INTRODUCTION TO BANKING
SECTOR & SBI
HISTORY OF BANKING INDUSTRY:
The Reserve Bank of India (RBI), as the central bank of the country, closely monitors
developments in the whole financial sector.
Scheduled commercial banks touched, on the deposit front, a growth of 14% as against 18%
registered in the previous year. And on advances, the growth was 14.5% against 17.3% of the
earlier year.
State Bank of India is still the largest bank in India with the market share of 20% ICICI and its
two subsidiaries merged with ICICI Bank, leading creating the second largest bank in India with
a balance sheet size of Rs. 1040bn.
Higher provisioning norms, tighter asset classification norms, dispensing with the concept of
past due for recognition of NPAs, lowering of ceiling on exposure to a single borrower and
group exposure etc., are among the measures in order to improve the banking sector.
A minimum stipulated Capital Adequacy Ratio (CAR) was introduced to strengthen the ability of
banks to absorb losses and the ratio has subsequently been raised from 8% to 9%. It is proposed
to hike the CAR to 12% by 2004 based on the Basle Committee recommendations.
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Retail Banking is the new mantra in the banking sector. The home loans alone account for nearly
two-third of the total retail portfolio of the bank. According to one estimate, the retail segment is
expected to grow at 30-40% in the coming years.
Net banking, phone banking, mobile banking, ATMs and bill payments are the new buzz words
that banks are using to lure customers.
Banks are free to acquire shares, convertible debentures of corporate and units of equity-oriented
mutual funds, subject to a ceiling of 5% of the total outstanding advances (including commercial
paper) as on March 31 of the previous year.
The finance ministry spelt out structure of the government-sponsored ARC called the Asset
Reconstruction Company (India) Limited (ARCIL), this pilot project of the ministry would pave
way for smoother functioning of the credit market in the country. The government will hold 49%
stake and private players will hold the rest 51%- the majority being held by ICICI Bank (24.5%).
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After the second phase of financial sector reforms and liberalization of the sector in the early
nineties, the Public Sector Banks (PSB) s found it extremely difficult to complete with the new
private sector banks and the foreign banks. The new private sector banks first made their
appearance after the guidelines permitting them were issued in January 1993. Eight new private
sector banks are presently in operation. These banks due to their late start have access to state-ofthe-art technology, which in turn helps them to save on manpower costs and provide better
services.
During the year 2000, the State Bank of India (SBI) and its 7 associates accounted for a 25%
share in deposits and 28.1% share in credit. The 20 nationalized banks accounted for 53.5% of
the deposits and 47.5% of credit during the same period. The share of foreign banks ( numbering
42 ), regional rural banks and other scheduled commercial banks accounted for 5.7%, 3.9% and
12.2% respectively in deposits and 8.41%, 3.14% and 12.85% respectively in credit during the
year 2000.
CLASSIFICATION OF BANKS:
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NABARD NHB
Commercial
Banks
Banks
IRBI
Regional Rural
Banks
SBI Groups
EXIM Bank
ISIDBI
Land Development
Banks
Co-operative
Banks
Nationalized Banks
ABOUT SBI:
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Indian Banks
Foreign Banks
The State Bank of India, the countrys oldest Bank and a premier in terms of balance sheet size,
number of branches, market capitalization and profits is today going through a momentous phase
of Change and Transformation the two hundred year old Public sector behemoth is today
stirring out of its Public Sector legacy and moving with an agility to give the Private and Foreign
Banks a run for their money.
The bank is entering into many new businesses with strategic tie ups Pension Funds, General
Insurance, Custodial Services, Private Equity, Mobile Banking, Point of Sale Merchant
Acquisition, Advisory Services, structured products etc each one of these initiatives having a
huge potential for growth.
The Bank is forging ahead with cutting edge technology and innovative new banking models, to
expand its Rural Banking base, looking at the vast untapped potential in the hinterland and
proposes to cover 100,000 villages in the next two years.
It is also focusing at the top end of the market, on whole sale banking capabilities to provide
Indias growing mid / large Corporate with a complete array of products and services. It is
consolidating its global treasury operations and entering into structured products and derivative
instruments. Today, the Bank is the largest provider of infrastructure debt and the largest arranger
of external commercial borrowings in the country. It is the only Indian bank to feature in the
Fortune 500 list.
The Bank is changing outdated front and back end processes to modern customer friendly
processes to help improve the total customer experience. With about 8500 of its own 10000
branches and another 5100 branches of its Associate Banks already networked, today it offers the
largest banking network to the Indian customer. The Bank is also in the process of providing
complete payment solution to its clientele with its over 8500 ATMs, and other electronic
channels such as Internet banking, debit cards, mobile banking, etc.
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With four national level Apex Training Colleges and 54 learning Centres spread all over the
country the Bank is continuously engaged in skill enhancement of its employees. Some of the
training programes are attended by bankers from banks in other countries.
The bank is also looking at opportunities to grow in size in India as well as internationally. It
presently has 82 foreign offices in 32 countries across the globe. It has also 7 Subsidiaries in
India SBI Capital Markets, SBICAP Securities, SBI DFHI, SBI Factors, SBI Life and SBI
Cards - forming a formidable group in the Indian Banking scenario. It is in the process of raising
capital for its growth and also consolidating its various holdings.
Throughout all this change, the Bank is also attempting to change old mindsets, attitudes and
take all employees together on this exciting road to Transformation. In a recently concluded mass
internal communication programme termed Parivartan the Bank rolled out over 3300 two day
workshops across the country and covered over 130,000 employees in a period of 100 days using
about 400 Trainers, to drive home the message of Change and inclusiveness. The workshops
fired the imagination of the employees with some other banks in India as well as other Public
Sector Organizations seeking to emulate the programme.The Bank is actively involved since
1973 in non-profit activity called Community Services Banking. All their branches and
administrative offices throughout the country sponsor and participate in large number of welfare
activities and social causes.
Their business is more than banking because they touch the lives of people anywhere in many
ways. Their commitment to nation-building is complete & comprehensive.
The State Bank of India, the countrys oldest Bank and a premier in terms of balance sheet size,
number of branches, market capitalization and profits is today going through a momentous phase
of Change and Transformation the two hundred year old Public sector behemoth is today
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The bank is entering into many new businesses with strategic tie ups Pension Funds, General
Insurance, Custodial Services, Private Equity, Mobile Banking, Point of Sale Merchant
Acquisition, Advisory Services, structured products etc each one of these initiatives having a
huge potential for growth.
It is also focusing at the top end of the market, on whole sale banking capabilities to provide
Indias growing mid / large Corporate with a complete array of products and services. It is
consolidating its global treasury operations and entering into structured products and derivative
instruments. Today, the Bank is the largest provider of infrastructure debt and the largest arranger
of external commercial borrowings in the country. It is the only Indian bank to feature in the
Fortune 500 list.
The Bank is changing outdated front and back end processes to modern customer friendly
processes to help improve the total customer experience. With about 8500 of its own 10000
branches and another 5100 branches of its Associate Banks already networked, today it offers the
largest banking network to the Indian customer. The Bank is also in the process of providing
complete payment solution to its clientele with its over 8500 ATMs, and other electronic
channels such as Internet banking, debit cards, mobile banking, etc.
With four national level Apex Training Colleges and 54 learning Centers spread all over the
country the Bank is continuously engaged in skill enhancement of its employees. Some of the
training programmes are attended by bankers from banks in other countries.
The bank is also looking at opportunities to grow in size in India as well as internationally. It
presently has 82 foreign offices in 32 countries across the globe. It has also 7 Subsidiaries in
India SBI Capital Markets, SBICAP Securities, SBI DFHI, SBI Factors, SBI Life and SBI
Cards - forming a formidable group in the Indian Banking scenario. It is in the process of raising
capital for its growth and also consolidating its various holdings.
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The CNN IBN, Network 18 recognized this momentous transformation journey, the State Bank
of India is undertaking, and has awarded the prestigious Indian of the Year Business, to its
Chairman, Mr. O. P. Bhatt in January 2008.
State Bank of India (SBI) has history of more than 200 years of existence. SBI is the largest
commercial bank in India and accounts for approximately 18% of the total Indian banking
business and the group account for 25% of the total Indian banking business.
The central bank, Reserve Bank of India (RBI) is the largest shareholder in the bank with59.7%
stake followed by overseas investors including GDRs with 19.78% shareholdingas on September
06. RBIs stake in the bank is likely to be transferred to the Governmentof India (GOI).
SBI has the largest distribution network in India spread across every nook and corner of India.
