1.

INTRODUCTION

Project financing is an innovative and timely financing technique that has been used on many
high-profile corporate projects. Employing a carefully engineered financing mix, it has long been
used to fund large-scale natural resource projects, from pipelines and refineries to electric-
generating facilities and hydro-electric projects and many more areas. Increasingly, project
financing is emerging as the preferred alternative to conventional methods of financing
infrastructure and other large-scale projects worldwide.

Project Financing discipline includes understanding the rationale for project financing, how to
prepare the financial plan, assess the risks, design the financing mix, and raise the funds. In
addition, one must understand the cogent analyses of why some project financing plans have
succeeded while others have failed. A knowledge-base is required regarding the design of
contractual arrangements to support project financing; issues for the host government legislative
provisions, public/private infrastructure partnerships, public/private financing structures; credit
requirements of lenders, and how to determine the project's borrowing capacity; how to analyze
cash flow projections and use them to measure expected rates of return; tax and accounting
considerations; and analytical techniques to validate the project's feasibility.

Project finance is different from traditional forms of finance because the credit risk associated
with the borrower is not as important as in an ordinary loan transaction; what is most important is
the identification, analysis, allocation and management of every risk associated with the project.

The purpose of this project is to explain, in a brief and general way, the manner in which risks
are approached by financiers in a project finance transaction. Such risk minimization lies at the
heart of project finance.

In a no recourse or limited recourse project financing, the risks for a financier are great. Since the
loan can only be repaid when the project is operational, if a major part of the project fails, the
financiers are likely to lose a substantial amount of money. The assets that remain are usually
highly specialized and possibly in a remote location. If saleable, they may have little value

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outside the project. Therefore, it is not surprising that financiers, and their advisers, go to
substantial efforts to ensure that the risks associated with the project are reduced or eliminated as
far as possible. It is also not surprising that because of the risks involved, the cost of such finance
is generally higher and it is more time consuming for such finance to be provided.

Project finance is the financing of long-term infrastructure and industrial projects based upon a
complex financial structure where project debt and equity are used to finance the project.
Usually, a project financing scheme involves a number of equity investors, known as sponsors, as
well as a syndicate of banks which provide loans to the operation. The loans are most commonly
non-recourse loans, which are secured by the project itself and paid entirely from its cash flow,
rather than from the general assets or creditworthiness of the project sponsors. The financing is
typically secured by all of the project assets, including the revenue-producing contracts. Project
lenders are given a lien on all of these assets, and are able to assume control of a project if the
project company has difficulties complying with the loan terms.

Risk identification and allocation is a key component of project finance. A project may be subject
to a number of technical, environmental, economic and political risks, particularly in developing
countries and emerging markets. Financial institutions and project sponsors may conclude that
the risks inherent in project development and operation are unacceptable (unfinanceable). To
cope with these risks, project sponsors in these industries (such as power plants or railway lines)
are generally completed by a number of specialist companies operating in a contractual network
with each other that allocates risk in a way that allows financing to take place. The various
patterns of implementation are sometimes referred to as "project delivery methods." The
financing of these projects must also be distributed among multiple parties, so as to distribute the
risk associated with the project while simultaneously ensuring profits for each party involved.

2. OVERVIEW

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Banking sector overview:
Banking sector reforms introduced in India in 1992 have impacted major structural changes in
the financial sector. Increasing growth while controlling inflation was the major challenge & both
were taken into account while forming the policy. Since then Banks have been lending
aggressively providing funds towards infrastructure sector. Major policy measures include
phased reductions in statutory pre-emption like cash reserve and statutory liquidity requirements
and deregulation of interest rates on deposits and lending, except for a select segment. The
diversification of ownership of banking institutions is yet another feature which has enabled
private shareholding in the public sector banks, through listing on the stock exchanges, arising
from dilution of the Government ownership. Foreign direct investment in the private sector banks
is now allowed up to 74 per cent.

The co-existence of the public sector, private sector and the foreign banks has generated
competition in the banking sector leading to a significant improvement in efficiency and
customer service. The share of private and foreign banks in total assets increased to 31.5 per cent
at end-March 2007 from 27.6 per cent at end-March 2006 and less than 10.0 per cent at the
inception of reforms.

Union Bank of India overview:

Union bank of India was inaugurated by the father of the Nation, Mahatma Gandhi at the onset of
20th century & has traversed the long road of successful Banking of 85 years.

Union Bank of India is committed to maintain its identity as a leading innovative commercial
Bank, alive to the changing needs of the society. Union Bank has offered vast and varied services
to its entire valuable clientele taking care of their needs. Today, with its efficient customer
service, consistent profitability & growth, adoption of new technologies and value added
services, Union Bank truly lives up to the image of, "GOOD PEOPLE TO BANK WITH".
Anticipative banking is an integral ingredient of value-based services. This ability to gauge the
customer's needs long before he realizes, best reduces the gap between expectations and
deliverance.

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Manpower is the key factor for the success of any organization. Union Bank has a dedicated
family of about 26,000 qualified / skilled employees who will and always will be delighted to
extend their services to the customers with heartfelt efforts.

The Bank is a Public Sector Unit with 60.85% Share Capital held by the Government of India.
The Bank came out with its Initial Public Offer (IPO) in August 20, 2002 and Institutions,
Individuals and others presently hold 39.15 % of Share Capital.

The Bank has over the years earned the reputation of being a techno-savvy Bank and is one of
the front runners amongst public sector bank in the field of technology. It is one of the pioneer
public sector banks, which launched Core Banking Solution in 2002. As of March 2005, more
than 600 branches/extension counters of Bank are networked under Core Banking Solution,
powered with the centralized technology platform, the Bank has launched multiple Electronic
Delivery Channels and has installed nearly 351 networked ATMs. Online Tele banking facility is
available to all its Core Banking customers. The multi facility versatile Internet Banking Solution
provides extensive information in addition to the on line transaction facility to both individuals
and corporate banking with the Core Banking branches of the Bank. In addition to regular
banking facilities, today customer can also avail variety of value added services like cash
management service, insurance, mutual funds, Demat from the Bank.
The Bank will continue its endeavor in providing excellent services to its customer and enhance
its businesses thereby fulfilling its vision of becoming "THE BANK OF FIRST CHOICE IN
OUR CHOSEN AREA BY BUILDING BENEFICIAL AND LASTING RELATIONSHIP
WITH CUSTOMERS THROUGH A PROCESS OF CONTINUOUS IMPROVEMENT".
UBI has been ranked at 5th position among the nationalized bank in India.

Overview on banks deposits and advances:

Items 2003-04 2004-05 2005-06 2006-07 2007-08

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Deposits

Investments

Advances

Industrial Finance Branch (IFB) Overview:

The main function of the IFB is to provide the corporate banking product and service to our
corporate customers. Products for corporate customers include term loans (Long term basis,
usually 1-10 years) and advances for the creation or improvement of assets or for the project and
also working capital funding which is on a yearly basis. This branch also provides other services,
such as LG, LC, BG etc.

In branch, corporate customers are from diverse range of industries. UBI have specialized IFBs
located in Mumbai, New Delhi, Chennai, Kolkata, Bangalore, Ahmadabad, Pune and Baroda,
which cater to the needs of customers located at different geographical areas.

Products of IFB:

Term Loans:

Term loans mainly consist primarily of financing for the creation or improvement of assets,
including project finance. Period of the term loans generally varies from 1-10 years depending on
the requirements. In some exceptional cases, it can go up to 10-15 years also. These loans are
typically repaid in installments over the life of the loan. Term loans are sanctioned on the sake of
primary and collateral security like fixed assets, shares etc. by having different charges like first
charge, second charge, pari passu charge etc.

Cash credit and other working Capital Facilities:

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Cash credit facilities are the most common form of working capital financing in India. Bank
offers revolving credit facilities secured by working capital assets, mortgage etc. It is typically
provided for 1 year. Bank also provides overdraft, working capital demand loans, working capital
term loans and bills discounting facilities to our corporate and commercial borrowers.

Letter of Credit:

Letters of credit facilities are often partially or fully secured by assets including cash deposits,
documents of title to goods, stocks and receivables. These facilities are provided as part of
package of working capital financing charge on assets including cash deposit.

Letter of Guarantee:

Bank issue guarantees on behalf of customers to guarantee their payment and performance
obligation. These are secured by account indemnities, a counter guarantee or fixed or floating
charge on the assets of the borrower including cash and deposit.

Other Corporate Products and services:

Other Corporate Products and services consist of Foreign Currency Loan, Export Credits, Import
Finance, Nostro Accounts, Exchange Houses, Union Transport Scheme & Union Channel
finance.

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 EXECUTIVE SUMMARY

The project studies various criteria’s involve in Credit appraisal. It highlights the
procedure adopted by Union bank of India for credit appraisal. The project lays emphasis on the
way bank scrutinizes the request of the corporate client for credit.

Initially the report gives introduction of UBI & Industrial branch and then explains about
credit appraisal, finance requirement of corporate borrowers, procedure of funding

The project also focuses on the methodology adopted by Union Bank of India for project
appraisal.

OBJECTIVE

The objective of my project:

• To get a holistic view of project finance.

• To assess the financial health of organizations that approaches Union Bank of India for credit
for import export purposes.
• To assess the suitability of the company for disbursement of credit.
• To critically analyze the criteria’s involved in appraising of the project and the corporate
borrowers.

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 3. CREDIT APPRAISAL

What is credit appraisal?

