A

THESIS ON
THE ROLE OF FINANCIAL RATIO ON DISBRUSEMENT OF LOAN
TO COMPANIES

“A CASE STUDY OF INDUSTRIAL DEVELOPMENT BANK IN

ORISSA.”

SUBMITED BY
JHANSI RANI MAHALIK
7NBCU015
 A
THESIS ON
THE ROLE OF FINANCIAL RATIO ON DISBRUSEMENT OF LOAN
TO COMPANIES

“A CASE STUDY OF INDUSTRIAL DEVELOPMENT BANK IN

ORISSA.”

SUBMITED BY
JHANSI RANI MAHALIK
7NBCU015

UNDER THE GUIDANCE OF

Ms. GOURI PRAVA SAMAL
(Faculty in Finance)

FINAL REPORT SUBMITTED FOR THE PARTIAL FULLFILLMENT

OF MBA DEGREE (2007-09)

ICFAI NATIONAL COLLEGE, CUTTACK

 CERTIFICATE
------------------------------------------------------------------------

This is to certify that the project report entitled “ROLE OF

FINANCIALRATIO ON DISBRUSEMENT OF LOAN TO COMPANIES,A
CASE STUDY OF INDUSTRIAL DEVELOPMENT BANK IN ORISSA”
done by Jhansi Rani Mahalik and submitted in partial fulfillment of the
requirements of MBA program of ICFAI National College, Cuttack.

Ms. Gouri Prava Samal

Faculty Guide
INC

I
 DECLARATION
-----------------------------------------------------------------------

I hereby declare that this report on “ROLE OF FINANCIALRATIO ON

DISBRUSEMENT OF LOAN TO COMPANIES,A CASE STUDY OF
INDUSTRIAL DEVELOPMENT BANK IN ORISSA” has been written and
prepared by me during the academic year 2007-2009.This project was
done under the able guidance and supervision of Ms. Gouri Prava Samal
Faculty, ICFAI National College in partial fulfillment of the requirement
for the Master of Business Administration Degree course of the ICFAI
National College.

I also declare that this project is the result of my own effort and has not been
submitted to any other institution for the award of any Degree or
Diploma.

Place: Cuttack Jhansi Rani Mahalik

Date: 7NBCU015

II
 ACKNOWLEDGEMENT
------------------------------------------------------

To acknowledge all the persons who had helped for the fulfillment of the project is not
possible for any researcher but in spite of all that it becomes the foremost
responsibility of the researcher and also the part of research ethics to acknowledge those who
had played a great role for the completion of the project. So in the same sequence at
very first, I would like to acknowledge my parents because of whom I got the
existence in the world for the inception and the conception of this project Because
IDBI bank has trusted me and given me a chance to do my integrated research study, I
would like to give thanks to the organization and especially to Mr. Suresh Kumar from the
depth of my heart. Rest all those people who helped me are not only matter of
acknowledgment but also authorized for sharing my success.
I also thank Ms.Gouriprava Samal, INC, Cuttack, who has sincerely supported me with
the valuable insights into the completion of this project. I am grateful to all faculty members
of INC, Cuttack and my friends who have helped me in the successful completion of this
project.

III
 SUMMARY

This project has been a great learning experience for me; at the same time it gave me enough
scope to implement my analytical ability.
The first part gives an insight about the financial institutions, its function, different
types of loan and theirs various aspects. One can have a brief knowledge about financial ratio
and all its basics through this project. Other than that the real servings come when one
moves ahead.

The financial services sector and capital markets have a significant influence on how
economies develop, principally through their role in allocating financial capital
between different economic activities, as well as through their own operations,
not only do banks manage their own financial and sustainability performance, they
are in a position to influence Socio-economic and environmental performance in
client organizations and through their lending strategies. In this report, we examine
whether and how IDBI bank manages this.

All the topics have been covered in a very systematic way. The language has been kept
simple so that even a layman could understand. All the data have been well analyzed with the
help of charts and graphs.
 VI

A. INTRODUCTION OF PROJECT

My survey is based on role of financial ratio for IDBI bank while lending finance to any
organization. By conducting this survey I came to know what is the procedure of lending in
case of IDBI bank. My project speaks about the banking system India, different type’s banks
and its services. Its gives better idea about the major banking sectors and its operations in
India. It contains company profile of IDBI bank, its products chart and organizational chart.
In the later sections we will see various types of financial ratio and its importance for a bank
in case of disbursement of loan to a company.

The most widely emphasized goal of the firm is to maximize the value of
the firm to its owner’s .This is possible only when, it has sufficient financial resources to
meet the long term and short term requirements. Funds are invariably required to carry on the
various activities of a business. Thus, Finance is a significant factor of every business. Funds
can be procured through various modes. Banks play an important role in the industrial

economy of India. Bank loans are the primary source of funds for private limited companies. 

Though lending is the primary activity of the bank, they are very cautious in granting the 

loans to their clients because their funds are collected from the general public in the form of 

deposits that can be withdrawn at a short notice at any time.

Before providing finance to the company, bank assesses the ability of the 

business   to   repay   its   debts   on   maturity   through   their   financial   statements.   Analysis   of 

financial statements helps the banker to know the financial position of the business which 

enables   the   banker   to   take   better   decisions.   Among   the   various   tools   for   evaluating   the 

financial statements, ratio analysis is the most widely used tool, as it helps us to measure the 

financial   and   operational   performance   of   any   business.   Ratio   analysis   will   facilitate 

meaningful   and   purpose   oriented   decision   making,   depending   on   the  evaluator’s

requirements.
 1

B. RESEARCH OBJECTIVE:

1To know the importance financial ratio.

2To know the role played by financial ratio in IDBI bank towards disbursement of loan to
the various organization.

3To know what are the techniques followed by the loan officer of IDBI bank.

4To assess the short­term and long­term solvency of the company.

5To know the efficiency of financial operations. 

6To predict the financial health and viability of the company with special reference to the 
debt capacity. 

7To provide suggestions for improving the financial position. 
 2

C. METHODOLOGY

Methodology plays a significant role in any study including social science research. It
provides the essential tools/techniques to carry out the study in a scientific manner. The
concept of truth, usefulness, acceptability could be ascertained through paper quantification,
verification of facts through different method of study. The reliability and validity of the
study /project depend upon the methods/procedures used.
Keeping this in view, the following methods has been employed to carry out the present
study.

PRIMARY DATA:-Primary data will be collected using the following methods. It is the
direct or first-hand data.
1Questionnaires
2Direct interaction.
SECONDARY DATA:- It will be collected from already available source like-
1Magazines, journals, newspapers.
2Different books
3Reference to the existing work done in this area.
4Reference to the various reports, material, published by the company
1Internet
DATA ANALYSIS TOOLS
1- Ratio analysis.
2-For data representation tables and graphs will be used.

TOOLS OF OBSERVATION

I will use the following two types of observation tools to collect primary data for my study.
i. Questionnaire
ii. Personal interview
 3

D. REVIEW OF LITERATURE

• Many of the research works have been conducted, over the period to evaluate the 

financial position of the company with the help of the various ratios or by applying 

the Multiple Discriminate Analysis to predict the corporate performance.

• .Bagchi S.K (2004) analyzed about practical implication of accounting ratios in risk 

evaluation   and   concluded   that   accounting   ratios   are   still   dominant   factors   in   the 

matter of credit risk evaluation

• Krishna Chaitanya (2005) used Z model to measure the financial distress of IDBI and 

concluded that IDBI is likely to become insolvent in the years to come. From the 

above reviews, the researcher identified the research gap which could be dealt in this 

study. 

• Whereas Mansur. A.Mulla (2002 made a study in Textile mill with the help of Z score 

model   for   evaluating   the  financial  health   with   five   weighted  financial  ratios   and 

followed by Selvam M, and others (2004).
 4

E. LIMITATIONS OF THE STUDY

No study is an ultimate effort. It always leaves room for improvement and it is the limitation 

of one study, which serves as the bases for further research ventures.  Even though,   sincere 

efforts   are   taken to ensure   that   an exact picture can be arrived at, still there may be some 

limitations related to the study. These are listed as below:

• This study is limited to only one financial institution i.e. IDBI Bank.

• The study is limited to time, cost and effort of the investigator. In a few span of 

period it is not possible to collect all the information.

• As I am a stranger to the company, companies are being heisted to provide to right or

valid data which is very much important for my study and it forced me to rely on
secondary data to grate extend.

• There may be some vital information which the organization may feel reluctant to

share. They may give some wrong information

• There are very few branches of IDBI bank present in Orissa .But their location are
not feasible for me to conduct my study, because it is more time consuming and more
expensive too.
 5

1.1 INTRODUCTION OF FINNANCIAL SYSTEMS

The Financial System Financial System Financial System Financial System is a set or
aggregation of institutions, instruments, markets and services. A complex interplay of these
components makes the financial system vibrant.
As with any other system, the financial system too has a paramount objective, i.e. to ensure
smooth flow of money from those who have it [savers] to those who want to use it [users], so
that the latter can make an effective use of the same, in the process benefiting themselves,
the savers and the economy as a whole.

