SUMMER TRAINING REPORT

on

Credit Appraisals and Working Capital Finance Indian Overseas bank

Submitted in partial fulfillment of the requirements of Post Graduate Programme by

Priyanka Dwivedi

2012-2014 FT-12-FS-414

IILM Institute for Higher Education New Delhi

DECLARATION FORM

I hereby declare that the Project work entitled CREDIT APPRAISAL AND WORKING CAPITAL FINANCE submitted by me for the Summer Internship during the Post Graduate Program to IILM Institute for Higher Education is my own original work and has not been submitted earlier either to IILM or to any other Institution for the fulfillment of the requirement for any course of study. I also declare that no chapter of this manuscript in whole or in part is lifted and incorporated in this report from any earlier / other work done by me or others.

Signature of Student: _____________ Name of Student: Date: Place: _______________

ACKNOWLEDGEMENT
The satiation and euphoria that accompany the successful completion of task would be incomplete without the mention of the people who made it possible. I would first like to thank Indian Overseas Bank for providing me this opportunity for working with them and provided assistance in completing the project to the best of my abilities. I would like to extend my sincere gratitude to my project guide Mr. C. Krishna Kumar
and Mr. M.K. Gupta, the Chief Managers of the bank for their assistance, motivation and being

a continual source of encouragement and providing me an insight to the various issues pertaining to the cases mentioned in the report. I would also mention the support and guidance of the staff members at Regional Office of IOB who helped me throughout the period of training. Their professional advice given throughout the completion of this project will not be forgotten. I am also thankful to my institute IILM GSM for providing the necessary guidelines that helped me to complete the project. I would also like to offer my sincere thanks to my faculty guide, Ms.Swati Sharma for his benevolent and expertise guidance. Her mentorship gave valuable suggestions that helped me during the internship period. Her guidance gave immense confidence and encouragement that helped me to put my best.

TABLE OF CONTENTS S.No Name of the Topic Executive Summary Objectives Company Profile Introduction CSR activities Socio- Economic responsibilities Introduction to the Project Meaning of credit appraisal Credit Appraisal process Working Capital Finance Introduction Operating cycle Working capital financing by banks Form of assistance Working Methodology Procedure of Credit Appraisal Analysis Working Capital Analysis Ratio Analysis Case Study XYZ Media Ltd. Recommendations Limitations Conclusion References Page no. Remarks 6 7 8 9 11

Chapter - 1 1.1 1.2 1.3 Chapter- 2 2.1 2.2 Chapter - 3 3.1 3.2 3.3 3.4 Chapter - 4 4.1 Chapter - 5 5.1 5.2 Chapter - 6

12 13

14 15 16 16

20

29 33

34 45 46 47 48

FIGURES S.No Figure Name 1 Credit Appraisal Process 2 Operating Cycle 3 Credit Appraisal At IOB TABLES S.No 1 2 3 4 Table Name Research Methodology Current Assets And Current Liabilities Ratio Types Financial Indicators Page no. 18 31 33 36 Remarks Page no. 13 15 21 Remarks

GRAPHS and SNAPSHOTS S.NO 1 2 3 4 5 6 7 8 9 10 11 12 13 14 Name of Graph /Snapshot TNW TOL/TNW Funded Debt to TNW NWC Current Ratio Net Sales Gross Profit ratio Operating Profit Ratio NPBT To Sales NPAT to TNW NPAT To Sales Snapshot 1 Balance sheet Snapshot 2 Profit /Loss A/c Snapshot 3 Analytical Ratios Page no. 37 38 38 39 40 40 41 41 42 42 42 23 25 27 Remarks

Executive Summary
I have taken up the project Credit Appraisals and Working Capital Financeat Indian Overseas Bank Rajendra Place for the period of 2 months under Loans and Advances department.IOB is a Chennai based and one of the nationalized bank of India that has substantive history since 1937.It is a pioneer in many fields Banking, Insurance and Industry with the twin objectives of specializing in foreign exchange business and overseas banking.. The project Credit Appraisals and Working Capital Finance deals with the process of sanctioning a credit proposal.Credit appraisal means an investigation/assessment done by the bank prior before providing any loans & advances/project finance & also checks the commercial, financial & technical viability of the project proposed its funding pattern & further checks the primary & collateral security cover available for recovery of such funds. The project work also included the working capital assessment. The methods that are used by the banks in order to calculate the loan limits are Turnover method (Nayak committee) and second method of lending of Tondons committee, also called MPBF. The financial viability of the borrower and its firm is analysed through firms CMA data or through its proposed financial statements like audited and provisional balance sheet and P/L account of previous years, current financial year and assessment year. The objective of this project is to study various kinds of cash credit facilities provided by the bank such as the three categories of cash credit followed by the bank are OCC(Open Cash credit),MCC (Miscellaneous cash credit )and ETF-CC(Easy Trade Finance).Another objective is to know how to assess the working capital limits to be sanctioned by the bank depending upon drawing power of the borrower, fims turnover and holding level of the firm. The most important part of this project is the case analysis of XYZ private limited.The company is availing the different kinds of cash credit facilities.It gives the clear understanding of financial ratios.It also explains the method used for assessing working capital limit.The project also contains the CMA data of the firm. During this internship period, it has given an insight to legal procedures which are needed to be verified before considering the proposal such procedures are CIBIL report generation,ECGC specific approval list, RBI defaulter list and willful defaulter list verification and watch out investors website approval. Different types of cash credit facilities ,term loans, methods of assigning working capital limits to the individuals and firms, has been the integral part of the study during two months of internship program. The whole two months period of internship gave me a richful experience of working in loans and advances department with deep understanding of lending procedures followed at Indian Overseas Bank.

OBJECTIVES
The project Credit Appraisals and Working Capital Finance deals with the procedures of appraising a credit proposal and the methods to finance working capital required by the firms. Appraising a credit proposal is an important activity carried out by the credit department of the bank to determine whether to accept or reject the proposal for finance. The project deals in banking such as working capital methods of assessment, appraisal of credit reports. Working capital products include both fund and non-fund based products. The main objectives of this project are: To understand the entire process of sanctioning a credit proposal and various legal procedures. Study various types of working capital finance provided by banks. To know in details the procedure of assessment of working capital finance extended by banks. To study various kinds of cash credit facilities provided by the bank such as the three categories of cash credit followed by the bank are OCC(Open Cash credit),MCC (Miscellaneous cash credit )and ETF-CC(Easy Trade Finance). To get the understanding of financial statements like balance sheet and profit& loss account of the borrowing firms and analyzing financials of the company through ratio analysis To understand the various lending facilities provided by the bank to borrower like fund based (bank overdraft, term loan) and non fund based facilities (letter of credit & letter of guarantee). To know about various legal procedures required to be verified during appraisal of a credit proposal like CIBIL report generation, ECGC approval list, RBI defaulter list etc. To apply these procedure at a practical level with the help of case studies

Chapter 1 Company Profile 1.1 Introduction

Indian Overseas Bank (IOB) was founded in February 10th of the year 1937 Shri.M.Ct.M.Chidambaram Chettyar, a pioneer in many fields Banking, Insurance and Industry with the twin objectives of specializing in foreign exchange business and overseas banking. Presently, there are 10 Directors on the Board of the Bank. Shri. M.Narendra is the current Chairman and Managing Director of IOB.. Indian Overseas Bank has an ISO certified in-house Information Technology department, which has developed the software that 900 branches use to provide online banking to customers. The various periods of company are : At the dawn of Independence IOB had 38 branches in India and 7 branches abroad. The Products & Services of the bank includes NRI Services, Personal Banking, Forex Services, Agri Business Consultancy, Credit Cards, Any Branch Banking and ATM Banking. Pre-nationalization era (1947- 69) During the period, IOB expanded its domestic activities and enlarged its international banking operations. IOB was the first Bank to venture into consumer credit. It introduced the popular Personal Loan scheme during this period. At the time of Nationalization (1969) IOB was one of the 14 major banks that was nationalized in 1969.On the eve of Nationalization in 1969, IOB had 195 branches in India with aggregate deposits of Rs. 67.70 Crs. and Advances of Rs. 44.90 Crs. Post - nationalization era (1969-1992) In 1973, IOB had to wind up its five Malaysian branches as the Banking law in Malaysia prohibited operation of foreign Government owned banks. This led to creation of United Asian Bank Berhad in which IOB had 16.67% of the paid up capital. Computeraization: The Bank setup a separate Computer Policy and Planning Department (CPPD) to implement the programme of computerization, to develop software packages on its own and to impart training to staff members in this field.