Credit Appraisal is a process to ascertain the risks associated with the extension of the credit
facility. It is generally carried by the financial institutions which are involved in providing
financial funding to its customers. Credit risk is a risk related to non repayment of the credit
obtained by the customer of a bank. Thus it is necessary to appraise the credibility of the
customer in order to mitigate the credit risk. Proper evaluation of the customer is performed this
measures the financial condition and the ability of the customer to repay back the loan in future.
Generally credits facilities are extended against the security know as collateral. But even though
the loans are backed by the collateral, banks are normally interested in the actual loan amount to
be repaid along with the interest. Thus, the customer's cash flows are ascertained to ensure the
timely payment of the principal and the interest.

Companies that intend to seek credit facilities approach the bank. Financial requirements for
Project Finance and Working Capital purposes are taken care of at the Credit Department.
Primarily, credit is required for following purposes:-

1. Working capital finance

2. Term loan for mega projects
3. Non fund based Limits Like Letter of Guarantee, Letter of Credit
Companies present its full annual report of that includes audited balance sheets of the current and
previous years. They also present project details for assessment purpose for the bank. All these
things are used to determine the financial health, turnover trends and rise and fall of profitability.
Then by evaluating some ratios based on different parameters, bank gives the comments on those
ratios & financial parameters. Then for each parameter score is calculated on the credit rating
score chart. Then total score is obtained. Based on that score, credit rating is found out. If that
credit rating is within range which bank allows then the loan is sanctioned otherwise it is
rejected.

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The financial health and credit rating are theoretical methods for determining the right interest
rate. However, in practice, banks consider other factors such as history with client, market
reputation and future benefits with clients. Thus, a difference exists between theoretical approach
and practical approach.

Project Objectives
1. To evaluate the financial health of organizations that approaches Union Bank of India for
credit purposes. This includes following methods:
 Analysis of Balance Sheet
 Analysis of Cash Flow Statements
 Analysis of Profit & Loss statements
 Analysis of projected financial statements
 Analysis of CMA data
2. To assess the suitability of the company for disbursement of credit. This would involve
the following actions:
 Use of credit rating charts
 Evaluation of management risk
 Evaluation of financial risk
 Evaluation of market-industry risk
 Evaluation of the facility
 Evaluation of compliance of sanction terms
 Calculation of credit rating
3. Determination of interest rate: This would entail the following sequence of actions.
 Collect data regarding financial health evaluation
 Noting down of credit rating
 Referencing the banks’ interest rate guidelines circular
 Choosing the interest rate from the circular on the basis of financial health and credit
rating

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 5. TERM LOAN ASSESSMENT

Submission of Project Report along with the Request Letter

Carrying out due diligence

Preparing Credit Report

Determining Interest Rate

Preparing and submission of Term Sheet

If not approved if approved

Preparation of proposal

Submission of Proposal to designated authority

If No queries raised If queries raised

Sanction of proposal on
Project Rejected Solve the queries
various Terms &

Communication of Sanction

Acknowledgement of Sanction

Application to comply with Sanction Terms &

Condition & execution of Loan Documents

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Disbursement
STEP 1: SUBMISSION OF PROJECT REPORT ALONG WITH THE
REQUEST LETTER
Entrepreneur submits in detailed Project Report, which is being prepared by an approved
agency or a consultancy organization. This report provides in-depth details of the why finance is
required for the project, its managerial aspect, technical aspects, the market Condition and
projected performance of the company. It is necessary for the appraising officer to cross check
the information provided in the report for determining the worthiness of the project.

PROJECT DETAILS:
Definition of the project and alternative scenarios and models
• List the type and quality of product(s) or service(s) to be marketed.

• Specify the time limit, i.e., from the when the project is to be initiated and when it’s going
to be over.

• Outline the general business model (i.e. how the business will make money).

• Include the technical processes, size, and location, kind of inputs.

Relationship to the surrounding geographical area

• Identifies economic and social impact on local communities.

• Identifies environmental impact on the surrounding area.

ORGANIZATIONAL/MANAGERIAL FEASIBILITY

Business structure

• Outline alternative business model(s) (how the business will make money).

• Identify the proposed legal structure of the business.

• Identify any potential joint venture partners, alliances or other important stakeholders.

• Identify availability of skilled and experienced business managers.

• Identify availability of consultants and service providers with the skills needed to realize the
project, including legal, accounting, industry experts, etc.

• Outline the governance, lines of authority and decision making structure.

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MANAGERIAL PERSONNEL

Managerial Personnel play a key role in directing the working of the company. It is
important for an organization to have a pool of efficient personnel who bear the capacity to bail
the company out from crisis situation and work towards optimum utilization of organizational
resources. Such capacity of the personnel can be determined by having complete details on
following key aspects:

• Market reputation on the promoter / management of the company

• Hands on experience of the management personnel in the industry / Business managed by
qualified personnel
• Decision-making – Is it concentrated?
• Organisation structure / Succession planning / Labour relations
• Are any group company in default / Any Directors on RBI’s negative list / Borrower’s track
record in honouring financial commitment?
• Length of relationship with the bank.

FINANCIAL FEASIBILITY

Estimate the total capital requirements

• Assesses the capital needs of the business project and how these needs will be met.

• Estimates capital requirements for facilities, equipment and inventories.

• Determines replacement capital requirements and timing for facilities and equipment.

• Estimates working capital needs.

• Estimates start-up capital needs until revenues are realized at full capacity.

• Estimates contingency capital needs (construction delays, technology malfunction, market

access delays, etc.

• Estimates other capital needs.

• Estimated equity and credit needs.

• Identifies alternative equity sources and capital availability -- producers, local investors,
angel investors, venture capitalists, etc.

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• Identifies and assess alternative credit sources -- banks, government (i.e. direct loans or loan
guarantees), grants, local and state economic development incentives.

• Assesses expected financing needs and alternative sources -- interest rates, terms, conditions,
covenants, liens, etc.

• Establishes debt-to-equity levels.

Budgets expected costs and returns of various alternatives

• Estimates expected costs and revenue.

• Estimates the profit margin and expected net profit.

• Estimates the sales or usage needed to break-even.

• Estimates the returns under various production, price and sales levels. This may involve
identifying "best case", "typical", and "worst case" scenarios or more sophisticated analysis
like a Monte Carlo simulation.

• Assesses the reliability of the underlying assumptions of the financial analysis (prices,
production, efficiencies, market access, market penetration, etc.)

• Creates a benchmark against industry averages and/or competitors (cost, margin, profits,
ROI, etc.).

• Identifies limitations or constraints of the economic analysis.

• Determines project expected cash flow during the start-up period.

• Identifies project an expected income statement, balance sheet, etc. when reaching full
operation.

TECHNICAL FEASIBILITY

Technology plays an important role in maintaining a competitive position in this highly

competitive market conditions. Investing in the proper technology is the key to success it
irrespective of size of business thus for achieving its projected performance, it is important for it
to have sound technological background. Such technical competence of the project can be
determined by having detailed study done on following key aspects:

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Determining facility needs

• Estimates the size and type of production facilities.

• Investigates the need for related buildings, equipment, rolling-stock

Suitability of Production Technology

• Investigates and compare technology providers.

• Determines reliability and competitiveness of technology (proven or unproven, state-of-the-

art).

• Identifies limitations or constraints of technology.

MARKET FEASIBILITY

Industry description

• Describes the size and scope of the industry, market and/or market segment(s).

• Estimates the future direction of the industry, market and/or market segment(s).

• Describes the nature of the industry, market and/or market segment(s) (stable or going
through rapid change and restructuring).

• Identifies the life-cycle of the industry, market and/or market segment(s) (emerging, mature)

Industry Competitiveness

• Investigates industry concentration (few large producers or many small producers).

• Analyzes major competitors.

• Explores barriers/ease of entry of competitors into the market or industry.

• Determines concentration and competitiveness of input suppliers and product/service buyers.

• Identifies price competitiveness of product/service.

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Market Potential

• Will the product be sold into a commodity or differentiated product/service market?

• Identifies the demand and usage trends of the market or market segment in which the
proposed product or service will participate.

• Examines the potential for emerging, niche or segmented market opportunities.

• Explores the opportunity and potential for a "branded product".

• Assesses estimated market usage and potential share of the market or market segment.

Sales Projection

• Estimates sales or usage.

• Identifies and assess the accuracy of the underlying assumptions in the sales projection.

• Projects sales under various assumptions (i.e. selling prices, services provided).

Market Outlets access

• Identifies the potential buyers of the product/service and the associated marketing costs.
Investigates the product/service distribution system and the costs involved.

Study Conclusions

The study conclusions contain the information you will use for deciding whether to proceed
business. The major categories this section should include are:

• Identify and describe alternative business scenarios and models.

• Compare and contrast the alternatives based on their business viability.

• Compare and contrast the alternatives based on the goals of the producer group.

• Outline criteria for decision making among alternatives.

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STEP 2: CARRYING OUT DUE DILIGENCE

After the feasibility study has been completed and presented, a carefully study and analysis the
conclusions and underlying assumptions. Next, you will be faced with deciding which course of
action to pursue.

Potential courses of action include:

• Choosing the most viable business model, for investment.

• Identifying additional scenarios for further study.

Deciding that a viable business opportunity is not available and moving to end the business
assessment process.