Chart-1-STRUCTURE OF FINANCIAL SYSTEM

 6

1.2 FINANCIAL SYSTEM CONSTITUENT

Financial Institutions are engaged in the business of ‘money or finance’. They can be
further classified into three categories:
• Intermediaries
• Non-Intermediaries
• Regulatory Agencies

A. Intermediaries
Intermediaries are the financial institutions that accept deposits from the savers and
channelize the same as lending/ investment to the users. In other words, financial
Intermediaries function as abridge between the savers and the users in any economy. The
financial intermediaries by their smooth ‘conduit function’ make the economy infinitely
more efficient in the usage of money.
Examples of financial intermediaries are:
Banks,
Investment Companies
 Non-Banking Finance Companies [NBFCs],
Insurance companies,
Mutual funds,
Stock Brokerages
Credit Card Companies
B. Non Intermediaries
These are popularly known as Development Banks. These institutions fund the users of
money, but, as a matter of policy, do not accept deposits from ordinary savers. They get
funds from their owners or members as capital contribution/subscription & not from
depositors.
Classic examples of such institutions in the international context are
Asian Development Bank
World Bank
International Monetary Fund (IMF).
State Financial Corporations (In the Indian context)
7

C. Regulatory
These are agencies whose sole function is to monitor and regulate the functioning of the
intermediaries and non-intermediaries and are referred to as ‘Regulatory Authorities ’.
They are like the traffic cops that lay down the “Do’s and Don’ts” for the players in the
market. To make their regulations enforceable, these agencies are generally armed with
punitive powers, which can be exercised in case of non-compliance by any of the
players.

1.3 FINANCIAL INSTITUTIONS

Financial institutions have traditionally been the major source of long-term funds for the
economy in line with the development objective of the state. A wide variety of financial
institutions (FIs) emerged over the years. While most of them extend direct finance, some
also extend indirect finance and still some others extend largely refinance.
A financial institution acts as an agent that provides financial services for its clients or
members. Financial institutions generally fall under financial regulation from a government
authority. Common types of financial institutions include banks, building societies, credit
unions, stock brokerages, asset management firms, and similar businesses.

1.4 FUNCTION
Financial institutions provide a service as intermediaries of the capital and debt markets.
They are responsible for transferring funds from investors to companies, in need of those
funds. The presence of financial institutions facilitate the flow of monies through the
economy. To do so, savings are pooled to mitigate the risk brought vide funds for loans. Such
is the primary means for depository institutions to develop revenue. Should the yield curve
become inverse, firms in this arena will offer additional fee-generating services including
securities underwriting, and prime brokerage

1.5 TYPES OF FINNANCIAL INSTITUTIONS

Financial Institutions can be broadly categorised as all India or state level institutions
depending on the geographical coverage of their operation. Based on their major activity, all-
India financial institutions (AIFIs) can be classified as (i) term-lending institutions [IFCI
Ltd., Industrial Investment Bank of India (IIBI) Ltd., Infrastructure Development Finance
Company (IDFC) Ltd., Export-Import Bank of India (EXIM Bank) and Tourism Finance
Corporation of India (TFCI) Ltd.] which extend long-term finance to different industrial
sectors; (ii) refinance institutions [National Bank for Agriculture and Rural Development
(NABARD), Small Industries Development Bank of India (SIDBI) and National Housing
Bank (NHB)] which extend refinance to banking as well as non-banking financial
intermediaries for on-lending to agriculture, small scale industries (SSIs) and housing
sectors, respectively; and (iii) investment institutions [Life Insurance Corporation of India
(LIC) and General Insurance Corporation of India (GIC) and its erstwhile subsidiaries),
which deploy their assets largely in marketable securities. State/regional level institutions are
a distinct group and comprise various State Financial Corporations (SFCs), State Industrial
and Development Corporations (SIDCs) and North Eastern Development Finance
Corporation (NEDFi) Ltd. Some of these FIs have been notified as Public Financial
Institutions (PFIs) by the Government of India under Section 4A of the Companies Act,
1956.

1.6 INTRODUCTION OF BANKING SYSTEM

1.6(A). DEFINATION OF A BANK

The term bank is generally understood as an institution that holds a banking license granted
by the Bank regulatory authority and is provided rights to conduct the most fundamental
banking services. All banks come under the Intermediaries categories functioning as a
bridge between the savers and the users.
Bank is a commercial institution licensed as a receiver of deposits. It is a financial institution
that accepts deposits and channels the money into lending activities. It provides banking
services for profit. The essential function of a bank is to provide services related to
the storing of deposits and extending of credit. A bank generates profits from transaction
fees on financial services and on the interest it charges for lending.
1.6(B). BANKING SERVICES
Although the nature of services offered by a bank depends upon the type of the bank and the
country, the primary services provided include
• Taking deposits from the general public and issuing checking and savings
• Accounts, keeping money safe while also allowing withdrawals when needed
• Providing loans to individuals, businesses & Corporate
• Encashing cheques
• Facilitating money transactions such as wire transfers and cashiers checks
(Inter Bank, Intra Bank, Inter/Intra country etc…)
• Issuing credit cards, ATM, and debit cards
• Storing valuables, particularly in a safe deposit box
• Facilitation of standing orders and direct debits, so that payments for bills can be
made automatically

10

1.6(C). BANKING SYSTEM IN INDIA

Indian Banking System is fairly complex because of the presence of a variety of banks and a
phenomenal number of branches. (Possibly; in terms of sheer branch network, Indian
banking system could be reckoned as the largest in the world. Incidentally, SBI
is the largest bank in terms of number of branches/ personnel. As for the structure, the
Ministry of Finance is the super-regulator with RBI operating under its guidance. RBI is
the regulator of the banking system in India. It is responsible for bank licensing, as well
as branch licensing, issuing directives and supervising the functioning of banks.
It is empowered with punitive powers that can be exercised against errant banks.
Besides the RBI, there are agencies such as the Deposit Insurance, Corporation &
Guarantee Corporation of India (DICGC) and the Banking Ombudsman that have
Jurisdiction over banks in select matters
Categories of banks in India include: Public Sector Banks, Private Sector Banks,
Foreign Banks, Cooperative Banks, Local Area Banks and Regional Rural Banks. Examples
of Public sector banks are SBI & its associates and nationalized banks such as Canara Bank,
UCO Bank, Syndicate Bank, etc. Old generation Private sector banks include: Karur Vysya
Bank, Federal Bank, Catholic Syrian Bank, etc. & those incorporated after 1992 are
branded as “New Private Sector Banks. E.g.: HDFC Bank, ICICI Bank and Indusind Bank.
Foreign banks are those that are incorporated outside India but carry on their operations in
India under license from the RBI [E.g.: Citibank, Standard Chartered, HSBC Bank, etc.
While the above categories of banks are treated as ‘commercial banks’, there are also other
banks in India such as Cooperative Banks, Local Area Banks and Regional Rural Banks. The
regulatory framework could vary in detail from one category of banks to another.

11

1.6(D). KINDS OF BANKS

Financial requirements in a modern economy are of a diverse nature, distinctive variety and
large magnitude. Hence, different types of banks have been instituted to cater to the varying
needs of the community.
Banks in the organized sector may, however, be classified in to the following major
forms:
1. Commercial banks
2. Specialized banks
3. Co-operative banks
4. Central bank
-: COMMERCIAL BANKS:-
Commercial banks are joint stock companies dealing in money and credit. In India,
however there is a mixed banking system, prior to July 1969, the entire commercial
Banks-73 scheduled and 26 non-scheduled banks, except the state bank of India and its
Subsidiaries-were under the control of private sector. On July 19, 1969, however, 14 major
commercial banks with deposits of over 50 Corers were nationalized. In April 1980, another
six commercial banks of high standing were taken over by the government.
At present, there are 20 nationalized banks plus the state bank of India and its 7 subsidiaries
constituting public sector banking which controls over 90 per cent of the banking
business in the country.

-: SPECIALIZED BANKS:-

There are specialized forms of banks catering to some special needs with this
unique nature of activities. There are thus,
1. Foreign exchange banks,
2. Industrial banks,
3. Development banks,
4. Land development banks,
5. Exim bank.

12

-:CO-OPERATIVE BANKS:-

Co-operative banks are a group of financial institutions organized under the provisions
of the Co-operative societies Act of the states.
The main objective of co-operative banks is to provide cheap credits to their
members. They are based on the principle of self-reliance and mutual co-operation. Co-
operative banking system in India has the shape of a pyramid a three tier structure,
constituted by
 Chart-2

-: CENTRAL BANK:-

A central bank is the apex financial institution in the banking and financial system of a
country. It is regarded as the highest monetary authority in the country. It acts as the leader of
the money market. It supervises, control and regulates the activities of the commercial
banks. It is a service oriented financial institution.
India’s central bank is the reserve bank of India established in 1935.a central bank is usually
state owned but it may also be a private organization. For instance, the reserve bank of
India (RBI), was started as a shareholders’ organization in 1935, however, it was
nationalized after independence, in 1949.it is free from parliamentary.

