specified format.

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 Based on the above and the general perception of the prospects of the industry / market especially having regard to local conditions, the branch may prima facie satisfy itself about the acceptability of the proposal and then forward the same to CLPC for further processing. BO may also discuss with the promoters and broadly finalise the major terms of sanctions viz like interest rates, repayment period, security, upfront fee, etc. One complete set of application, the Relationship Manager report and recommendation of the Branch In-charge may be forwarded to the CLPC for further processing of the proposal. Simultaneously or even earlier the BO could appoint advocate / valuers for carrying out title search / valuation of the properties being offered as security. The outcome may be advised to CLPC for suitably incorporating in the appraisal report. However, normally the sanction process may not be held up for this reason. The CLPC would carry out detailed appraisal of the proposal including credit risk assessment and risk rating, analysis of previous years balance sheets, finalising the projections etc. During the course of appraisal, CLPC may seek additional clarifications / hold discussion with the promoters. Normally CLPC team would identify the areas that need to be discussed and forward the points to the BO/RM well in advance, who in turn would discuss these threadbare with the promoters. Thereafter, on an appointed date, meeting would be held through tele conferencing between CLPC and the promoters/BO/RM. If required, the proceedings could be documented duly signed by the promoters and forwarded to the CLPC. To enable teleconferencing, all BOs covered under CLPC may purchase speaker phones as per the DoP. Generally CLPC may not be required to directly meet the promoters or make site visit. However, if considered necessary, on a case to basis, visit may be taken up with the approval of Zonal In-charge. A flexible approach would be adopted in this regard especially in the initial period.

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 CLPC would prepare and finalize the detailed appraisal memorandum which would be placed before the competent authority for sanction. If required, the Committee may have a presentation of the case by the team leader of CLPC. The proposals to be forwarded to CD, HO would be routed through the Zonal- In- Charge as per extant practice. The cases to be rejected (without taking to the Committee) would be put up to Zonal In-charge. Any difference of opinion on any issue between the CLPC team and BO would be effectively resolved by the Zonal In- charge. On sanction of the case, the CLPC would advise the sanction to BO. The post sanction activities like documentation/ security creation etc. would be handled by the respective branches. BO would effectively use the Direct Credit System (DCS) software for generation of LOI and Loan Documents and making speedier disbursements. The RM would continue to be the focal point for co-ordination between the customer and various departments like (i) post sanction department, (ii) legal department/ advocates, etc. He shall co-ordinate the various activities to ensure quick disbursement of cases. The CLPC would effectively monitor the status of cases through the CITRIX based MIS system. It would collect periodical feedback from BOs with the prime objective of ascertaining the lacunae if any in the appraisal and strengthening the process. CLPC would also develop the industry specific expertise, in due course, which would help in improving the quality of decision making. CLPC would also be in a position to provide necessary information support to BOs in augmenting their business development efforts. The entire process would work with the philosophy of collaborative effort to achieve the desired objectives.
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Types of projects and its Appraisal

The projects which are coming to banks and financial institutions for financing may be divided into following categories: New projects Expansion projects - For increasing the capacity of existing units Diversification projects - For manufacturing new products by existing units Backward Integration projects For manufacturing certain products which are being used as raw material by the existing unit Forward Integration projects For manufacturing certain products which require the products of the existing unit as raw material Modernization projects It can be for any one or more than one of the following objects Changing obsolete machinery Enlarging the product mix/product range to meet changing requirements of the market Reducing the manufacturing cost or for improving the quality of the product Changing the requirement of raw material (shifting from present raw material to some other raw material) Rehabilitation projects For reviving sick units and making them viable to complete with normal/healthy units.

Assessment of Project Appraisal

Banks and financial Institutions have to examine the viability of a project before providing financial assistance. They have to ensure that the project will generate sufficient return on the resources invested in it. With shift from security oriented lending to purpose oriented lending; the study of viability of a project has become sufficient return to serve

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the resources invested in it. In brief a project should satisfy the tests of technical, commercial, financial and managerial feasibilities.

Management Appraisal
Promoters/ Borrowers/ Associate Concerns Whether first generation/experienced in the same line/established entrepreneurs. Bio Data of promoters / directors; Details regarding directorships / partnerships / proprietorship / association in other companies / concerns / firms / others. Net worth statement of each guarantor should be furnished in SIDBI format containing following particulars : full details of his/her immovable properties including complete address, area (residential, commercial etc.) and whether they are mortgaged with others, with details thereof; (copies of title deeds to be obtained) full details of movable assets including the details of investments in shares, bonds, debentures, fixed deposits indicating name of company / firm, amount, face value, interest rate, etc., and whether they are pledged with others, with details thereof; full details of liabilities, In respect of cases where the assistance is more than Rs.500 lakh, the Net worth statements of promoters/guarantors shall be certified by the Chartered Accountant of the borrower. Performance of the associate concerns to be assessed by scrutiny of financial position/working results of each concern for three years. Credit facilities enjoyed by the associate concerns. The resourcefulness of the promoters / guarantors. Due diligence/ discreet market information on borrowers and Branch perception of borrowers. Details of connected lending concerning Directors of FIs/Banks, if any

Credit Report on Borrowers

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Credit report from the bankers' about the borrowers and their associate concerns should generally be obtained before recommending a proposal for sanction. It is necessary that credit reports from bankers are obtained when the appraisal is in process or before issue of LoI. However, in case the credit report is not received within a reasonable time (say 30 days maximum), the branch may follow-up with the banker through a written communication. In the meantime, the branches could proceed with the appraisal of the project provided they are prima facie satisfied with the credentials of the promoters.

Brief history / Back Ground / Financials of the borrower: Scrutiny of Memorandum & Articles of Association with regard to Object clause, borrowing powers and authorised share capital. common seal clause (originals may be called for verification). In case of an existing company, brief details of existing facilities, capacity utilisation etc. may be furnished. Analysis of past balance sheet and working results of the company as per format may be given. In case of Pvt Ltd / Ltd Companies, copies of past annual accounts should be certified as True Copy by companys director Details of all borrowings [short term / long term] from the FIs, State Level Institutions, banks, NBFCs and others. The projected cash flow statement shall contain the repayment of the above liabilities in line with the relative repayment schedule wherever envisaged at the time of availing corresponding facility / loans by the respective institutions / others.

Management and shareholding pattern Composition of the Board, share-holding pattern, executive management, chief executive, adequacy of organizational set up, arrangements for executive staff responsible for major areas like project implementation, production, marketing, finance may be commented upon. In case promoters are not qualified in the line, arrangements made for inducting experienced person(s) in the same area of activity and assessment of the adequacy of the arrangement may be indicated.

Technical Appraisal

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Scope of the project: Scope of the project cover areas like proposed plant scale, product mix in comparison to similar projects already in existence etc.

Location Availability of infrastructural facilities - independent approach road, how far away from National/State Highway, other units in the locality, proximity to market, power substation and raw materials sources, comments on the basis of site visit carried out.