IOB was one among the first to join Reserve Bank of India's negotiated dealing system for security dialing online. The Bank has finalised an e-commerce strategy and has developed the necessary Internet banking modules in-house. For the first time a Total Branch Automation package developed in-house has been customised in one of the Overseas Branches of the Bank. Most software developed in-house. During the year 2002-03, a new credit scheme Shubh Yatra' was introduced to provide loans to those who undertake foreign travel for tourism, employment and medical treatment. During the year 2004, the Government OF India selected IOB for channelising government credit to other countries, which runs into billions of dollars. And also in the same year the bank made tie up with Times Online Money to launch an Internet-based remittance product, e-Cash Home, targeted at NRIs in the US wishing to transfer money to India. IOB made pact with Chola for MF products. During the year 2005, the bank joined hands with Visa to offer debit cards to its esteemed customers. In the year 2006, IOB inked MoU with CRI Pumps. In September 2006, Indian Overseas Bank (IOB) has finally taken control of Bharat Overseas Bank (BhOB), an unlisted private bank. This is the first instance of a public sector bank taking over a strong private sector bank without resorting to the moratorium route. During May of the year 2007, Indian rating agency ICRA assigned an 'A1+' rating to the proposed 20 bln rupee certificates of deposit programme of Indian Overseas Bank, citing the bank's consistent and measured growth, the improvement in its asset quality through effective monitoring and collection systems, and improving core profitability. During June of the year 2008, IOB launched two new products namely IOB Gold' and IOB Silver' in savings account and IOB Classic' and IOB Super' under current account. IOB have a network of more than one thousand eight hundred branches all over India located in various metropolitan cities, urban, suburban and rural areas. IOB plans to set up banking operations in Malaysia in a joint venture with two other India-based banks Bank of Baroda and Andhra Bank with a minimum capital investment of RM320 million (US$100 million).

1.2 Corporate Social Responsibility

M Narendras commitment to serve the rural India is evident from the fact that the bank that he heads Indian Overseas Bank has over 70 per cent of its branches in rural areas. Narendra has treaded the uncharted territories owing to his passion to help the socially and economically underprivileged. Narendra has identified 30 villages in association with Friends of Tribal Society in the Nilgiris, to set up one school each for tribal children providing them with vocational training. The Bank has, always, supported worthy social causes and endeavours. During the year, the Bank contributed Rs. one crore each to two states, viz., Andhra Pradesh and Karnataka, towards the respective Chief Minister's Relief Funds to give relief to the flood affected people in these two states. Apart from these, the Bank also made donations to other organizations serving the community at large. Awards has Given away in presence of Mr P Chidambaram, Honble Home Minister; Mr Montek Singh Ahluwalia, Honble Deputy Chairman, Planning Commission; and, Dr C Rangarajan, Honble Chairman, Economic Advisory Council on 27th Day of March 2012 at New Delhi.
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Several other CSR initiatives are: Upgradation of Farmers A special grant of 25 million rupees has been earmarked for five farmers schools to provide skill development and skill upgradation to farmers. Education academies have been set up in identified villages to support students who are weak in subjects like math and science. Narendras efforts in providing support to various cancer societys have saved many life. IOB-Sampoorna Project - A Total Village Development Project The Bank launched an innovative rural development project aiming at Total Village Development called IOB-Sampoorna in Kuthambakkam and Padur Villages in TiruvallurDistrict, Kameshwaram village in Nagapattinam District, Dhaliyur Village in CoimbatoreDistrict and Innambur village in Thanjavur District of Tamil Nadu. IOB-Sampoorna is an unique Project encompassing several livelihood initiatives in the villages to ensure all-inclusive growth of rural population. Sakthi Memorial Trust The Trust set up jointly by the Management of the Bank, Indian Overseas Bank Officers Association and All India Overseas Bank Employees' Union, to perpetuate the memory of Banks Founder Shri M.Ct.M. Chidambaram Chettiar, continued to provide entrepreneurial development training to women thereby empowering them socially and financially.The Trust has so far conducted 44 Entrepreneurial Development Programmes (EDPs) exclusively for women at various centres, benefiting 1,601 women. For the women entrepreneurs and Self Help Groups, 1013 Sakthi Bazaars' were organized at many branches, for exhibition cum sale of their products. Rural Self Employment Training Institutes (RSETIs) In line with the guidelines issued by Ministry of Rural Development, Govt of India, Bank had set up RSETIs at Thiruvananthapuram (Kerala State), Tirunelveli, Thanjavur and Trichy (Tamilnadu State) to provide training to farmers, members of SHGs, beneficiaries under SGSY, Educated Unemployed Youths, Artisans and Beneficiaries belonging to weaker sections.One Rural Training Centre was set up by the Bank (jointly with NABARD and Indian Bank)at Karaikudi (Sivaganga District, Tamil Nadu). Financial Literacy and Credit Counselling Centres (FLCCC) viz., SNEHA With a view to promoting financial education and awareness among general public the Bank set up two FLCCCs at Nagercoil and Trichy during the year under review. These centres will educate the people in rural and urban areas with regard to various financial products/ services available from formal financial sector, provide face-toface financial counselling services and offer debt counselling to indebted individuals.
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1.3 Social -Economic Responsibilities

Rajbhasha (Official Language Policy) The Bank has taken all efforts to implement the Official Language Policy of Government of India during the year 2012-13. During the year 160 Staff members who do not possess working knowledge of Hindi were trained in IOB Praveen and Banking Pragya Courses. Minutes of all meetings of all board level committees were translated in Hindi. Banking terminology has been provided on IOB ONLINE for the benefit of staff members. Training has been given to 1614 staff members for the use of Hindi in computers. Script Magic packagehas been provided in all branches for issuing pass books, statement of account, DD &Deposit receipts in Hindi. Four issues of quarterly Hindi Magazine "VANI" inprint as well as in digital form. Bank's website has been made available in Hindi also. Green Initiatives: The Bank has been taking various initiatives towards saving precious natural resources and energy by adopting the latest technological advances. Video Conferencing is very widely used both for Top Management level meetings / promotion interviews /performance reviews and for virtual classrooms. Paperless Banking Initiatives: As a step towards paperless banking initiative, Bank has implemented Microsoft SharePoint which enables the Board members to access the Agenda papers through their IPADs using Wi-Fi. All agenda papers are ported on the website and no paper notes need be carried by the members. Biometric Solutions With a view to increase Security, Biometric solutions were procured and implemented across all our branches facilitating foolproof operational safety at all our branches. The solution envisages authenticating the user every time he logs into the CBS with biometric as 3rd authentication. IOB is one of the first banks to implement biometric authentication successfully. Contributing towards society IOB has provided many other solutions that serves to the society like GENNEXT Branch to cater to the needs of techsavy younger generation, Aadhar registration through the branches has been enabled, Bank has also introduced direct remittance facility at their overseas branches. Industrial Relations In order to maintain good Industrial Relations climate in all offices of the Bank, guidelines are issued from time to time regarding enforcement of discipline, policies to be followed in recruitment, promotion etc., which has led to reduction of cases The industrial relations environment for the Bank remained cordial and conducive for achieving organization's objectives.
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Chapter 2 Introduction to the project

2.1 Meaning of credit Appraisals
Credit appraisal is an important activity carried out by the loans and advances department of the bank to determine whether to accept or reject the proposal for financing its project. The project deals in credit facilities such as working capital methods of assessment, compilation of credit reports. The methods that are used by the banks in order to calculate the loan limits are Turnover method, MBPF system and Cash budget system. The financial viability of the borrower and its firm is analysed through firms CMA data or through its proposed financial statements like audited and provisional balance sheet and P/L account of previous years, current financial year and assessment year. The firms financial performance is analyzed through ratio analyses. Financial requirements for project finance and working capital purposes are taken care of at the credit department. Companies that intend to seek credit facilities approach the bank. Primarily, credit is required for following purposes:1. Working capital finance 2. Term loan for projects Credit appraisal is a means of an investigation/assessment done by the bank prior before providing any loans & advances/project finance & also checks the commercial, financial & technical viability of the project proposed its funding pattern & further checks the primary & collateral security cover available for recovery of such funds. 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 appraisal decides everything. It is the process by which a lender appraises the creditworthiness of the prospective borrower. It is a very important step in determining the eligibility of a loan borrower for a loan. As has been mentioned, the eligibility of a borrower for a loan depends on her/his creditworthiness. Creditworthiness of a customer lies in assessing if that customer is liable to repay the loan amount in the stipulated time, or not. Here also, every bank has their own methodology to determine if a borrower is creditworthy or not. It is determined in terms of the norms and standards set by the banks. Being a very crucial step in the sanctioning of a loan, the borrower needs to be very careful in planning his financing modes. However, the borrower alone doesnt have to do all the hard work. The banks need to be cautious, lest they end up increasing their risk exposure. All banks employ their own unique objective, subjective, financial and non-financial techniques to evaluate the creditworthiness of their customers.