13

1.6(E). INDIAN BANKING INDUSTRIES

In India the banks are being segregated in different groups. Each group has their own
benefits and limitations in operating in India. Each has their own dedicated target market.
Few of them only work in rural sector while others in both rural as well as urban. Many even
are only catering in cities. Some are of Indian origin and some are foreign players.
Table-1

MAJOR BANKS IN INDIA

• ABN-AMRO Bank
• Abu Dhabi Commercial Ban
• American Express Bank
• Andhra Bank
• Allahabad Bank
• Bank of Baroda
• Bank of India
• Bank of Maharashtra
• Bank of Punjab
• Bank of Rajasthan
• Bank of Ceylon
• BNP Paribas Bank
• Canara Bank
• Catholic Syrian Bank
• Central Bank of India
• Centurion Bank
• China Trust Commercial bank
• Citi Bank
• City Union Bank
• Corporation Bank
• Indian Overseas Bank
• Indusind Bank
• ING Vysya Bank
• Jammu & Kashmir Bank
• JPMorgan Chase Bank
• Karnataka Bank
• Karur Vysya Bank
• Laxmi Vilas Bank
• Oriental Bank of Commerce
• Punjab National Bank
• Punjab & Sind Bank
• Scotia Bank
• South Indian Bank
• Standard Chartered Bank
• State Bank of India (SBI)
• State Bank of Bikaner & Jaipur
• State Bank of Hyderabad
• State Bank of Indore
• State Bank of Mysore
• State Bank of Saurastra
14
• Dena Bank • State Bank of Travancore
• Deutsche Bank • Syndicate Bank
• Development Credit Bank • Taib Bank
• Dhanalakshmi Bank • UCO Bank
• Federal Bank • Union Bank of India
• HDFC Bank • United Bank of India
• HSBC • United Bank Of India
• ICICI Bank • United Western Bank
• IDBI Bank • UTI Bank
• Indian Bank • Vijaya Bank

1.6F. UPCOMING FOREIGN BANKS IN INDIA

By 2009 few more names is going to be added in the list of foreign banks in India. This is as
an aftermath of the sudden interest shown by Reserve Bank of India paving roadmap for
foreign banks in India greater freedom in India. Among them is the world's best private bank
by EuroMoney magazine, Switzerland's UBS.

The following are the list of foreign banks going to set up business in India:-
• Royal Bank of Scotland
• Switzerland's UBS
• US-based GE Capital
• Credit Suisse Group
• Industrial and Commercial Bank of China

15
 2.1. INTRODUCTION TO LOAN

Loan is a type of debt. A loan entails the redistribution of financial assets over time, between
the lender and the borrower.

One of the reasons for boom in Indian economy is that now a days loans are easily available
and the rate of interests at which they are available are very reasonable. Banks are giving
loan for and loan against any and every thing. Government too is encouraging people to take
loans for certain purposes. For example, government is encouraging people to take housing
loans by giving tax concessions.

2.2 TYPES OF LOAN

 Home Loans
 Auto Loans
 Business Loans- Business loans are available to firms and corporations to meet their
operating expenses; to finance for capital expenditure / acquisition of fixed assets
towards starting / expanding a business or industrial unit; and to swap existing high
cost debt from other bank / financial institution etc.
Maximum amount of business loan that can be sanctioned varies from bank to bank.
Generally, the maximum loan amount is Rs. 25 lakhs and maximum loan tenure is 5
years.
 Education Loans
 Marriage Loans
 Personal Loans
 Loans against
 Loans against
 Loans against share
16

2.3 HOW IS A LOAN PROCESSED?

Banks are experts at analyzing financial condition of potential borrowers. Depth of analysis
depends on size of the loan, type of loan (revolving line of credit, seasonal loan backed by
inventory or receivables, or term loan with lien on some asset), and whether or not the
applicant is known to the bank. Naturally, the type of loans a bank is willing to offer is at the
heart of its strategy, and that determines the parameters for pricing different loans.
Initial bank loan application, interview and negotiation with loan officer

A local branch loan officer, who receives an initial inquiry from a potential borrower, must
conduct a complete analysis of the client. The first step is to determine whether the type of
loan the client wants is available from the bank (i.e. if it is part of bank's strategy). The loan
officer will reject a request if i) the information provided is insufficient, ii) the bank does not
offer the type of financing requested, or iii) there is doubt as to the ability of the borrower to
repay the loan. If the request is not rejected, the loan officer is then responsible for gathering
of all the information essential to conduct a complete investigation of the applicant.

The information requested is usually a business plan with financial statements for the past
three years, cash flow statements, tax returns, pro forma (or projected) statements and
budgets, such as, especially, a cash budget. A cash budget is essential for a revolving line of
credit and a season loan because it must show the pattern of loan repayment down to zero.
Since a cash budget covers only 12 months, it is not as crucial for term loans with
installments extending over several years, but it still illustrates a company's handling of its
obligations.

Other information that may be needed deals with the nature of the activity or asset being
financed, documents related to the collateral or personal financial statements of business
owners, especially if the firm is a closely held corporation, a partnership or sole
proprietorship. The bank officer must also supplement all the documents received with
personal observations about the applicant. It is during a crucial initial interview that
judgmental observations about the applicant are recorded by the loan officer while checking
the completeness of the loan application with its supporting documents.

17
The investigation involves the use of credit reporting agencies, inquiries to other banks of
the client, checking public records for liens or judgments against applicant, as well as
assembling all relevant information about the nature of the industry and the history of the
company.

When you submit your business loan application, it may seem like it disappears into
a black hole. But understanding how the commercial loan processing system works can help
reduce your anxiety while you wait for approval.
Some lenders like to prequalify potential borrowers to determine how much they can afford.
This will also give you and your lender an opportunity to see which loan program would be
most appropriate for your needs. The lender will gather basic information, such as your
income and existing debts. To initiate the loan process, you must then complete and submit a
loan application.
Once your application is received, a loan officer or processor will review your credit
reports, the amount of available collateral, and your income. Your loan officer will
determine if any additional documentation is required, such as personal financial
statements. If you are purchasing real estate, you may also need to submit preliminary
environmental reports, area maps, title reports, property appraisals, and lease
summaries. If you are going through a broker, he or she will package your loan request
and submit it to several lenders for approval.
After your commercial loan package is submitted to the decision makers — either a loan
committee or underwriter — the processor will present you with a letter of intent or term
sheet. This is a formal document intended to ensure that all parties involved (the lender and
your company) are on the same page. The letter of intent may include the names of
involved parties, amount of financing, type of security (collateral), and other key terms.
During the underwriting process, you may need to furnish additional documentation.
If you are using a broker, he or she should be helping you negotiate the best terms, fees, and
conditions from various lenders. The next step is choosing the most attractive offer, and
signing and returning the final letter of intent along with a check, if required, for a
deposit, and to pay for third-party reports, such as appraisals.

18

2.4. CREDIT RISK RATING

Credit risk rating is a rating assigned to borrowers is based on an analysis of their ability and
willingness to repay the debt taken from the bank. This rating is assigned on a scale, which
generally has 6 to 8 levels. Companies falling in the same credit risk category
have similar probability of default. Better the rating, lower is the probability of
default. The probability of default increases in an exponential manner as the
credit risk rating deteriorates.
Uses of Credit Risk Rating
Credit risk rating is one of the important tools to decide in the following matters:

Whether to lend to a borrower or not: The credit risk rating of a borrower

determines the appetite of the bank in determining exposure level. A bank would be
willing to lend to highly rated borrowers but would not like exposure to borrowers
with very poor credit risk rating.

Pricing : The risk premium to be charged to a borrower should be determined by its credit
risk rating. Borrowers with poor credit rating should be priced high.

Risk Mitigants: The extent of collateral security required and the need to step up margin
requirements are linked to credit risk rating of a borrower. The higher the risk category of
a borrower, the greater should be the value of collateral and/or the margins.

Product mix: There is need to gradually shift from the present form of credit facility
by way of Cash Credit limit to Term Lending in Working Capital.

Level of decision-making: The delegation of loan sanction/approval powers can be

linked to the credit risk rating of a borrower. For low risk borrowers, higher power of
approval can be at the branch level to facilitate faster sanctioning of loans thereby
ensuring better customer service. For higher risk borrowers, approval from higher levels may
be considered.