Technology Where no foreign collaboration is involved : Selection of technology, comments on alternative production processes, brief description of the process, comments on technology (latest/appropriate/proven), technical collaborators/consultants, their sales/profit/track record, reasonableness of technical know-how fees, other concerns to whom such technology provided, their satisfactory working, comments on technical knowhow agreement - validity, quality assurance/standards to be achieved, passing on further developments in the technology, other support in selection/procurement of machinery and installation, guarantee regarding performance of machinery, assistance in finalizing the plant layout, setting up facilities for quality control and R&D, training of personnel, off take/prices, comments on royalty/technical know-how fees, patents/trademarks,

arrangements for quality control etc. Where foreign collaboration is involved: In addition to above, banker's report on collaborator, RBI/ GOI approval for the agreement, other countries to whom such technology provided, support for sourcing and procurement of imported raw materials etc.

Raw materials/components Availability, proximity, lead time, holding period and price trends etc.

Utilities

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Power - Total electrical load of the unit. Comments on availability of power, rate of power. Requirement of the power back up by way DG set for the project etc. Water Requirement, availability, test report and treatment facilities proposed, if required. Fuel Requirement in optimum year, availability / sources, whether consents required for storage etc.

Market Any market survey conducted, industry and market prospects, demand and supply position-present and projected, price trends-local and imported, principal customers, their location, tie up if any made, major competitors in the field. Selling and distribution arrangements, comments with reference to the industry practice. Off take guarantee and tripartite agreement, in case of ancillary units.

Financial Appraisal
The purpose of appraisal of financial aspects of a project is generally to ensure the initiation of financial conditions for the sound implementation and efficient operation of the project. Further, since the FI finances only a part of the investment cost of a project, it is necessary to ensure that funds from other sources are available on acceptable terms to meet the balance of the cost. Financial appraisal also evaluates capacity of revenue producing investments and viability of the project based on the projected cash flows and profitability estimates for the project.

Preparation of financial statements Detailed assumptions including product mix, product specifications, export sales, arrangements for export - direct or through export houses, selling prices, input-output norms, prices of raw materials, other input costs, depreciation method, income tax rate, exemptions under various sections of IT Act assumed for calculation of tax, sales tax deferment, if any, rates of interest on loans and working capital finance, on which profitability estimates have to be prepared. Project profitability statement, projected utilisation of capacity assumed in the profit, cash flow statement and projected balance
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sheet are to be prepared. Basis of assumptions on projected capacity utilisation, selling prices for finished products/raw materials. Comparison of gross profit percentage with industry average, earning per share, dividend prospects. Examination of critical factors on which viability depends. In modernisation/technology upgradation proposals, qualitative as well as quantitative benefits of proposed modernisation on upgradation of the product, process or technology, energy saving, cost of production and profitability of the unit etc. may be assessed . Assessment of Cost of the Project Based on technical appraisal which indicates the requirement of physical assets such as land, building, plant and machinery, other equipment for the project, the various estimates of project cost furnished by the promoter are assessed. The funds from various sources needed to finance the project are also identified at this stage together with the terms at which these funds are expected to be raised and feasibility of timely raising of the funds. The following heads are included while calculating the cost of the project.

a) Land and site development: Adequacy, availability of land for future expansion may be commented upon. Whether land acquired is disproportionate to requirement, whether permission for nonagricultural use is obtained. Freehold or leasehold. In case land property (with or without civil constructions) forms part of promoters contribution to the cost of project, value of such property would generally be based on the cost appearing in the sale/lease deed for the purpose of computing Cost of Project and Promoters Contribution provided the date of sale deed is within one year from the date of application. In the case of ancestral/inherited land property of the promoters (with or without civil construction) or purchased by the promoters one year earlier to the date of application, where the value as appearing in the document of title / historical value is substantially low as compared to the realisable value/ market value of the same property as appearing in the recent Valuation Report (not more than 1 year old), then 75% of the realisable value/ market value of the property as appearing in the valuation report could be considered towards Cost of Project as well as Promoters Contribution. However, a
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minimum promoters contribution, in addition to the value of the property as indicated above, of 10% shall be brought in.

b) Building: Nature and type of construction, justification of Cost per sq. ft / sq. mtr assumed for construction may be commented upon. In case the envisaged value of civil construction in the project cost at the time of appraisal is upto Rs.1 crore, the acceptance of the value for the project cost would be based on the break up details of estimations furnished by the applicant and assessed by the appraisal team. In case the envisaged value of civil construction in the project cost is more than Rs.1 crore, the acceptance of the value for the project cost would be based upon architects estimates (not more than one year old) and as assessed by the appraisal team.

c) Plant and machinery Whether imported / indigenous, basic cost, duties, cost of transportation, installation, erection; in case of imported machinery basic cost and import duty/rate to be worked out separately. Reputation of suppliers of main machinery to be commented upon. Basis of selection of machinery as also examination of recent competitive quotations obtained, guarantees regarding the performance.

d) Misc. fixed assets Details and justification / reasonableness. Technical know-how fees reasonableness in the context of services to be provided under the agreement.

e) Margin money for working capital As per latest RBI guidelines, Projected Turnover Method (Nayak Committee) for cases requiring aggregate fund based working capital limits upto Rs.5 crore may be used. The assessment of working capital credit limits should be done both as per projected turnover basis and traditional method (second method of lending). If the credit requirement based on production/ processing cycle is higher than the one assessed on projected turnover basis, the same may be sanctioned as RBI guidelines
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stipulate bank finance at minimum of 20 per cent of the projected turnover. On the other hand if the assessed credit requirement is lower than the one assessed on projected turnover basis, while the credit limit can be sanctioned at 20 per cent of the projected turnover, actual drawals may be allowed on the basis of drawing power arrived at after excluding unpaid stocks. The margin money for working capital shall be computed depending upon the method of assessment of working capital chosen. Where the aggregate fund based working capital limits required is more than Rs.5 crore, the second method of lending for arriving at the MPBF may be applied and margin money for working capital computed accordingly. However, the various holding periods for raw materials, work in process, finished goods, receivables and sundry creditors shall be considered on a realistic basis taking into consideration the various factors like availability of raw material, processing time, credit practices prevalent in the industry etc. and also RBI guidelines issued from time to time.