STEP 3: PREPARING CREDIT REPORT

CREDIT REPORT
The credit report is an important determinant of an individual's financial credibility. They also
help the person concerned to narrow down on the financial problem areas.

Credit report is a document, which comprises detailed information about the credit payment
history of an applicant. The lenders to determine the credit worthiness of an applicant mostly use
it. The business credit reports provide information on the background of a company. This assists
one to take crucial business related decisions. People can also assess the amount of business risk
associated with a company and then decide whether they would be comfortable in providing
them with credit facilities. The degree of interest that would be shown by investors in their
company can also be gauged from the business credit reports as they can get an idea of the
conception of their customers regarding themselves. Since these records are updated at regular
intervals of time they enable people to identify the risk levels associated with a business as well
as its future. These reports also allow businesses to get detailed information about the financial
status of business partners and suppliers.

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Corporate credit rating

Credit rating is an opinion on the inherent credit quality of the borrower and/or credit instrument.
It is a primary indicator of risk associated with credit exposure. The objective of rating is to
provide banks with an adequate measurement of the risks involved while issuing loan to the
borrower.

The most important source of information concerning the creditworthiness of a corporation can
be found in the publicly available financial statements issued by corporation. Credit rating
focuses on information contained within financial ratios derived primarily from financial
statements.

Ratings can be assigned to short-term and long-term debt obligations as well as securities, loans,
preferred stock and insurance companies. Long-term credit ratings tend to be more indicative of a
country's investment surroundings and/or a company's ability to honor its debt responsibilities.
The ratings therefore assess an entity's ability to pay debts.

Coverage:

I. INDUSTRY:

• SSI and other than SSI.

II. TRADE SECTOR:

• Under priority sector and other than priority sector.

• Both retail and wholesale.
• Indirect agricultural finance (fertilizer dealer).
III. SERVICES:

• Small business.
• Self employed – under priority sector.
• Self employed – under non-priority sector.
• Union health scheme.

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IV. AGRICULTURAL SECTOR:

• Allied agricultural activities like diary, poultry, piggery, fishing etc.

• Construction of cold storage.
V. Borrower enjoying exclusive export or import credit limit or non-fund based limit.

Various factors are included while rating the borrower; hence, a method based on a multi-
dimensional criterion is developed at Union Bank of India. Following criteria are used for rating
the borrower and different weights are assigned to the criteria to arrive at the final rating:

• Financial risk
− Balance sheet ratios
− Cash flow statement ratios
• Management risk
• Market industry risk
• Conduct of the customer with the bank
All the points allotted to the above criteria are added up and final total is converted into
percentages. Then final rating is allotted according to the percentage, and interest rates are
decided on the basis of rating.

Model coverage

The coverage models cover the following four aspects: -

•Borrower rating: cover financial, industrial and management aspect.

•Facility rating: cover compliance part, operations in account and repayment experience.
•Risk Mitigators: cover value and quality of collaterals.
•Business Aspects: cover relationship and income value.

Borrower Rating: Calculating ratios that determine the short term and long term financial
position of the firm derives the financial ability of the firm.

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Short term ratios include Current Ratio, determines the liquidity position of the company over a
period of one year.

Current ratio= current assets/current liabilities.

According to the guidelines given to UBI the ideal level is at 1.33:1 for industries however the
acceptable level is at 1.17:1(according to RBI guidelines).

• Current ratio indicates that for every one rupee of liability, customer has 1.17
worth of current assets to pay of the liability.
• It also indicates the funds, which are contributed by the company from the long-term
finance to invest in the short-term finance. When customer comes to bank for finance,
bank does not pay the full amount of loan requirement. The customer has to chip in certain
percentage of finance on its own; this amount will come from long-term finance.
• E.g. suppose customer want loan for requirement of buying inventory of Rs.100, Bank will
provide loan on 25% margin i.e. bank will pay Rs. 75 and rest Rs. 25 is to be brought by
the customer. Now the customer has liability worth of Rs.75 which in the form of loan
from bank and the inventory worth of Rs.100 i.e. Current assets of Rs. 100. Thus, Current
ratio will be 100/75 i.e. 1.33:1.
• The above example shows us that customer has put in Rs. 25 from his long-
term funds into current assets. Above example also clarifies that current assets will always
be higher than current liability because bank will always provide loan on margin i.e. will
not finance full amount of loan. If current ratio is less than 1, which means customer is not
investing his own money in current assets and is taking full amount of liability from bank,
than bank will not finance such customer.

However at times current ratio may not be a true indicator, the current ratio for road projects is
very high but this does not indicate that the company is not using its assets well but the ratio is
high because the activity involves more in dealing with current assets. Hence it is important for
the evaluator to understand the nature of the industry.

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Long-term ratio include Debt Equity Ratio is a financial ratio indicating the relative proportion
of equity and debt used to finance a company's assets. This ratio is also known as Risk, Gearing
or Leverage.

Debt equity Ratio = debts/ equity.

It can be calculated in two ways as follows

1. Term liability/Tangible net worth: -

Net worth refers the owned funds of the firm. Net worth would comprise of Paid-up capital
plus Free Reserves including Share Premium but excluding Revaluation Reserves (since
revaluation reserve is just book entry and there is no actual flow of funds), plus Investment
Fluctuation Reserve and credit balance in Profit & Loss account, less debit balance in Profit
and Loss account, Accumulated Losses and Intangible Assets. Infusion of capital through
equity shares, either through domestic issues or overseas floats after the published balance
sheet date, may also be taken into account for determining the ceiling on exposure to capital
market.

Term liability here refers to the long-term liability of the firm.

Maximum ratio permissible for term liability/Tangible net worth is 2:1. It indicates that for
every Rs. 2 worth of long-term liability, the firm has Rs. 1 worth of its own funds to meet
liabilities.

2. Total liability/Tangible net worth:

Maximum ratio permissible for total liability/tangible net worth is 4:1. It indicates that for
every Rs. 4 worth of total liability, the company has invested Rs.1 worth of its owned funds.

A high debt equity ratio is not preferable by an investor, as the company already has acquired
high amount of funds from market thereby reducing the investor share over the securities
available, increasing the risk.

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 It is also important for the lender bank to assess the firm’s debt paying capacity over a period.
Calculating ratio like Debt Service Coverage Ratio minimum acceptable level is 1.50 derives
such capacity.

It is also necessary for the lender to determine the ability of the firm to achieve the projected
growth by evaluating the projected sales with actual. However such parameter remains non
applicable if the business is new.

Financial risk evaluation is only one of the parameter and not the only parameter for
determining the risk level. It is important to evaluate the Management Risk also while
evaluating the risk relating to borrower.

It is the management of the company that acts as guiding force for the firm. The key

Managerial personnel should bear the capacity to bail out the company from crisis situation.
In order to remain competitive it is essential to take initiatives. Such skills are developed over
years of experience, thus for better performance it is required to have a team of well qualified
and experienced personnel

After evaluating the risk level involved the lender bank decided on lending Interest Rate.

In UBI they are categorized in 9 segments. In UBI, a business receiving Credit Rating above
level 6 are not considered good from point of investment and thus are avoided.

INVESTMENT GRADE NON INVESTMENT GRADE

Credit Quality Rating Aggregate Credit Rating Aggregate Score
Numeric Score Quality Numeric
Lowest risk CR 1 >90 Risk Prone CR 7 51-55
Minimal risk CR 2 81-90 High Risk CR 8 50 & below
Moderate risk CR 3 71-80 Sub- CR 9 Default – NPA
Standard
Satisfactory CR 4 66-70 Doubtful CR 10 -
risk
Acceptable risk CR 5 61-65 Loss CR 11 -
Watch List CR 6 56-60
STEP 4: DETERMINATION OF INTEREST RATE

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 The interest rate is determined from the interest rate guidelines circular. This circular is
regularly updated to reflect the bank’s latest credit policies. The rupee credit is based on BPLR
and the foreign exchange loans are based on LIBOR.

The guidelines define how much interest rate is to be assigned for a particular credit rating and
credit duration. However, credit rating and its use in determining interest rate is a theoretical
concept and the bank may allow a reduction in interest rate under the following conditions:

Good Client

The organization is a long-term client and brings good business to the bank.

The organization’s actions show that it intends to become a long-term customer of the bank.

Banking Consortium

The organization is seeking credit from a consortium of banks. In some cases like this, the lead
bank might decide the interest rate and all the member banks of the consortium follow this
interest rate.

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23
STEP 5: PREPARING AND SUBMISSION OF TERM SHEET
Following a favorable feasibility check, credit rating the next step is preparing term sheet.
A Term Sheet is brief document that provides details on aspects like:

• Account Details
• Financial highlights for immediate previous two audited years and projection for
proceeding year
• Nature of Project
• Cost of Project
• Means of finance
1. Nature of Facility
2. Purpose
3. Tenure of Term Loan
4. Interest rate Reset

24
 5. Margin
6. Interest Rate, Commission
• Door to Door Tenor i.e. the period within which the entire amount is to be disbursed.
1. Repayment Terms
2. Prime Security
3. Collateral Security
4. Upfront fees i.e. the charges levied by the bank for processing the documents.