19
 Frequency of renewal and monitoring: Renewal of facility in case of high rated
borrowers can be considered at longer intervals as compared to low rated borrowers. Credit
risk ratings eventually help a bank to assign a probability of default for borrower according
to its risk category. This probability of default is determined statistically from past data by
observing the behavior of various rated clients over a number of years. The expected losses
from a loan can be determined using this probability of default. This probability will
then help to determine the terms and conditions for the loans in terms of the amount, interest
rate to be charged, maturity etc. Credit risk rating will be just one of the inputs which will be
used in making the credit decisions, besides other factors like collateral provided, period and
quality of relationship with the borrower, portfolio concentration etc.
2.5. RBI GUIDELINES ON CREDIT RATING

Banks should have a comprehensive risk scoring/rating system that serves as a single point
indicator of diverse risk factors of counter party and for taking credit decisions in a
consistent manner. T o facilitate this, a substantial degree of standardization is required in
ratings across borrowers. The risk rating system should be designed to reveal the overall
risk of lending, critical input for setting pricing and non-price terms of loans as
also present meaningful information for review and management of loan portfolio.
This risk rating, in short, should reflect the underlying credit risk of the loan book.
The rating exercise should also facilitate the credit granting authorities some comfort in its
knowledge of loan quality at any moment of time. The risk rating system should be
drawn up in a structured manner, incorporating, inter alia, financial analysis,
projections and sensitivity, industrial and management risks. The banks may use any number
of financial ratios and operational parameters and collaterals as also qualitative aspects of
management and industry characteristics that have bearings on the creditworthiness
of borrowers. Banks can also weigh the ratios on the basis of the years to which
they represent for giving importance to near term developments. Within the
rating framework, banks can also prescribe certain level of standards or critical parameters,
beyond which no proposals should be entertained. Banks may also consider separate
rating framework for large corporate/small borrowers, traders, etc. that exhibit varying
nature and degree of risk. Forex exposures assumed by corporate who have no natural hedges
20
have significantly altered the risk profile of banks. Banks should, therefore, factor
the unhedged market risk exposures of borrowers also in the rating framework. The
overall score for risk is to be placed on a numerical scale ranging between 1-6, 1-
8, etc. On the basis of credit quality. For each numerical category, a quantitative
definition of the borrower, the loan’s underlying quality, and an analytic representation of
the underlying financials of the borrower should be presented. Further, as a
prudent risk management policy, each bank should prescribe the minimum rating below
which no exposures would be undertaken. Any flexibility in the minimum standards
and conditions for relaxation and authority, therefore, should be clearly articulated in the
Loan Policy. The credit risk assessment exercise should be repeated biannually (or even at
shorter intervals for low quality customers) and should be delinked invariably from the
regular renewal exercise.

The updating of the credit ratings should be undertaken normally at quarterly intervals or at
least at half-yearly intervals, in order to gauge the quality of the portfolio at periodic
intervals. Variations in the ratings of borrowers over time indicate changes in credit quality
and expected loan losses from the credit portfolio. Thus, if the rating system is to be
meaningful, the credit quality reports should signal changes in expected loan losses. In order
to ensure the consistency and accuracy of internal ratings, the responsibility for setting or
confirming such ratings should vest with the Loan Review function and examined by an
Independent Loan Review Group. The banks should undertake comprehensive study
on migration (upward – lower to higher and downward – higher to lower) of borrowers
in the ratings to add accuracy in expected loan loss calculations.

21
 3.1. INTRODUCTION OF DEVLOPMENT BANK
The economic development of any country depends on the extent to which its
financial system efficiently and effectively mobilizes and allocates resources.
There are a number of banks and financial institutions that perform this function;
one of them is the development bank. Development banks are unique financial institutions
that perform the special task of fostering the development of a nation, generally not
undertaken by other banks. Development banks are financial agencies that provide
medium-and long-term financial assistance and act as catalytic agents in promoting balanced
development of the country. They are engaged in promotion and development of industry,
agriculture, and other key sectors. They also provide development services that can aid in the
accelerated growth of an economy.
3.2. OBJECTIVES OF DEVLOPMENT BANK
The objectives of development banks are:
 To serve as an agent of development in various sectors, viz. industry, agriculture,
and international trade
 To accelerate the growth of the economy
 To allocate resources to high priority areas
 To foster rapid industrialization, particularly in the private sector, so as to provide
employment opportunities as well as higher production.
 To develop entrepreneurial skills.
 To promote the development of rural areas.
 To finance housing, small scale industries, infrastructure, and social utilities.
In addition, they are assigned a special role in:
 Planning, promoting, and developing industries to fill the gaps in
industrial sector.
 Coordinating the working of institutions engaged in financing, promoting or
developing industries, agriculture, or trade, rendering promotional services
such as discovering project ideas, undertaking feasibility studies, and
providing technical, financial, and managerial assistance for the implementation of
projects. 22
3.3. COMPANY OVERVIEW OF IDBI BANK
The Industrial development bank of India (IDBI) was established in 1964 by parliament as
wholly owned subsidiary of reserve bank of India. In 1976, the bank’s ownership was
transferred to the government of India. It was accorded the status of principal
financial institution for coordinating the working of institutions at national and state
levels engaged in financing, promoting, and developing industries.
IDBI has provided assistance to development related projects and contributed to
building up substantial capacities in all major industries in India. IDBI has directly or
indirectly assisted all companies that are presently reckoned as major corporate in the
country. It has played a dominant role in balanced industrial development. IDBI set up the
small industries development bank of India (SIDBI) as wholly owned subsidiary to cater to
specific the needs of the small-scale sector.
In 2004, IDBI Bank and IDBI Limited were merged to form IDBI - a Universal Bank. IDBI
created history as the company profile includes the building up of leading financial
institutions in India namely:

 National Stock Exchange of India (NSE)

 The National Securities Depository Services Limited (NSDL)

 Stock Holding Corporation of India Ltd. (SHCIL)

Currently enjoying the position of the tenth-largest development bank in the world, IDBI has
employee strength of around 7500 employees. The careers at IDBI are among the most
desired ones for anyone in the finance industry. Also the recruitments are done on the basis
of exams conducted regularly. The results are displayed on the official IDBI website. The
result of the exam decides your merit for a career at IDBI Bank India Ltd.

With a web of 502 branches, 865 ATM and 314 Centers, IDBI plans to reach as many
customers as possible and provide finance solutions to one and all. The Chairman and MD of
IDBI - Mr. Yogesh Agarwal aims to take the bank to universal standards fulfilling the
commitments made to the people in India.

23
3.4 FINANCIAL HIGHLIGHTS

Profitability:-
IDBI Bank reported a net profit of Rs. 160 crore for the quarter ended June 30, 2008, as
against Rs. 153 crore in the corresponding quarter ended June 30, 2007. This amounts to an
increase in net profit by 4% for the quarter compared to corresponding period last year.

Business:-
As of June 30, 2008, IDBI Bank’s total business (deposits and advances) stood at Rs 1,
50,832 crore as against Rs 1, 06,529 crore as of June 30, 2007, registering a growth of 42%.

Deposits:-
Deposits increased by a robust 56% year-on-year (y-o-y) to Rs. 72,717 crore from Rs. 46,757
crore outstanding as of June 30, 2007. Advances also increased by 31% to Rs. 78,115 crore
y-o-y, as compared to Rs. 59,772 crore as at end-June, 2007.

Advances:-
Advances also increased by 31% to Rs. 78,115 crore y-o-y, as compared to Rs. 59,772 crore
as at end-June, 2007.
As of June 30, 2008, aggregate assets stood at Rs. 1, 30,410 crore as against Rs. 1, 05,147
crore as on June 30, 2007, registering a growth of 24%.

Non Performing Assets (NPAs):-

The gross NPAs and net NPAs as on June 30, 2008 stood at Rs. 1578 crore (1.98%) and Rs.
1071 crore (1.36%) respectively as against Rs. 1294 crore (2.06%) and Rs. 714 crore
(1.15%) as on June 30, 2007.

CAR:-
IDBI Bank continued to maintain a sound capital base as indicated by its Capital Adequacy
Ratio (CAR). As against the stipulated RBI norm of 9%, the Bank's CAR stood at 12.02%
(Tier-I: 7.47%) as of June 30, 2008.

24

3.5 IDBI BANK BUSINESS CHART

Chart-3

IDBI BANK

DEVELOPMENT
RETAIL BANKING
BANKING

SAVING ACCOUNT CURRENT ACCOUNT INVESTMENT

PERSONAL SAVING CORPORATE SAVING

25
3.6 IDBI BANK ORGANIZATIONAL CHART

CHAIRMAN

PRESIDENT

Vice-President Vice-President Vice-President Vice-President

Finance H.R. Marketing Operation

Regional Head

Zonal Head

Divisional Sales
Manager

Territory In charge

26
3.7 IDBI BANK’S PRODUCT AND SERVICES

IDBI Bank offers a bunch of products and services to meet the every need of the people. The
company cares for both, individuals as well as corporate and small and medium enterprises.
For individuals, the company has a range accounts, investment, and pension scheme,
different types of loans and cards that assist the customers. The customers can
choose the suitable one from a range of products which will suit their life-stage and needs.
For organizations the company has a host of customized solutions that range from
funded services, Non-funded services, Value addition services, Mutual fund etc.
These affordable plans apart from providing long term value to the employees help in
enhancing goodwill of the company.
The products of the company are categorized into various sections which are as follows:
Table-2 PERSONAL BANKING

Loan Product Deposit Product Investment & Insurance

•
• Home Loans • Savings Account • Demat Account

• Loans Against • Current Accounts • IPO

Property
• Fixed Deposits • FamilyCare
• Education Loans
• Suvidha Tax Saving • Wealth Insurance
• Personal Loan Fixed Deposit

• Loan Against • Pension Accounts

Securities
• Sabka Account
• Holiday Travel Loan
• Sample AOF
• Reverse Mortgage
Loan • Super Shakti
Account for Women

• Jubliee Plus Account

27
 Cards Payment Services Access To Bank

• Gold Debit Card • Tax Payments • Phone Banking

• International Debit • Stamp Duty • SMS Banking

cum ATM Card Payment
• Account Alerts
• Foundation Day • Easy Fill
Cash Back Scheme • Internet Banking
2008 • Bill Payment

• Gift Card • Card To Card

Money Transfer
• World Currency
Card • Online Payments

• Cash Card • Pay Mate

OTHER PRODUCTS

• Institutional Savings
Account
• Corporate Payroll
Account
• Citizenidbibank
• Lockers
• India Post