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2.2 Credit Appraisal Process FIGURE 1

Receipt of application from applicant

Receipt of documents (Audited, Provisional or Projected Balance sheets, Valuation reports of properties, Legal Opinion, ROC documents, Guarantors Statement, Debtors & Stock statements for 120 days)

Pre-sanction visit by bank officers

Verification of legal procedures (Check for RBI defaulters list, Wilful defaulters list, CIBIL Report, ECGC specific approval list, check for watchoutinvestors website etc.) Property and unit /stock inspection

Preparation of CMA data

Proposal preparation

Assessment of working capital limits to be sanctioned (Turnover method or MBPF method)

Sanction/approval of proposal by appropriate sanctioning authority

Documentations, agreements, mortgages

Disbursement of cash credit limits or term loan

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Chapter - 3 Working capital finance 3.1 Introduction

Working capital is the fund invested in current assets and is needed for meeting day to day expenses. It occupies an important place in a firms Balance Sheet. Working capital financing is a specialized area and is designed to meet the working requirements of a business. The main sources of working capital financing are trade credit, bank credit, factoring and commercial paper. Out of all these, the project deals with only bank credit which represents the most important source for financing of current assets. The firms generally enjoy easy access to the bank finance for meeting their working capital needs. But from time to time, Reserve Bank of India has been issuing guidelines and directives to the banks to strengthen the procedures and norms for working capital financing. The project attempts to analyse the role of bank credit in financing working capital needs of firms. Working capital is that portion of a firms capital which is employed in short term operations. Current assets represent Gross Working Capital. The excess of current assets over current liabilities is Net Working Capital. Current assets consists of all stocks including finished goods, work in progress, raw material, cash, marketable securities, accounts receivables, inventories, short term investments, etc. These assets can be converted into cash within an accounting year. Current liabilities represent the total amount of short term debt which must be settled within one year. They represent creditors, bills payable, bank overdraft, outstanding expenses, short term loans, etc.The working capital is the finance required to meet the costs involved during the operating cycle or business cycle. Operating cycle is the period involved from the time raw materials are purchased to the time they are converted into finished goods and the same are finally sold and realized. The need for current assets arises because of operating cycle. The opera1ting cycle is a continuous process and therefore the need for current assets is felt constantly. Each and every current asset is nothing but blockage of funds. Therefore, these current assets need to be financed which is done through Working Capital Financing. There is always a minimum level of current assets or working capital which is continuously required by the firm to carry on its business operations. This minimum level of current assets is known as permanent or fixed working capital. It is permanent in the same way as the firms fixed assets are. This portion of working capital has to be financed by permanent sources of funds such as; share capital, reserves, debentures and other forms of long term borrowings. The extra working capital needed to support the changing production and sales is called fluctuating or variable or temporary working capital. This has to be financed on short term basis. The main sources for financing this portion are trade credit, bank credit, factoring and commercial paper.

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3.2 Operating cycle:

The time between purchase of inventory items (raw material or merchandise) and their conversion into cash is known as operating cycle or working capital cycle. The longer the period of conversion the longer will be the period of operating cycle. A standard operating cycle may be for any time period but does not generally exceed a financial year. Obviously, the shorter the operating cycle larger will be the turnover of the fund invested for various purposes. The channels of investment are called current assets.

Operating Cycle- FIGURE 2 Cash

Receipt from debtors

Purchase of Raw material

Creation of Receivables (Debtors)

(Debtors)

Creation of A/c payable (Creditors)

Sales of Finished Goods

Payments to creditors

Warehousing Of Finished Goods

Manufacturing operation: wages & salaries, fuel, power, etc

Office, selling, distribution and other15 expenses

3.3 WORKING CAPITAL FINANCING BY BANKS

A commercial bank is a business organization which deals in money i.e. lending and borrowing of money. They perform all types of functions like accepting deposits, advancing loans, credit creation and agency functions. Besides these usual functions, one of the most important functions of banks is to finance working capital requirement of firms. Working capital advances forms major part of advance portfolio of banks. In determining working capital requirements of a firm, the bank takes into account its sales and production plans and desirable level of current assets. The amount approved by the bank for the firms working capital requirement is called credit limit. Thus, it is maximum fund which a firm can obtain from the bank. On the basis of the estimates submitted by the company, the bank may decide the amount of assistance which may be extended, after considering the margin requirements. This margin is to provide the cushion against the reduction in the value of security. If the company fails to fulfil its obligations, the bank may be required to realize the security for recovering the dues. Margin money is meant to take care of the possible reduction in the value of security .

3.4 Form of Assistance:

After deciding the amount of overall assistance to be extended to the company, the bank can disburse the amount in any of the following forms: Fund Based Non-Fund Based Lending 3.4.1 FUND BASED LENDING In case of Fund Based Lending, the lending bank commits the physical outflow of funds. As such, the funds position of the lending bank gets affected. The Fund Based Lending can be made by the banks in the following formsCash credit Cash Credit is granted by banks for meeting daily business expenses keeping a certain percentage of the current assets value as margin money. The Cash Credit facility is generally granted for one year and it is subject to review at the expiry of one year. At the time of first time sanction of Cash Credit or Renewal of Cash Credit, borrower is required to give to the bank a Cash Credit Proposal along with CMA DATA, through which bank assesses the Working Capital Gap of the borrower that can be funded by the bank. Indian Overseas Bank offers three types of cash credit products, they are Open Cash Credit (OCC) for SME, Manufacturers etc. Miscellaneous cash credit (MCC) for contractors. Easy Trade Finance Cash Credit (ETF-CC) for small traders, retail traders etc.
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Loan: In this case, the entire amount of assistance is disbursed at one time only, either in cash or by transfer to the companys account. It is a single advance. The loan may be repaid in instalments, the interests will be charged on outstanding balance. Overdraft Overdraft is a credit facility in the nature of a Credit Account from which the borrower can avail the funds anytime at his convenience but whose Upper Limit is fixed depending on the value of the security offered by the borrower to the bank. Overdraft can be availed against any financial assets like Fixed Deposits, Bonds, Shares Securities, Gold & Silver Jewelry or Physical Assets like Motor Car, Pool of Vehicles, Immovable Properties like Factory Land etc.Overdraft helps you meet your short-term funding needs and allows you to leverage every business opportunity that comes your way against the security of residential or commercial property. Bills purchased or discounted This facility enables the company to get the immediate payment against the credit bills raised by the company. The bank holds the bill as a security till the payment is made by the customer. The entire amount of bill is not paid to the company. The Company gets only the present worth of the amount of bill, the difference between the face value of the bill and the amount of assistance being in the form of discount charges. On maturity, bank collects the full amount of bill from the customer. Packing Credit This type of assistance may be considered by the bank to take care of specific needs of the company when it receives some export order. Packing credit is a facility given by the bank to enable the company to buy the goods to be exported. If the company holds a confirmed export order placed by the overseas buyer or a letter of credit in its favour, it can approach the bank for packing credit facility.

3.4.2 Non Fund Based Lending

In case of Non-Fund Based Lending, the lending bank does not commit any physical outflow of funds. As such, the funds position of the lending bank remains intact. The Non-Fund Based Lending can be made by the banks in two forms

Bank Guarantee:
Suppose Company A is the selling company and Company B is the purchasing company. Company A does not know Company B and as such is concerned whether Company B will make the payment or not. In such circumstances, D who is the Bank of Company B, opens the Bank Guarantee in favour of Company A in which it undertakes to make the payment to Company A if Company B fails to honour its commitment to make the payment in future. As such, interests of Company A are protected as it is assured to get the payment, either from
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Company B or from its Bank D. As such, Bank Guarantee is the mode which will be found typically in the sellers market. As far as Bank D is concerned, while issuing the guarantee in favour of Company A, it does not commit any outflow of funds. As such, it is a Non-Fund Based Lending for Bank D. If on due date, Bank D is required to make the payment to Company A due to failure on account of Company B to make the payment, this Non-Fund Based Lending becomes the Fund Based Lending for Bank D which can be recovered by Bank D from Company B. For issuing the Bank Guarantee, Bank D charges the Bank Guarantee Commission from Company B which gets decided on the basis of two factorswhat is the amount of Bank Guarantee and what is the period of validity of Bank Guarantee. In case of this conventional for of Bank Guarantee, both company A as well as Company B get benefited as it is able to make the credit purchases from Company A without knowing Company A. As such, Bank Guarantee transactions will be applicable in case of credit transactions. In some cases, interests of purchasing company are also to be protected. Suppose that Company A which manufactures capital goods takes some advance from the purchasing Company B. If Company A fails to fulfil its part of contract to supply the capital goods to Company B, their needs to be to be some protection available to Company B. In such circumstances, Bank C which is the banker of Company A opens a Bank Guarantee in Favour of Company B in which it undertakes that if Company A fails to fulfil its part of the contract, it will reimburse any losses incurred by Company B due to this non fulfilment of contractual obligations. Such Bank Guarantee is technically referred to as performance Bank Guarantee and it ideally found in the buyers market.

Letter of Credit:
The non-fund based lending in the form of letter of credit is very regularly found in the international trade. In case the exporter and the importer are unknown to each other. Under these circumstances, exporter is worried about getting the payment from the importer and importer is worried as to whether he will get the goods or not. In this case, the importer applies to his bank in his country to open a letter of credit in favour of the exporter whereby the importers bank undertakes to pay the exporter or accept the bills or drafts drawn by the exporter on the exporter fulfilling the terms and conditions specified in the letter of credit.