As on September 06, the bank has 14,061 branches which include 4,755 branches of its
associated banks. The bank also has the largest network of 5,624 ATMs.
Background:
State Bank of India is the largest and one of the oldest commercial bank in India, in existence for
more than 200 years. The bank provides a full range of corporate, commercial and retail banking
services in India. Indian central bank namely Reserve Bank of India (RBI) is the major share
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SBI has the largest branch and ATM network spread across every corner of India. Thebank has a
branch network of over 14,000 branches (including subsidiaries). Apart fromIndian network it
also has a network of 73 overseas offices in 30 countries in all time zones, correspondent
relationship with 520 International banks in 123 countries. In recent past, SBI has acquired banks
in Mauritius, Kenya and Indonesia. The bank had total staff strength of 198,774 as on 31st
March, 2006. Of this, 29.51% are officers, 45.19% clerical staff and the remaining 25.30% were
sub-staff. The bank is listed on the Bombay Stock Exchange, National Stock Exchange, Kolkata
Stock Exchange, Chennai Stock Exchange and Ahmedabad Stock Exchange while its GDRs are
listed on the London Stock Exchange.
SBI group accounts for around 25% of the total business of the banking industry while itaccounts
for 35% of the total foreign exchange in India. With this type of strong base, SBI has displayed a
continued performance in the last few years in scaling up its efficiency levels. Net Interest
Income of the bank has witnessed a CAGR of 13.3% during the last five years. During the same
period, net interest margin (NIM) of the bank has gone up from as low as 2.9% in FY02 to
3.40% in FY06 and currently is at 3.32%.
EVOLUTION OF SBI:
The origin of the State Bank of India goes back to the first decade of the nineteenth century
with the establishment of the Bank of Calcutta in Calcutta on 2 June 1806. Three years later the
bank received its charter and was re-designed as the Bank of Bengal (2 January 1809). A unique
institution, it was the first joint-stock bank of British India sponsored by the Government of
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Imperial Bank
The Imperial Bank during the three and a half decades of its existence recorded an impressive
growth in terms of offices, reserves, deposits, investments and advances, the increases in some
cases amounting to more than six-fold. The financial status and security inherited from its
forerunners no doubt provided a firm and durable platform. But the lofty traditions of banking
which the Imperial Bank consistently maintained and the high standard of integrity it observed in
its operations inspired confidence in its depositors that no other bank in India could perhaps then
equal. All these enabled the Imperial Bank to acquire a pre-eminent position in the Indian
banking industry and also secure a vital place in the country's economic life.
When India attained freedom, the Imperial Bank had a capital base (including reserves) of
Rs.11.85 crores, deposits and advances of Rs.275.14 crores and Rs.72.94 crores respectively and
a network of 172 branches and more than 200 sub offices extending all over the country.
Key Areas of Operations:
The business operations of SBI can be broadly classified into the key income generating areas
such as National Banking, International Banking, Corporate Banking, & Treasury operations.
The functioning of some of the key divisions is enumerated below:
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1) Corporate Accounts
This SBU is important for the bank as its loan portfolio constituted about 27.05% of thebanks
commercial and institutional non-food credit and 12.85% of the total domestic credit portfolio as
on 31st March 2006.
Some of the products under corporate accounts SBU are as follows:
SBI-FAST, which is the cash management product offered by this SBU, had a turnover of
Rs.4,705.75bn as of 31st March 2006. This product is now comprehensive cash management
solution, offering payments in addition to collections.
Vendor financing activity is being integrated with core banking through the internet platform.
This is identified as a focus area to capture the credit portfolio of vendors.
The foreign exchange business grew by around 55% y-o-y and reached Rs.1,747.70bn as of
31st March 2006. This SBU now handles nearly 12% of the countrys visible trade and about
43% of banks forex business.
2) Leasing
This SBU is not writing any leases since the past few years as unfavorable business climate and
availability of alternative funding options at cheaper cost. As at the end March 2006, the
disbursements and capitalization were zero and profit amounted to Rs.245.9mn.
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This SBU focuses on funding core projects like power, telecom, roads, ports, airports, special
economic zones and others. During FY06, total sanctions for 18 projects involving a total State
Bank of India, Corporate Banking, National Banking, International Banking, Treasury
Operations Associates & Subsidiaries amount of Rs.42.11bn were in place as against 13 projects
involving Rs.25.08bn in the previous year. It also handles non-infrastructure projects with certain
ceilings on minimum project costs. During FY06 sanctions for 29 projects involving a total
amount of Rs.55.80bn were in place as against 27 projects involving Rs.51.63bn in the previous
year. As a whole, this SBU achieved total sanctions of Rs.238.86bn (fund based and non fund
based) including syndication amount of Rs.140.95bn during the period ended March 2006.
During FY06, this SBU entered into financing of aviation sector actively by sanctioning loans
for modernization of airports and acquisition of aircrafts.
The Mid Corporate Group (MCG) created in June 2004 has 7 MCG Regional Officescontrolling
28 large branches with high concentration of Mid Corporate (MC) business.The entire Off-Site
MC business of all branches at 31 identified centres has been broughtunder the fold of MCG.
The average processing time of credit proposals is about 15 daysand quicker decision making on
credit proposals of the Mid Corporate units has resulted in greater customer satisfaction. As of
March 2006, 21 MCG branches have been migrated to core banking platform. New technology
products like RTGS, CINB, Multi-City cheque facility and Core Power have been introduced in
all these branches. These technology products coupled with quick Turn Around Time (TAT) have
enabled Mid-Corporate Group to increase its business substantially and generate higher income,
both interest and fee based.
5) Stressed Assets Management
During FY06, the banking industry witnessed a major policy initiative by Reserve Bank of India
with the opening up of sale / purchase of non performing assets to banks, FIs and non-banking
finance companies (NBFCs). During FY06, the bank sold NPAs to the tune of Rs.8.9bn against
security receipts and Rs.11.41bn on cash basis to Asset Reconstruction Company (ARCIL). The
progress in enforcing the security interest has somewhat slowed down due to the requirement of
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b) NATIONAL BANKING
The national banking group has 14 administrative circles encompassing a vast network of 9,177
branches, 4 sub-offices, 12 exchange bureaus, 104 satellite offices and 679 extension counters, to
reach out to customers, even in the remotest corners of the country. Out of the total branches, 809
are specialized branches. This group consists of four business group which are enumerated
below:
This SBU is mainly responsible for retail business. During FY06, personal banking advances
increased from Rs.464.51bn to Rs.610.67bn, showing a growth of Rs.146.16bn at the rate of
31.47 % against a growth rate of 40.12% in the previous year.
On the home loan front, several new products were introduced, tailored to fit the needs of
specific customer segments, such as SBIMaxgain (minimize interest burden, earn on savings, at
no extra cost), SBI NRI-Home Loans, SBI Freedom Home Loans (Loans given without
mortgage of property, but against alternate securities, instead), SBI Tribal Plus Home Loans. The
auto loans portfolio has shown a growth of Rs.17.74bn in absolute terms and 65% which is
considerably higher than last years growth, mainly due to implementation of well planned
strategies.
2) Small & Medium Enterprises
The SME Business Unit implemented comprehensive strategies, revamped business processes
and with its focus on market dynamics and customer preferences, achieved commendable
business growth. The initiative was implemented by focusing on specific industry segments, and
concentrating on various players in the value chain. Debt restructuring mechanism for units in
SME sector has been devised to ensure restructuring of debt of all eligible Small and Medium
Enterprises (SMEs) on favorable terms.
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Focused on the SME sector, projects under Uptech are taken up in location specific and activity
specific industry clusters. So far the bank has taken 28 projects for modernization under the
Project Uptech covering industries like foundry, pumps, glass, auto components, and knitwear,
etc. The bank has also covered agro based industries like rice mills, sago and starch and
horticulture activities like Apple Orchards and grape farming under the scheme. The deposits of
the SME SBU increased to Rs.1,042.70bn as at the end of March 2006 from Rs.890.60bn of
previous year recording a growth of 17.08% during the year. SME advances increased to
Rs.456.53bn from Rs.328.30bn of previous year, recording a growth of 39.06 %. The criteria laid
down by the Government of India for growth in SME advances is 20%.
3) Agricultural Banking
This SBU is accountable for agricultural credit both traditional and new thrust areas like contract
farming, farmers financed through Agri Export Zones (AEZs) and value chain financing.
Increase in disbursements during FY06 was 83% against the Govt. of India target of 30%.
Agricultural advances grew from a level of Rs.205.26bn in FY05 to Rs.305.16bn as at the end of
March 06. As on November 2006, agriculture loans contribute 11% of the total loan book.