28

Corporate Banking
1-Project Finance
2-Infrastructure Finance
3-Syndication, Underwriting &
Advisory Services
4-Carbon Credits Business
5-Working Capital
6-Cash Management services
7-Trade Finance
8-Tax Payments
9-Derivatives
10-Technology Up gradation
Fund Scheme (TUFS)
11-Film Financing Scheme
12-Direct Discounting Bills
13-Rehabilitation Finance
Table-2 OTHER SERVICES
SME Agri Business
Finance
1-Sulabh Vyapar Loan (SHORT TERM LOANS)
1-Crop Loan With Kisan Credit
2-Dealer Finance
Card
3-Funding under CGFMSE
2-PSL Gold Loan Scheme
4-Direct Credit Scheme –
3-Warehouse Receipt Finance
SIDBI
4-Loan Against Crop
5-Preferred customer
receivables
scheme – IDBI Bank /
(TERM LOANS)
SIDBI
4-Farm Mechanization
6-Vendor financing (Pre –
5-Financing Wells
Sale)
6-Financing Minor Irrigation
7-Vendor financing (Post –
Schemes
Sale)
7-Lift Irrigation Schemes
8-Lending Against the
8-Loans For Purchase of Land
Security of Future Credit
9-Loan For Land Development
card Receivables
10-Horticulture & Forestry
9-Working Capital
11-Development Loans
Financing – Software
12-Loans For Bullock Pairs &
Development
bullock Cart
10- Finance to Medical
13-Two Wheeler Loan to
Practitioners
farmers
11-Loan to SRWTO
14-Bio Gas
12-SME Hosiery Special
Allied Activities
Current Account 15-Dairy Loans
16-Poultry Farming
17-Loans For Sheep & Goats
rearing
18-Fisheries Loans
19-Financing Piggery Unit
20-Loan For Silk Production
(Sericulture)
21-Bee Keeping Madhu
Makshika Palan(Apiculture)
29
3.8 IDBI LENDING PROCESS AND INSTITITUIONAL STRUCTURE
IDBI was established in 1964 under an Act of Parliament for providing credit and other 

facilities for the development of industry. It also acts as the principal financial institution for 

coordinating the activities of institutions engaged in the finance, promotion, or development 

of industry. The Government of India’s shareholding in IDBI amounts to 72%, and the rest of 

the shares are owned by the general public. IDBI has also offered specialized schemes for 

energy   conservation   viz.   Equipment   Finance  for   Energy   Conservation   and   Energy   Audit 

Subsidy Scheme. Presently, IDBI provides rupee and foreign currency term loans for the 

acquisition and installation of energy conservation equipment, and for pollution control and 

prevention projects in highly polluting industrial sectors, funded  inter alia, out of World 

Bank’s Industrial Pollution Prevention Project (IPPP) or the US Agency for International 

Development­funded Greenhouse Gas Pollution Prevention (GEP) Project. Besides, finance 

is made available for out of the on­going Industrial Energy Efficiency Project of the ADB of 

which the TA forms a part. Under this project, finance is given to industrial units in rupee as 

well   as  in foreign currency. Additional funding needs left unmet by the ADB  funds   are 

supplemented by IDBI’s own funds as well

3.8A. IDBI INSTITUTIONAL STRUCTURE 

IDBI is   governed   by   a   Board   of   Directors   and   its   operation   is   carried   out   under   the 

supervision of the Chairman and Managing Director assisted by four Executive Directors and 

one Adviser. With its head office in Mumbai, IDBI has 43 additional offices throughout 

India. As of November 1998, IDBI was structured into 33 departments, which are organized 

into five groups to facilitate proper distribution of responsibility. Among these departments, 

the ones relevant to the efficient lending activities are briefly described below.

1. Project appraisal department. The Project Appraisal Department (PAD) appraises all the 

industrial project proposals. PAD projects constitute the majority of projects sanctioned by 

IDBI in terms of value. Besides a number of smaller projects are funded at the branch level.
 30

2.   Corporate   finance   departments.  The   three   Corporate   Finance   Departments   (CFDs) 

follow up on the projects that have already been sanctioned, in order to ensure their timely 

implementation and proper utilization of funds. In addition, a new concept of a Relationship 

Manager   was   instituted   within   the   CFDs.   These   managers   will   be   dedicated   to   manage 

IDBI’s interactions with a major industrial (ownership) group, such as Reliance Industries, 

the Tata Group, etc. IDBI’s interactions with a major industrial (ownership) group, such as 

Reliance Industries, the Tata Group, etc. While the relationship manager system works well 

from the perspective of consolidating knowledge about an industry group, it may not work as 

well where the focus has to be on an aspect of technology within an industry sector. For 

example, a relationship manager cannot be expected to be an expert on energy efficiency in 

every industry sector that forms a part of the industry group being dealt with by him/her. 

Hence,   in   order   to   develop   some   expertise   in   some   of   the   industries,   which   are   not 

necessarily dominated only by a few major industry groups, industry­sector­wise approach is 

also  adopted. Thus the organization of a CFD  is a workable mix of  industry group  and 

industry sub­sector, with the expertise of one Dealing group drawn upon by another.

3. Forex services and treasury departments. The Treasury and Funding Division contracts, 

decides on utilization and monitors all lines of credit from multi­lateral institutions like the 

World   Bank   (WB)   and   the   Asian   Development   Bank   (ADB).   It   manages   the   various 

specialized loans and grants for energy and environmental technology projects, including this 

TA project.
3.8B. IDBI LENDING PROCEDURE
The current procedure for lending at IDBI includes: (1) an inquiry stage, (2) an application 

stage,   (3)   site   visits,   (4)   preparation   of   an   appraisal   note,   (5)   an   evaluation   by   IDBI 

committee, (6) the issuance of a Letter of Intent, and (7) preparation of a legal agreement for 

lending for suitable projects. IDBI also operates special credit lines for the mitigation of 

pollution,   implementation   of   the   Montreal   Protocol   commitments,   modernization   and 

expansion   of   energy   intensive   industry,   etc.   The   technical   norms   for   these   lines   were 

determined   individually,   but   the   lending   procedure   is   the   same   as   that   for   other   IDBI 

projects. 

31

The lending procedure followed by IDBI is comprehensive, based on accepted methods of 

evaluation   and   collective   wisdom,   and   is   transparent.   The   procedure,   however,   does   not 

provide for a serious attempt to evaluate the energy and environmental components of any 

lending proposal. At each stage of the application for a loan, a company is required to provide 

information   on   energy   consumption,   along   with   that   of   other   utility   services.   Energy 

consumption information is disaggregated into fuels and electricity categories. The company 

is not required to provide indicators of energy use to IDBI, which makes the information 

difficult to evaluate. Indicators could link the energy (fuel and electricity) consumption to 

physical activity levels and permit comparison with best practice in India and abroad. 

3.8C. DOCUMENTATION FOR LOAN APPLICATION

♦ Application form of bank duly filled in

♦ Industrial license/SIA registration, NOC from State Pollution Control Board, Sanction for
Power
♦ Balance Sheet, Profit & Loss Account and Directors Report for minimum 3 years
♦ Memorandum and Articles of Association
♦ Cash Budget, in case of working capital borrowing
♦ Statement of Net wealth of Promoters
♦ Statement of collateral securities with their market valuation by approved valuer and
copies of title deeds
♦ Copies of board resolutions authorizing execution of loan agreement and signing various
documents to be submitted
♦ Quotations, purchase orders, invoices

32

4.1 FINANCIAL RATIOS

Financial ratios are useful indicators of a firm's performance and financial situation. Most
ratios can be calculated from information provided by the financial statements. Financial
ratios can be used to analyze trends and to compare the firm's financials to those of other
firms. In some cases, ratio analysis can predict future bankruptcy. Financial ratios are used
by managers within a firm, by current and potential shareholders (owners) of a firm, and by a
firm's creditors. Security analysts use financial ratios to compare the strengths and
weaknesses in various companies. If shares in a company are traded in a financial market, the
market price of the shares is used in certain financial ratios.

Values used in calculating financial ratios are taken from the balance sheet, income
statement, cash flow statement and (rarely) statement of retained earnings. These comprise
the firm's "accounting statements" or financial statements. Ratios are always expressed as a
decimal value, such as 0.10, or the equivalent percent value, such as 10%.
4.2 USE AND USERS OF RATIO ANALYSIS
There are basically two uses of financial ratio analysis: to track individual firm performance
over time, and to make comparative judgments regarding firm performance. Firm
performance is evaluated using trend analysis—calculating individual ratios on a per-period
basis, and tracking their values over time. This analysis can be used to spot trends that may
be cause for concern, such as an increasing average collection period for outstanding
receivables or a decline in the firm's liquidity status. In this role, ratios serve as red flags for
troublesome issues, or as benchmarks for performance measurement.
Another common usage of ratios is to make relative performance comparisons. Users of
financial ratios include parties both internal and external to the firm. External users include
security analysts, current and potential investors, creditors, competitors, and other industry
observers. Internally, managers use ratio analysis to monitor performance of the organization.