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Chapter -4 Working Methodology

This is analytical research area where we analyses information with cause and its effects relationship. This analysis leads to the simple conclusions of whether to provide assistance of working capital to the institution for business. When entrepreneurs for financing working capital requirements approach the banks, the bank has to examine the viability of the project before agreeing to provide working capital for it. Financial institutions & bank while providing term loan finance to unit for acquisition of fixed assets does a detailed viability study. They have to ensure that the project will generate sufficient return on the resources invested in it. The viability of a project depends on technical feasibility, marketability of the products, at a profitable price, availability of financial resources in time & proper management of the unit. In brief the project should satisfy the tests of technical, commercial, financial & managerial feasibility. The proposed methodology for fulfilling the objectives is as follows: The project is based on secondary source of data. Secondary data have been mainly obtained from reports, records and books of M/s. XYZ Media LTD. The data also collected from audited financial statements periodicals and other records maintained by M/s. XYZ Media LTD. The methodology includes the detailed study of data of the borrower as provided by the bank officials for analytical study which have been utilised for the case study. After the detailed study of the data, the pre and post requisites of lending are analysed. Preparation of CMA data of the borrowing firm. RESEARCH METHODOLOGY TABLE -1 Research Type Source of Data Sample Unit Sample Sample Technique Analysis Tool used Analytical Primary and Secondary Industries applying for loan Case studies Allocation of Case Financial Analysis

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 Primary Data: Observation, Discussion with the company guide at the bank. The company profile , its guidelines and principles. Secondary Data: Secondary data relating to the procedure of assessment of working capital finance, old sanction proposals, RBI guidelines etc., financial statements have been sourced from the branch and referenced books.

4.1 Procedure of Credit Appraisal at IOB

Credit appraisal is a means of an investigation/assessment done by the bank prior before providing any loans & advances/project finance & also checks the commercial, financial & technical viability of the project proposed its funding pattern & further checks the primary & collateral security cover available for recovery of such funds. At Indian Overseas Bank ,Credit Appraisal is a long procedure which are required to be done before the credit document is sent to higher authorities. Credit Appraisal process at IOB involves major 5 steps. They are as follows:

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CREDIT APPRAISAL FIGURE 3

PRE SANCTION PROCESS

Preparation of CMA data

Assessment of Working Capital Limits

APPRAISAL & RECOMMANDATION

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1. PRE SANCTION PROCESS: When a customer required any credit facility or working capital loan he is required to complete application form and submit the same to the bank.Also the borrower has to submit the required information along with the application form. Pre sanction process requires following documents and information which are analysed prior to raising the credit proposal Audited balance sheets and profit and loss accounts for the previous three year Estimated balance sheet for current year. Projected balance sheet for next year Profile for promoters/directors, senior management personnel of the company Obtain Guarantors statement Examine for preliminary appraisal RBI guidelines and Policies Prudential exposure norms and bank lending policy Industry exposure restriction and related risk factors. Obtain RAM rating ,CRISIL rating Compliance regarding transfer of borrowers accounts from one bank to another bank Government regulation / legislation impact on the industry Acceptability of the promoter and applicant status with regards to other unit to industries. Credit report of accounts running with other banks Arrive at the preliminary decision. Evaluation of prime and collateral security Examine/analysis /assessment Financial ratio & Dividend policy. Depreciation method Revaluation of fixed assets. Records of defaults (Tax, dues etc.) Pending suits having financial implication (Customs, excise etc.) Check for RBI defaulter list, Willful defaulter list, ECGC specific approval list,CIBIL report. Qualifications to balance sheet auditors remarks etc. Trend in sales and profitability and estimates /projection of sales. Production capacities and utilization: past & projected production efficiency and cost. Estimated working capital gap W.R.T acceptable build-up of inventory/receivables/other current assets and bank borrowing patterns. Assess MPBF determine facilities required Companys structure and system Profitability factor, Inventory/Receivable level, Capacity utilization
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2. Preparation of CMA data Credit Monitoring Arrangement (CMA) data is a very important area in the process of credit appraisals. It is a critical analysis of current & projected financial statements of a loan applicant by the banker. CMA data is a systematic analysis of working capital management of a borrower and objective of this statement is to ensure the usage of long term and short term fund have been used for the given purpose.CMA data is also beneficial for analysing financial indicators .CMA data at Indian Overseas Bank is prepared in main 3 components statements. Balance sheet - Balance sheet analysis for the current & projected financial years is the first statement in CMA data. This statement gives the detailed analysis of Current & noncurrent assets, fixed assets, cash & bank position, current & noncurrent liabilities of the borrower. Also this statement indicates the net worth position of the borrower for the projected years. Balance sheet analysis gives a complete financial position of the borrower and cash generating capacity during the projected years. Below is the snapshot of CMA data of XYZ Media Ltd. Co. prepared at IOB as a part of the project.

SNAPSHOT - 1
Type of Financials Year ended 1.ASSETS 1.1CURRENT ASSETS I. Inventories Raw Materials Stock in process Finished Goods Consumable Spares Audited 2011 BALANCE SHEET Audited 2012 Provisional 2013 Projected 2014

198.59 0.00 0.00 0.00

240.45 0.00 0.00 0.00

160.00 0.00 0.00 0.00

110.00 0.00 0.00 0.00

TOTAL INVENTORIES II. Trade Debtors Domestic Debtors over six months Domestic Debtors less than six months Export Debtors over six months Export Debtors less than six months TOTAL DEBTORS III. Other Current Assets Cash and Bank Balance Prepaid Expenses Advance Tax Deposits with Excise and Sales Tax Loans and Advances Others/Dep margin with Bank/cenvat input

198.59

240.45

160.00

110.00

0.00 701.89 0.00 0.00 701.89

0.00 990.10 0.00 0.00 990.10

0.00 1,000.00 0.00 0.00 1,000.00

0.00 1,100.00 0.00 0.00 1,100.00

11.32 0.00 0.00 750.75 0.00 0.00

20.11 0.00 0.00 831.84 0.00 0.00

19.97 0.00 0.00 900.00 0.00 0.00

25.67 0.00 0.00 850.00 0.00 0.00

23

Total Other Current Assets SUB- TOTAL (a) 1.2 FIXED ASSETS I. Land & Buildings II. Plant & Machinery III. Sundries Gross Fixed Assets Less: Depreciation to date Net Fixed Assets (b) Capital Work in Progress

762.07 1,662.55

851.95 2,082.50

919.97 2,079.97

875.67 2,085.67

0.00 0.00 394.33 394.33 85.87 308.46 0.00

0.00 0.00 506.79 506.79 131.91 374.88 0.00

0.00 0.00 600.00 600.00 180.00 420.00 0.00

0.00 0.00 700.00 700.00 240.00 460.00 0.00

1.3 NON-CURRENT ASSETS I. Investments in/Loans to subsidiaries/associates

0.00

136.51

91.00

91.00

II. Others Non Current Assets Investment in other companies Loans and Advances Overdue debitors security and other deposits Non-Moving Inventories Others

0.00 0.00 0.00 56.51 0.00

0.00 0.00 0.00 120.13 0.00

0.00 0.00 0.00 140.00 0.00

0.00 0.00 0.00 145.00 0.00

56.51 Total Other Non Current Assets SUB-TOTAL (c) Deferred Tax Asset (d) 1.4 INTANGIBLE ASSETS (e) TOTAL ASSETS (a+b+c+d+e) 56.51 0.00 0.00 2,027.52 2011 31-Mar-11

120.13 256.64 0.00 0.00 2,714.02 2012 31-Mar12

140.00 231.00 0.00 0.00 2,730.97 2012 31-Mar-12

145.00 236.00 0.00 0.00 2,781.67 2014 31-Mar-14

Year ended 2. LIABILITIES 2.1.CURRENT LIABILITIES I. Borrowings from IOB From other Banks Commercial Paper sub- total II. Creditors for Purchases III. Other Current Liabilities Creditiors for Expenses Provision TL due within one year Outstanding Expenses

312.35 0.00 0.00 312.35 3.35 0.00 14.50 42.70 0.00

439.76 0.00 0.00 439.76 9.31 0.00 26.00 16.67 0.00

440.00 0.00 0.00 440.00 10.00 0.00 23.00 29.00 0.00

500.00 0.00 0.00 500.00 12.00 0.00 28.00 66.00 0.00

24

Others/Advances taken

91.61

67.37

72.25

65.30

Total Other Current Liabilities IV. Creditors on Capital Account

148.81 0.00 464.51

110.04 0.00 559.11

124.25 0.00 574.25

159.30 0.00 671.30

SUB-TOTAL (e) 2.2.DEFERRED LIABILITIES I. Term Loan from IOB II. Term Loan from institutions III. Other Long Term Liabilities Preference Shares Long-term loans from other banks Foreign currency loans NCD borrowings Others Other Long term liability which have been taken as Quasi Equity Total Other Long Term Liabilities SUB-TOTAL (f) 2.3.CAPITAL AND SURPLUS I. Paid up Capital II. Reserves and Surplus III. Revaluation Reserves Share Application Money SUB-TOTAL (g) Deferred Tax Liability (h) TOTAL LIABILITIES (e+f+g+h) Off Balance Sheet Debt Current Portion of Long Term Debt