Means of finance The important sources of financing are: Issue of share capital including ordinary/ preference shares, Issue of secured debentures (convertible or non-convertible) Secured long term and medium term loans (including the loans applied for the project). Unsecured loans and deposits from promoters, directors, etc. Fixed deposit from public. Deferred payments. Capital subsidy, from Central/ State Government. Internal cash accruals. The items classified above can be broadly classified into two categories i.e. equity and debt. 1. Equity component will consist of share capital, premium on issue of shares (share premium), reserves and surplus and quasi equity.Reserves and surplus will include free
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reserves including surplus in Profit & Loss a/c, Development Reserve, Investment allowance reserve, debenture redemption reserve, etc. However, accumulated loss, preliminary expenses not written off, arrears of unabsorbed depreciation and any intangible assets are to be deducted from free reserves. Unrealisable investments are also to be deducted from free reserve. Quasi capital will include Amount of Central/ State subsidy Long term unsecured interest free loans from government or government agencies such as sales tax loan etc. Long term unsecured interest free loans from promoters provided such loans are subordinated to the loans from banks/ financial institutions Non-refundable deposits ; and Risk capital assistance. 2. Debt is the sum of the following items : Redeemable preference shares where redemption is due after 1 year Convertible and non-convertible debentures except that part of convertible debentures which is compulsorily to be converted to equity. Long term interest bearing loan/ deposits from government/ government agencies/ promoters. Long term loans from banks and financial institutions (including loan applied for). Deferred payments not falling due within a year. The composition of the sources of finance as above will depend upon the composition of promoters contribution (equity) and debt. The ratio of the amount of debt to equity is called the debt-equity ratio (DER). DER varies from project to project and unit to unit

3. Subsidy State Subsidy is not to be treated as a means of finance, while arriving at promoter's contribution. ZO / BOs to obtain confirmation whether unsecured loans in lieu of subsidy are being raised; power of attorney in favor of SIDBI would be registered with the authorities for direct release of subsidy to SIDBI.

4. Promoters' Contribution
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a) Only interest free unsecured loans are to be taken as part of promoters' contribution. b) It would be ideal if the entire promoter's contribution is raised by way of equity share capital. However, in case promoters contribution is to be brought in through equity share capital and interest free unsecured loans, the ratio of fresh equity share capital and interest free unsecured loans brought in for the project shall be around 3:1 (i.e. fresh equity share capital 75% and unsecured loans 25%). The Sanctioning authority is permitted to relax the ratio between share capital and interest free unsecured loan upto 1:1 in deserving cases. Standard undertaking for retention of unsecured loans and non-payment of interest thereon during the currency of SIDBI loan should be obtained from the providers of such unsecured loans. Also the retention of the unsecured loans may be monitored from the annual accounts. c) If Promoter's Contribution (PC) is brought in by way of internal cash accruals, the audited accounts of the company/ firm, prima facie, should corroborate availability of adequate/surplus internal accruals for investment in the project being financed by SIDBI. In such cases, it shall be necessary to have a critical analysis of the current assets, current liabilities, fluctuation in the profit figures during the past 2-3 years, dividend payment/withdrawal by the partners etc., so as to estimate and decide upon the extent and availability of adequate internal generation for investment in the project as PC. The important consideration in this regard should be to examine whether the internal accrual are available for deployment in the project or they are blocked in illiquid assets. d) The equity share capital, stipulated to be raised as part of the promoter's contribution, may be permitted to be brought in the form of equity and/or share premium. The proportion of equity/ premium may be decided by the promoter. The share premium, if any, has to be brought in cash and utilized on approved project components / approved business purposes Typically, the project cost and means of finance are broken up into broad heads as given below: Cost of the Project Amount Land & Site Development Sources of Finance Amount Equity Share Capital Promoters
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Building Plant and machinery

Equity Share Capital Associates Quasi Equity - Interest Free Unsecured Loans, Preference Share Capital, etc. Term Loan from SIDBI Term Loan from Others Others Total

Misc. Fixed Assets Preliminary & preoperative expenses Provision for contingencies Margin money for working capital Total Financial projections

This involves an assessment of the financial costs and benefits of the project, present and future, by preparation of projected cash flow statement, profitability statement and the balance sheet of the unit. The projected financial statements are based on assumptions for costs of inputs, interest rates, prices of product, capacity utilisation of the unit, etc. arrived at based on technical and commercial appraisal. The projected statements helps in ascertaining the cost involved in production and the profits expected there from. Besides, the projections are used for calculating selected parameters for the project which are indicators of its viability. The Banks Loan Policy has specific bench mark norms / parameters for considering assistance.

The parameters usually calculated are given below: a) Break-even point : Break- even point is the point at which there is no profit or loss, or rather it is the level of operation at which operating costs are equal with neither profit nor loss. It can be expressed in terms of quantity of output if the product is properly priced ensuring its marketability at that price. It is calculated on the basis of following formula-

BEP =

Fixed Cost

Fixed Cost Contribution

Sales Price- Variable cost

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Where:BEP=Break Even Point Contribution=Sales Price- Variable cost.

b) Internal Rate of Return (IRR): It is the discount rate at which the Present value of both total outflow of funds and inflow of returns would equal and is the best way to measure the prospective results of alternative investment opportunities. IRR is a discount rate at which Net Present Value (NPV) is equal to zero. c) Debt-service coverage Ratio( DSCR): DSCR is the financiers test for the borrowers capacity to repay loan installments and interest every year and for the period of the loan as a whole. These payments are to be met from after-tax profit, increased by depreciation and non cash charges and interest.

DSCR = [Profit after tax + Depreciation / non cash charges + Interest on Term Debt + Lease Rentals] / [Repayment of Term Debt + Interest on Term Debt + Lease Rentals] DSCR is calculated for all years in which the project has debt outstanding. The maximum, minimum and average DSCR (for the entire period of debt) are considered. In general, an average DSCR of about 2 :1 is considered satisfactory although the same may vary depending on the nature of the project. The minimum DSCR should always be higher than 1:1. The DSCR is one of the most important ratios kept in view while judging debt servicing capacity of a project.

d) Return on capital employed ( ROCE):

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It is used in finance as a measure of the returns that a company is realising from its capital employed. It is commonly used as a measure for comparing the performance between businesses and for assessing whether a business generates enough returns to pay for its cost of capital. Formula:

ROCE = Pre tax operating profit Capital employed Where: EBIT= Earnings before interest and tax TA = Total Assets CL = Current Liabilities e) Cost of Capital:

OR

EBIT TA-CL

The literal meaning of cost of capital of a firm is a weighted sum of the cost of equity and the cost of debt. The cost of capital is the rate of return that providers of capital demand to compensate them for both the time value of their money and risk. The cost of capital is specific to each particular type of capital a company uses. Sensitivity analysis: It is basically done to analyze the sensitivity of the projects viability. As indicated, the project viability is assessed by preparation of projected financial statements (cash flow, profitability, etc.) and the ratios / viability parameters (DSCR, IRR, etc.) are calculated from these projected statements. The projections are based on assumptions relating to sales volumes / capacity utilisation, sales prices, production and operating costs, funding costs, etc. which may or may not hold true in future. Following parameters are considered for sensitivity analysis: Raw material price
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 Sales price Capital utilization is the secondary parameters which are to be also considered.

Economic and Social Appraisal

Appraisal of economic aspects of a project carries importance because it is necessary to ensure that the project represents a high priority use of a regions resources. A purely financial analysis say to provide an adequate basis for judging the projects value to the economy since the financial analysis looks at the project only from a limited view point of the revenues. An economic or social analysis looks at the project from the view point of the whole economy, asking whether the latter will show benefits sufficiently greater than project costs to justify the investments in it. The economic analysis of the project is done so that the project may take economic benefits resulting in increased output of goods and services directly or indirectly.