4) Government Banking
With the establishment of the government business unit and the consequent focus on marketing,
business turnover of this segment has grown substantially over the years. Banks business
turnover from the government business segment during 2004-05 was Rs.8,843.81bn. The
turnover increased by 10.52 % to Rs.9,773.90bn during FY06.
c) INTERNATIONAL BANKING
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SBI has a network of 73 overseas offices in 30 countries in all time zones and correspondent
relationship with 520 international banks in 123 countries. The bank is keen to implement core
banking solution to its international branches also. During FY06, 25 foreign offices were
successfully switched over to Finacle software. SBI has installed ATMs at Male, Muscat and
Colombo Offices. In recent years, SBI acquired 76% shareholding in Giro Commercial Bank
Limited in Kenya and PT Indomonex Bank Ltd. in Indonesia. The bank incorporated a company
SBI Botswana Ltd. at Gaborone.
d) TREASURY
The bank manages an integrated treasury covering both domestic and foreign exchange markets.
In recent years, the treasury operation of the bank has become more active amidst rising interest
rate scenario, robust credit growth and liquidity constraints. The bank diversified its operations
more actively into alternative assets classes with a view to diversify the portfolio and build
alternative revenue streams in order to offset the losses in fixed income portfolio. Reorganization
of the treasury processes at domestic and global levels is also being undertaken to leverage on
the operational synergy between business units and network. The reorganization seeks to
enhance the efficiencies in use of manpower resources and increase maneuverability of banks
operations in the markets both domestic as well as international
The State Bank Group with a network of 14,061 branches including 4,755 branches of its seven
Associate Banks dominates the banking industry in India. In addition to banking, the Group,
through its various subsidiaries, provides a whole range of financial services which includes Life
Insurance, Merchant Banking, Mutual Funds, Credit Card, Factoring, Security trading and
primary dealership in the Money Market.
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All associate banks have migrated to Core Banking (CBS) platform. Single window delivery
system has been introduced in all associate banks. SBIs seven associate banks are the first
amongst the public sector banks in India to get fully networked through CBS, providing anytimeanywhere banking to its customers to facilitate a bouquet of innovative customer offerings.
i) SBI Life:
SBI Life is the third largest private insure with the market share of 10.21% among the private
players and number one in terms of number of lives insured amongst private players (no. of lives
insured and policies is 25mn). In H1FY07 gross premium was Rs.7.68bn.
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f) Human Resources
The bank had total staff strength of 198,774 on the 31st March, 2006. Of this, 29.51% are
officers, 45.19% clerical staff and the remaining 25.30% were sub-staff. SBI had launched VRS
scheme for its employees in FY01 in which it has reduced it staff by approximately 5,000 and
estimates natural retirement of another 5,000 employees in next 4-5 year.
INVESTOR RELATIONS:
State Bank of India, the countrys largest commercial Bank in terms of profits, assets, deposits,
branches and employees, welcomes you to its Investors Relations Section. SBI, with its
heritage dating back to the year 1806, strives to continuously provide latest and upto date
information on its financial performance. It is our endeavor to walk on the path of transparency
and allow complete access to all the stakeholders enabling total awareness about the Bank. The
Bank communicates with the stakeholders through a variety of channels, such as through e-mail,
website, conference call, one-on-one meeting, analysts meet and attendance at Investor
Conference throughout the world.
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State Bank of India has an extensive administrative structure to oversee the large network of
branches in India and abroad. The Corporate Centre is in Mumbai and 14 Local Head Offices
and 57 Zonal Offices are located at important cities spread throughout the country. The
Corporate Centre has several other establishments in and outside Mumbai, designated to cater to
various functions. Our Colleges/Institutes/Training Centres are the seats of learning and research
and development to spread the wings of knowledge not only to our employees but also other
banks/establishments in India and abroad.
The Corporate Accounts Group is a Strategic Business Unit of the Bank set up exclusively to
fulfil the specialised banking needs of top corporates in the country.
State Bank of India has 52 foreign offices in 34 countries across the globe.
State Bank of India invites you to take a journey to understand the potential of not just a large
but truly global organisation.
CHAPTER-2
BRIEF OVERVIEW OF CREDIT
APPRAISAL
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.
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Credit Appraisal is a process to ascertain the risks associated with the extension of the credit
facility. It is generally carried by the financial institutions which are involved in providing
financial funding to its customers. Credit risk is a risk related to non repayment of the credit
obtained by the customer of a bank. Thus it is necessary to appraise the credibility of the
customer in order to mitigate the credit risk. Proper evaluation of the customer is performed
which measures the financial condition and the ability of the customer to repay back the loan in
future. Generally the credit facilities are extended against the security know as collateral. But
even though the loans are backed by the collateral, banks are normally interested in the actual
loan amount to be repaid along with the interest. Thus, the customer's cash flows are ascertained
to ensure the timely payment of principal and the interest.
It is the process of appraising the credit worthiness of a loan applicant. Factors like age, income,
number of dependents, nature of employment, continuity of employment, repayment capacity,
previous loans, credit cards, etc. are taken into account while appraising the credit worthiness of
a person. Every bank or lending institution has its own panel of officials for this purpose.
However the 3 C of credit are crucial & relevant to all borrowers/ lending which must be kept
in mind at all times.
Character
Capacity
Collateral
If any one of these are missing in the equation then the lending officer must question the viability
of credit.
There is no guarantee to ensure a loan does not run into problems; however if proper credit
evaluation techniques and monitoring are implemented then naturally the loan loss probability /
problems will be minimized, which should be the objective of every lending officer.
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Credit allowsyoutobuygoodsorcommoditiesnow,andpayforthemlater.Weusecredittobuythings
withanagreementtorepaytheloansoveraperiodoftime.Themostcommonwaytoavailcreditisby
theuseofcreditcards.Othercreditplansincludepersonalloans,homeloans,vehicleloans,studentloans,
smallbusinessloans,trade.
A credit is a legal contract where one party receives resource or wealth from another party and
promises to repay him on a future date along with interest. In simple terms, a credit is an
agreement of postponed payments of goods bought or loan. With the issuance of a credit, a debt
is formed.
There are four basic types of credit. By understanding how each works, you will be able to get
the most for your money and avoid paying unnecessary charges.
Service credit is monthly payments for utilities such as telephone, gas, electricity, and water.
You often have to pay a deposit, and you may pay a late charge if your payment is not on time.
Loans let you borrow cash. Loans can be for small or large amounts and for a few days or
several years. Money can be repaid in one lump sum or in several regular payments until the
amount you borrowed and the finance charges are paid in full. Loans can be secured or
unsecured.
Installment credit may be described as buying on time, financing through the store or the easy
payment plan. The borrower takes the goods home in exchange for a promise to pay later. Cars,
major appliances, and furniture are often purchased this way. You usually sign a contract, make a
down payment, and agree to pay the balance with a specified number of equal payments called
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1. GENERAL
The objective of running any industry is earning profits. An industry will require funds to acquire
Fixed assets like land, building, plant, machinery, equipments, vehicles, tools etc., & also to
run the business i.e. its day to day operations.
Funds required for day to-day working will be to finance production & sales. For production,
funds are needed for purchase of raw materials/ stores/ fuel, for employment of labour, for power
charges etc., for storing finishing goods till they are sold out & for financing the sales by way of
sundry debtors/ receivables.
Capital or funds required for an industry can therefore be bifurcated as fixed capital & working
capital. Working capital in this context is the excess of current assets over current liabilities. The
excess of current assets over current liabilities is treated as net working capital or liquid surplus
& represents that portion of the working capital which has been provided from the long term
source.
2. Definition
Working capital is defined as the funds required to carry the required levels of current assets to
enable the unit to carry on its operations at the expected levels uninterruptedly.
LIMITS
METHOD
SSI
Upto Rs 5 cr
Above Rs 5 cr
SBF
All loans
& Upto Rs 1 cr
C&I Trade
Services
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Stock in
Process
Raw
Materials
Finished
Goods
Cash
Bills
c) The time that lapses between cash outlay & cash realization by sale of finished goods &
realization of sundry debtors is known as the length of the operating cycle.
d) That is, the operating cycle consists of:
Time taken to acquire raw materials & average period for which they are in store.
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=
=
But the working capital requirement, as you know, is not Rs. 72,000.
In these cases, there are 3 operating cycles in a year. That means each rupee of working
deployed in the unit is turned over 3 times in a year. (This is also known as working capital
turnover ratio).