STEP 6: PREPARATION OF PROPOSAL

An approved term sheet leads to preparation proposal. A proposal is prepared in standard

format; this enables the bank to keep a proper track record and also facilitates proper comparison.
A proposal a fully fledged document providing details on project submitted and requesting
finance from bank. A proposal contains information on following aspects:

• Details of Account: It includes name of the Account Holder, Date of incorporation, Line of
Activity, Internal Credit Rating level, Address of the Registered Office, Name of Directors,
Share Holding Pattern, Asset Classification and Purpose of the Loan.
• Securities: Lenders often feel more confident about a loan if they are given a security interest
in the assets of a business. Then, if the borrower does not repay the loan as promised, the
lender can take the property the borrower pledged, sell it and use the proceeds to repay (or
partially repay) the borrowed amount. It provides detailed information on nature of securities
given in lieu of the Loan. They are of two types, namely: -
i. Prime Securities: ‘Pari Passu’ is a term used in banking transactions which means that
the charge to be created is in continuation of an earlier charge which might be held by the
same institution or by another institution.
ii. Collateral Securities: In lending agreements, collateral is a borrower's asset that is
forfeited to the lender if the borrower is insolvent, i.e., unable to pay back the principal
and interest on the loan. When insolvent, the borrower is said to default on the loan, in
which case the lender becomes the owner of the collateral. It includes details on

25
  Nature / Description of collateral security indicating area & location of property
 Value in Rupees.
 Date of valuation along with name of Valuer
 Insurance Amount & Date of Expiry

Personal guarantee / Corporate Guarantee if any, includes Name of the guarantor, Value of
Guarantee.

• Financial Highlights:

It provides details of important financial elements over a period of years. It includes

Details on Paid capital, Tangible Net worth, Net working Capital, Current Assets, Current
Liabilities, Net Profit, Net Sales, Reserves and Surplus, Intangible Assets, Long Term
Liabilities, Fixed Assets, Investments, Noncurrent Assets like guarantees Cash Accruals,
Capital employed.

It also includes ratios like Debt Equity Ratio, Current Ratio, Debt Service Coverage Ratio
and so.

The interpretation of the financial data presented provides information on the performance
trend of the company also of the Projections made. Such financial highlight plays an
important role in assessing the financial strengths and weakness of the business.

• Status of the project:

In this part of proposal a brief about the project is explained, it includes information on
nature, type of project, purpose of the project, commencement details, the promoters and
related details of the project. If it is an on-going project it also gives details on progress and
status of progress.

• Evaluation of Industry :
This Section gives brief details on the

1. Scope of the industry

2. Growth level and overall performance of the industry

26
 3. Recent Developments and Trend Evaluation
Conduct of the Account:
This section provides details on:

Regularity in Submission of—

1. Stock Statements / Book Debt Statement

2. QPR Statements / Half Yearly Statement

3. Financial Statements

4. CMA Data

STEP 7: SUBMISSION OF PROPOSAL TO DESIGNATED AUTHORITY

Designated authorities are the one who have the authority to sanction the proposal.
Without their approval no fund can be given for the said project.
Below table shows the authorities that have authority to sanction the loan and their limits:

Sr. Name of designated authority Limit (both fund and non-fund)

no. (Rs. In crores)
1 General manager (credit) 50
2 Executive director 75
3 Managing director 100
4 Board of director Above 100

STEP 8: SANCTION OF PROPOSAL ON VARIOUS TERMS &

CONDITIONS

There are various terms and condition laid by the bank on the project which is required to
be approved by entrepreneur. Some of terms and condition could be as follows:

• For what purpose the amount of loan to be used.

27
 • Repayment of the principal.
• How the interest is to be paid.
• Prepayment penalty.
• All the lease and hire purchase assets to be adequately insured.
• What will be the drawing power limit?
• In case the company commits any default in the repayment of the loan or interest thereon
or any of the agreed installment of the loan on the due dates, the bank/RBI will have
unqualified right to disclose or publish the company’s name or name of the
proprietor/director as defaulters.

STEP 9: COMMUNICATION OF SANCTION TERMS & CONDITION

Letter is being sent to the entrepreneur regarding sanction of loan on various terms and
condition, prepared by the bank, seeking for their approval on the same.

These terms and condition can be modified with the negotiation between entrepreneur and bank;
however proposal again required approval of designated authority.

STEP 10: ACKNOWLEDGEMENT OF SANCTION

If the company agree to the given terms and conditions send their acknowledgements to the bank.

STEP 11: APPLICATION TO COMPLY WITH SANCTION TERMS &

CONDITION & EXECUTION OF LOAN DOCUMENTS

28
 Under this step company comply with all the pre-requirements like getting document
stamped, submitting demand promissory note in case of term loan and letter continuing security
in case of working capital, mortgage paper and all the other formalities and thus proceeds with
the execution of loan.

STEP 12: DISBURSEMENT

After submission Proposal to Designated/ Sanctioning Authority for sanctioning the Term
Loan. The authorities may raise queries, if any relating to projects and thereby convey it to the
processing officer the processing officer in turn addresses them to the borrower for necessary
step to be taken; such queries are required to be solved to the earliest by the applicant for further
processing of the proposal.

If the authorities are satisfied and have no further queries with respect to proposal, the Loan gets
sanctioned and the disbursement would be released in as per the terms decided.

FOLLOW-UP
This is most crucial stage in process of term loan assessment. Since amount of credit
required is usually high, such amounts are disbursed in one installment, they are paid in
installments. This helps the lender bank to understand and assess the utilization of funds
disbursed by the lender Bank. Such evaluation is done by obtaining Lender’s Engineer Report; it
is report that provides complete details of the status of the project. It is prepared on monthly
basis. It also provides CA Report, it verifies the Financial details furnished to bank for further
disbursement. This is known as renewal of account.

29
 6. WORKING CAPITAL APPRAISAL
MEANING:
The amount of funds required for the smooth and uninterrupted functioning of the normal
business operations of a unit ranging from the procurement of raw materials, converting it into
finished goods for sale and realizing cash along with profit from the account receivables that
arise from the sale of finished goods on credit.

OPERATIVE CYCLE:
Operating cycle means cash to cash cycle. The cycle begins from acquiring raw material, to
ultimate finished goods, to conversion into debtors through sales, to realization of debtors into
cash. In the process entrepreneur gets credit on raw material and services. This shortens the
cycle.

THE COMPONENT OF WORKING CAPITAL:

• Amount of raw materials / goods of various kinds in store or in transit

30
 • Amount of stored consumables stores and other material required for production purposes
• Value of stock in process
• Value of all finished goods including in transit
• The composition of working capital
• Amount of receivables or sundry debtors
• Monthly expenses generally reflected through the current assets other than those
mentioned above such as cash and bank balances, advance allowed, prepaid expenses etc.

FACTORS INFLUENCING WORKING CAPITAL:

• Nature of business
• Seasonality of operations
• Production policy
• Market conditions
• Conditions of supply
• Paying habits of customers
• Government policy

31
PROCEDURE FOR WORKING CAPITAL ASSESSMENT:

STEP I - ESTIMATING THE PROJECTED LEVEL OF OPERATIONS

Fixed assets are like structure of a body, which cannot generate income of it. It has to be used
with the working capital. Working capital is the life and blood of an enterprise. A business or a
unit cannot run without working capital. It is used to carry on day-to-day operation. Entrepreneur
who had applied for WC loan should first estimate what will be his projected level of operation.
He has to take into consideration

◙ Future requirement
◙ Realistic sales projections
◙ Percentage of rise or fall in net sales
◙ Available capacity - utilization, marketability of product, availability of raw material
◙ Comparison of projections with peer units in case of a new unit

32
Step-II Estimating The Reasonable Level Of Total Working Capital Required
For Achieving The Projected Level Of Operations
For the purpose of estimating WC finance, level of TCA required for achieving the
projected level of operations is to be calculated.

WC should be adequate to complete operating cycle since:

• Inadequate WC
- Under utilization of capacity leading to financial difficulties.
• Excessive WC
- Unproductive use and unnecessary interest burden.

- Possibility for diversion of fund.

Operating cycle means cash to cash cycle. The cycle begins from acquisition raw material
to possessing into work in progress to ultimate finished goods.

Similarly debtors are taken into consideration.

STEP-III ESTIMATING THE REASONABLE LEVEL OF SUNDRY

CREDITORS AND OTHER CURRENT LIABILITIES AND FINDING OUT
THE WORKING CAPITAL GAP

Funds blocked up in various current assets minus the credit available from the suppliers
can be treated as the working capital gap.

Working capital gap represents the extent to which total current assets cannot be financed out of
other current liabilities. This WCG need to be financed from 2 other sources namely:

1. Net Working Capital (NWC)

2. Short term Bank Borrowings (BB)
Therefore, WCG=NWC + BB

Also, WCG= TCA – OCL

33
 Where, TCA = total current assets

OCL = other current liabilities.

WCG= TCA-OCL= NWC=BB

Thus,

STEP-IV DETERMINING REASONABLE LEVEL OF NET WORKING

CAPITAL AND FINDING OUT PERMISSIBLE BANK FINANCE;
PROJECTED TOTAL CURRENT ASSETS LEVEL METHOD (FOR MFG.
UNITS):

Two methods by which we can arrive at PBF or flexible bank finance.

Projected TCA level Projected Turn Over

Method Method

1. PROJECTED TCA LEVEL METHOD (FOR MFG UNITS):

Net Working Capital= Total Current Assets – Total Current Liabilities

Working Capital Gap = Projected Total Current Assets – Projected Other Current Liabilities

34
 Permissible Bank Finance = Working Capital Gap – (25% of Working Capital Gap or Net
Working Capital whichever is higher)

2. PROJECTED TURN OVER METHOD

Net Working Capital = Total Current Assets – Total Current Liabilities

• Permissible Bank Finance = 20% of Projected sales – (5% of Projected sales or NWC
whichever is higher)
Turn over Method as per loan policy 2003-04 for credit limits upto 100 lacs (500 lacs in
case of SSI):

PBF = (A+B) – (Higher of B or C)

Where, A= 20% of Projected accepted sales.