Ratio analysis:
Ratio analysis is a useful tool to analyze the financial performance of a firm. It is the most common form of financial analysis. Ratios are normally used in cross-sectional approach or time series analysis. In cross sectional approach the financial ratios of one firm are compared with ratios across different firms in the same industry at the same point of time. This helps in checking the performance of the firm vis-a-vis other firms performance in the industry. Sometimes they are also compared with ratios of firms in different industries. In time series analysis, ratios of the same firm are compared with ratios across different time periods. This helps in knowing how the firm is performing over time. Types of ratio: There are mainly of six type which are mentioned as under: Liquidity ratios Coverage ratios Leverage ratios Profitability ratios
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Control ratios Activity ratios

1) Liquidity ratios: Liquidity Ratios measure how easily the company can lay its hand on cash. These ratios indicate the short term financial position of the unit. Current Ratio: Current Ratio is not only a measure of the companys liquidity but is also a measure of safety that management maintains in order to allow for the inevitable unevenness in the flow of funds through current asset and liability accounts. However a very high current ratio is not desirable because it means excessive investment in current assets. Current Ratio = Current Assets / Current Liabilities Quick Ratio: A refinement of the current ratio is the quick ratio. It is also known as acid test ratio. This ratio is expressed as quick assets or liquid assets to current liabilities. Quick Ratio = Quick Assets / Current Liabilities

2) Coverage Ratios: Coverage ratios measure the debt servicing capability of the firm. The Banks and FIs are interested in these ratios as they give an idea of the margin of safety available to the company in meeting its debt obligations. Interest coverage: This ratio indicates the margin of safety available to the company to meet the interest payment obligations against the uncertain cash generations. Formula: [PAT + Interest + Depreciation + Lease Rentals] [Interest + Lease Rentals] Where:
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PAT= Profit after tax

Debt service coverage ratio: This ratio covers the entire debt obligations for the year unlike the interest coverage which considers only the interest part. FIs and Banks are interested not only in interest payments but also principal repayments. Formula: Gross Profit / (Principal repayments + Interest) Fixed asset coverage: Fixed assets are taken net of depreciation and include capital work-in-progress. Long term debt includes the loans taken and the debentures issued by the unit. Unsecured borrowings are not included in the long term debt. Formula: Net Fixed Assets / Total Long Term Debt Overall Asset Coverage: Overall Asset Coverage = Total Tangible security
including Collateral Security / Term Loan

3) Leverage ratios: Leverage ratios show how heavily the company is in debt. A company with high debt is considered more risky compared to a company with lower debt. Hence these ratios are of interest to Banks. Formula: Debt Equity Ratio= Total Long term Debt / Equity Debt equity ratio gives an indication of the risk accepted by the company. While high debt reduces the tax liability of the company and hence increases the returns available to the owners, it also increases the risk for the owners as a fall in revenues may lead to losses. Financial Institutions and Banks view high debt equity ratio negatively, because it indicates that the most of the risk is being borne by the debt holders rather than the equity holders. A debt equity ratio of up to 2:1 is considered acceptable.

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4) Profitability Ratios: Profitability ratios are used to judge how efficiently the firm is using its assets. Banks are interested in the continued profitability of the firm as their debt repayment is dependent on this. Following are the parameters which are also considered: Gross profit to net sales= [Gross profit*100/Net Sales.] This ratio gives an indication of the returns generated by the firm.

Profit after tax to net sales= [Profit after Tax (PAT) * 100 / Net Sales.]

This ratio gives the returns available to the owners for appropriation. The Bankers and FIs are also interested in this ratio because it gives an indication of the profitability of the company and hence the companys ability to payback its debt. Return on Capital Employed (ROCE) = [Operating Profit + NonOperational Income Interest + Lease Rentals] / [Net fixed assets+ Lease Rentals + Investments + Current Assets - Provisions - Creditors] This is an indicator of the true return generated by the company. For efficient use of capital, investment should be directed to areas which give higher return i.e. higher ROCE. Return on Net Worth (RONW) = Where:

[RONW = Returns/Net Worth]

Return = (PAT + Tax + Depreciation) PAT= Profit after Tax Earnings per Share (EPS) = [Net Profit - Preference Dividend -other Dividend] / [No of Equity Shares at the end of the year]
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This ratio is an indicator of capacity to service equity share capital.

Note: In project financing or for the purpose of term loan Debt Service Coverage Ratio and Debt Equity Ratio plays an important role. The debt coverage ratio allows the lender to see if a property generates enough income to cover the propertys operating expenses and debt service. To a lender the higher the debt coverage ratio, the less risk there will be with the investment. Most lenders will accept a debt coverage ratio of 1.2 or above. Debt Equity Ratio also plays an important role in project financing as Debt Service Coverage Ratio plays.

5.1.3 Post Sanction Procedure & Terms / Conditions

Issue of Letter of Intent (LoI) After the assistance is sanctioned and compliance with pre-LoI conditions, if any, LoI conveying the terms and conditions of sanction is to be issued to the borrower. While preparing the LoI all the terms & conditions of sanction, including additional / modified conditions as stipulated by the sanctioning authority along with proper phrasing of security clauses should be incorporated in the LoI. Upfront fee (wherever applicable) should be collected before issue of LoI and realisation of payment should be ensured. The upfront fee is non-refundable.

Acceptance of LoI by the Borrower The borrower has to furnish to SIDBI unqualified acceptance of the terms and conditions of the LoI within 30 days from the date of the LoI. In case of partnership / proprietorship concerns, the LoI acceptance should be signed by all the partners/proprietor. In case of companies, LoI has to be accepted by way of resolution passed by the Board of Directors at its meeting and duly certified copy of the Board Resolution should be submitted to SIDBI. The accepted copy of the LoI along with the Board Resolution, if

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applicable, shall be kept in the safe custody and the signatures should tally with the specimen signature available with SIDBI. Valuation of Property offered as Security Security offered is generally in the form of hypothecation of movables, mortgage of immovable property, pledge of shares / other liquid securities etc. While collateral properties offered to bank shall be got valued in all cases, valuation of primary security may be insisted upon in cases of rather large outlay/higher per sq. ft. rate for building and self-fabricated machinery etc., if considered necessary. The valuation of the property to be offered as security should be carried out by entrusting the work to an independent registered valuer empanelled with SIDBI.

Safe custody All the original documents such as duly accepted LOI, Board resolutions, executed loan documents, title deeds and other documents deposited by the mortgagors should be kept in a sealed envelope. A register called Safe Custody Register should be maintained at the BO and all such documents including those deposited while creation of mortgage should be entered in the safe custody register and kept in safe custody vault. The documents shall be kept in the safe custody duly sealed and signed across by two officers with list of contents pasted on the cover. This should be verified once in every six months by an officer, not below the rank of Grade "C", working in a department other than Direct Finance and a certificate may be obtained and submitted to the Branch-in-Charge.