Therefore WCR =
Operating Expenses
No. of cycles per annum
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Other manufacturing
Expenses
Total expenses
Profit
= 15 days
= 2 days
= 3 days
= 15 days
= 35 days (D)
TERM LOAN
1. A term loan is granted for a fixed term of not less than 3 years intended normally for
financing fixed assets acquired with a repayment schedule normally not exceeding 8
years.
2. A term loan is a loan granted for the purpose of capital assets, such as purchase of land,
construction of, buildings, purchase of machinery, modernization, renovation or
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The term loan is an advance not repayable on demand but only in installments
ranging over a period of years.
The repayment of term loan is not out of sale proceeds of the goods & commodities
per se, whether given as security or not. The repayment should come out of the
future cash accruals from the activity of the unit.
The security is not the readily saleable goods & commodities but the fixed assets of
the units.
3. It may thus be observed that the scope & operation of the term loans are entirely different
from those of the conventional working capital advances. The Banks commitment is for
a long period & the risk involved is greater. An element of risk is inherent in any type of
loan because of the uncertainty of the repayment. Longer the duration of the credit,
greater is the attendant uncertainty of repayment & consequently the risk involved also
becomes greater.
4. However, it may be observed that term loans are not so lacking in liquidity as they appear
to be. These loans are subject to a definite repayment programme unlike short term loans
for working capital (especially the cash credits) which are being renewed year after year.
Term loans would be repaid in a regular way from the anticipated income of the industry/
trade.
5. These distinctive characteristics of term loans distinguish them from the short term credit
granted by the banks & it becomes necessary therefore, to adopt a different approach in
examining the applications of borrowers for such credit & for appraising such proposals.
6. The repayment of a term loan depends on the future income of the borrowing unit.
Hence, the primary task of the bank before granting term loans is to assure itself that the
anticipated income from the unit would provide the necessary amount for the repayment
of the loan. This will involve a detailed scrutiny of the scheme, its financial aspects,
economic aspects, technical aspects, a projection of future trends of outputs & sales &
estimates of cost, returns, flow of funds & profits.
7. Appraisal of Term Loans
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Appraisal of term loan for, say, an industrial unit is a process comprising several
steps.
There are four broad aspects of appraisal, namely
Technical Feasibility - To determine the suitability of the technology selected &
the adequacy of the technical investigation & design;
Economic Feasibility - To ascertain the extent of profitability of the project & its
sufficiency in relation to the repayment obligations pertaining to term assistance;
Financial Feasibility - To determine the accuracy of cost estimates, suitability of
the envisaged pattern of financing & general soundness of the capital structure; &
Managerial Competency To ascertain that competent men are behind the project
to ensure its successful implementation & efficient management after
commencement of commercial production.
7.1 Technical Feasibility
The examination of this item consists of an assessment of the various requirement of the
actual production process. It is in short a study of the availability, costs, quality &
accessibility of all the goods & services needed.
a) The location of the project is highly relevant to its technical feasibility & hence
special attention will have to be paid to this feature. Projects whose technical
requirements could have been taken care of in one location sometimes fail because
they are established in another place where conditions are less favorable. One project
was located near a river to facilitate easy transportation by barge but lower water
level in certain seasons made essential transportation almost impossible. Too many
projects have become uneconomical because sufficient care has not been taken in the
location of the project, e.g. a woolen scouring & spinning mill needed large quantities
of good water but was located in a place which lacked ordinary supply of water & the
limited water supply available also required efficient softening treatment. The
accessibility to the various resources has meaning only with reference to location.
Inadequate transport facilities or lack of sufficient power or water for instance, can
adversely affect an otherwise sound industrial project.
b) Size of the plant One of the most important considerations affecting the feasibility
of a new industrial enterprise is the right size of the plant. The size of the plant will be
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ii)
iii)
The cash flow estimates will help to decide the disbursal of the term loan. The estimate of
profitability & the breakeven point will enable the banker to draw up the repayment programme,
start-up time etc. The profitability estimates will also give the estimate of the Debt Service
Coverage which is the most important single factor in all the term credit analysis.
A study of the projected balance sheet of the concern is essential as it is necessary for the
appraisal of a term loan to ensure that the implementation of the proposed scheme.
Break-even point:
In a manufacturing unit, if at a particular level of production, the total manufacturing cost equals
the sales revenue, this point of no profit/ no loss is known as the break-even point. Break-even
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Debt Service =
Cash accruals
Coverage Ratio
Maturing annual obligations
This ratio is valuable, in that it serves as a measure of the repayment capacity of the project/ unit
& is, therefore, appropriately included in the cash flow statements. The ratio may vary from
industry to industry but one has to view it with circumspection when it is lower than the
benchmark of 1.75. The repayment programme should be so stipulated that the ratio is
comfortable.
NON-FUND BASED:-
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LETTER OF CREDIT
Introduction
The expectation of the seller of any goods or services is that he should get the payment
immediately on delivery of the same. This may not materialize if the seller & the buyer are at
different places (either within the same country or in different countries). The seller desires to
have an assurance for payment by the purchaser. At the same time the purchaser desires that the
amount should be paid only when the goods are actually received. Here arises the need of Letter
of Credit (LCs). The objective of LC is to provide a means of payment to the seller & the
delivery of goods & services to the buyer at the same time.
Definition
A Letter of Credit (LC) is an arrangement whereby a bank (the issuing bank) acting at the request
& on the instructions of the customer (the applicant) or on its own behalf,
i.
is to make a payment to or to the order of a third party (the beneficiary), or is to accept &
pay bills of exchange (drafts drawn by the beneficiary); or
ii.
authorizes another bank to effect such payment, or to accept & pay such bills of
exchanges (drafts); or
iii.
authorizes another bank to negotiate against stipulated document(s), provided that the
terms & conditions of the credit are complied with.
Basic Principle:
The basic principle behind an LC is to facilitate orderly movement of trade; it is therefore
necessary that the evidence of movement of goods is present. Hence documentary LCs is those
which contains documents of title to goods as part of the LC documents. Clean bills which do not
have document of title to goods are not normally established by banks. Bankers and all
concerned deal only in documents & not in goods. If documents are in order issuing bank will
pay irrespective of whether the goods are of expected quality or not. Banks are also not
responsible for the genuineness of the documents & quantity/quality of goods. If importer is your
borrower, the bank has to advice him to convert all his requirements in the form of documents to
ensure quantity & quality of goods.
Parties to the LC
1)
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3)
4)
Advising Bank The Bank which advises the LC after confirming authenticity
5)
6)
7)
Reimbursing Bank The Bank which reimburses the LC amount to negotiating bank
8)
Confirming bank may not be there in a transaction unless the beneficiary demand confirmation
by his own bankers & such a request is made part of LC terms. A bank will confirm an LC for his
beneficiary if opening bank requests this as part of LC terms. Reimbursing bank is used in an LC
transaction by an opening bank when the bank does not have a direct correspondent/branch
through whom the negotiating bank can be reimbursed. Here, the opening bank will direct the
reimbursing bank to reimburse the negotiating bank with the payment made to the beneficiary. In
the case of transferable LC, the LC may be transferred to the second beneficiary & if provided in
the LC it can be transferred even more than once.
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172.64
69.41
(A)
(B)
(C)
(D)
5.78
11.30
3 months
1 month
4 months
23.12
23.00
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BANK GUARANTEES
A contract of guarantee is defined as a contract to perform the promise or discharge the liability
of the third person in case of the default. The parties to the contract of guarantees are:
a) Applicant: The principal debtor person at whose request the guarantee is executed
b) Beneficiary: Person to whom the guarantee is given & who can enforce it in case of
default.
c) Guarantee: The person who undertakes to discharge the obligations of the applicant in
case of his default.
Thus, guarantee is a collateral contract, consequential to a main contract between the
applicant & the beneficiary.
Purpose of Bank Guarantees
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(Stamp)
Form No. .
.
.
.
Dear Sir,
Guarantee No.
Amount of Guarantee Rs.
Guarantee cover from 1.1.20*0 to 31.3.20*1
Last date for lodgement of claim 31.3.20*1
This Deed of guarantee executed by the State Bank Of India constituted under the State Bank of
India Act, 1955 having its Central Office at Nariman Point, Mumbai & amongst other places, a
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CHAPTER-3
RESEARCH METHODOLOGY
INTRODUCTION TO CREDIT APPRAISAL:
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.
PROBLEM STATEMENT:
To study the Credit Appraisal System in SME sector, at State Bank of India (SBI), Ahmedabad.