B= 5% of Projected accepted sales.

C= NWC

NOTE: Projected TCA level method is used when credit limit is below 100 crores.

35
 7. APPRAISAL OF NON FUND BASED CAPITAL
• Non Fund Based Limits are normally to be sanctioned for exiting customer only who
already enjoy fund based limits
• If new borrower full processing as applicable to Fund Based Limits to be carried.
• Borrower’s background and experience of meeting commitments to be examined in details.
• LC limit to be considered as per terms of Purchase or contract, lead period and minimum
economical quantity of supply of stocks
• Non Fundable Limits are to be supported by necessary fund based limits.
• Past experience of payment of bill sunder LC to be verified before considering new request.
• While Assessing the LG Limit contract or agreement which is the base for LG, should be
examined in details for any ambiguous clauses.
Any request for financial Guarantee to be critically examined before taking decision.

36
8. CASE STUDY – 1 (TERM LOAN)

37
Proposal Request: Term loan of Rs. 100 Crores

Account Name: ABC Limited

Status of Account: New Account

Banking: Multiple

Constitution: Public Limited Company

Date of incorporation: December 2005

Business Line: NBFC- Consumer and Commercial financing

Nature of activity: ABC Limited is focused on the business of Consumer and Commercial
financing. Its target market comprises of Micro-entrepreneurs (the self employed running small
business and the small salary earners). The company is in the business of serving customers in
the mass market. It offers salaried people personal loans, two wheelers loans and mortgage
products. For small entrepreneurs, it offers unsecured business loans to buy inventory, raw
materials, renovation of premises, working capital and for personal requirements as well. Besides
this, ABC Limited also distributes third party general and life insurance products to this segment,
with great success (success ratio of around 80%), where there is very low penetration of
insurance.

Background of Promoters:

ABC Limited is 100% subsidiary of DEF, which in turn is wholly owned by GHI. GHI is 100%
owned by the Ministry of Finance Singapore. By virtue of this, ABCL is 100% subsidiary of
Ministry of Finance Singapore. The immediate parent company is JKL Limited which is a 100%
subsidiary of DEF Limited.

GHI:

GHI is an Asia investment house headquartered in Singapore. They are 100% owned by the
Minister of Finance (Incorporated). GHI manages a portfolio of over S$185 billion, or more than
US$134 billion, focused primarily in Asia and Singapore. The shareholder’s return since
inception 34 years ago is more than 18% compounded annually.

38
GHI is rated AAA/Aaa by Standard & Poor's and Moody's respectively, it has investment in
diverse industries covering banking & financial services, real estate, transportation & logistics,
infrastructure, telecommunications & media, bioscience & healthcare, education, consumer &
lifestyle, energy & resources, engineering as well as technology.

DEF, Singapore:

DEF invests in financial institutions in emerging markets, managing a portfolio of 12 financial

institution investments throughout Asia. The prime areas of focus are in both Business banking
and Consumer banking. Business banking focus is on the Commercial, SME and Self Employed
Mass Market segments, and Consumer banking focus is on the Mass Affluent and Mass Salaried
segments.

JKL Ltd, Singapore:

JKL Ltd is the Investment arm of Asia Financial Holdings. JKL is a 100% subsidiary of DEF.

Capital Structure: (As on 31-12-2008)

Particulars Amount Rs.(000)

1. Share Capital

1a. Authorized Share Capital (equity capital of Rs. 10 each) 250,00,000

1b. Issued, Subscribed & Paid-up Equity Share Capital (equity

capital of Rs. 10 each fully paid up) 135,70,913

2. Share Premium Account 69,600

SHAREHOLDING PATTERN:
Sr. Face Value
No. Category No. of Shares (Rs.) % Holding

1 Promoter (JKL) 1,35,70,90,744 10 99.9999627%

2 Others 506 10 0.0000373%

Total 1,35,70,91,250 100%

TOTAL INDEBTEDNESS:

39
 (Rs. in crores)

NON-FUND BASED FUND BASED TOTAL

Existing Proposed Existing Proposed Existing Proposed

- - - - - -
Our Bank
Working Capital - - - - - -

Term Loan - - - 100.00 - 100.00

Sub-Total - - - 100.00 - 100.00

- - 93.00 93.00 93.00 93.00

Other Banks- WC
- - 875.00 1275.00 875.00 1275.00
Other Banks- TL
Sub-Total - - 968.00 1368.00 968.00 1368.00

TOTAL - - 968.00 1468.00 968.00 1468.00

FINANCIAL INDICATORS:
(Rs. In crores)

31.3.2006 31.3.2007 31.3.2008

Year Ending
(Aud.) (Aud.) (Est.)

Paid up Capital 212.9 654.75 855.16

Share Application money 209.18

Reserves & Surplus 8.65 8.65 8.65

Intangible Assets 19.32 81.60 336.78

Tangible Net Worth 202.23 581.80 736.21

Long Term Liabilities 2.20 214.45 1422.07

Capital Employed 204.43 796.25 2158.28

Net Block 5.53 38.54 136.86

Investments _ -- --

40
 Non Current Assets 142.64 705.88 1982.75

Net Working Capital 56.26 51.82 38.67

Current Assets 78.04 145.44 288.17

Current Liabilities 21.78 93.62 249.50

Current Ratio 3.58:1 1.55:1 1.15:1

Debt Equity Ratio 0.01:1 0.37:1 1.93:1

TOL/TNW 0.12:1 0.53:1 2.27:1

Net Revenue/ income 5.43 69.59 350.65

Other Income _ _ _

Net Profit Before tax -28.37 -47.51 -241.09

Net Profit After Tax -19.61 -57.47 -244.60

Depreciation 1.13 3.86 25.89

Cash Accruals - 18.48 -53.61 -218.71

COMMENTS:
1. The paid up capital of the company has increased from Rs. 654.75 crores as of
31.03.2007 to Rs. 855.16 crores as of 31.03.2008. During 2007-08 the company has
infused additional equity of Rs.200.41 crores by issuing 200410000 equity shares of
Rs.10/- each.
2. Net worth of the company stood at Rs 736.21Crores as on 31st March’08 against Rs
581.80 Crores as on March’07.
3. Long term liabilities increased from Rs.214.45 crores as of 31.03.2007 to Rs.1422.07
crores as of 31.03.2008. It pertains to term loans from Bank of Rs.490.00 crores and
Commercial papers (CP) of Rs. 931.99 Crore and other secured loans of Rs. 0.08 Crores.
4. Net block increased from Rs.38.54 crores as of 31.03.2007 to Rs.136.86 crores as of
31.03.2008.
5. Investments are Nil. However other current investments of Rs.50.00 crores as of
31.03.2008 are taken into current assets. It pertains to various mutual funds.
6. Non-current assets increased from Rs.705.88 crores as of 31.03.2007 to Rs.1982.75
crores as of 31.03.2008. It pertains to installments in the loan accounts beyond one year.
7. Net working capital decreased from rs.51.82 crores as of 31.03.2007 to Rs.38.67 crores as
of 31.03.2008 due increase in current liability.

41
8. Current Ratio as of 31.03.2008 is 1.15:1 which is below the acceptable level. The
company has informed that they will infuse adequate equity (to the extent of Rs. 300.00
Crore Approx) in the business to improve the financial ratios.
9. DER (TL/TNW) as of 31.03.08 is 1.93:1 and DER (TOL/TNW) as of 31.03.08 is 2.27:1
which are at acceptable levels. NBFCs can leverage eight to 10 times of the equity
capital, but leverage as reflected by the Debt Equity ratio and the TOL/TNW ratio is
much less when compared to peers or the limit allowed (Industry standard is 6)
10. Net Revenue of the Company has increased from Rs. 69.59 Crores during 2006-07 to Rs.
350.65 Crores during 2007-08. The increase in the income is about 404% compared to
previous year.
11. The company has been in loss for three years consecutively. The loss during the year
2006-07 was Rs. 57.47 Crore which has increased to Rs. 244.60 Crore during 2007-08.
The loss suffered in the past years is mainly due to the rapid expansion carried out by the
company for making it as one of the largest NBFC in retail funding (as per the company).
First two years of operations were mainly on account of expenses for setting up the
branches as per the roll-out plan. The company has already set up 800+ branches
throughout the country in ‘brick and mortar’. The company projects to break even in
FY 2008-09.