5.1.4 Disbursement
Disbursements are made after execution of necessary documents and compliance of the pre disbursement formalities as indicated in disbursement procedure. Visits to the assisted unit before effecting each disbursement must be undertaken. It should be ensured that during the implementation of the project, the gap between two visits is not more than three months. Disbursement can be classified into two broad categories namely Regular Disbursement and Interim Disbursement.

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Regular Disbursement The borrower is eligible for drawing assistance out of the loan after complying with all the pre - disbursement conditions and completion of legal formalities & creation of the stipulated securities. Interim Disbursement Prima-facie clear and marketable title should be established and all the original title deeds must be deposited with SIDBI as custodian for creating security, before permitting interim disbursement. Approval of delegated authority should be obtained for interim disbursement. Additional interest of 1% p.a. is charged till the date of creation of final security.

Direct payments to suppliers Wherever feasible, the loan disbursements would be made by way of direct payments to the suppliers of machinery/ materials, architects and contractors (as per DAN) instead of routing them through the no lien account.

Handing over of the cheques As far as new borrowers are concerned, under no circumstances should the cheque or the demand draft be handed over to the borrower or the borrowers representative. These are necessarily to be handed over to the machinery supplier or his authorised representative with due acknowledgement or sent directly to the machinery supplier by courier etc., and proper acknowledgement by way of PoD etc. may be kept on record.

Payment in No-Lien Account Disbursements to the borrower shall be made after satisfactory compliance of the pre-disbursement formalities and after obtaining due approvals from delegated authority for relaxations, if any. Disbursement should be made through a no-lien account opened with a commercial bank.

5.1.5 Follow up and Monitoring

Objectives of Follow-up:
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The objective of providing financial assistance for creation of new capacity, modernisation, expansion, diversification etc. to existing units cannot be achieved by mere sanction of assistance. Activities in sequence to sanction, have to encompass long term relationship between the borrower and SIDBI viz., disbursement, proper utilisation of funds, achievement of physical results projected at the time of appraisal, periodic review of implementation/ operation and prompt servicing of assistance. Thus, the relationship goes beyond 'lender-borrower' concept to that of a partnership with common goal. Follow up commences soon after sanction aimed at achieving the goal and optimising the benefits of investment within the constraints and opportunities. An effective follow up and supervision of borrowal accounts have continued to invite a major share of efforts for improvement in the Bank's credit administration and risk management. The objectives of project follow-up, supervision and monitoring are the following: To ensure proper utilization of assistance Implementation within cost and time originally estimated To anticipate problems and reorient policies / procedures To ensure viable operations of the unit Evaluation of operations of the unit To obtain continuous feedback and To utilize the feedback for project appraisal and policy formulation.

5.2 Rating Tools

EXTERNAL-SMERA INTERNAL-RAM, CART Small Medium Enterprise Rating Agency of India Limited (SMERA) SMERA is the countrys first rating agency (Sep.2005) that focuses primarily on the Indian MSME segment. SIDBI along with Dun & Bradstreet and 11 leading public , foreign and private banks in India joined hands to set up SME Rating Agency of India limited(SMERA)
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 SMERA rating is in grades 1 to 3 (SME1 to SME3) Credit Appraisal and Rating Tool (CART) SIDBI had been using CART, an IT based mechanism for appraising and rating loan exposure upto 200 lakh. 50 lakh is handled by BCC-AGM committee 200 lakh is handled by BCC-DGM committee CART is applied on the basis of such condition: It should be last 3 year profitable It should not be a Green field. CART grading is in terms of CAAA to CA

CRISIL Risk Assessment Model (RAM) Risk Assessment Model (RAM) in the form of software tools have since been designed, developed and implemented in the Bank for credit risk rating of various segments of the Bank's borrowers. All the proposals pertaining to new projects, expansion, modernization, diversification, renewal of limits, etc. should be rated for credit risk using the RAMs. Borrower and facility rating The rating models have two-dimensions: 1. Rating of the borrower (entity) for assessing the creditworthiness of the borrower (without taking into account the instrument, tenor or securities) called "obligor rating" 2. Rating of facility/ies extended to the borrower which integrates securities/ collaterals into risk calculations. The obligor rating is computed based on scoring of parameters relating to (i) Industry Risk, (ii) Business Risk, (iii) Financial Risk (iv) Management Risk and, wherever applicable, (v) Project Implementation/ Project Post-implementation Risks.

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Rating Scale CRISIL also offers SME Ratings to the larger domain of SMEs, of which SSIs are a subset. The SME Rating Scale is an eight-point scale (SME 1 to SME 8) that symbolizes the rated entitys creditworthiness in relation to other SMEs.

RAM Rating SME 1 SME 2 SME 3 SME 4 SME 5 SME 6 SME 7 SME 8

Rating Scale Highest High Above Average Average Below Average Inadequate Poor Default

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Chapter 6 Case Study

There were many cases which were studied and discussed during my internship. Among those one of the cases is discussed and analyzed below.

Name of the unit: M/s. Triveni Almirah

Proposal for renewal cum enhancement of working capital limit from Rs.125 lakh to Rs.175 lakh Some briefings of the case are as follows: Name of the Applicant: M/s Triveni Almirah [Now converted into Triveni Almirah Private Limited] Constituent: Pvt. Ltd. Company Industry: Steel Furniture Products: Steel Almirah End uses: Steel Almirah are used for storage in households as well as in offices and other commercial set ups. Purpose: Renewal with enhancement Appraisal Team: CLPC/BO

APPLICATION FORM: The Concern has submitted dully filled application form on the prescribed format along with supporting documents. DETAILS OF PROPOSAL: After receipt of application form, the relationship manager has described the brief summary of proposed project and site inspection report of the unit in RM report and Visit Report respectively. BO/CLPC: Both are participating in project appraisal. PROCESSING UNDER CLPC: After receipt of application form, visit report, RM report and other relevant documents from BO, the Appraisal officer has analyzed the feasibility of the proposed assistance for the proposal/project.
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APPRAISAL PROCESS IN CLPC: The appraisal process consists of three steps: Detailed Appraisal Note [DAN] Worksheet Analysis for Financial Statement Risk Assessment Module [RAM]

DETAILED APPRAISAL NOTE [DAN] It is a note which contains a detailed assessment of Management, Financial, Technical and Economical aspects of the project.