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OBJECTIVES
RESEARCH DESIGN
Analytical in nature
COVERAGE
Study of credit appraisal in banking sector at State Bank of India, Ahmedabad
DATA COLLECTION
Secondary Data
Books & magazines
Database at SBI
Library research
Websites
E-circulars of SBI
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This study will help in understanding the credit appraisal system in banks & to reduce various
risk parameters, which are broadly categorized into financial risk, business risk, industrial risk &
management risk associated in providing any loans or advances or project finance.
CHAPTER-4
INTRODUCTION OF SME
SME
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4.1 Concept:
The small-scale industries (SSI) produce about 8000 products, contribute 40% of the industrial
output and offer the largest employment after agriculture. The sector, therefore, presents an
opportunity to the nation to harness local competitive advantages for achieving global
dominance.
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4.3 Definition of SMEs At present, a small scale industrial unit is an undertaking in which investment in plant and
machinery, does not exceed Rs.1 crore, except in respect of certain specified items under hosiery,
hand tools, drugs and pharmaceuticals, stationery items and sports goods, where this investment
limit has been enhanced to Rs 5 crore. Units with investment in plant and machinery in excess
of SSI limit and up to Rs. 10 crore may be treated as Medium Enterprises (ME).
The Government of India has enacted the Micro, Small and Medium Enterprises Development
(MSMED) Act 2006 which was notified on October 2, 2006. The definition of the small and
medium enterprises as provided in the Act (Annex VII) will have immediate effect.
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SME: At present, a small scale industrial unit is an industrial undertaking in which investment in
plant and machinery, does not exceed Rs.1 crore except in respect of certain specified items
under hosiery, hand tools, drugs and pharmaceuticals, stationery items and sports goods where
this investment limit has been enhanced to Rs.5 crore. A comprehensive legislation which would
enable the paradigm shift from small scale industry to small and medium enterprises is under
consideration of Parliament. Pending enactment of the above legislation, current SSI/tiny
industries definition may continue. Units with investment in plant and machinery in excess of
SSI limit and up to Rs.10 crore may be treated as Medium Enterprises (ME). Only SSI financing
will be included in Priority Sector.
All banks may fix self-targets for financing to SME sector so as to reflect a higher disbursement
over the immediately preceding year, while the sub-targets for financing tiny units and smaller
units to the extent of 40% and 20% respectively may continue. Banks may arrange to compile
data on outstanding credit to SME sector as on March 31, 2005 as per new definition and also
showing the break up separately for tiny, small and medium enterprises.
Banks may initiate necessary steps to rationalize the cost of loans to SME sector by adopting a
transparent rating system with cost of credit being linked to the credit rating of enterprise.
SIDBI has developed a Credit Appraisal & Rating Tool (CART) as well as a Risk Assessment
Model (RAM) and a comprehensive rating model for risk assessment of proposals for SMEs. The
banks may consider to take advantage of these models as appropriate and reduce their transaction
costs.
In order to increase the outreach of formal credit to the SME sector, all banks, including
Regional Rural Banks may make concerted efforts to provide credit cover on an average to at
least 5 new small/medium enterprises at each of their semi urban/urban branches per year.
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CHAPTER-5
CREDIT RISK ASSESSMENT
FOR A BANK, WHAT IS RISK?
Risk is inability or unwillingness of borrower-customer or counter-party to meet their
repayment obligations/ honor their commitments, as per the stipulated terms.
LENDER TASK
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To put in another way, success factors behind a business are: Managerial ability
Favorable business environment
Favorable industrial environment
Adequate financial strength
As such, these are the broad risk categories or risk factors built into our CRA models. CRA takes
into account the above types of risks associated with the borrowal unit. The eventual CRA rating
awarded to a unit (based on a score of 100) is a single-point risk indicator of an individual credit
exposure, & is used to indentify, to measure & to monitor the credit risk of an individual
proposal. At the corporate level, CRA is also used to track the quality of Banks credit portfolio.
CREDIT & RISK
Go hand in hand.
They are like twin brothers.
They can be compared to two sides of the same coin.
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All credit proposals have some inherent risks, excepting the almost negligible volume of
lending against liquid collaterals with adequate margin.
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Trading Sector
( Trade & Services)
Regular Model
Simplified Model
Model
Regular Model
(ii)
Simplified Model
Type of Rating
Borrower Rating
Facility Rating
Borrower Rating
Borrower
Rating
Range of
scores
Risk level
Comfort Level
1
2
3
4
5
SB1
SB2
SB3
SB4
SB5
94-100
90-93
86-89
81-85
76-80
6
7
8
9
10
SB6
SB7
SB8
SB9
SB10
70-75
64-69
57-63
50-56
45-49
Acceptable Risk
Safety Threshold
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Moderate Safety
11
12
13
14
15
SB11
SB12
SB13
SB14
SB15
40-44
35-39
30-34
25-29
<24
16
SB16
Inadequate safety
Low safety
Lower safety
Lowest safety
Nil
Bank has introduced New Rating Scales for borrower for giving loans. Rating is given on the
basis of scores out of 100. Bank gives loans to the borrower as per their rating like SBI gives
loans to the borrower up to SB8 rating as it has average risk till SB8 rating. From SB9 rating the
risk increases. So banks does not give loans after SB8 rating.
FACILITY
GRADES
1
2
3
4
5
FR1
FR2
FR3
FR4
FR5
RANGE
OF
SCORES
94-100
87-93
80-86
73-79
66-72
6
7
8
9
FR6
FR7
FR8
FR9
59-65
52-58
45-51
38-44
10
11
FR10
FR11
31-37
24-30
RISK LEVEL
COMFORT
LEVEL
Acceptable Risk
(Risk Tolerance Threshold)
High Risk
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Moderate
Safety
Above Safety
Threshold
Safety Threshold
Low Safety
FR12
17-23
Higher Risk
Lower Safety
13
14
15
16
FR13
FR14
FR15
FR16
11-16
5-10
1-4
0
Substantial Risk
Lowest Safety
Highest Risk
NIL
CHAPTER-6
SBI NORMS FOR CREDIT
APPRAISAL
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.
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1.2 The Loan Policy of the any bank has successfully withstood the test of time and with inbuilt flexibilities, has been able to meet the challenges in the market place. The policy exits
& operates at both formal & informal levels. The formal policy is well documented in the
form of circular instructions, periodic guidelines & codified instructions, apart from the
Book of Instructions, where procedural aspects are highlighted.
1.3 The policy, at the holistic level, is an embodiment of the Banks approach to sanctioning,
managing & monitoring credit risk & aims at making the systems & controls effective.
1.4 The Loan Policy also aims at striking a balance between underwriting assets of high quality,
and customer oriented selling. The objective is to maintain Banks undisputed leadership in
the Indian Banking scene.
1.5 The Policy aims at continued growth of assets while endeavoring to ensure that these
remain performing & standard. To this end, as a matter of policy the Bank does not take
over any Non-Performing Asset (NPA) from other banks.
1.6 The Central Board of the Bank is the apex authority in formulating all matters of policy in
the bank. The Board has permitted setting up of the Credit Policy & Procedures Committee
(CPPC) at the Corporate Centre of the Bank of which the Top Management are members, to
deal with issues relating to credit policy & procedures on a Bank-wide basis. The CPPC sets
broad policies for managing credit risk including industrial rehabilitation, sets parameters
for credit portfolio in terms of exposure limits, reviews credit appraisal systems, approves
policies for compromises, write offs, etc. & general management of NPAs besides dealing
with the issues relating to Delegation of Powers.
Based on the present indications, following exposure levels are prescribed:
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Non-corporates
Corporates
1 (B) Quantitative:
(a) Working capital:
The basis quantitative parameters underpinning the Banks credit appraisal are as follows:-
Sector/ Parameters
Liquidity
Mfg
1.33
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Others
1.20
3.00
2:1
1.75:1
2:1
1.75:1
2:1
2:1
30% of equity 20% of equity
(i) Liquidity:
Current Ratio (CR) of 1.33 will generally be considered as a benchmark level of liquidity.
However the approach has to be flexible. CR of 1.33 is only indicative & may not be deemed
mandatory. In cases where the CR is projected at a lower than the benchmark or a slippage in the
CR is proposed, it alone will not be a reason for rejection for the loan proposal or for the sanction
of the loan at a lower level. In such cases, the reason for low CR or slippage should be carefully
examined & in deserving cases the CR as projected may be accepted. In cases where projected
CR is found acceptable, working capital finance as requested may be sanctioned. In specific
cases where warranted, such sanction can be with the condition that the borrower should bring in
additional long-term funds to a specific extent by a given future date. Where it is felt that the
projected CR is not acceptable but the borrower deserves assistance subject to certain conditions,
suitable written commitment should be obtained from the borrower to the effect that he would be
bringing in required amounts within a mutually agreed time frame
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(iii)
Financial Soundness:
This will be dependent upon the owners stake or the leverage. Here again the benchmark will be
different for manufacturing, trading, hire-purchase & leasing concerns. For industrial ventures a
Total Outside Liability/ Tangible Net worth ratio of 3.0 is reasonable but deviations in selective
cases for understandable reasons may be accepted by the sanctioning authority.