The company has been maintaining a healthy CAR throughout as per table below

2005-06 2006-07 2007-08 2008-09*

Capital Adequacy Ratio (CAR) 132% 74.78% 32.30% 27.15%

Current Performance:

Company’s current financial performance upto September 2008 is as under:

Particulars Amount ( Rs. in

crores)

Income from Financing 466.49

Operations

Other Income 5.53

Profit Before Tax ( 71.03)

Profit After Tax (74.37)

Key financial figures of the DEF Ltd. (Holding company)

42
 Income Statement 2007 (S$ millions) 2006 (S$ millions)

Net interest income 1,683 1,476

Net interest income 1,683 1,476

Net operating income 3,662 2,246

Allowance for loan losses 405 275

Operating expenses 1,481 1,220

Profit before income tax 1,780 755

Profit for the year 1,533 619

2007 (S$ 2006 (S$

Balance Sheet millions) millions)

Loans to customers 15,475 12,438

Derivative financial
instruments 79 20

Investment securities 33,391 30,013

Other assets 10,844 11,253

Total assets 59,710 53,704

Liabilities

Deposits from customers 17,238 16,221

Loan from parent 10,298 10,659

Other liabilities 6,109 5,287

Total liabilities 33,645 32,167

Shareholder equity 26,065 21,537

COMMENTS ON CASH BASIS:

(Rs. In crores)

43
 31.03.2007 31.03.2008

Net cash from operating activities (A) (566.55) (1448.06)

Net cash from investing activities (B) (51.11) (219.69)

Net cash from financing activities (C) 636.86 1555.77

Net decrease in cash & cash equivalents 19.20 (111.98)

(A+B+C)

Cash & cash equivalents at the beginning of the 72.33 91.53

year

Cash & cash equivalents at the end of the year 91.53 (20.46)

MANAGEMENT EVALUATION:
Market reputation:

 ABC Limited is 100% subsidiary of DEF, which in turn is wholly owned by GHI. GHI is
100% owned by the Minister of Finance Singapore.

 GHI is known in the global investment community as a responsible and disciplined long-
term investor with a mandate to maximize sustainable shareholder value, with a strong
reputation for high standards of integrity and corporate governance

 GHI manages a portfolio of over S$185 billion, or more than US$134 billion, focused
primarily in Asia and Singapore. The shareholder’s return since inception 34 years ago is
more than 18% compounded annually.

 GHI is rated AAA/Aaa by Standard & Poor's and Moody's respectively

Management experience:

As per ICRA’s rating rationale “"The ratings are also supported by the experienced management
team that has established and managed similar businesses, management’s strong focus on
establishing systems and processes,..."

44
ABC is managed by the team of exceedingly rich experienced professional who all are experts in
their individual trade line of business activity, whether it is business development, risk
management, human resource management, compliance, rural initiatives, technology etc.

ABCL's senior and middle management teams, roped in from leading retail financiers, bring in
vast experience in setting up and running a retail finance business. All business heads carry a risk
management background, which forms the core of managing and growing a retail lending
portfolio, to a perceivably vulnerable customer segment. The expertise residing at the executive
management level could ensure profitable growth in business volumes for ABCL.

Credit Rating:

ABC is assigned a rating of “F1+(Ind)” from FITCH for Rs. 2500 Crore and second rating of
“A1+” from ICRA Limited for Rs.3000 Crore for the short term debt / Commercial paper
programme. ABC is also assigned an Issuer’s rating “LAAA” from ICRA Limited for long term
for Rs. 2000 Crore. These ratings are the highest-credit-quality ratings.

INDUSTRY EVALUATION:
The retail lending space has grown rapidly over the last few years – outstanding retail portfolio
now accounts for 24% of the total bank credit compared to less than 5%, 10 years ago.

Retail lending is expected to grow because of the following factors:

1. Favourable demographics:

At average age of 28.4 years, India is a young nation. The country’s population profile is
characterized by declining dependency ratio, i.e. increasing percentage of working age
population.

2. Changing consumer mindset towards borrowing:

Indian consumer no longer considers borrowing as a taboo – purchase of assets using leverage is
quite an accepted practice now, at least in urban India. The concept of modest borrowing for
consumption purposes (domestic/ overseas holidays, marriages or other functional needs) is also
developing rapidly to improve lifestyle.

3. Increasing household income:

Households are migrating to higher income groups – as a result, higher income households are
growing at a faster rate than lower income ones.

4. Low asset ownership:

45
Asset ownership continues to be quite low – especially in high-ticket items such as housing and
cars. Even in low-ticket items, most categories have not reached saturation levels (which is
placed at 80% asset ownership).

Based on these factors, retail finance opportunity is expected to be worth US $69 bn by FY09
and 22% CAGR in annual disbursements.

Credit Worthiness and leverage:

The very survival of NBFCs depend on effective sourcing of funds. The yardstick bank loans
as a percentage of owned funds. This yardstick shows the extent to which an NBFC has been
able to leverage its assets to obtain bank finance and measures an NBFC's exposure to the
banking system

NBFCs can leverage eight to 10 times of the equity capital, but leverage as reflected by the Debt
Equity ratio and the TOL/TNW ratio is much less when compared to peers or the limit allowed
(Industry standard is 4.9%)

ABC is assigned a rating of “F1+(Ind)” from FITCH for Rs. 2500 Crores and second rating of
“A1+” from ICRA Limited for Rs.3000 Crores for the short term debt / Commercial paper
programme. ABC is also assigned an Issuer’s rating “LAAA” from ICRA Limited for long term
for Rs. 2000 Crores. These ratings are the highest-credit-quality ratings. Copies of the rating
letters are attached.

TERM LOAN ASSESSMENT:

Present Request: The company has approached various Banks for Financial assistance by way
of Term Loan. They have also approached us with a request for sanction of term loan of
Rs.300.00 crores. We however, propose to take Rs.100.00 crores as term loan.
“In principle approval” has been given.
Nature of Limit Term Loan

Amount Rs.100.00 crores

Rate of Interest BPLR i.e. 12.50% p.a.,( At present)

payable monthly

Repayment Loan shall be repaid in 3 years with

period equated quarterly installment commencing
from the date of first draw own.

46
 Security Pari-passu charge on receivables (Either
present unencumbered securities or created
out of loan money) with existing /
proposed lenders.

Upfront Fees 1% of loan amount

Justification:

The loan portfolio of the company is growing at a fast pace, business wise
disbursements done by the company are as below:

Presently the company is availing credit facilities under Multiple Banking arrangement. The
details of this is as follows

The company at present avails Term Loans under ‘Multiple Bank Arrangement’ as
detailed below:
Name of the Nature of Present
Amount
Bank Facility Outstanding

HSBC Yen Loan Term Loan 65 Cr 65 Cr

HSBC Bank Term Loan 460 Cr 461 Cr

Yes Bank Term Loan 275 Cr 276 Cr

Bank Of
Term Loan 75 Cr 75 Cr
America

 The Company does not accept any deposit from the Public.
 Based on the annual report details and information from the management, the Company
has not defaulted in repayment of dues to a financial Institution, Bank or Debenture
holder.
As per the Auditor's Report in Annual Report 2007-08, no funds raised on short term basis have
been used for long term investment.

Company Business:
ABC follows a unique community led, branch centric relationship based approach to
serve the mass market by dealing with the customer directly, eliminating intermediaries

47
 which are a common practice with most financial service companies. The company
services the market directly through its own branch network providing one stop financial
solution shop where the customer can access a wide range of financial products under one
roof. ABC’s employee market and service the customer directly to build a relationship
and provide quality post purchase customer service.

This model offers many advantages, branches increases access to customers. Employees
belong to the local communities and therefore understand the language and culture of the
place. They service the community in close proximity of the branch giving them in-depth
knowledge of the customer base and their credentials. Localized credit assessment and
appraisals helps in servicing the customer’s needs speedily.

The company works on the following pyramid, which is based on approaching and
targeting the mass market of the self employed and salaried group.

In order to understand and to offer customized solutions to each segment, ABC decided to
segment the market by the type of customers rather than its products. ABC has created
two independent and robust business verticals. The Company’s business structure is
appropriately termed as the ‘Community Business Model’, as it is built not only on the
basis of products, but also customer segments. The well-defined verticals for salaried
individuals as well as the self-employed segment comprising of owners of small sized,
traders and entrepreneurs, are:

COMPLIANCE FORMALITIES
Credit Rating:

ABC is assigned a rating of “F1+(Ind)” from FITCH for Rs. 2500 Crore and second
rating of “A1+” from ICRA Limited for Rs.3000 Crore for the short term debt /
Commercial paper programme. ABC is also assigned an Issuer’s rating “LAAA” from
ICRA Limited for long term for Rs. 2000 Crore. These ratings are the highest-credit-
quality ratings.

Net Owned Funds:

The Net Owned Funds as on 31.03.2008 works out to Rs.736.64 crores.

The NOF of ABCL is Rs. 736.64 crores as of 31.03.2008. As per the extant guidelines of
the Bank, outer limit for credit exposure will be Rs.2209.92 crores. The limits of
Rs.1468.00 crores sought by the company from the Banks are well within the outer limit
of the Bank.
Capital Adequacy Ratio

NBFCs are to maintain a minimum capital adequacy norm of 15% of the risk weighted
assets and off balance sheet items. The Capital may be either in the form of Tier I or Tier

48
 II capital subject to a condition that the total Tier II capital at any point in time shall not
exceed one hundred percent of Tier I capital.

The company has been maintaining a healthy CAR throughout as per table below

2005-06 2006-07 2007-08 2008-09*

Capital Adequacy Ratio (CAR) 132% 74.78% 32.30% 27.15%

Financial support from Parent company:

With a capital adequacy ratio of 27.17%, ABCL's capitalization levels were comfortable
as of 31st October 2008. Gearing levels remained moderate at 2 times despite the growth
in the loan portfolio as a result of the periodical capital infusion from the Parent. It should
be noted that the industry average is 5.0. As a result of the US$ 50 million fresh capital
infusion from GHI upto October 2008, the networth of the company stood at Rs. 1357.1
Crore despite losses reported by the company during the past 3 financial years. Given the
Parent’s long term plans in the Indian financial sector, ICRA expects capitalization to
remain comfortable given the commitment from GHI to financially support this entity
over the medium term.