33

4.3 TYPES OF FINANCIAL RATIO

Considering the need of users’ financial ratio can be divided into five types

• LIQUIDITY RATIO which give a picture of a company's short term financial

situation or solvency.
• LEVERAGE RATIOS which show the extent that debt is used in a company's capital
structure.
• TURNOVER RATIOS which use turnover measures to show how efficient a
company is in its operations and use of assets.
• PROFITABILITY RATIOS which use margin analysis and show the return on sales
and capital employed.
• VALUATION RATIOS which give a picture of a company's ability to generate cash
flow and pay it financial obligations.

LIQUIDITY RATIOS
Liquidity implies a firm’s ability to pay its debt in short term. This ability can be measured
by the use of liquidity ratio. Short term liquidity involves the relationship between current
and current liability. If a firm has sufficient net working capital (excess of current asset over
current liabilities) it assumed to have enough liquidity.
Liquidity ratio can be classified into three types- current ratio, acid-test ratio, and cash ratio.
 Current ratio: - The current ratio measures the capabilities of the organization to meet
its current liabilities. Current assets include cash, current investments, debtors,
 inventories, loan and advances and prepaid expenses. Current liabilities are those that
have to be repaid within one year. Current liabilities include loans (secured as well as
unsecured) taken, trade creditors, accrued expenses and provisions.

Current Ratio = Current Assets / Current Liabilities

Short-term creditors prefer a high current ratio since it reduces their risk. Shareholders may
prefer a lower current ratio so that more of the firm's assets are working to grow the business.
Typical values for the current ratio vary by firm and industry. For example, firms in cyclical
industries may maintain a higher current ratio in order to remain solvent during downturns.
One drawback of the current ratio is that inventory may include many items that are difficult
to liquidate quickly and that have uncertain liquidation values. For most manufacturing
companies 1.5 is an acceptable current ratio. The standard current ratio for a healthy business
organization is close to 2.0.
34

 Acid-test/Quick Ratio: - The quick ratio is an alternative measure of liquidity that

does not include inventory in the current assets. It is a more stringent measure of liquidity
because inventories, which are last liquid of current assets, are excluded from the ratio.
Ideally the acid test ratio will be 1.1, but 0.8 is acceptable.

Acid-test Ratio (Quick ratio) = (Current Assets – [Inventories +

Prepayments]) / Current Liabilities
 Cash Ratio: - The cash ratio is the strictest measure of the liquidity of a company. It
takes into account the cash and bank balance of the organization and current investments
and matches them with current liabilities.
LEVERAGE RATIOS
Leverage ratios assess the capital structure of an organization (in terms of equity and debt)
and the risk arising from the use of debt as a source of funds. It helps in controlling the cost
of capital and risk of increased debt.
Leverage ratio can be classified into structural ratios and coverage ratios.
 Structural Ratios:- Structural ratios are derived from the proportions of debt and
equity used by the organization. The important structural ratios are: financial leverage
ratio, debt-equity ratio, and debt-asset ratio.
 Financial Leverage Ratio: - Financial leverage ratios are used to assess the
effectiveness with which the organization utilizes external funding to improve returns
to shareholders.

Financial leverage ratio = Total assets/Shareholder’s fund (net worth)

 Debt-Equity Ratio: - It indicates the proportion of equity and debt the company is
using to finance its assets. High debt-equity ratio implies that the company is at
higher risk of bankruptcy. Capital-intensive industries such as auto manufacturing
tend to have a debt-equity ratio of above 2, while less capital intensive industries
have a debt-equity ratio of under 0.5.

Debt-Equity Ratio = Debt/Equity

35

 Debt-Asset Ratio: - The debt-asset ratio indicates what proportion of the

company’s assets is being financed through debt. A ratio of less than 1 means a
majority of assets are financed by through equity, above 1 means they are financed
more by debt.

Debt-Asset Ratio = Debt/Assets

 Coverage Ratios: - It shows the relationship between the obligations will be met.
The important coverage ratios are interest coverage ratio, fixed charges coverage ratio,
and debt service coverage ratio.

Coverage Ratios = Funds available to meet an obligation /amount

of that obligation
  Interest Coverage Ratio:-This ratio tells us how many times the firm can cover or
meet the interest payments associated with debt. It is also referred to as the times
interest-coverage ratio. A high interest coverage ratio means that the company can
easily pay the interest dues even if its profit before interest and taxes (PBIT) declines
to some extent.

Interest Coverage Ratio = EBIT / Interest Expenses

 Fixed Charges Coverage Ratio: - The fixed charges coverage ratio indicates the
organization’s ability to meet fixed financing expenses, such as interest and leases.
The fixed charges coverage ratio indicates the risk involved in the organization’s
ability to pay the fixed cost when business activity falls. It is desirable to have a fixed
charge coverage ratio greater than 1.

Fixed charges coverage ratio = Earnings before depreciation, debt

interest and lease rentals and taxes/debt interst+loan repayment
installment/ (1-tax rate) +preference dividends/ (1-tax rate)

36

 Debt Service Coverage Ratio: - The debt service coverage ratio, which is a post
tax coverage used by term lending financial institutions in India. It is a measure of the
cash flow available to met annual interest and principal payments on debt. A debt
service coverage ratio of less than 1 would mean a negative cash flow. A debt service
coverage ratio of say 0.75 would mean that there is only enough operating cash flow
to cover 75% of the annual debt payment.

Debt service coverage ratio = PAT + Depreciation+ Other non cash

charges+ Interest on term loan / interest on term loan+Repayemnt
of the term loan

TURNOVER RATIO
Turnover ratio measures how efficiently a company utilizes its assets. These ratios are also
known as efficiency ratios or asset management ratios. It gives the speed of conversion of
 current assets into cash. The inventory turnover ratio, the debtor turnover ratio, the average
collection period, the fixed assets turnover ratio, and total assets turnover ratio are some
important turnover ratio.
 Inventory Turnover Ratio:- The inventory turnover ratio or stock turnover measures
how fast the inventory is moving through the firm and generating sales. Higher the ratio,
greater the efficiency of inventory management. It could also mean that there is insufficient
inventory. A low turnover implies poor sales and therefore excess inventory.

Inventory Turnover Ratio = Cost of Goods Sold / Average Inventory

 Debtor Turnover Ratio: - The debtor turnover ratio measures the number of times
receivables turn over during a year. If the turnover ratio of receivables is high, then it
would indicate a short time period between sales and cash collection.

Debtor Turnover Ratio= Annual Credit Sales/Annuals Credit Sales

37

 Average Collection Period: - It indicates the time taken (in days) by a company to
collect its account receivables. This ratio indicates efficiency of its collection managers.

Average Collection Period=360/Average Account receivable turnover

 Fixed Assets Turnover Ratio: - It is a measure of the sales generated per rupee
invested in fixed assets. It measures the company effectiveness in generating revenue
from investment in fixed assets. The higher the fixed assets turnover ratio, the more
effective the company’s investment in net property, plant, and equipment.

Fixed Assets Turnover Ratio = Net sales/Average Net Fixed Assets

  Total Assets Turnover Ratio: - It is a measure of the sales generated per rupee
invested in total assets. It measures the company’s effectiveness in generating revenue
from investment in total assets.

Total Assets Turnover Ratio = Net sales/Average Total Assets

PROFITABILITY RATIO
Profitability ratios measure the outcomes or profitability of business operations Profitability
ratios measure the firm's use of its assets and control of its expenses to generate an
acceptable rate of return. Gross profit margin, net profit margin, return on assets, earning
power, return on capital employed, and return on equity are some of the widely used
profitability ratio.
 Gross Profit Margin: - It is a measure of the gross profit earned on sales by a company.
It indicates how efficiently a business is using its material and labour in the production
process. It shows the percentage of net sales remaining after subtracting the cost of goods
sold. A high gross profit margin indicates that a business can make a reasonable profit on
sales, as long as it keeps overhead cost under control.

Gross Profit Margin= Sales - Cost of Goods Sold/ Sales

38

 Net Profit Margin:- It indicates the earnings of the company after deduction of taxes
as a percentage of net sales. The net profit margin tells us how much profit a company
makes for every rupee it generates in revenue. The higher a companies profit margin as
compared its competitors the better.

Net Profit Margin=PAT/Net Sales

 Return on Assets: - It is an indicator of how profitable a company is relative to its

assets. The ROA indicates how efficiently an organization is in managing it’s an asset to
generate returns.

Return on Assets = Net Income/total Assets

 Earning Power Ratio: - Earning power is a measure of performance of the business
which is not affected by tax or interest charges.

Earning Power Ratio = PBIT/Average Total Assets

 Return On Capital Employed: - It is a measure of the returns realized from the total
capital employed in the business. ROCE gives an indication of whether the organization
is earning adequate revenue and profit through the efficient use of its capital.

Return on Capital Employed = NOPAT/Average Assets

 Return on Equity: - It measures how much profit a company generates with the
money invested by the shareholders. It also known as return on net worth (RONW).

Return on Equity = PAT/Average Equity

39

VALUATION RATIO

Valuation ratio gives an indication of how the stock of the company is valued in the capital
market. Price earning ratio, yield, and market value to book value ratio are some of the
important valuation ratio.

 Price Earning Ratio: - Price earning ratio is the ratio of a company’s current share
price to it’s per share earnings. It shows how much investors are willing to pay per rupee
earned by the company.