97.51 84.16

65.00 100.00

56.00 80.00

0.00 70.00

0.00 0.00 0.00 0.00 0.00 159.35 159.35 341.02

0.00 0.00 0.00 0.00 0.00 621.14 621.14 786.14

0.00 0.00 0.00 0.00 0.00 600.00 600.00 736.00

0.00 0.00 0.00 0.00 0.00 550.00 550.00 620.00

51.94 1,141.30 0.00 29.00 0.00 1,222.24 0.00 2,027.77 0.00 42.70

65.96 1,297.82 0.00 5.00 0.00 1,368.78 0.00 2,714.03 0.00 16.67

66.56 1,348.16 0.00 6.00 0.00 1,420.72 0.00 2,730.97 0.00 29.00

72.56 1,411.81 0.00 6.00 0.00 1,490.37 0.00 2,781.67 0.00 66.00

Profit and loss P &L is the second component of CMA data of a company and shows the company's revenues and expenses during a particular period. It indicates net sales, gross profit, operating profit, profit before tax (PBT), and net profit after tax (NPAT). SNAPSHOT -2
Year ended PROFIT AND LOSS 1.NET SALES I.Domestic Sales - Cash II.Domestic Sales - Credit iii. Exports Less Excise Duty Total Net Sales 31-Mar-11 31-Mar-12 31-Mar-13 31-Mar-14

1,470.58 0.00 0.00 0.00 1,470.58

1,976.42 0.00 0.00 0.00 1,976.42

2,400.00 0.00 0.00 0.00 2,400.00

2,600.00 0.00 0.00 0.00 2,600.00

25

2. COST OF SALES Opening stock finished goods Opening stock WIP Opening stock RM - Indigenous Opening stock RM - Imported Add Purchases RM - Indigenous Add Purchases RM - Imported Stores consumed Manufacturing Expenses Depreciation Add:Purchases Finished Goods Less Closing stock finished goods Less closing stock WIP Less closing stock RM - Indigenous Less closing stock RM -- Imported Cost of Sales Cost of Production 3. GROSS PROFIT(+)/LOSS(-) (1-2) 4. SELLING & ADM. EXP. 5. INTEREST & FIN.CHARGES

0.00 0.00 774.15 0.00 0.00 0.00 0.00 51.99 45.31 0.00 0.00 0.00 0.00 0.00 871.45 871.45 599.13 498.37 63.83

0.00 0.00 997.87 0.00 0.00 0.00 0.00 56.91 46.34 0.00 0.00 0.00 0.00 0.00 1,101.12 1,101.12 875.30 735.02 81.02

0.00 0.00 1,260.00 0.00 0.00 0.00 0.00 95.20 55.00 0.00 0.00 0.00 0.00 0.00 1,410.20 1,410.20 989.80 845.40 87.00

0.00 0.00 1,325.00 0.00 0.00 0.00 0.00 105.10 60.00 0.00 0.00 0.00 0.00 0.00 1,490.10 1,490.10 1,109.90 954.25 97.00

Total (4+5) 6.OPERATING PROFIT/LOSS 7.I.OTHER INCOME Sale of Scrap Interest Received Profit on Sale of FA / INV Others

562.20 36.93

816.04 59.26

932.40 57.40

1,051.25 58.65

2.35 0.00 0.00 6.74

5.10 0.00 0.00 11.82

0.00 0.00 0.00 16.20

7.00 0.00 0.00 15.00

Total Other Income 7 II.LESS OTHER EXPENSES Loss on Sale of FA / INV Loss on Currency Fluctuation Misc. Exp written off Others

9.09 0.00 0.00 0.00 0.00

16.92 0.00 0.00 0.00 0.00

16.20 6.00 0.00 0.00 10.00

22.00 0.00 0.00 0.00 0.00

Total Other Expenses Other Income Net of Expenses 8.PROFIT BEFORE TAX/LOSS 9.INCOME-TAX PROVISION 10.NET PROFIT AFTER TAX/LOSS 11.N.P.BEFORE DEP.&TAX 12.N.P.BEFORE DEP.TAX&INT. 13. CASH GENERATION

0.00 9.09 46.02 14.50 31.52 91.33 155.16 76.83

0.00 16.92 76.18 26.00 50.18 122.52 203.54 96.52

16.00 0.20 57.60 23.00 34.60 112.60 199.60 105.60

0.00 22.00 80.65 28.00 52.65 140.65 237.65 112.65

26

14.DIVIDEND 15. PREFERENCE DIVIDEND 16.RETAINED PROFIT 17.NET CASH ACCRUAL

0.00 0.00 31.52 76.83

0.00 0.00 50.18 96.52

0.00 0.00 34.60 105.60

0.00 0.00 52.65 112.65

Analytical and comparative Ratios- Ratio Analysis is a form of Financial Statement Analysis that is used to obtain a quick indication of a firm's financial performance in several key areas. The computation of ratios facilitates the comparison of firms which differ in size. Ratios can be used to compare a firm's financial performance with industry averages. In addition, ratios can be used in a form of trend analysis to identify areas where performance has improved or deteriorated over time. SNAPSHOT - 3
Year ended ANALYTICAL AND COMPARATIVE RATIOS I.FINANCIAL INDICATORS 1.TANGIBLE NETWORTH 2.TOTAL OUTSIDE LIAB.TO TNW (TOL-USL)/(TNW+USL) 3.FUNDED DEBT TO TNW 4.NET WORKING CAPITAL 5.CURRENT RATIO 6.STOCK HOLDINGS 6.1.RAW MATERIALS R.M. HOLDING (IN MTHS) 6.2.STOCK IN PROCESS SIP HOLDING (IN MTHS) 6.3.FINISHED GOODS FG HOLDING (IN MTHS) 6.4.CONSUMABLE SPARES CON.SPARE CONSUMED CON.SPARE HOLD(MTHS) 7.SUNDRY DEBTORS (DOMESTIC) SUNDRY DEBTORS (EXPORT) GROSS SALES (DOMESTIC) GROSS SALES (EXPORT) RECEIVABLES HOLD(MTHS) (DOMESTIC) RECEIVABLES HOLD(MTHS) (EXPORT) 8. CREDITORS FOR PURCHASES PURCHASES CREDIT AVAIL (MONTHS) 31-Mar-11 31-Mar-12 31-Mar-13 31-Mar-14

1,222.24 0.66 0.30 0.28 1,198.04 3.58 0.00 198.59 3.08 0.00 0.00 0.00 0.00 0.00 0.00 #DIV/0! 701.89 0.00 1,470.58 0.00 5.73 #DIV/0! 3.35 0.00 #DIV/0!

1,368.78 0.98 0.26 0.57 1,523.39 3.72 0.00 240.45 2.89 0.00 0.00 0.00 0.00 0.00 0.00 #DIV/0! 990.10 0.00 1,976.42 0.00 6.01 #DIV/0! 9.31 0.00 #DIV/0!

1,420.72 0.92 0.27 0.52 1,505.72 3.62 0.00 160.00 1.52 0.00 0.00 0.00 0.00 0.00 0.00 #DIV/0! 1,000.00 0.00 2,400.00 0.00 5.00 #DIV/0! 10.00 0.00 #DIV/0!

1,490.37 0.87 0.32 0.42 1,414.37 3.11 0.00 110.00 1.00 0.00 0.00 0.00 0.00 0.00 0.00 #DIV/0! 1,100.00 0.00 2,600.00 0.00 5.08 #DIV/0! 12.00 0.00 #DIV/0!

27

II. PROFITABILITY RATIOS 9. NET SALES INCREASE/DECR.SALES 10.PERCENT.INCR. SALES 11.GROSS PROFIT TO SALES 12.OP.PROFIT TO SALES 13.N.P.BEFORE TAX TO SALES 14.N.P.AFTER TAX TO TNW 15. TOTAL BANK BORROWINGS 16. NPAT/Sales

1,470.58 #REF! #REF! 40.74 2.51 3.13 2.58 312.35 2.14

1,976.42 505.84 34.40 44.29 3.00 3.85 3.67 439.76 2.54

2,400.00 #REF! #REF! 41.24 2.39 2.40 2.44 440.00 1.44

2,600.00 200.00 8.33 42.69 2.26 3.10 3.53 500.00 2.03

3. Assessment of working capital limits - A unit needs working capital funds mainly to carry current assets required for its operations. Proper assessment of funds required for working capital is essential not only in the interest of the concerned unit but also in the national interest to use the scare credit according to production requirements. When a borrower demands for a credit facility from the bank, the bank has to assess the limits of working capital to be sanctioned. Proper assessment of working capital requirement may be done as underi. TURNOVER METHOD (Nayak Committee Recommendations) a. Mainly used for SMEs (Small and Medium Enterprises). b. Not appropriate for manufacturing and big trading companies. ii. CASH BUDGET SYSTEM a. Mainly used for service sector companies b. Cash inflow Cash outflow = Bank finance in form of WC TONDON COMMITTEE RECOMMENDATIONS a. It has three methods of lending. b. Out of 3 methods recommended, method II also known as Maximum Permissible Bank Finance (MPBF) is mainly used by the banks for assessment of WC finance 4. Appraisal and Recommendation

iii.