Expansion plans:
The current financial crisis have put a severe strain on the fund raising capacities of
NBFCs and as a result lot of NBFCs have either stopped their business or have gone slow
in disbursement. However, Fullerton is still disbursing loans to the customers. Company
finds this as opportunities to increase its market share and to become the largest NBFC of
the country. It can pick and choose the asset quality, further the acquisition of the assets
are undergoing a thorough scrutiny. This will result in a strong portfolio with lesser bad
cases.

PROJECTED P & L Accounts:

(Rs in Crores)

31- 31- 31- 31- 31- 31-Mar-

Particulars Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 11

Income

Income from Financing 1,010.6 1,596.6

Operations 4.83 66.09 340.94 5 3 2,239.75

Other income 0.6 3.5 9.71 118.25 44.47 59.35

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 1,128.9 1,641.1
Total 5.43 69.59 350.65 0 0 2,299.11

Expenditure

Employee’s' Cost 10.94 49.01 248.25 348.55 368.71 456.52

Administrative and Other

Expenses 9.98 44.19 233.89 270.27 297.3 327.03

Depreciation 1.13 3.86 25.89 47.42 49.87 57.17

Financial Expenses 2.06 19.21 66.21 261 430.07 581.29

Bad Debts Written off 9.7 0.84 17.5 192.7 404.48 559.94

1,119.9 1,550.4
Total Expenditures 33.8 117.1 591.74 4 3 1,981.94

PBDT -28.37 -47.51 -241.09 8.96 90.67 317.17

Tax Expense

Income Tax - - - 28.69

Deferred Tax Expenses/

(Credit) -9.35 9.26 - - - -

FBT 0.08 0.7 3.51 5.07 5.95 6.54

Excess tax provision Written

Back 0.51 - - - - -

PAT -19.61 -57.47 -244.6 3.89 84.73 281.94

Dividend

Equity Dividend

Preference Dividend

Dividend Distribution Tax

Balance taken to Bal Sheet -19.61 -57.47 -244.6 3.89 84.73 281.94

Cash Flow Projections:

50
 (Rs. in crores)

ABC Ltd.

31-Mar- 31-Mar- 31- 31-Mar- 31-Mar-

Particulars 08 09 Mar-10 11 12

EBDTA -215.2 56.38 141.65 397.05 565.62

Less Tax 3.51 5.07 5.95 54.95 174.77

Add: Bad Debts 17.5 192.7 404.48 559.94 681.24

(Increase)/Decrease in working
capital 55.58 -35.89 30.68 61.68 34.84

Cash From Operations -145.63 208.12 570.87 963.73 1,106.93

Inflow

Adjustment in Debit bal of PL

due to merger 36

Increase in Share Capital 409.59 405.87- - -

2,224.0
Increase in Secured Loans 189.38 1,071.00 0 1,275.00 1,575.00

Increase in Unsecured Loans 1,018.24 1,917.00 675 1,519.00 1,070.00

1,771.7
Collections 1,731.63 2,277.66 2 2,496.30 3,418.00

4,670.7
Total 3,348.84 5,707.53 2 5,290.30 6,063.00

Uses

Increase in Fixed Assets 134.79 30.18 13.5 67.75 75

Increase in Investment 37.96 137- - -

Decrease in Secured Loans 65 150 881 1,150.00

1,360.0
Decrease in Unsecured Loans 1,689.00 0 675 825

Disbursements 3,026.00 3,895.00 3,876.7 4,628.46 5,080.67

51
 9

5,400.2
Total 3,198.75 5,816.18 9 6,252.21 7,130.67

Opening Balance 107.22 111.69 211.16 52.46 54.28

Surplus/(Deficit) 4.47 99.47 -158.7 1.82 39.25

Closing Balance 111.69 211.16 52.46 54.28 93.53

CONSORTIUM ARRANGEMENT: The company is presently banking under multiple

arrangement.

CREDIT RATING
Parameters Score Marks Secured

Current year.31.03.2008

Financial Risk 46 21/40

Asset Quality 13 13/13

Capital Adequacy 12 12/12

Resource Raising Capacity 8 8/8

Competition and Market 7 7/7

Position

Management 20 17/20

Total Marks with grade 100 78/100

CREDIT RATING CR-4

Recommendations:
By studying overall performance of the company Term Loan of Rs.100.00 crores in favour of
M/s ABC Ltd. is sanctioned.

52
9. CASE STUDY – 2 (WORKING CAPITAL LOAN)

53
Proposal Request: RENEWAL/ENHANCEMENT OF LIMITS

Account Name: XYZ PVT.LTD

Status of Account: Regular

Banking: Consortium

Constitution: Public Limited Company

Date of incorporation: 1966

CAPITAL STRUCTURE:

Authorised Capital : Rs.30.00 crores(30000000 equity shares of Rs.10/- each)

Paid-up Capital : Rs.27.20 crores
Book Value (31.03.08) : Rs.39.50 per share of Rs.10/- each

Business Line: Engineering, design and fabrication of equipments and machineries for
Chemical, Fertilizers, Petro- chemicals and nuclear industries. Besides they are engaged in
Shipping by fabrication, repair and leasing barges.

TOTAL INDEBTEDNESS:
(Rs. In crores)

FUND BASED NON-FUND BASED TOTAL

Existing Proposed Existing Proposed Existing Proposed

Our Bank
Working Capital 1.80 5.63 36.00 51.75 37.80 57.38

W.C.(Adhoc) -- -- 13.00 13.00 13.00 13.00

54
 Term Loan -- -- -- -- -- --

Sub-Total 1.80 5.63 49.00 64.75 50.80 70.38

6.20 19.37 124.00 178.25 130.20 197.62

Other Banks (WC)
-- -- 62.00 62.00 62.00 62.00
Other Banks
(Adhoc)
Fin. Institutions -- -- -- -- -- --

TOTAL 8.00 25.00 235.00 305.00 243.00 330.00

BRIEF BACKGROUND OF THE COMPANY:

XYZ Ltd started its manufacturing in the year 1967 and has two manufacturing units located at
Bangalore in South India and Tarapur in Western India. Both the units are fabricating custom
made equipment for Process Industries like Petrochemical, Fertilizer, Chemical and Nuclear
Industries. Also the company has a shipyard at Goa, manufacturing flat bottom self propelled
barges for transportation of Iron Ore. They also own a fleet of barges, which are available for
hire to Iron Ore exporters. XYZ group also has rerolling mill at Bangalore for manufacture of
Torr Steel. (Reinforcement Steel and Round Bars).

The above 2 workshops are approved by various international inspection agencies such as
Lloyd’s, Bureau Veritas, Det Norske Veritas, Engineers India Ltd., Kvaerner Power gas, H and
G, Projects and Development India Ltd and Bechtel.

FINANCIAL PARAMETERS:
(Rs. In crores)

Year Mar.2007 April.200 As on Mar.2009 Mar.2010

Ended/Ending 8 1.05.08
(Aud.) (Est.) (Proj.)
(Aud.) (Prov.)

Before After de-

de- merger
merger

12 M 13 M 13 M 11 M 12 M

27.20 27.20 5.44 5.44 5.44

Paid up Capital

55
 Reserves & Surplus 47.73 80.38 87.54 94.53 107.49

Intangible Assets - 0.14 0.08 -- --

TNW 74.93 107.44 92.90 99.97 112.93

Long Term 32.06 67.24 18.74 23.59 24.08

Liabilities

Capital Employed 106.99 174.68 111.64 123.56 137.01

Net Block 39.82 60.97 17.01 21.81 34.72

Investments - - - - -

Other Non Current 7.94 26.64 23.43 24.75 11.65

Assets

59.23 87.07 71.20 77.00 90.64

Net Working
Capital
Current Assets 112.45 180.13 156.96 169.68 227.01

Current Liabilities 53.22 93.06 85.76 92.68 136.37

Current Ratio 2.11 1.94:1 1.83:1 1.83 1.66

DER (TL/TNW) 0.43 0.63:1 0.20:1 0.24 0.21

DER(TOL/TNW) 1.14 1.49:1 1.12:1 1.16 1.42

Net Sales 113.10 176.11 -- 246.00 320.00

Other Income 8.78 31.91 -- 2.90 2.00

Net Profit before 18.14 42.93 -- 15.32 26.69

Tax

Net Profit after Tax 11.81 30.26 -- 10.11 17.62

Depreciation 4.27 6.87 -- 2.88 5.19

Cash Accruals 16.08 37.13 -- 12.99 22.81

COMMENTS:
56
 1. Capital of the company remained constant at Rs.27.20 crores as of 30.04.08. Reserves &
Surplus increased from Rs.47.73 crores as of 31.03.07 to Rs.80.38 crores as of 30.04.08
mainly due to retention of profit of 30.21 crores.
2. TNW therefore improved from Rs.74.93 crores as of 31.03.07 to Rs.107.44 crores as of
30.04.08.