(A)

MANAGEMENT APPRAISAL

The background, creditworthiness and track record of the promoters / promoter companies and their past dealings with institutions / banks should be ascertained. A proper evaluation of management is a highly essential part of the overall appraisal of a project. It includes the managerial approach for project analysis. It evaluates the qualities of the promoter like educational background, industrial experiences, their character, competence, initiative,

abilities and intelligence. M/s. Trivani Almirah was incorporated in January 02, 2003 and engaged in manufacturing of Steel furniture primarily steel almirah. Shri Varun Kumar Tiwari and Shri Yogendra Prashad Tiwari are partners in M/s Triveni Almirah. Both of them are brothers by relation. Shri Varun Kumar Tiwari is a certficate holder from ITI in welding trade. He previously worked as an apprentice in HAL. In 1988, he resigned from HAL and started his own fabrication business in the name of M/s Triveni Fabricators. This unit is not in operation now. In 1995, he established another firm in the name of M/s Triveni Engineers. This Company is engaged in fabrication related works and serving mainly clients like HAL, TELCO etc. Shri Yogendra Prashad Tiwari has also been associated with his brother for the past 12 years in the business of fabrication and manufacturing of steel almirah. M/s Triveni Engineers and Triveni Household Items Manufacturers Private Limited (an ISO certified unit) are the associate concerns of the unit.
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Triveni Almirah Private Limited was sanctioned a term loan of ` 375.00 lakh and working capital limit of ` 125.00 lakh on November 09, 2009. The outstanding in term loan was ` 359.00 lakh as on April 01, 2011. The conduct of the account has been satisfactory and it has never slipped into stress category from the opening of the account.

M/s. Triveni Almirah has been converted into Private Limited Company

on

December 14, 2010 under the name and style of Triveni Almirah Private Limited. Shri Varun Kumar Tiwari and Shri Yogendra Prasad Tiwari, Parnters of the Firm, has now become Promoter Director of the Company. They are having controlling stake of about 99% in the Company. Brief particulars of promoters / directors: Name of the promoter Age Educational Qly. Relationship with Chief Promoter Experience- in what capacity / industry/years Shri Varun Kumar Tiwari 44 years ITI certificate holder in welding Self 20 years in similar activity Shri Yogendra Prashad Tiwari 36 years Graduate Brother 12 years in similar activity 208.87

357.69 Net worth As on 08/02/2011 (In ` Lakh) * Partner M/s Triveni Engineers. Other concerns / interests/ Director in Triveni Household Items capacity Manufacturers Private Limited

Director in Triveni Household Items Manufacturers Private Limited

Management and Organization Shri Varun Kumar Tiwari and Shri Yogesh Prashad Tiwari are partners in M/s Triveni Almirah. Both partners are actively associated with activities of the Company and other group business concerns. Shri Varun Kumar Tiwari mainly deals with Production and Marketing Department whereas Shri Yogesh Prashad Tiwari mainly deals with overall supervision of factory, Purchase Department, Finance & Accounts Department. The

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Company has recruited professional manpower who are assisting the Company in effective management of business. Financial Position of associate concern(s): The firm has two associate concerns: (i) Triveni Household Items Manufacturers Private Limited: The Company was incorporated on 20/04/2006. However, till FY 2008, it did not start commercial activities. The setting up plant for manufacturing Steel Almirah was its first commercial activity, which started in late FY 2008. The major shareholders of the company are Shri Varun Kumar Tiwari and Shri Yogesh Prashad Tiwari, who are having shareholding of 32.59% and 26.31% respectively. The summary of financial results of the company in FY 2010 past 3 years is as under: -

Particulars

FY 2008 [Audited] [ Rs. In lakh ]

FY 2009 [Audited] [ Rs. In lakh ] 277.77 71.33 0.91 19.21 129.00 -8.88 63.75 104.43

FY 2010 [Audited] [ Rs. In lakh ] 507.97 82.02 18.02 36.81 158 9.13 117.03 104.43

FY 2011 up to Sept. 30, 2010 [ Prov. ] 252.05 33.24 3.60 12.07 158 12.74 123.76 118.43

Net Sales PBDIT Net Profit Net cash Accruals Share capital Reserves and Surplus Net Worth

4.63 -3.12 -9.66 -4.80 100 -9.78 27.57

Unsecured loan Interest 94.93 free Net Block Long Term Debt DER Current Ratio 450.82 241.33 3.36 0.88

445.84 188.63 1.92 0.94

431.10 159.91 1.24 1.24

380.86 151.31 1.09 1.45

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The overall performance of the company during the last few years has been satisfactory both in terms of increase in sales and net profit. The company was dealing with Allahabad Bank, Lucknow for both term loan and working capital. However, Triveni Household Items Manufacturers Pvt. Ltd. was sanctioned a term loan of Rs.600 lakh [ including takeover of Rs.150 lakh from Allahabad Bank ], Working capital limit of Rs.350 lakh [ including takeover of Rs.200 lakh from Allahabad Bank ] and subsidy of Rs.7.50 lakh under CLCSS by CZCSC in its meeting held on November 29, 2010. The both term loan and working capital account have since been taken over from Allahabad Bank. The expansion project is under implementation.

(ii) M/s Triveni Engineers: It has been set up in the year 1995. It is dealing in fabrication work of corporate clients on a contract basis besides acting as a distributor of Triveni Household Items Manufacturers Private Limited for Lucknow. The summary of financial results of the past 3 years is as under: [ In Rs. lakh ] Particulars FY 2008 [Audited] Net Sales PBDIT Net Profit Net Profit Margin Net cash Accruals Proprietors capital Net Worth Unsecured loan Net Block DER Current Ratio 294.91 17.48 4.61 1.56% 8.32 24.72 24.72 51.50 27.74 2.08 1.48 FY 2009 [Audited] 135.70 15.66 2.02 1.49% 6.77 25.80 25.80 51.50 37.78 2.00 1.27 FY 2010 [Audited] 480.18 28.52 9.86 2.05% 18.11 42.85 42.85 51.50 52.74 1.50 1.32

The overall performance of the unit is satisfactory and it has been showing improving trend during the last few years.
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Feedback from other stake holders / parties: Feedback about the promoters &the firm has been obtained that existing assisted unit with good track record and satisfactory unit.

Defaulter list issued by RBI/Caution list: The result of RBI/CIBIL defaulter has no matches. Promoter and its associate concern are not covered under willful defaulter list.

(B) TECHNICAL APPRAISAL

Technical appraisal of a project is essential to ensure that necessary physical facilities required for production will be available and the best possible alternative is selected to procure them. Location: The Registered Office of the Company is 36, Ekta Market, D-Block, Indiranagar, Lucknow -226016. The distance of the unit is 20 kms from Lucknow branch office. The site is easily approachable with necessary infrastructure road, power and water.

Raw Material Availability and Suppliers Major raw materials are Iron Sheet, Powder for painting, Chemicals and Locks, fittings & other hardware. The raw materials are available in any quantity demanded throughout the year at prevailing market price. Major suppliers are Essar Steel Ltd. and Bhushan Steel Limited. Considering the easy availability of raw materials at prevailing market price and unit being operational for the last 6 years, no problem is envisaged in procuring raw materials as per requirement of the plant.