This is the last step of appraising the credit proposal. All lending made or proposed by the branches must be in conformity with banks lending policy and within the budget allocations made from time to time. In this connection officers are expected to be thorough with the Loan Policy Document. Managers should strictly adhere to all the instructions and guidelines issued by the Central Office from time to time. It is primarily the responsibility of the Branch Managers to ensure the safety of all the advances of their branches. It is the basic duty of the Branch Managers and the other officials to protect the banks interest in all the transactions of the bank handled by them including advances. When the entire assessment is done ,the proposal is sent to discretionary powers to appraise the credit proposal

28

Chapter 5 ANALYSIS
The project involves the following tools for analysing the given project proposal: Working capital analysis Ratio analysis

5.1 Working capital analysis

All enterprises engaged in manufacturing or trading or providing services require finance for their day-to-day operations, the amount required to finance day-to-day operation is called working capital & the assets & liabilities are created during the operating cycle are called current assets & current liabilities. The total of all the current assets is called gross working capital & the excess of current assets over current liabilities is called net working capital. When entrepreneurs for financing working capital requirements approach the banks, the bank has to examine the viability of the project before agreeing to provide working capital for it. Financial institutions & bank while providing term loan finance to unit for acquisition of fixed assets does a detailed viability study. They have to ensure that the project will generate sufficient return on the resources invested in it. In brief the project should satisfy the tests of technical, commercial, financial & managerial feasibility. Proper co-ordination amongst banks & financial institution is necessary to judge the viability of a project & to provide working capital at appropriate time without any delay. In the view of scarcity of bank credit, its increasing demand from various sectors of economy & its importance in the development of economy, bank should provide working capital finance according to production requirements. Therefore it is necessary to make a proper assessment of total requirement of the working capital, which depends on the nature of the activities of an enterprise & the duration of its operating cycle. It has to be ensured that the unit will have regular supply of raw material to facilitate uninterrupted production. The unit should be able to maintain adequate stock of finished goods for smooth sales operation. The requirement of trade credit, facilities to be given by the unit to its customers should also be assessed on the basis of practice prevailing in the particular industry/trade which assessing above requirements, it should also be ensured that carrying cost of inventories & duration of credit to customers are minimized. After assessing the total requirement of working capital, a part of working capital requirement should be financed for the long term & partly by determining maximum permissible bank finance.

29

5.1.2 Factors for Deciding Working Capital Limits

Drawing power of the borrower Security

1. DRAWING POWER OF THE BORROWER The drawing power that a borrower enjoys at any one point depends on each components of working capital. The bank for each component, which the borrower must hold as his contribution to finance working capital, prescribes margins. The drawing power of the borrower can be best explained with the following illustration Illustration: Suppose a borrower has Rs 100.00 lacs as working capital limit sanctioned to him by a bank. The security provided by the borrower to the bank is the hypothecation of inventory. Suppose, the borrower needs to hold an inventory level of say 130 lacs in order to enjoy Rs 100 lacs as his working capital limit. The actual level of inventory with the borrower at a point is say 110 lacs.The inventory margin prescribed by the bank is say 25 % Therefore with this inventory level, the borrower enjoys only Rs 82.5 lacs as his working capital limit as against Rs 100 lacs. 2. SECURITY Banks provide credit on the basis of the following modes of security from the borrowers. Hypothecation: the banks provide credit to borrowers against the security of movable property, usually inventory of goods. Mortgage: It is the transfer f a legal / equitable interest in specific immovable property for securing the payment of debt. Pledge: The goods which are offered as security, are transferred to the physical possession of the lender.

30

5.1.3 Assessment of working capital limit:

In order to calculate net working capital & maximum permissible bank finance, it is necessary to have proper classification of various items of current assets & current liabilities. All illustrative lists of current assets & current liabilities for the purpose of assessment of working capital are furnished below: TABLE - 2 Current Assets Cash and bank balances Investments Receivables Inventories Advance payment Prepaid expenses Sundry debtors Current Liabilities Short term borrowings Unsecured loan Sales-tax, excise, etc. Deposits Interest and financial charges accrued Provision for taxes Sundry creditors

5.1.4 Methods of financing working capital

Bank follows certain norms in granting working capital finance to companies. These norms have been greatly influenced by the reconditions of various committees appointed by the RBI from time to time.RBI has made certain recommendations for lending credit facilities especially to SMEs (Small and Medium Enterprises) for which no tangible security is needed. Recommendations suggested that bank credit will be provided on the basis of operating cycle and its inventories or turnover period. Following committees were appointed to provide bank credit to SMEs Tondon Committee Nayak Committee

1. Tondon Committee (Operating cycle Method)

Reserve Bank of India constituted a 'Study Group' with Shri Prakash Tandon as Chairman in July, 1974 to frame necessary guidelines on bank credit for commercial banks for follow-up & supervision of bank credit for ensuring proper end-use of funds. Its main recommendations related to norms for inventory and receivables, the approach to lending, style of credit, follow ups & information system. As per the recommendations of Tondon Committee, the corporates should be discouraged from accumulating too much of stocks of current assets and should move towards very lean inventories and receivable levels. The committee even suggested the maximum levels of Raw Material, Stock-in-process and Finished Goods which a corporate operating in an industry should be allowed to accumulate These levels were termed as inventory and receivable

31

norms. Depending on the size of credit required, the funding of these current assets (working capital needs) of the corporates could be met by one of the following methods: First method of lending Banks can work out the working capital gap, i.e. total current assets less current liabilities other than bank borrowings (called Maximum Permissible Bank Finance or MPBF) and finance a maximum of 75 per cent of the gap; the balance to come out of long-term funds, i.e., owned funds and term borrowings. This approach was considered suitable only for very small borrowers i.e. where the requirements of credit were less than Rs.10 lacs Second method of lending This is the most commonly used methods by bnks.Under this method, it was thought that the borrower should provide for a minimum of 25% of total current assets out of long-term funds i.e., owned funds plus term borrowings. A certain level of credit for purchases and other current liabilities will be available to fund the build up of current assets and the bank will provide the balance (MPBF). Consequently, total current liabilities inclusive of bank borrowings could not exceed 75% of current assets. RBI stipulated that the working capital needs of all borrowers enjoying fund based credit facilities of more than Rs. 10 lacs should be appraised (calculated) under this method. Third methods of lending Under this method, the borrower's contribution from long term funds will be to the extent of the entire CORE CURRENT ASSETS, which has been defined by the Study Group as representing the absolute minimum level of raw materials, process stock, finished goods and stores which are in the pipeline to ensure continuity of production and a minimum of 25% of the balance current assets should be financed out of the long term funds plus term borrowings. But This method was not accepted for implementation.

2. Nayak committee (Turnover Method)

Reserve Bank of India constituted a Committee on 9 December 1991 under the Chairmanship of Shri P.R. Nayank, Deputy Governor to examine the difficulties confronting the small scale industries (SSI) in the country in the matter of securing finance. The representative of the SSI associations had earlier placed before the Governor, Reserve Bank of India, various problems, issues and the difficulties which the SSI sector had been facing. Turnover method can be illustrated as: i. ii. iii. iv. v. vi. Lets say ,sales or Turnover is X Now, calculate 25% of X Also, Calculate 5% of X Now,Net Working Capital Available Take Y as the maximum of (iii or iv) Subtract Y from (ii),lets say this amount as Z.
32

vii.

Therefore Z is the amount that would be financed by the banks.

The level of credit limits to be assessed by turnover method ' has since been increased to Rs. 2.00 crores for all categories of borrowers and further to Rs. 5.00 crores for SSI units. The banks have further been given discretion to apply this method upto any level of limits not below the limits specified by Reserve Bank of India and frame a suitable policy in this regard.

5.2 Ratio analysis

Ratio analysis is a widely used tool of financial analysis. It can be used to compare the risk and return relationships of different sizes. It is defined as the systematic use of ratio to interpret the financial statements so that the strengths and weaknesses of a firm as well as its historical performance and current financial condition can be determined. A ratio is a quantity that denotes the proportional amount or magnitude of one quantity relative to another. The ratios show the relationship in the more meaningful way so as to enable us to draw conclusion from than a single figure. Ratios are calculated from current year numbers and are then compared to previous years, other companies, the industry, or even the economy to judge the performance of the company. Ratio analysis is predominately used by proponents of fundamental analysis. Ratios which are used by Indian Overseas Bank for the purpose of financial analysis are: TABLE - 3 FINANCIAL INDICATORS TNW TOL/TNW TOL-USW/TNW+USW Funded Debt to TNW Net Working Capital ratio Current ratio PROFITABILITY RATIOS Net Sales Gross Profit to Sales Operating profit to Sales NPBT To sales NPAT to TNW NPAT To Sales

Detailed ratio analysis for the case study of XYZ Media Ltd. Has been mentioned in the next section.

33

Chapter 6 CASE STUDY XYZ Media Ltd.