(iv) Turn-Over:
The trend in turnover is carefully gone into both in terms of quantity & valve as also market
share wherever such data are available. What is more important to establish a steady output if not
a rising trend in quantitative terms because sales realization may be varying on account of price
fluctuations.
(v) Profits:
While net profit is ultimate yardstick, cash accruals, i.e., profit before depreciation & taxation
conveys the more comparable picture in view of changes in rate of depreciation & taxation,
which have taken place in the intervening years. However, for the sake of proper assessment, the
non-operating income is excluded, as these are usually one time or extraordinary income.
Companies incurring net losses consistently over 2 or more years will be given special attention,
their accounts closely monitored, and if necessary, exit options explored.
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The other basic parameter would be the net debt service coverage ratio i.e.
exclusive of interest payable, which should normally not go below 2. On a gross basis
DSCR should not be below 1.75. These ratios are indicative & the sanctioning authority
may permit deviations selectively.
(iv)As regards margin on security, this will depend on Debt: Equity gearing for the project,
which should preferably be near about 1.5: 1 & should not in any case be above 2:1, i.e.,
Debt should not be more than 2 times the Equity contribution. The sanctioning authority
in exceptional cases may permit deviations from the norm very selectively.
(v) Other parameters governing working capital facilities would also govern Term Credit
facilities to the extent applicable.
(C) Lending to Non-Banking Financial Companies (NBFCs)
(D) Financing of infrastructure projects
(E) Lease Finance
(F) Letter of Credit, Guarantees & bills discounting
(G) Fair Practices for lenders
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1. Pricing in the Bank can be divided into interest pricing and non-interest pricing. Pricing of
loans up to Rs.2 lacs will be as prescribed by RBI. In line with RBI guidelines, he Bank
announces from time to time its single Benchmark Prime Lending Rate (BPLR), i.e., reference /
indicative rates at which the Bank would lend to its best customers. The BPLR would be referred
to as State Bank Advance Rate (SBAR) in our Bank. Interest rate without reference to SBAR
could be charged in respect of certain categories of loan / credit like discounting of bills, lending
to intermediary agencies etc. Interest rates below SBAR could be offered to exporters or other
credit worthy borrowers including public enterprises on the lines of a transparent and objective
policy approved by the Bank's Board. All other loans are to be priced on the basis of Bank's
SBAR with the pricing being linked to grade of the risk in the exposure. The maximum spread
over SBAR which could be charged by the Bank will be decided by the Bank from time to time.
Within such ceiling, the pricing for various credit facilities, schemes, products, credit related
services etc., including sub-SBAR pricing would be determined by ALCO or COCC, as
considered appropriate. Bank may also price floating rate products by using market benchmarks
(e.g. G-Sec rates, MIBOR etc.) in a transparent manner as per Board approved policies.
2. An internal Credit Risk Rating system covering all advances of Rs.25 lacs and above in C&I,
SSI and AGL segments has been put in place to facilitate structured assessment of credit risks.
The system enables evaluation of the fundamental strength of the borrower so as to charge a
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3. Bank has introduced fixed interest rates in respect of certain categories of loans in personal
segment, e.g. housing term loans to individuals. Fixed interest rates are also extended for
commercial loans, albeit highly selectively.
4. Market related charges and a discretionary structure that enables branches to effectively face
competition are in place. These would be reviewed periodically based on feedback from
operating units and the market.
5. Pricing of Bank's funds and services while being basically market driven is also determined by
two important considerations, i.e., minimum desired profitability and risk inherent in the
transaction. At the corporate level, the applicable price for a particular advance or service is fixed
taking into account the marginal cost of Bank's funds and desired rate of return as calculated
from indices like profitability levels and return on capital employed. In case of corporate
relationship where the value of connections and overall potential for profitability from a
particular account are more important than a particular transaction, the price is fine tuned even to
level of no-loss-no-profit in the transaction. For long term exposures, the factors that weigh are
the rate charged by the financial institutions, the period of exposure, the pattern of volatility in
the interest rates and the expected movement of the rates in the long term perspective.
1. Working capital facilities are granted by the Bank for a period of 1 year and thereafter they are
required to be renewed each year, i.e., fresh sanction is accorded for the limits. Where, however,
renewal is not possible for some reason, sanction for the continuance of the limits is obtained in
each case by reviewing the facilities.
2. Term loans which are irregular will be reviewed once in six months.
A separate authority structure, as given below, has been prescribed for above noted half-yearly
review of term loans:
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3. In the case of all listed companies with credit rating of SB4/SBTL4 and below, a brief review
is to be put up on the basis of half-yearly working results published by them duly incorporating
comments such as extent of exposure, conduct of the account etc. Such review is to be submitted
to the respective GE in respect of ECCB sanctions, to the CGM (Circle) / CGM (CAG-Cen.) in
respect of COCC-I&II sanctions and to the GM (Network) in all other cases.
4. There will be no CRA rating review for term loans. However, in respect of term loans, the
following set of financial covenants is to be stipulated:
(a) Any adverse deviation by more than 20% from the stipulated levels in respect of any two
of the items (i) to (iii) above - penal interest to be levied for the period of non-adherence
subject to a minimum period of 1 year.
(b) Default in payment of interest/installments to the Bank or to other FI/Banks-penal
interest to be levied for the period of such defaults.
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1. Bank needs to aggressively market for good quality advances. One of the strategies for
increasing good quality assets in the Bank's loan portfolio, would be to take over advances from
other banks/FIs. Keeping this in view and with the prime objective of adding only good quality
assets, a common set of norms / guidelines for C&I, SSI and AGL segments has been laid down
for take over of advances.
(iii)
The account should have been a standard asset in the books of the other bank/FI
during the preceding 3 years. (If this information is not forthcoming from the bank/FI, a
certificate should be obtained from the borrowers Auditor that the loan has been a
standard asset during the preceding 3 years in the books of the bank/FI in terms of the
asset classification norms of RBI. The services of statutory auditors of our Bank may also
be sought for this purpose). However, if a unit is not having a track record for 3 years, as
it has been in existence for a shorter duration, takeover can be considered based on the
track record for the available period, which should be at least one year.
(iv) The unit should have earned net profits (post tax) in each of the immediately preceding 3
years. However, if the unit has been in existence for a lesser period, it should have earned
net profit (post tax) in the preceding year of operation.
(v) The Term Loan proposed to be taken-over should not have been rephased, generally, by
the existing FI/Bank after commencement of commercial production. However, if a
rephasement was necessitated due to external factors and viability of the unit is not in
doubt, such proposals may also be considered for sanction on a case to case basis.
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(vi)The remaining period of scheduled repayment of the term loan should be at least 2 years,
when only TLs are taken over.
For takeover of existing TLs, while the original time frame for repayment will be generally
adhered to, flexibility may be allowed in the quantum of periodical repayments. If sanction of
fresh term loan is proposed along with the takeover, the schedule of repayment for the existing
term loans, if necessary, may be permitted to extend up to 8 years. [The norms at (v), (vi) and
(vii) above are not applicable for take-over of working capital advances]
Note 1 : In the case of take-over proposals involving advances up to Rs.25 lacs, the ratingshould
be carried out, as per the scoring model prescribed under SME Smart Score (Refer page 170,
Chapter 34, Part III, Volume III of Manual on Loans & Advances). Other factors that may be
kept in view are: -
Continued viability
Track record
Standing in the market of the unit/ promoter.
Note 3 : In the cases of working capital finance through consortium or multiple banking,
increasing our share, and joining a consortium (or when a member bank exits consortium and we
join the consortium in its place), are not reckoned as take-over of advances from other banks.
i) The current ratio and TOL/TNW ratio should be at acceptable levels, as per audited balance
sheet not older than 12 months. Current ratio of not below 1 is acceptable up to FBWC limit of
Rs.5 cr. For FBWC limits of above Rs.5 Cr. the current ratio of 1.33 will be indicative. It may be
considered acceptable up to 1.20, depending on the activity. TOL/TNW ratio higher than 3 would
be permissible depending on the type of activity.
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ii) The unit should have earned post-tax profits in each of the immediately preceding 3 years.
However, if the unit has been in existence for a lesser period, it should have earned net profit
(post-tax) in the preceding year of operation.