Price earning ratio = Market price per share/Earning per share

 Yield: - Yield is a measure of the rate of return earned by shareholders. Shareholders
earn returns in terms of dividend and capital appreciation. Yield is the sum of dividend
yield and capital gains yield. [Dividend/Initial market price per share] is also known as
dividend yield and [Change in market price per Share/ Initial market price per share] is
known as capital gains yield.

Yield = {Dividend/Initial market price per share} + {Change in market

price per Share/ Initial market price per share}

 Market Value to Book Value Ratio:-It is an indication of the organization’s

contribution to wealth creation in society. It is desirable to have a market value to book
value ratio greater than 1 because it means that the company has been successful in
creating wealth for society.

Market Value to Book Value Ratio = Market value per share / Book value
per share

40

5.1ANALYSIS OF DATA

Table-4 BALANCE SHEET OF ITC Ltd AND TVS Motors (Rs. in Crore)

ITC Ltd TVS Motor

Mar ' 08 Mar ' 07 Mar ' 08 Mar ' 07
SOURCES OF FUNDS
Owner's Fund:
Equity share capital 376.86 376.22 23.75 23.75
Share application money ---- ---- ----- -----
Preference share capital ---- ---- ----- -----
Reserves & surplus 11,624.69 10,003.78 797.83 785.52
Loan Funds:
Secured loans 5.57 60.78 452.68 446.16
Unsecured loans 208.86 140.10 213.66 187.40
Total 12,215.98 10,580.88 1,487.92 1,442.83
USES OF FUNDS
Fixed Assets:
Gross block 8,959.70 7,134.31 1,790.97 1,483.01
Less: revaluation reserve 56.12 57.08 ----- -----
Less: accumulated depreciation 2,790.87 2,389.54 774.49 685.93
Net block 6,112.71 4,687.69 1,016.48 797.08
Capital work-in-progress 1,126.82 1,130.20 26.57 205.83
Investments 2,934.55 3,067.77 38.96 344.74
Net Current Assets:
Current assets, loans & advances 7,306.99 6,281.07 839.84 860.59
Less: current liabilities & provisions 5,265.09 4,585.85 786.70
823.95
Total net current assets 2,041.90 1,695.22 53.14 36.64
Miscellaneous expenses not written ----- ----- 52.77
58.54

Total 12,215.98 10,580.88 1,487.92 1,442.83

41

Table-5 FINANCIAL RATIO OF ITC Ltd AND TVS MOTOR

Ratios ITC Ltd TVS Motor

Mar ' 08 Mar ' 07 Mar ' 08 Mar ' 07

Liquidity ratios:
Current ratio 1.39 1.37 1.07 1.04
Quick ratio 0.56 0.58 0.46 0.51
Leverage ratios:
Financial leverage ratio 1.02 1.02 1.81 1.78
 Long term debt / Equity 0.01 0.01 0.81 0.78
Total debt/equity 0.01 0.01 0.81 0.78
Debt/Assets 0.017 0.018 0.44
0.43
Financial charges coverage ratio 199.51 268.33 9.82 5.06
Profitability ratios:
Gross profit margin (%) 28.44 29.56 -1.53 1.35
Net profit margin (%) 21.50 21.40 0.96 1.69
Return on net worth (%) 25.99 26.01 4.13 8.87
Turnover ratio:
Inventory turnover ratio 5.51 6.05 9.61 11.86
Fixed assets turnover ratio 1.59 1.75 1.80 2.60
Days of Inventory holding 226 205 200 138

42

 From the above ratio analysis the Current ratio of ITC and TVS is not satisfactory
in the year 2008 and 2007 because the ratio should lies within the standard
limit of 2:1. The current ratio of 1.39 times of ITC Ltd. says that the company is in
relatively good short-term financial standings than TVS. The ratio is an indication of a
company's ability to meet short-term debt obligations; the higher the ratio, the more
liquid the company is.

 The small ‘Quick ratio’, i.e. 0.56 times says that the company's financial strength is not
so strong. In general, a quick ratio of 1 or more is accepted by most creditors; however,
 quick ratios vary greatly from industry to industry. We have seen that the company had a
lower current ratio in 2008 and was unable to meet its short term obligations as compared
to 2007. ITC does not have as such any worry in getting creditors.ITC has strong
financial positions in many other aspects. TVS had a lower quick ratio than ITC in both
years.

 The Debt-equity ratio of ITC is 0.01 times, which means that the company has not been
aggressive in financing its growth with debt and the debt portion is less than equity. Thus
its earnings are stable. The company has better support from the shareholders.

 The Inventory turnover ratio of ITC in the year 2007 was 6.05 which indicate
that 6.05 times in a year the inventory of the firm is converted into receivables or
cash. However, in 2008, the inventory turnover ratio slightly decreased to 5.51. But in
case of TVS inventory turnover ratio is higher than the ITC. Higher the ratio, greater the
efficiency of inventory management.

 ITC takes more days than TVS in case of liquidating its inventory. Due to this ITC faces
excessive carrying charges. TVS have experienced a fall in the inventory days due to
larger sales and larger cost of the goods sold.

43

 The Fixed assets turnover ratio of TVS is 2.60 times in 2007 signifies that the company
is very efficiently utilizing its fixed assets for generating sales revenue. This ratio
measures the extent of turnover or volume of gross income generated by the fixed assets
of a company or in other words the efficiency in their utilization. According to the
calculations above the productivity of fixed assets in year 2008 of TVS is better than the
ITC. In 2007, it was 2.60 times and now it has been decreased to 1.80 times. This change
was brought about by decrease in total sales.
 The Gross profit margin of ITC is much higher than the TVS. The gross margin of
28.44% of ITC in 2007 is quiet impressive, and the company is making good profit than
the TVS after the deduction of production cost. In case of TVS this ratio i.e.-1.53 %
shows the loss relative to sales after the direct production costs are deducted.

 The Net profit margin of ITC is much higher than the TVS. The net margin of 21.50%
of ITC is quiet impressive, and the company is performing well than TVS in both years.
This ratio shows 21.50 earnings left for shareholder of ITC as a percentage of net sales.
But in case of TVS the net margin of 0.96% in 2008 indicates some mismanagement in
the areas excluding production.

 The Return on net worth of 25.99% in 2008 is quiet good and ITC is utilizing the
shareholders funds in a better way. But in case of TVS return percentage i.e. 4.13 is much
lower than the industry norm. It is an important profit indicator.

44

In this segment I will show my findings in the form of graphs and charts. All the data which
I got form the market will not be disclosed over here but extract of that in the form of
information will definitely be here.

Chart 5- MARKET SHARES OF IDBI IN COMPARISION TO

COMPETITORS
BANK NAME % OF SHARE
SBI 30%
IDBI 15%
ICICI 25%
PNB 10%
HDFC 5%
HSBC 5%
OTHERS 10%

45

Chart-6 FACTORS RESPONSIBLE FOR PERFORMANCE OF IDBI

BANK

PARAMETERS % OF SHARE
PRODUCT 50%
ADVERTISMENT 5%
MANPOWER 25%
NET-BANKING 2%
 PHONE BANKING 5%
NVESTMENT SCHEME 10%
NETWORK 3%

46

Chart-7 COMPARATIVE STUDY WITH MAJOR COMPETITORS ON

BASIC PARAMETERS

PARAMETERS/BANKS IDBI ICICI SBI PNB HSBC CANARA

BANK
PRODUCT 20% 15% 30% 15% 10% 10%
ADVERTISMENT 3% 45% 15% 20% 7% 10%
MANPOWER 10% 50% 2% 3% 25% 10%
NET-BANKING 3% 50% 10% 12% 8% 17%
PHONE BANKING 10% 40% 5% 5% 3% 10%
INVESTMENT SCHEME 5% 25% 50% 10% 5% 5%
NETWORK 2% 40% 40% 5% 3% 10%
CREDIBILITY 20% 10% 40% 20% 5% 5%

47

Role of financial ratio and loan officer

Commercial loan departments of IDBI Bank use financial ratios to determine whether a loan
should be granted to companies, as well as the amount it will lend.
The ratios considered most significant by commercial loan officers are financial measures of
liquidity and debt. Loan officers need to consider a company’s ability to repay the loan, thus
liquidity ratios are emphasized. Debt ratios are also emphasized in order to determine the
degree to which a company uses long-term debt and to determine the company’s financial
structure (how it uses debt versus equity).
Specifically, loan officer consider the current ratio and the debt/equity ratio the most
significant in determining whether to grant a loan and the amount to lend. The third most
significant ratio, according to loan officers, is the net profit margin, which is a measure of the
company’s profitability. Loan procedure of IDBI bank can be easily understood by following
example.

Sagar Cements Limited

In this activity, the Senior Loan Officer at IDBI Bank must determine whether to grant a
$750 million loan requested by ExchangePlace.com. Then he requested to a Junior Analyst
at the Bank analyze the financial statements (balance sheet and income statement) of Sagar
Cements Limited and make an initial recommendation as to whether the loan should be
granted. The Junior Analyst has recommended that the Bank grant the loan to Sagar Cements
Limited. Then the Senior Loan Officer assesses the Junior Analyst’s analysis and determines
whether the recommendation is appropriate or not.