Brief Description of production process: The basic production process involved is as under:

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Raw material from Power Presses

Iron Sheet

Cutting from Shearing Machine

Notching Welding of Grinding Locks & &

Bending from Press Brake Machine Spot

Parts by MIG Process Complete Frame & Accessories Assembly Finishing Pre treatment Process Other Accessories Fitting Powder Coating Packing Baking

Marketing & Selling Arrangements: Based on the following, the overall marketing and selling arrangements of the unit appears to be satisfactory: The unit has appointed 53 dealers in major districts of Uttar Pradesh. It is also supplying to markets in Delhi, Rajashthan and other states. The unit has opened seven showrooms in different cities of Uttar Pradesh. Five of the showrooms are in Lucknow, One in Meerut and one in Barielly. The group is also supplying its products to outlets of Hariyali Kishan Bazaar Center [ 64 centres at present ]. The Company has signed an agreement with Home Town Unit of Big Bazaar as per which all Home Town Outlets will be selling Triveni Almirah and other Products from their showroom. The brand image of Triveni Almirah has been well established in the market and quality of the products is well established. Hence, marketability of the products is easier. All existing facilities of the group concerns are operating at maximum level. At full capacity utilization, the Company is required to sale approx. 25 Almirah per day which appears to be realistic figure considering network of 53 dealers in U.P, marketing net work in Delhi, Rajasthan etc. With growing business, the promoters are focusing both on print and electronic media for higher publicity and efforts in this direction is likely to be intensified in coming years. The Company is having own vechicles for free home transportation of Triveni Almirah and one executive of the Company makes visit to new customer with view to convey thanks evidencing the Company is working on satisfactory marketing strategy.
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Seeing the marketing and selling arrangements of the firm, it seems that the firm is working at a very satisfactory level and if this arrangement is followed then the sales would increase in the near future.

Infrastructure: The unit has been operational at the current location for the past seven years. All basic infrastructures required for operation of the unit are available at the site. The site
is in a strategic location having approachable infrastructure, such as, power, fuel, roads and water. Raw material required for production is easily available in local and nearby areas. The unit consists of technical, non-technical staff and casual labour.

Power Being an industrial area, the availability of power is generally satisfactory. However power cuts for few hours is generally experienced. A suitable condition had been stipulated in the last saction that before seeking disbursement of the term loan of last Rs. 25.00 lakh, the firm shall submit documentary evidence confirming arrangement of adequate power supply for the project to the satisfaction of SIDBI. Water Water is required only for drinking purpose. The requirement will be met by bore well installed in the unit premises.

Effluent disposal The firm has obtained No Objection Certificate for operation from pollution control board vides letter no. 2149/NOC-2506/03 dated 30/01/2003. Its renewal is being ensured on a regular basis.

Manpower: After the expansion, apart from skilled and unskilled labour, the firm has planned to have around 30 permanent / contract employees including general manager, assistant
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general manager, manager, supervisor, marketing staff, assistants, peon, driver and security guard. As the unit is already operational and plant is located in industrial area where large number of industries is in operation, no problem is envisaged in getting experienced and qualified manpower for the plant / firm at the prevailing market rate.

(C)

COMMERCIAL APPRAISAL

Furniture industry has thrown up a whole new segment in premium modular office furniture and big-ticket Indian companies are diversifying their product lines to cater to this cash-rich sector. Furniture industry in India is concentrated in the unorganized sector with 85% of it coming from individual, cottage, and small industries. One study estimates the total size of this market at Rs 3,500 crore. Of this, the market for office furniture in commercial establishments and service sectors accounts for Rs 1,100-1,200 crore, while premium office furniture, or designer furniture, commands a market share of Rs 400-500 crore. With government liberalizing FDI norms in this sector, several MNCs and big ticket Indian players have set up state-of the-art production facilities aimed to cater to the IT, ITeS, and other service and manufacturing industries, which have hired a lot of office space and hope to boost their operations, even during this period of a global downturn, as India and China are the only two major economies in the world with their GDPs growing at around 7%. Some of these players, including MNCs, are Haworth, Herman Miller, Godrej & Boyce Manufacturing Co Ltd, BP Ergo, Steelcase, Teknion, etc. The overall prospect of furniture industry in India appears to be satisfactory.

(D)

FINANCIAL ECONOMIC APPRAISAL

The purpose of appraisal of financial aspects of a project is generally to ensure the initiation of financial conditions for the sound implementation and efficient operation of the project. Financial appraisal also evaluates capacity of revenue producing investments and viability of the project based on the projected cash flows and profitability estimates for the project.
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Financial Analysis
Analysis of balance sheet and working results for past & following years:

FY 2009 As on/ for FYE Net Block Non current assets Current assets (Audited) 53.01 0 109.37 163.28 Total assets Partners capital Tangible Net Worth (including DTL & adjusting Preliminary expenses) Long/ medium term loans [including interest free / bearing unsecured loans] Bank borrowings (working capital) Other Current Liabilities Total liabilities Net Sales Depreciation Operating Profit before Interest Interest (including bank charges) Other Income (non-operational) PAT Cash Accruals 44.19 44.19

FY 2010 (Audited) 322.87 0 357.16 680.03 153.35 153.35

FY 2011 (Projected) 544.71 0 445.75 990.46 190 248.59

FY 2012 (Projected) 510.18 0 517.70 1027.88 190 314.63

38.22

298.08

447.08

329

10.47

54.07

125

175

70.40 163.38 88.59 4.17 5.56 11.75 10.53 2.84 7.01

174.53 680.03 327.43 4.12 16.61 13.12 5.14 5.94 10.06

169.73 990.46 695 24 95.25 60 0.27 27.05 51.05

209.25 1027.88 1000 34.53 114.88 67.00 0 33.02 67.55

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DER Current ratio TOL/ TNW

0.86 1.37 2.67

1.94 1.56 3.43

1.80 1.51 2.98

1.05 1.35 2.27

Brief comments: The net block of the Company has increased due to implementation of new project financed by SIDBI to the Company. Due to increase in partners capital, the net worth of the Company has increased during the last 3 years. The sales and net profit of the Company have been showing increasing trend during the period of review as new project has been implemented. The PAT of the Company has also increased. DER, Current Ratio and other financial ratios of the Company are generally at satisfactory level. Overall performance of the Company during the period of the review has been generally satisfactory. Other comments: Comments on Sales: The limit is more or less being utilized as per the sanction terms. The new project of the Company has been implemented in December 2010 only. The turnover of the company as on March 31, 2011 was ` 695 lakh, accordingly it has achieved sales turnover as projected for FY 2011. The projected sales turnover for FY 2011 was Rs. 648.00 lakh. Comments upon any irregularity The Company was sanctioned TOD of Rs. 12.50 lakh on January 18, 2011 for period of one month. It was regularized within the time frame. Comments on Monitoring of Account The overall performance of the account is satisfactory. The conduct of the promoters is satisfactory with the BO.
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Assessment of Working Capital Limits a) As per Turnover Method (Nayak Committee) Sr. No . 1 2 3 4 5 5A 6 7 Particulars For Estimated/ Projected Year ended as on FY 2012 1000 250

Gross Sales Working Capital Requirement (@ 25 % of Gross Sales)

Minimum stipulated Margin Money for Working Capital 50 (@ 5 % of Gross Sales) Net Working Capital 133.45 Permissible Bank Borrowing (2 3) Based on 200 Minimum Stipulated Margin Money Permissible Bank Borrowing (2 3) Based on 116.55 Projected Margin Money Existing Working Capital Limit 125.00 Additional Permissible bank borrowing b) As per Second Method of Lending 75.00

Sr. No.