3. Term Liabilities increased from Rs.32.06 crores as of 31.03.07 to Rs.67.24 crores as of

30.04.08.
4. 14.1.4 Net Block increased from Rs.39.82 crores as of 31.03.07 to Rs.60.97 crores as of
30.04.2008.
5. The non-current assets of Rs.26.64 crores as of 30.04.08 comprised of company’s loans to
subsidiary companies of Rs.6.46 crores, Debtors older than six months of Rs.4.06 crores,
investment in subsidiaries Rs.0.06 crores and other current assets of Rs.16.06 crores.
6. The CR of 1.94, TL/TNW Ratio of 0.63 and TOL/TNW Ratio of 1.49 as of 30.04.2008
are within acceptable levels.
7. The Net Profit of the Company for 2007-08 amounted to Rs.30.26 crores as against the
estimate of Rs.35.00 crores for the year.( Last year net profit of Rs.11.81 crores ) The
shortfall in the net profit was due to non-completion of order of HPCL, which was to be
completed before December-2007. During the current FY 2008-09, the company has
estimated net profit of Rs.10.11 crores, which is lower than the profit earned in FY 2007-
08. The profit of the erstwhile company for the FY 2007-08 includes an amount of
Rs.15.90 crores being a profit on sale of fixed assets arising out of the conversion of
Bangalore property in Technology Park and receipt of lease rentals of Rs.6.79 crores. The
profit on sale of fixed assets being an amount of non- recurring nature will not be present
in the ensuing year. The receipts from lease rentals henceforth will be the income of PQR
Ltd., demerged company of erstwhile XYZ Ltd. from current FY 2008-09.
8. The overall financial position of the company is satisfactory.

COMMENTS ON CASH BASIS:

(Rs. in Crores)
Year 2006-07 2007-08

Net cash from operating activities (20.37) (53.74)

Net cash used in investment activities (36.01) 1.44

Net cash from financing activities 7.12 45.44

57
Net cash Generation 8.52 (6.86)

Opening cash balance as on 1st April 0.29 8.81

Closing cash balance as on 31st March 8.81 1.95

MANAGEMENT EVALUATION:
Market reputation:

XYZ has already established itself as a leading engineering company. The company is
professionally managed by technocrats and enjoying high reputation in their field. The company
has developed enough experience and expertise in their field.

Crisis Management:

The present promoters of the company are committed towards the project and can be reasonably
expected to support the same in case of crisis though on their own.

Organisation structure / Succession Planning / Labour relations

The company has well defined structured organisation and maintain cordial industrial relations.

INDUSTRY EVALUATION:
Industry competition:

Though there are competitors in this field, the company has proved themselves as a reliable
manufacturer- supplier for petro industries and nuclear establishments. The company has
acquired expertise and experience in supplying tailor made products to suit to the requirement of
the customers. Hence they are considered as a preferred supplier in these industries.

Industry structure:

The industry is a consolidated with select players as it requires technical expertise of a high order
in meeting the stringent quality requirement.

Government policies

With emphasis being self reliance in the power, fertilizer and petroleum refining sectors, the
Government policies are conducive to the growth of the Engg. good industry.

Business risk:
Diversity in customer base and products
Company caters to the capital goods requirements of giant enterprises, mainly from Public
Sector, in different industries like Fertilisers, Power and Petrochemicals. In that sense the
58
customer base can be termed as well spread. The products manufactured by them are specialised
and for specific use of the industry.

Market share of the company’s main products

The company’s products have sizeable share in the industry esp. high tech petro storage and
nuclear industries.

Availability of raw material

The raw materials for this industry are technology and special alloy steel to meet the
specification of the customers.

Selling and distribution arrangement

The company has already established itself as a leading manufacturer/ supplier of high tech
process units and storage tanks for petroleum industries and specific spares supplier for nuclear
industry with representative office/ centres in Mumbai, Bangalore and Goa.

Technology issues if any

The company mainly deals with petro process units and storage facilities. The company has
reasonable technological base in the form of technology, trained man power, products and
contemporary focus, hence it does not foresee any issues in this front.

WORKING CAPITAL ASSESSMENT:

Present Request:

The Company has requested the consortium for enhancement in existing fund based working

capital limits from Rs. 8.00 Crores to Rs. 25.00 Crores and NFB limits from Rs.160.00 crores

to Rs.230.00 crores to meet the additional working capital requirement for achieving the

increased net sales from Rs.176.11 Crores during FY 2007-08 to Rs. 320.00 Crores during

the FY 2009-10.

The company has further informed that the average outstanding under buyer’s credit during

the last two years was Rs 24 to 25 Crores. The company has now proposed enhancement in

Cash Credit limit because of the fear of appreciating dollar in the last few months. Besides

this the company has received bulk order of Rs 340.00 Crores from M/s STU Ltd, Bhatinda.

59
 The execution period of such orders will generally be of 18 to 24 months. As such the

turnover arising out these orders will reflect in next two years.

The company has submitted the CMA data based on actuals of 30.04.2008 and estimates and
projections for the next two years to the lead Bank i.e. Bank of Maharashtra. The lead Bank has
assessed company’s working capital requirements as under.

Sales Projections:
The company has estimated sales turnover of Rs.225.00 crores for FY 2007-08 against
which it has achieved Rs.176.11 crores i.e. 75.76% of their estimate. The company, has
achieved sales of Rs.182.95 crores upto January-2009. The company has estimated sales of
Rs.246.00 crores in FY 2008-09. Considering the present work orders of Rs.778.90 crores,
the company is hopeful to achieve estimated sales.

Considering the past performance and future business prospects, the sales projections are on
conservative basis and achievable and hence lead bank has accepted the projections.

Assessment of working capital limits

The holding level of the company is as under:-

(Rs. in Crores)

Sr. No. Particulars 06-07 07-08 08-09 09-10

1 Raw Materials 15.86 24.77 31.91 43.12

(Months’ consumption) 3.61M 2.66M 3.27M 3.00M

2 Work in Progress 22.02 67.94 45.61 53.40

(Months’ cost of production) 2.91M 6.87M 2.50M 2.50M

3 Receivables 20.32 43.76 67.09 80.00

(Months’ sales) 2.48M 3.34M 3.00M 3.00M

4 Creditors excluding Buyers Credit 8.70 15.99 19.50 28.75

(Months’ purchases) 1.98M 1.72M 2.00M 2.00M

60
Raw Materials
Holding of raw materials is slightly decreased during FY 07-08 as compared to previous years.
However it will be increased to 3 months for the next two years. The reasons are as under:

1. The company is buying steel in bulk quantities to take care of flow

of orders.
2. The necessity of business requirements.
3. To derive the cost benefits.

Stock In Process
The holding period for stock in process is 2 to 3 months and represents time required for
fabrication of the large columns, heat exchangers, oil tankers and other heavy equipments as per
specifications required by its customers. As these jobs are tailor made, the processing period can
sometimes increased beyond six months.

Receivables
The estimated / projected receivables for the FY 2008-09 & 2009-10 are at 3.00 months resp.,
which is less than actual. As the company’s main clienteles are from big corporate and public
sector undertakings, quality of debtors and realization of the same are good. We therefore accept
the receivables level as reasonable

Creditors
The creditors level for manufacturing is estimated and projected at 2.00 months i.e. as per the
past trend. This is because company wants to avail bank finance instead of credit from suppliers.

CREDIT RATING
a)

Year 31.03.2007 31.03.2008

Total score obtained 70/87 i.e. 81% 75/92

Grade CR-3 CR-2

b)

Para meters Marks obtained

61
 31.03.2007 31.03.2008

Borrower rating 55/62 58/67

Facility rating 14/15 14/15

Risk Mitigators 0/6 0/6

Business aspects ¼ 3/4

Total Marks with grade 70/87 i.e. 81% 75/92 i.e. 81.52%

Recommendations:
By studying satisfactory financial position of the company and the past satisfactory operations in
the account, we recommend renewal of limits at enhanced level for further period of one year.

10. SUMMARY & CONCLUSION

62
Credit Appraisal is a process of appraising the credit worthiness of loan applicants. The funds
of depositor’s, i.e., general public are mobilized by means of such advance/investment. Thus it
extremely important for the lender bank to assess the risk associated with credit; thereby ensure
the security for the funds deposited by the depositors.

In UBI the credit appraisal is done by thorough study of the project which involves following:

1) Evaluation of Management: A detailed study about the promoters is carried out in order
to ensure promoters are experienced in the line of business and are capable to implement
and run the project

2) Technical Feasibility: A detailed study about the technical aspects is done to determine
the technical soundness of the project

3) Financial Viability: A detailed study relating to financial viability of the project is done;
thereby ensuring that project will generate sufficient surplus to repay the loan installment
and interest

4) Risk analysis: it determines the risk associated with the project this is done by performing
a Sensitivity analysis and Credit Rating. With Sensitivity Analysis the projects capacity to
service debts under worsened conditions is determined. Credit rating, provides rating for
various parameters like management, financial, market and so, thereby determine the
credit worthiness of the borrower

It is on the basis of the credit risk level, collateral securities to be given by the borrower are
determined.

This shows Union Bank of India has sound system for providing finance & appraising the credit
of the corporate borrowers.

63
 11. REFERENCES & BIBLIOGRAPHY

BOOKS:

• Hand Book of Banking Information

N. S. Toor
• Bank Finance- Practical Aspects
D. N. Chaudhari

Alok Kulshreshtha

• Credit Appraisal & Risk Analysis

K. M. Chitnis

• Banking Strategies, Credit Appraisal & Learning Decision

Hrishikesh Bhattachrya

WEBSITES:

• www.ubi.com
• www.wikipedia.com
• www.indianexpress.com
• www.economictimes.com

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