XYZ Media Ltd was incorporated as a private limited company with an objective to provide for outdoor advertising solutions to various companies for marketing their products. It is reportedly known as one among the first five advertising companies in Delhi NCR to provide complete outdoor advertising solutions. Company is engaged in renting out display advertising spaces at various media/ public utilities which are developed & maintained by the subject company such as Countdown Timers, Bus Queue Shelters, Public Utilities, etc.Also the company has to maintain the allotted sites for such term as mentioned in the contract. In turn company gets the advertising rights on those spaces/ infrastructure developed, which it rents out to corporate and other clients. Company is taking orders from various other companies and advertising agencies to advertise their products or services on various media available with the subject, and charge monthly service rentals/ display charges for the advertisements so displayed. Date of establishment Sector Industrial classification Banking with us since Enjoying Credit facilities since Names of Directors Designation Age 18.03.2002 MSME Media Advertising March 2005 March 2006 Worth (Rs in lacs) Amount Mr. X Director 54 As on Experience (in brief)

102.69 31.01.13 He has experience of more than a decade in the field of advertising. Has rich experience in the field of real estate, hospitality & timber imports. 25.55 31.01.13 More than four years of experience in advertising field.

Mr. Y

Director

27

Mr. Z

Director

45

34.60 31.01.13 Worked as director in MNC. He is associated with advertising field for more than 9 years.

34

REQUIREMENT OF: Enhancement in cash credit limits & LG limit to Rs.5.00crs & Rs.2.60crs respectively with projected sales of Rs 26 crores for the year 2013-14 To raise term loan of 6.60 crores PURPOSE: In 2010, company acquired two major tenders for a term of five years from DMRC. For the same purpose we issued a bank Guarantee of Rs 216.00lacs on behalf of the subject company in favour of DMRC. Company requires term loan to erect 42 super structures at Gwalior for advertising

Security
Prime Security -Stocks- Rs 160.00 lacs -Book Debts- Rs 1000.00 lacs -Fixed Assets- Rs 420.00 lacs (As per ABS- 31.03.13) Rs.1580 lacs

Total value:

Collateral security

Total value:

Forced Sales Value of property (FSV) Agra- 35.00 lacs Faridabad- 156.00 lacs IP Extn. Delhi- 115.00 lacs Gujarat-60.00 lacs Fixed Deposit- 57.00 lacs Collateral Coverage: 51% Rs. 423 lacs

Banking Arrangement: Subject is presently enjoying CC limit of Rs 330.00lacs, Term loan of Rs 175.00lacs and LG of Rs 230.00lacs, from IOB, Vanasthali branch. Limits are utilized judiciously and operations in the account are reported to be satisfactory. Past Performance: Sales of the company are increasing continuously over the last 3 years. It achieved sales of Rs 910.74lacs in 2009-10 compared to Rs 884.70lacs in 2008-09, which translated in increase of 2.94% over previous year. In FY2010-11 they achieved sales of Rs 1470.58lacs i.e. 73.53% of their projections (`2000.00lacs). In FY 2011-12, company has estimated sales of Rs 2200.00lacs
35

FINANCIAL ANALYSIS TABLE -4

BRIEF FINANCIAL INDICATORS OF SUBJECT COMPANY:
lacs) 31.03.11 (audited) Net Sales Operating Profit Net Profit after Tax Cash Accrual Net Working Capital Current Ratio Tangible Networth TOL/TNW (TOL-USL)/(TNW+USL) 1,470.58 36.93 31.52 76.83 1,198.04 3.58 1,222.24 0.66 0.30 31.03.12 31.03.13 31.03.14 31.03.15 (Projections) 2,800.00 83.95 72.95 137.95 1,460.32 3.20 1,581.32 0.81 0.30 (Rs in

(audited) (Provisional) (Projections) 1,976.42 59.26 50.18 96.52 1,523.39 3.72 1,368.78 0.98 0.26 2,400.00 57.40 34.60 105.60 1,505.72 3.62 1,420.72 0.92 0.27 2,600.00 58.65 52.65 112.65 1,414.37 3.11 1,490.37 0.87 0.32

Abridged financial position

31.03.11 (audited) Capital & Reserves Long Term Liabilities Current Liabilities TOTAL Fixed Assets Non-Current Assets Current Assets Intangible Assets TOTAL 1,222.24 341.02 464.51 2,027.77 308.46 0.00 1,662.55 0.00 2,027.52 31.03.12 31.03.13 31.03.14 31.03.15 (Projections) 1,581.32 620.00 662.35 2,863.67 500.00 0.00 2,122.67 0.00 2,863.67

(audited) (Provisional) (Projections) 1,368.78 786.14 559.11 2,714.03 374.88 0.00 2,082.50 0.00 2,714.02 1,420.72 736.00 574.25 2,730.97 420.00 0.00 2,079.97 0.00 2,730.97 1,490.37 620.00 671.30 2,781.67 460.00 0.00 2,085.67 0.00 2,781.67

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RATIO ANALYSIS 1. Financial Ratios

TNW- Tangible Net Worth A measure of the physical worth of a company, which does not include any value derived from intangible assets such as copyrights, patents and intellectual property. Tangible Net Worth = Total Assets Liabilities Intangible Assets. TNW of the company is increasing continuously over the last 4 years. This can be seen from the table given below (in lacs): 31.03.2011 TNW + NPAT (Additions) TNW for Next FY 1222.24 50.18 96.36 1368.78 31.03.2012 1368.78 34.60 17.34 1420.72 31.03.2013 1420.72 52.65 17.00 1490.37 31.03.2014 1490.37 72.95 18.00 1581.32

The TNW increased from Rs 1222.24 lacs in 2010-11 to Rs 1368.78 lacs in FY 2011-12 by retention of profits of Rs 50.18 and balance by induction of capital by Rs 96.36 lacs. Further in 2012-13 the TNW of the company increased to Rs 1420.72 lacs by retaining profits of Rs 34.60 lacs and balance by induction of fresh capital of Rs 17.34 lacs.The company further projected to achieve the TNW of Rs 1490.37 lacs in FY 2013-14 by retention of profits of Rs 52.65 lacs and balance by induction of fresh capital of Rs 17.00 lacs. The subjects projected TNW of Rs 1581.32 lacs for the FY 2014-15 by retention of Rs 72.95 lacs and balance by increasing the capital by Rs 18.00 lacs, which is acceptable.

GRAPH - 1

TNW(in lacs)
1600 1400 1200 1000 800 600 400 200 0 2011-12 2012-13 2013-14 2014-15 1222.24 1368.78 1420.72 1490.37

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 TOL/TNW - Total outside Liabilities / Tangible Net Worth

Indicate size of stakes, stability and degree of solvency. : The ratio for the company has improved to 0.66 in FY 2010-11, which is well below the maximum acceptable level of 4:1. The ratio has improved due to increase in TNW, reflecting availability of sufficient TNW as compared to the outside liability. For FY 2011-12 & 2012-13, the ratio is projected at 0.98 & 0.92 respectively. For FY 2013-14 & 2014-15, the ratio projected at 0.87 & 0.81 respectively, which is at a comfortable level and may be accepted.

TOL/TNW
1.2 1 0.8 0.6 0.4 0.2 0 2011-12 2012-13 2013-14 2014-15 0.66 0.98 0.92 0.87

GRAPH 2 Funded debt to TNW

Measures a company's leverage or the safety of principal on long-term debt. The larger the ratio,the riskier the enterprise. The value is computed by dividing total debt by total equity minus intangible assets. The long term debt and the total outside liabilities are quite low compared to equity. Hence, the financial position of the unit is good. GRAPH - 3

Funded debt to TNW

0.6 0.5 0.4 0.3 0.2 0.1 0 2011-12 2012-13 2013-14 2014-15 0.28 0.57 0.52 0.42

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 Net Working Capital

Net working capital= Current assets- Current liabilities.The ratio shows that the company has good working capital in hand to meet its obligations and it also increasing gradually and hence the project looks feasible. NWC is estimated to increase in 2011-12 from Rs 1198.04 lacs as on 31.03.11 to Rs 1523.39 lacs as on 31.03.2012. The subjects estimated NWC of Rs 1534.72 lacs in the current FY whereas the subjects projected to achieve NWC of Rs 1480.37 and Rs 1460.32 in the FY 2013-14 & 2014-15 respectively which is acceptable. However as CR is at a comfortable level, it reflects availability of sufficient NWC in to system.

GRAPH-4

Net Working Capital (in lacs)

1600 1400 1200 1000 800 600 400 200 0 2011-12 2012-13 2013-14 2014-15 1198.04 1523.39 1505.72 1414.37

Current ratio
It helps to measure liquidity and financial strength, indication of availability of current assets to pay current liabilities. The higher the ratio betters the liquidity position. Generally it should be at least 1.33. Current ratio for the company is at a comfortable level from last 4 years Current ratio for the company is at a comfortable level from last 4 years. CR for the company as on 31.03.2011 was 3.58, which is well above the benchmark level of 1.25:1(for SME units). For FY 2011-12, it is at 3.72 & estimated at 3.62 as on 31.03.13. The projected CR is 3.11 & 3.20 as on 31.03.14 & 31.03.15 respectively, which may be accepted. However debtor needs to be realized on a faster pace to improve liquidity

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GRAPH -5

Current Ratio
3.8 3.6 3.4 3.2 3 2.8 2011-12 2012-13 2013-14 2014-15 3.11 3.58 3.72 3.62

2. Profitability ratios Net sales

Sales of the company are increasing continuously over the last 3 years. It achieved sales of Rs 1976.42lacs in 2011-12 compared to Rs 1470.58 lacs in FY 2010-11. In FY2012-13 the company has achieved actual sales of Rs. 2686 lacs against estimated sales of Rs. 2400 lacs. The subjects have projected to achieve sales of Rs 2600lacs & Rs 2800 lacs for the FY 201314 & 2014-15 respectively which is acceptable.