Particulars

1 2

Working Capital Gap

For Estimated/ Projected Year ** ended as on FY 2012 308.45

3 4 4A 5 6

Minimum stipulated Margin Money for Working 77.11 Capital (25% of Total Current Assets) Projected net working capital [ margin ] 133.45 Permissible Bank Borrowing (1-3) Based on 231.34 Minimum Stipulated margin money Permissible Bank Borrowing (1-3) Based on 175.00 Projected Margin money for working capital Existing working capital limit 125.00 Additional Permissible bank borrowing 106.34

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Recommendation: In view of the above working capital limit of Rs. 175.00 lakh [enhancement by Rs. 50.00 lakh] has been recommended for sanction.

Eligibility for assistance as per our norms of the scheme/ Bank:

Financial/ Other parameters TOL/TNW Norm as guidelines per Banks Actual FY 2010 Projected FY 2012 2.27 Comments

Not to exceed 4:1. (can be 3.43 accepted upto 5:1 on case to case basis by respective sanctioning authority) 1.33 (can be relaxed to 1.10 1.56 on merits) Minimum interest coverage 1.66 (projected) of 1.5 times

Complied With

Current Ratio

1.35

Complied With Complied With

Interest Coverage

1.71

Overall coverage

Extent of relaxation: 1.25:1 asset Minimum overall asset coverage of 1.3 for existing companies and 1.4 for new 1.64 [878/ 534] projects

Complied With

Combined Rating

Proposals with internal risk rating between CR1 to CR5 (RAAA to RA- in CART) are considered as investment grade i.e. suitable for extending credit facilities. Margin on Normally should not be less stocks of raw than 30% but may be relaxed up to 25% on selective basis material, by sanctioning authority. Receivables / book debts, WIP, finished goods, etc. Not to exceed 90 days Debtor days
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Current rating: SME-3 / CR-4 Previous rating: SME-3 / CR-4

Complied With

30% on stocks 30% on stocks Complied and 30% of and 30% on with. book debts book debts.

104

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Complied

with

. Security Primary security: (i) First charge by way of hypothecation of whole of the current assets, of the Borrower, both present and future and including but not limiting to, all stocks of raw materials, workin-process, semi-finished goods, finished goods, packing materials, stores etc.;

(ii) First charge by way of hypothecation of all the present and future book-debts and other actionable claims arising out of genuine trade transactions;

Total Value of Primary security Approx: Rs. 250.00 lakh

Collateral security: (i) Extension of first charge by way of hypothecation of all the movables (save and except book debts and stock) including, plant, machinery, spares, tools & accessories, office equipments, computers, furniture and fixtures acquired/ to be acquired under the project/ scheme [Approx value: Rs. 180.00 lakh WDV as per provisional balance sheet dated 31/12/2011]

(ii) Extension of first charge by way of equitable mortgage of leasehold rights of the immovable property (land & building) situated at Plot No. G-20 (admeasuring 807.00 sq. meter), UPSIDC Industrial Area, Chinhat, Lucknow, Uttar Pradesh; in the name of M/s Triveni Almirah together with all civil structure created or to be created thereon. [Market Value of plot no G-20: Rs. 28.00 lakh, and building: Rs. 330.00 lakh].

(iii) Extension of first charge by way of equitable mortgage of leasehold rights of the immovable property (land & building) situated at Plot no. G-19 (admeasuring 810.00 sq. meter) UPSIDC Industrial Area, Chinhat, Lucknow, Uttar Pradesh; in the name of M/s

68

Triveni Almirah together with all civil structure created or to be created thereon. [Market Value: Rs. 40 lakh]

(iv) Extension of first charge by way of equitable mortgage of part of premises no. 123/1A [now new no.123 / 1- D (1) ] situate at Factory Area, Pratapganj, Kalpi Road, Kanpur admeasuring 224.99 Sq. Yard owned by Shri Varun Kumar Tiwari together with all civil strcuture created to created thereon. (Market Value = Rs.50 lakh)

Total Value of Collateral Security: Rs. 628 lakh Total value of security: Rs. 878 lakh

Asset Coverage: Total security/total exposure 1.64 [878/ 534]

Existing exposure: Term Loan outstanding: Rs. 359.00 lakh as on April 01, 2011; Proposed exposure: WC limit: Rs. 175.00 lakh Total Exposure = Rs. 534 lakh

Outcome
The outcome of this study was based on discussion with promoters, due diligence and site visit. All the eligibility and acceptability are satisfied as per SIDBI loan policy norms, the bank renewed and enhanced the working capital limit from Rs. 125 lakh to Rs. 175 lakh under SIDBI - IDBI Working Capital Arrangement.

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Chapter 7 Recommendations & Conclusion

In the above report Project Appraisal and its detailed analysis has been covered and all the related issues and factors are being studied and taken into consideration. The report is conveying the appraisal techniques to be used to judge the projects viability as per eligibility norms and examine the present financial assistance and sanctioning process for MSMEs followed in SIDBI. Some of the recommendations which I came across through observation during my project work are: Site inspection and interaction with the promoters, for appraise officers, are required in each and every case to get the feel of the case. Sometimes it is not possible for CLPC officers to visit every site for inspection, and have an interaction with the borrowers so it is kindly recommended that at least one site inspection should be done before sanction. There is a communication gap between the customer and dealing officer. Due to lack of communication the customer is not able to submit all the documents at one time and this increase the appraisal time. So, Customer Meet can be conducted at regular intervals wherein CLPC officer may be invited for interaction with customers. There is a need of access to market information. SIDBI should provide information to its officers about the market conditions, the prevailing rate of interest in other banks, etc. The officers had to depend upon their linkages for the additional information about the market. There is a need of innovation brought into the loan appraisal process. Since the middle management appraises the loan so they know what new ideas can be added and hurdles that can be removed from the procedure to make it easy and more effective. So while deciding the policies regarding assessment these officers should be concerned. For instance, paper work is very lengthy and much information is

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repeated two to three times in an appraisal note. So this should be avoided at every level of processing CLPC officers may also be inducted in sanctioning committee for fast sanction of loans. The flexible decision making process will help in smoothening the process as well as will be time saving.

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Chapter 8 References
Handbook on Lending to Micro, Small and Medium Enterprises (A Practical Guide), by D. P. Sarda. SIDBI Credit Manual 2010, and 2011. SIDBI Loan Policy 2011. SIDBI Annual Report for FY 2010-2011 Training manual on Working Capital Management for Officers of SIDBI, by Management Development Institute, Bank of India, Navi Mumbai. Government of India Guidelines on Credit Linked Capital Subsidy scheme (CLCSS) for Technology Upgradation of Small Scale Industries (SSI), Office of the Development Commissioner (SSI), Minister of Small Scale Industries, Government of India, Nirman Bhavan, New Delhi.
http://www.sidbi.in/

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