PRESENTATION ON CORPORATE

FINANCE

By : Sunita Sasankan
 Introduction to Bank Credit
• Why Bank Credit?
• The Financing needs of the Businessmen were met
by traditional financiers during the olden days.
Today the magnitude of both the demand and supply
have grown enormously which need a very large
financial backing, which can not be met by
traditional financiers. The importance of modern
commercial banks as credit providers to the
economy begins at this point.
 Sectors which Require Finance

• Before nationalization of the commercial bank’s

banks were owned/controlled by the large industrial
houses. This resulted in a large amount of bank
credit flowing to a few industries/activities.
• Post nationalization commercial banks are given
target to provide minimum level of credit to sectors
like agricultural, SME’s, Small Business &
Transport operators, food, housing, software etc.
 Loan Policy and Exposure Norms
• RBI has prescribed the ceiling levels for providing
credit to specific borrower groups by commercial
banks.
• Banks may lend up to a maximum level of 15% and
40% of their capital funds to a single borrower and
group respectively.
• An additional 10% exposure is allowed on account
of infrastructure financing.
 The security aspect of lending

• Credit provided by Banks create assets.

• Such assets are called primary assets or securities
• Any additional security provided to the lending
banker is known as collateral
• However in the context of credit provided globally
by Banks, Security in any form is known as
collateral.
 Decision Making in Credit

• May be done in subjective or objective manner.

• Subjective decision making is generally
impressionistic in nature.
• An objective decision making process makes an
attempt to quantify the various aspects of risk
contained in the credit proposal.
 Credit Appraisal

• Assessment of credit requirements of an enterprise

is done on the basis of analysis of the financial
statements.
• Major problem faced by credit analysts is that the
financial statements are prepared more for tax
management and less on the principles of prudential
financial management
 Understanding Financial Statements

• Financial Statements contain relevant financial

information of a business enterprise for a period,
which is presented in a structured manner.

• Financial statement includes Profit and Loss

Account, Balance Sheet, Cash Flow Statements, EPS
Statement etc.

• contd....
• Contd.…

• Financial Statements are prepared in terms of the

provisions of various statues in force such as The
Companies Act, SEBI Guidelines etc., besides
provisions of various accounting standard issued by
ICAI are also required to be followed in course of
compilation
Who Uses these Financial Statements?
• Various interested groups make use of these
Financial Statements.
• Investors
• Employees
• Customers
• Government & Allied agencies
• Lenders
Underlying assumptions and basic
accounting Concepts
• Money measurement concept

• The Entity concept

• Dual Aspect Concept

• Going Concern Concept

• The Accrual Concept

 Understanding Profit & Loss Account
Items
• 1. Gross Sales
• 2. Cost of Sales
• 3.Selling, general & Administrative expenses
• 4.Operating Profit (1-2-3)
• 5. Interest
• 6.Operating Profit (after interest & depreciation)
• 7. Add: Other non operating income-Other non operating
expenses

• contd.…..
• Contd.….

• 8. Profit before Tax(loss)

• 9. Provision for Taxes
• 10.Net profit / (loss)
• 11. Equity dividend paid
• 12. Retained profit
 Understanding Balance Sheet Items
• Schedule VI of the Companies Act prescribes two
format for preparation of Balance sheet:-
• 1. Vertical
• 2. Horizontal
• Central Government may allow companies to deviate
• Some companies engaged in specific activities like
banking, insurance and electricity generation etc,are
not required to present their balance sheet as per the
format
 Format of Horizontal Balance sheet as per Companies
Act
Liabilities Assets

Share Capital Fixed Assets

Reserves & Surplus Investments
Secured Loans Current Assets, Loans &
Advances
Unsecured Loans Misc..Expenditure
Current Liabilities & (to the extent not written
Provisions off or adjusted)

Total Liabilities Total Assets

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 Important General Instructions for
preparation of Balance Sheet
• When there are numerous items which cannot be
conveniently included in the Balance Sheet itself
shall be furnished in separate schedule
• Naye paise can also be given in addition to Rupees
• Short term loan will include those, which are due for
not more than one year
 Funds Flow Analysis

• A Funds Flow Statement is a statement of sources and uses

of funds for a given period. It is also know as Statement of
changes in Financial Position or Statement of Sources and
Application of Funds or where got where gone statement.
• It helps to monitor
• 1. Diversion of Funds
• 2. Withdrawal/External diversion of Funds
• 3. Withdrawal of profit
• 4. Monitoring

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 Analysis of Financial Statements
• It is an important exercise for the purpose for
studying the trends and bahaviour of different
financial parameters
• If required the financial statement are restructured
by classifying the various items as current, non
current and fixed assets or liabilities
• Ratio analysis is most power full tools for analyzing
the balance sheet
 Ratio Analysis

• Financial Ratio may broadly be categorized into:-

• Solvency Ratios
• Liquidity Ratios
• Leverage Ratios
• Profitability Ratios
• Activity Ratios
 Financing working Capital Requirement
• WHAT IS WORKING CAPITAL ?
• It is the capital required by a business unit to carry
out its day to day operation.
• Circulating capital
• In balance sheet it is reflected by those terms of
assets and liabilities which are constantly changing
form.
• Gross working Capital = current assets
• Net working capital : CA - CL
 Various Methods of Assessment of
Working Capital
• 1. First method of Lending
• 2. Second Method of Lending