GRAPH- 6

Net Sales(in lacs)

3000 2500 2000 1500 1000 500 0 2011-2 2012-13 2013-14 2014-15 1470.58 1976.42 2400 2600

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 Gross profit Ratio

A higher ratio of gross profit to sales is a sign of good management as it implies that the cost if production of the firm is relatively low. : Profit for the FY 2010 was Rs 31.52 lacs which increased to Rs 50.18 lacs in the FY 2010-11. The provisional profits for the FY 2012-13 dropped to Rs 34.60 lacs in FY 2012-13 whereas the subjects projected to achieve profits of Rs 52.65 lacs & Rs 72.95 lacs for 2014 & 2015 respectively, which is acceptable.

GRAPH-7

Gross Profit to Sales

45 44 43 42 41 40 39 38 2011-2 2012-13 2013-14 2014-15 40.74 41.24 44.28 42.69

Operating Profit ratio

This ratio is the test of the operational efficiency with which the business is being carried. The operating ratio should be low enough to leave a portion of sales to give a fair return to the investors. Compared to other years 2012-13 is very high thus decreasing the efficiency of the comapany. The increase may be due to increase in overhead and other financial charges and the management should check the increase. Operating profit ratio = op. profit / net sales.

Operating Profit to Sales

3.5 3 2.5 2 1.5 1 0.5 0 2011-2 2012-13 2013-14 2014-15 2.51 3 2.39 2.26

GRAPH-8

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NPBT TO Sales (Net Profit Before Tax) GRAPH -9

NPBT to Sales
5 4 3 2 1 0 2011-2 2012-13 2013-14 2014-15 3.13 2.4 3.85 3.1

NPAT to TNW (Net Profit After Tax) GRAPH-10

NPAT to TNW
4 3.5 3 2.5 2 1.5 1 0.5 0 3.67 2.58 2.44 3.53

2011-2

2012-13

2013-14

2014-15

NPAT TO SALES -

GRAPH 11

NPAT to Sales
3 2.5 2 1.5 1 0.5 0 2011-2 2012-13 2013-14 2014-15 1.44 2.14 2.54 2.03

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Working Capital Assessment

A. Acceptability of projected level of operation (Sales & Profitability) Sales: Sales of the company are increasing continuously over the last 3 years,which is acceptable. Profits: Profits are satisfactory to accept the proposal. B. Acceptability of inventory holding

Particulars

31.03.2011 (Audited)

31.03.2012 (Audited) 2.89 6.01 0.11

31.03.2013 (Provisional) 1.52 5.00 0.10

31.03.2014 (Projected) 1.00 5.08 0.11

31.03.2015 (Projected) 0.87 5.14 0.13

Stocks Sundry Debtors Sundry Creditors

3.08 5.73 0.05

Stock The average inventory period for raw material is reducing over the years. It has reduced from 3.08 months as on 31.03.11 to 2.89 months as on 31.03.12. It is further reducing to 1.52 months & 1 month as on 31.03.13 & 31.03.14 respectively. The subjects further projected to reduce the stovk holding to 0.87 months which is acceptable.

Sundry Debtors The holding level for Debtors is 5 months of sale. In view of the activity and past trend the said holding level is acceptable. However branch to arrive at DP on Debtors upto 120 days old debtors only.

Sundry Creditors The holding level of creditors has increased from 0.05 months to 0.11 months as on 31.03.2012. It has reduced to 0.10 months as on 31.03.2013. the projected holding level as on 31.03.2013 &b 31.03.2014 is 0.11 months & 0.13 months respectively which is acceptable.

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Assessment As Per Second Method Of Lending: (Tondon Committee)

Rs (in lacs) Total Current Assets Total current Liability(OTBB) Working Capital Gap Margin (25%of TCA) Actual/Projected NWC MPBF 2085.67 105.30 1980.37 521.42 1480.37 500.00

Assessment Of Term Loan

The T/L of Rs175 lacs was sanctioned to party showing outstanding of Rs52.05 lacs against DP of Rs 52.14 Lacs as at 23.05.13. In view of this and considering profitability position and DSCR we may review and DP whichever is lower with existing repayment programme

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RECOMMENDATIONS
1. All the documents required to appraise the project should be asked at the time of application only rather than later by the bank 2. The bank must bring more transparency in appraisal of the project, there should be explanation for a appraisal of the project that was sanctioned by higher authority. 3. The bank must not rely on software or information provided by the client the bank should dig in for other sources in order to draw a real picture for the company. 4. Credit scoring allows lenders to determine whether or not you fill the profile of the type of customers they are looking for. 5. Banks should not rely on the documents provided by the client,they must inspect each and every element of credit document. 6. Banks concerned should continuously monitor loans to identify accounts that have potential to become non-performing. 7. At the time of projections due to lack of documents, the projections are done. 8. Indian Overseas Bank uses only ratio analysis tool for assessment, it should also bring Capital Budgeting Techniques for assessment of working capital. 9. Bank provide loan on the basis of only re-payment capacity of the borrower and hence it is suggested to adopt some modern methods to appraise the loan to the business to check the feasibility of the project for appraising such high amount of loan. 10. Bank must extend working capital finance through non-fund based facilities. 11. Another ideal method would be to use LC as the primary source of extending, working capital clubbed with bill discounting. This would ensure that the credit isput to the right use by the borrower and repayment is guaranteed to the bank. 12. The bank must further secure themselves by holding a second charge on all the fixed assets of the borrower.

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LIMITATIONS
1. As far as the illustration and analysis of the case study is concerned, the project is limited to Indian Overseas Bank,Regional office ,Rajendra place 2. Matters related to Banks asset classification / income recognition procedures, investment are not given by the bank. 3. The project involves a case study of a firm for which the entire assessment has been done but the personal details and the companys name are intentionally kept hidden. 4. The project uses only ratio analysis tool for working capital assessment and it does not involve various other financial tool like capital budgeting technique. 5. The study of the project is limited to the types of advances funded by the bank i.e.IOB and not all types of advances.

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CONCLUSION
Credit appraisal is done to check the commercial, financial & technical viability of the project proposed its funding pattern & further checks the primary or collateral security cover available for the recovery of such funds Following points has been taken out of the project as the main crux of the study which Bank considers while sanctioning the working capital limit to the concern: 1. Turnover size of the concern: The bank normally gives working capital limit upto 2025 % of the turnover estimated (for the year under review) by the concern. 2. Current ratio should be 1.33: 1. Hence all the CR ratio level must above the benchmark level of 1.33 ,only then the proposal would be accepted. 3. Total Outside Liability/ Net Worth Ratio should lie in the limit of 4:1. 4. As a measure to incentive to export sector while calculating the margin i.e. 25% of current assets, export receivables are excluded from current assets. 5. Additional credit needs of exporters arising out of firm order/ confirmed letter of credit (which are not taken into account while fixing regular credit limits of borrowers) are to be met in full even if sanction of such additional credit limit exceeds MPBF 6. Credit limits of the borrowing concern in the sugar industry may be determined on the basis of a current ratio of 1:1. 7. Sick/weak units under rehabilitations will be exempted from the application of 2nd method of lending. 8. Term loan Installments payable within the next twelve months time are excluded from current liabilities while calculating MPBF but included while calculating Current Ratio. From the above discussion we can say that bank credit occupies an important place in financing working capital requirements of industries. Working capital financing is a specialized line of business and largely dominated by commercial banks. Generally, the bank finance for meeting working capital needs is easily available to firms. But it has been always difficult to determine the norms for an adequate quantum of bank credit required by an industry for working capital purpose. Various committees have been set up for examining the working capital financing by banks and to recommend norms for and to regulate bank credit. Besides this from time to time, Reserve Bank of India has been issuing guidelines and directives to the banks to strengthen the procedures and norms for working capital financing.

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REFERENCES
1. Real Estate Advances-Guidelines.ADV (2009),ADV/422/2010-11 ,BOI Advances General Instructions ,volume 2. 2. RBI. Management of advances(2012).RBI recommendations,Annexture 1,para 2.7 3. Bhalla, V. K., (2003), Working Capital Management, New Delhi, Anmol Publications Private Limited, 5th Edition. 4. Srinivasa, S., (1999), Cash and Working Capital Management, New Delhi, Vikas Publishing House Private Limited. 5. Tandon, Chore, Kannan and Certain Other Committees Recommendation,Retrived from http://www.rushabhinfosoft.com/webpages/BHTML/CH-16.htm 6. Credit facilities,Retrived from www.iob.in 7. Tondon committee and Nayak Committee Recommendations, Retrived from www.docstoc.com 8. RBI. Master Circular- Loans and Advances Statutory and Other Restrictions(201112), RBI/2011-12/59,Retrived from http://www.rbi.org.in/scripts/BS_ViewMasCirculardetails.aspx?id=6514 9. Market portfolio,Retrived from http://www.indiainfoline.com. 10. Pamela Peterson Drake( 2012),study on Financial Ratio Analysis

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