C. Other Guidelines:
(i) In all cases of take-over of advances from other banks, the credit information report in the
format prescribed by IBA should be obtained. The experience of the present banker (item 13 of
the format) should show satisfactory dealings with the unit. Where, from the point of
competition, it is necessary not to alert the bank concerned, the report may be obtained after the
sanction of facilities but before release of the facilities.
(ii) In all cases of take-over, branches should ensure proper documentation and other formalities
to protect the interest of our Bank.
(iii) In all cases of take-over, branches should assess the requirements of the borrower and obtain
sanction for the proposed limits before actually taking over the outstanding liability of the
borrower to their existing bank/ FI.
(iv) The following aspects should invariably be examined in each case of take-over.
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Terms and conditions stipulated by the existing bank and those proposed by our
Bank, particularly to ensure against dilution of security cover. No takeover of
advances from any Public Sector Bank will be resorted to by quoting finer rates
(v) The credit rating should be done based on the audited balance sheet which is not older than
12 months. However if the audited balance sheet is more than 12 months old and the proposal
has to be considered from the business angle, then a provisional balance sheet as on a recent
date may be obtained from the unit and the CRA exercise done based on these figures,
additionally. Unit should clear the stipulated hurdle rate in both the exercises.
In all the cases of take-over proposals, AC is required to be obtained. For this purpose, a brief
proposal containing, inter alia, the comments on compliance with the norms and the other
guidelines as above should be submitted to the appropriate authority as under:
(i) For take-over of units complying with all the norms prescribed:
(ii) For take-over of units not complying with any one or more of the norms prescribed:
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E. While take over of 'P' segment advances is not generally encouraged, in consideration of
larger business interests / valuable connections, take over of housing loans is considered
selectively after due diligence and precautions, in cases where possession of the house / flat has
been taken, repayment of existing loan has already commenced and installments have been paid
as per terms of sanction.
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The above policy on defaulters will be a broad framework for sanction / continuation of credit
facilities to companies whose directors are in the RBI's list of defaulting borrowers of banks / FIs
with dues of Rs.1 Cr. and above. When the list of such defaulters is circulated by CIBIL instead
of RBI), the same Policy would continue to apply.
2. Willful default & action there against - The penal measures would be made applicable to all
borrowers identified as willful defaulters or the promoters involved in diversion / siphoning of
funds with outstanding balance of Rs.25 lacs or more without any exception. Similarly, the limit
of Rs.25 lacs will also be applied for the purpose of taking cognizance of instances of siphoning
and diversion of funds.
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4. In cases of project financing, Bank would endeavour to ensure end-use of funds by, inter alia,
obtaining certification from Chartered Accountants. In case of short term corporate/clean loans,
such an approach would be supplemented by due diligence on the part of the Bank. It shall be the
endeavor of the Bank to ensure that such loans are limited to borrowers whose integrity and
reliability are above board. Bank will also retain the right to get investigative audit conducted
whenever it is prima facie satisfied that there is a case for such investigative audit to detect
siphoning/ diversion of funds or other malfeasance.
5. No additional facilities shall be granted by the Bank to the listed willful defaulters. Further,
entrepreneurs / promoters of companies where the Bank has identified siphoning /diversion of
funds, mis-representation, falsification of accounts and fraudulent transactions shall be debarred
from Bank finance for floating new ventures for a period of 5 years from the date the name of the
willful defaulter is published by RBI / CIBIL.
6. The legal process, wherever warranted, against the borrowers / guarantors and foreclosure of
recovery of dues should be initiated expeditiously. The Bank may also initiate criminal action
against willful defaulters, where necessary.
7. Where possible, Bank shall adopt a proactive approach for a change of management of the
willfully defaulting borrowing unit.
BSPATIL
To ensure that effective follow up of advances is in place and asset quality of good order
is maintained.
To look for early warning signals, identify incipient sickness and initiate proactive
remedial measures.
2. Detailed operative guidelines on the following aspects of effective credit monitoring are in
place:
BSPATIL
1. APPRAISAL
A. Preliminary appraisal
1.1 Sound credit appraisal involves analysis of the viability of operations of a business and the
capacity of the promoters to run it profitably and repay the bank the dues as and then they fall
1.2. Towards this end the preliminary appraisal will examine the following aspects of a proposal.
Banks lending policy and other relevant guidelines/RBI guidelines,
BSPATIL
1.3. Further, if the proposal is to finance a project, the following aspects have to be examined:
1.4. After undertaking the above preliminary examination of the proposal, the branch will arrive
at a decision whether to support the request or not. If the branch (a reference to the branch
includes a reference to SECC/CPC etc. as the case may be) finds the proposal acceptable, it will
call for from the applicant(s), a comprehensive application in the prescribed proforma, along
with a copy of the proposal/project report, covering specific credit requirement of the company
and other essential data/ information. The information, among other things, should include:
Organizational set up with a list of Board of Directors and indicating the qualifications,
experience and competence of the key personnel in charge of the main functional areas e.g.,
BSPATIL
Demand and supply projections based on the overall market prospects together with a copy of
the market survey report. The report may comment on the geographic spread of the market where
the unit proposes to operate, demand and supply gap, the competitors share, competitive
advantage of the applicant, proposed marketing arrangement, etc.
Current practices for the particular product/service especially relating to terms of credit sales,
probability of bad debts, etc.
Estimates of sales, cost of production and profitability.
Projected profit and loss account and balance sheet for the operating years during the
currency of the Bank assistance.
(i)appraisal report from any other bank/financial institution in case appraisal has been done by
them, (ii) No Objection Certificate from term lenders if already financed by them and
(iii) Report from Merchant bankers in case the company plans to access capital market, wherever
necessary.
1.5. In respect of existing concerns, in addition to the above, particulars regarding the history of
the concern, its past performance, present financial position, etc. should also be called for. This
data/information should be supplemented by the supporting statements such as:
a) Audited profit loss account and balance sheet for the past three years (if the latest audited
balance sheet is more than 6 months old, a pro-forma balance sheet as on a recent date should be
obtained and analysed). For non-corporate borrowers, irrespective of market segment, enjoying
credit limits of Rs.10 lacs and above from the banking system, audited balance sheet in the IBA
approved formats should be submitted by the borrowers.
BSPATIL
c) Credit information reports from the existing bankers on the applicant Company, and
B. Detailed Appraisal
1.6 The viability of a project is examined to ascertain that the company would have the ability to
service its loan and interest obligations out of cash accruals from the business. While appraising
a project or a loan proposal, all the data/information furnished by the borrower should be counter
checked and, wherever possible, inter-firm and inter-industry comparisons should be made to
establish their veracity.
1.7 The financial analysis carried out on the basis of the companys audited balance sheets and
profit and loss accounts for the last three years should help to establish the current viability.
1.8 In addition to the financials, the following aspects should also be examined:
The method of depreciation followed by the company-whether the company is following
straight line method or written down value method and whether the company has changed the
method of depreciation in the past and, if so, the reason therefore;
Whether the company has revalued any of its fixed assets any time in the past and the present
status of the revaluation reserve, if any created for the purpose;
Record of major defaults, if any, in repayment in the past and history of past sickness, if any;
BSPATIL
If the proposal involves financing a new project, the commercial, economic and Financial
viability and other aspects are to be examined as indicated below:
Statutory clearances from various Government Depts./ Agencies
Licenses/permits/approvals/clearances/NOCs/Collaboration agreements, as applicable
Details of sourcing of energy requirements, power, fuel etc.
Pollution control clearance
Cost of project and source of finance
BSPATIL
BSPATIL
Also examine and comment on the status of approvals from other term lenders, market view (if
anything adverse), and project implementation schedule. A pre-sanction inspection of the project
site or the factory should be carried out in the case of existing units. To ensure a higher degree of
commitment from the promoters, the portion of the equity / loans which is proposed to be
brought in by the promoters, their family members, friends and relatives will have to be brought
upfront. However, relaxation in this regard may be considered on a case to case basis for genuine
and acceptable reasons. Under such circumstances, the promoter should furnish a definite plan
indicating clearly the sources for meeting his contribution. The balance amount proposed to be
raised from other sources, viz., debentures, public equity etc., should also be fully tied up.
C. Present relationship with Bank:
BSPATIL
D. Credit risk rating: Draw up rating for (i) Working Capital and (ii) Term Finance.
BSPATIL
F. Existing charges on assets of the unit: If a company, report on search of charges with ROC.
I. Proposal for sanction: Prepare a draft proposal in prescribed format with required backup
details and with recommendations for sanction.