Sagar Cements Limited approached the Senior Loan Officer at IDBI Bank, requesting a $750
million loan. Sagar Cements Limited indicated the loan will be used to grow the business.
Then Senior Loan Officer asked the Junior Analyst to analyze the balance sheet and income
statement (2005 and 2004) of Sagar Cements Limited, and to make a recommendation based
on the analysis to either grant or deny the loan request.

48

The following additional information was provided by Sagar Cements Limited:

 Sagar Cements Limited incurred a net loss of $475 million in 2003.
 Sagar Cements Limited borrowed $680.5 million in 2005 and $325 million in 2004.
 The common stock of Sagar Cements Limited is publicly traded. In the past year (2005), it
raised $721 million by selling common stock, and plans to sell additional shares next year.
The market price of the stock continues to increase at a steady rate on the stock exchange.
Upon reviewing this information, senior loan officer have calculated the payments Sagar
Cements Limited would be required to make based on the terms of the loan. Payments would
be made quarterly over 25 years; each payment, which includes principle and interest, is
$28.95 million.

The Junior Analyst has recommended that IDBI Bank grant the loan to Sagar Cements
Limited and has provided with the following analysis.

Based on the analysis below, the Junior Analyst recommends that IDBI Bank grants the
$750 million loan requested by Sagar Cements Limited.

1. Sagar Cements Limited is very liquid, an indication that it is able to repay the loan. As
shown below, the current ratio is well above the standard or average of 2.0. In fact, the
current ratio improved from 1.99 in 2004 to 2.21 in 2005. The quick ratio and cash ratio
are both over 1.0, a rare and positive indicator of their liquidity position. These ratios
have also improved, from 1.31 and .25, respectively in 2004, to 1.76 and 1.07 in 2005. In
addition, working capital increased and is approaching $1 billion, at $986 million.

49

RATIOS 2005 2004

Current Ratio 2.21 1.99
Quick Ratio 1.76 1.31
Cash Ratio 1.07 .25
Working Capital $986,000 $546,500
2. Sagar Cements Limited is in a liquid position because its cash balance has increased
542%, or $734.5 million, from $135.5 million in 2004 to $870 million in 2005. This
provides Sagar Cements Limited the needed cash to repay a loan.

3. The company’s total assets have increased $732 million, from $1.881 billion in 2004 to
$2.613 billion in 2005, a sure sign that the company is growing.

4. Sagar Cements Limited provided information that in the past year (2005), it raised $721
million by selling common stock. Additional paid-in-capital increased almost 60%, from
$1.23 billion in 2004 to $1.951 billion in 2005. This indicates the company can raise
capital by selling shares of its stock, which it plans to do in the future. By selling shares
of its stock, the company provides itself with the liquidity to repay a loan.

50

5.2 FINDINGS

 It can be distilled from data that IDBI bank has good market share as compared to its
competitors considering the amount of resources deployed by them in the market.
 The credibility of IDBI bank is good in comparison to its competitors as GOI
(Government of India) is a major share holder in the company.

 IDBI bank will improve loan processing times by turning the linear process into a
virtual process. The flexibility of a virtual process allows employees to work on any part
of the loan process at any time, increasing productivity and reducing costs.

 Loan officer of IDBI Bank consider the current ratio and the debt/equity ratio the most
significant in determining whether to grant a loan and the amount to lend. Bank prefer a
high current ratio since it reduces their risk

 The SMEs are not aware of the credit schemes offered by the commercial banks and
nodal agencies.

 The delays in sanctioning of the loan and the neglecting attitude of the bank officials
are the main causes behind the bad perception of SMEs towards the banks.

 The network of IDBI in Orissa is lagging behind a little than its competitors like ICICI
bank and HDFC bank.
51

5.3 SUGGESTIONS
Based on the data collected through the questionnaire and interactions with the students
the following recommendations are made for consideration:
 Before approving the loan concerned officer should check the document and analyze the

financial statement properly.

 Since there is only four branch of IDBI bank and only three ATMs in Orissa, so it is

necessary for IDBI bank to open more branches and provide loans to small scale

industries as well as large scale industries

 Besides opening more branches it should also look for opening some extension counter in

rural areas.

 As Government is the majority share holder in the shares of IDBI bank, which makes this

bank more reliable than other private banks, this thing can be used in the favors of IDBI

bank by making people aware about this fact and winning their faith.

 Banks should also provide consultancy services and professional guidance at the

time of setting up for considering the long-term and short-term financial requirements of

a small unit for lending purposes.

 The entrepreneurs are of the opinion that , the funding institutions are taking much

time in sanctioning the loan. Hence it is suggested that the funding institutions should

take less time in offering credit to the entrepreneurs.

52

5.4 CONCLUSION

The financial services sector and capital markets have a significant influence on how
economies develop, principally through their role in allocating financial capital
between different economic activities, as well as through their own operations,
not only do banks manage their own financial and sustainability performance, they
are in a position to influence Socio-economic and environmental performance in
client organizations and through their lending strategies.
Banks are the oldest lending institutions in Indian scenario. They are
providing all facilities to all citizens for their own purposes by their terms. IDBI

Banks play an important role in the industrial economy of India. Bank loans are the primary 

source of funds for private limited companies. Though lending is the primary activity of the 

IDBI bank, they are very cautious in granting the loans to their clients because their funds are 

collected from the general public in the form of deposits that can be withdrawn at a short 

notice at any time.
Lending always invokes some amount of risk. The banker should evaluate the
borrowers’ credit history i.e. track records which reveal the morale of lenders. The basis for
analysis and decision-making is financial information. Financial information is needed to
predict, compare and evaluate the firms earning ability in all respects. The financial
information is reported through the financial statement, other accounting reports and ratio
analysis.
My project speaks about the banking system India, different type’s banks and its
services. Its gives better idea about the major banking sectors and its operations in India. It
contains company profile of IDBI bank, its products chart, organizational chart and lending
procedure. It also tells about the different types of financial ratio and its uses.
This study would help manager to find out the market response of corporate
loans and its credit risk before its launch. It helps them to know the different types of
financial ratios and its uses. It provides a feedback to the company about their product. It
provides the information about the company’s stand in the market. It helps the manager to
apply the various activities, which is useful to increase the market share of its product. It
helps the manager to know about the preference and choice of the customers so that they can
plan out their future analysis and strategies on that basis.
53

APPENDIX 1: 5.5 QUESTIONNAIRE

Questions to Manager of IDBI bank

1. What are the financial products are available in IDBI bank?

 2. Which sectors are mostly financially assisted by IDBI bank?

3. What are the different types of corporate loans provided by the bank?

4. What is your loan requirement (approx)?

5. Are you using financial ratio? YES NO

6. What are the different financial ratios used by loan officer of IDBI bank while
lending?

7. How is loan processed in IDBI bank?

8. What is the credit risk in corporate loan?

9. How does the Credit Manager calculate the Credit risk?

Questions to the customers

1. NAME ------------------------ 2.AGE ------------------- 3.ADDRESS-------------------

4. Do you know IDBI bank?

5. Do you know where the branch of IDBI located in Orissa is?

6. Rank the IDBI bank on the following features (Rank 1 for best and 5 for worse on 1

to 5 scales)

Efficiency Manpower

Internet banking/ATMs Network

Product range Phone banking

7. Your level of satisfaction with IDBI bank?

8. If you will have option against IDBI bank you will go for-

SBI PNB

ICICI OTHERS

54

5.6 REFERENCES

Books and magazine

 • Bank Management & Financial Services, Seventh Edition, pp. 521-642, McGraw Hill
International Edition.

• Selvam, M., Vanitha, S., & Babu (2004), “ A study on financial health of cement 

industry­“Z score analysis”, The Management Accountant, July, Vol.39, No.7, pp591­

593

• Bagechi S K (2004), “ Accounting Ratios For Risk Evaluation”, The Management 

Accountant, July, Vol.39, No.7, pp571­573 

• Krishna Chaitanya V (2005), “Measuring Financial Distress of IDBI Using Altman Z 

–Score Model”, The ICFAI Journal of Bank Management, August, Vol. IV , No.3 , 

pp7­17 

• Trend and progress of banking in India.

• Management Control System

• The ICFAI journal of bank management.

• Indian banking system.

• The economist magazine.

    Website

• Wikipedia.org

• Iloveindia.com

• Idbibank.com

• Scribd.com

55
 SCOPE OF THE STUDY

Lending always invokes some amount of risk. The banker should evaluate the borrowers’
credit history i.e. track records which reveal the morale of lenders. The basis for analysis and
decision-making is financial information. Financial information is needed to predict,
compare and evaluate the firms earning ability in all respects. The financial information is
reported through the financial statement, and other accounting reports. It contains a wealth of
information that if properly analyzed and interpreted can provide valuable insights of
purposes, which range from a simple analysis of short-term liquidity position of the firm to
comprehensive assessment of the strengths and weakness of the firm in various areas. In
other words, financial statements are mirrors; which reflect the financial position and
operating strengths and weaknesses of the concern. These statements are useful to
management, bankers and other interested parties. The company should be careful while
supplying the information to the stakeholders, especially Bankers. Hence, the present study
seeks to make an in-depth analysis of ratio of a company from a banker’s perspective