BSPATIL
J. Assistance to Assessment: Interact with the assessor, provide additional inputs arising
from the assessment, incorporate these and required modifications in the draft proposal and
generate an integrated final proposal for sanction.
BSPATIL
BSPATIL
The post-sanction credit process can be broadly classified into three stages viz., follow-up,
supervision and monitoring, which together facilitate efficient and effective credit management
BSPATIL
BSPATIL
BSPATIL
BSPATIL
CHAPTER-7
CASE STUDY OF SBI
(1). Details of case study
Company:- Janak Transport Co.
Firm:- Partnership
* Shri Harisinghbhai Lavjibhai Chaudhari;
* Shri Jesangbhai Lavjibhai Chaudhari;
* Shri Vinodkumar Lavjibhai Chaudhari;
* Shri Pratapbhai Lavjibhai Chaudhari;&
* Shri Janakkumar Jesangbhai Chaudhari
Industry:- Transport Activity
Segment:- C& I
Date of Incorporation:- 03.09.82
Banking with SBI since:- 16 years as a current A/C holder
Banking arrangement:- Multiple Banking Arrangement
BSPATIL
Janak Transport Co. is a partnership firm established in 1982 for carrying a transport business.
As the company is in this business since incorporation & the unit has good contracts with ONGC
since last 26 years so it has a good repo with ONGC.
As the company has a good repo with ONGC, the ONGC outlook of the business is considered
positive.
The firm has approached for term loan of Rs. 295 lacs to finance the purchase of MahindraBolero. The total project cost is estimated to be Rs. 363.44 lacs.
Brief of Contract:
(1). Fixed hire charges/ taxi/ month: Rs. 29150
(with fixed 3000 Km run/ month & 12 hours duty/ day)
(2). Additional/ km charges beyond 3000 km. Rs. 3.57
(3). Duration of contract = 3 Years
Proposed Credit Requirement:
Fund Based
BSPATIL
Performance Details
a) PERFORMANCE AND FINANCIAL INDICATORS:
(Rs. in lacs)
Aud.
Aud.
Esti.
Proj.
Proj.
Proj.
Proj.
31st March
2007
2008
2009
2010
2011
2012
2013
Net Sales
501.78
546.65
713.82
898.65
898.65
898.65
898.65
149.64
182.92
234.24
326.69
374.32
404.08
425.06
PBT
1.20
2.90
22.48
92.62
125.47
143.51
151.96
PBT/Sales (%)
0.24
0.53
3.15
10.31
13.96
15.97
16.91
PAT
1.20
2.90
22.48
92.62
125.47
143.51
151.96
Cash Accruals
39.05
40.51
129.25
233.74
224.25
212.66
200.36
PBDIT
54.44
52.41
150.01
266.99
247.21
226.20
203.72
Paid up Capital
21.04
22.56
91.00
113.48
181.10
256.57
340.08
TNW
21.04
22.56
113.48
181.10
256.57
340.08
427.04
Adjusted TNW
21.04
22.56
113.48
181.10
256.57
340.08
427.04
TOL/TNW
12.22
12.80
5.04
2.15
1.01
0.47
0.27
TOL/Adjusted TNW
12.22
12.80
5.04
2.15
1.01
0.47
0.27
Current Ratio
1.57
1.42
2.22
2.53
2.71
3.80
6.47
2.34
1.97
3.93
4.49
5.66
5.83
6.47
100.20
103.87
386.14
349.18
323.80
361.29
438.25
NWC
BSPATIL
Sources of funds
Share Capital
Reserves and Surplus
31.03.2007
21.04
31.03.2008
22.56
2.57
102.87
39.92
14.66
100.10
36.21
166.40
173.53
52.48
110.59
92.61
11.93
39.3
134.66
78.70
48.15
10.58
109.22
2.57
113.92
10.49
136.74
1.03
134.23
166.40
173.53
BSPATIL
c) Movement in TNW
(Rs. in lacs)
2007
2008
2009
2010
2011
2012
2013
Opening TNW
17.63
21.04
22.56
113.48
181.10
256.57
340.08
Add PAT
1.20
2.90
22.48
92.62
125.47
143.51
151.96
8.42
10.17
68.44
6.21
11.55
25.00
50.00
60.00
65.00
21.04
22.56
181.10
256.57
340.08
427.04
BSPATIL
113.48
Proposal: Term Loan of Rs.295.00 lacs under the Transport Plus Scheme.
b)
Project / Purpose: To purchase 59 new Mahindra Bolero under tie-up arrangement with
ONGC.
c)
Appraised by: Inhouse examined by the Branch and found to be economically viable
d)
e)
328.6
3
15.34
19.47
363.4
4
Means
Equity :
68.44
Debt:
Total
295.00
363.44
BSPATIL
31/03/09
31/03/10
31/03/11
31/03/12
31/03/13
713.82
898.65
898.65
898.65
898.65
223.76
44.89
268.65
253.68
47.39
301.07
253.68
48.89
302.57
253.68
50.89
304.57
253.68
55.98
309.66
72.40
85.52
87.52
90.72
94.07
8.50
20.76
106.77
208.43
445.17
0.62
336.18
47.10
9.50
33.25
141.12
269.39
597.58
0.66
408.17
45.42
10.50
22.96
98.78
219.76
596.08
0.66
332.97
37.05
11.50
13.54
69.15
184.91
594.08
0.66
280.17
31.18
12.50
3.36
48.40
158.33
588.99
0.66
239.89
26.69
101.66
445.17
0.62
163.97
128.27
597.58
0.66
194.35
120.98
596.08
0.66
183.30
115.76
594.08
0.66
175.39
109.93
588.99
0.66
166.56
22.97
21.63
20.40
19.52
18.53
BSPATIL
Commercial viability:
Year ending 31st March
Capacity utilisation %
Sales
Net Profit
Depreciation
Cash Accruals
Interest
TOTAL
TL / DPG repayments
Interest
TOTAL
Gross DSCR
Net DSCR
Average Gross DSCR
Average Net DSCR
2009
100%
713.82
22.48
106.77
129.25
20.76
150.01
83.75
20.76
104.51
1.44
1.54
2.02
2010
100%
898.65
92.62
141.12
233.74
33.25
266.99
132.92
33.25
166.17
1.61
1.76
2011
100%
898.65
125.47
98.78
224.25
22.96
247.21
94.58
22.96
117.54
2.10
2.37
2012
100%
898.65
143.51
69.15
212.66
13.54
226.20
93.85
13.54
107.39
2.11
2.27
2013
100%
898.65
151.96
48.40
200.36
3.36
203.72
43.02
3.36
46.38
4.39
4.66
Total
536.04
464.22
1000.26
93.87
1094.13
448.12
93.87
541.99
2.23
Indicative
Min/Max level as per
Scheme
Min. 1.33
Max. 3.00
Min. 2.00
Min. 10 %
Company's level as on
31/03/2008
Nil
1.42
12.80*
2.002
18.86%
RATE OF INTEREST:
As applicable to Transport Plus Scheme. At present 14.00 % (0.25% above SBAR-presently
13.75% wef 12/08/2008) with monthly rests. This is subject to change as per Banks Instruction.
BSPATIL
BSPATIL
The unit will have installed capacity of 2520 MT. The unit is expected to start commercial
production from first week of September, 2008. The capacity utilization for the year 2008-09 has
been projected at 70% of installed capacity in terms of the utilization of the machines.
Accordingly the unit is projected to achieve a sale of Rs.9.26 crores for the year 2008-09 in the
first six months of operations.
Further, the unit is projected to achieve capacity utilization of 80% during the year 2009-10 (the
first full year of operations) and accordingly the sale for the year is projected at Rs.19.77 crores.
The projections are considered acceptable in view of the following factors:
BSPATIL
The unit plans to initially market its product in Gujarat, Maharastra, Rajasthan and
sale to Central Govt. who purchases the HDPP woven sacks for grains through open
tenders. The unit has started negotiating for booking of the orders for the proposed
plant and results are promising as advised.
ii)
HDPP woven sacks are widely used as packaging material in Cement, Fertiliser,
storage of the AGL commodities. All these segments are reported to have good
demand for the HDPP/PE woven sacks in the Indian market.
iii)
As per ICRA report, grading and research services (2006) Flexible packaging sector
is expected to grow at the rate of 12.40%.
iv)
The promoters have sufficient experience in the line of activity. The promoters had
already made negotiations of the some of the industries as detailed under for selling
the HDPP woven sacks:
v)
The firm has also started marketing activity for their products by making personnel
contacts & writing introductory letters to potential customers & as the promoters are
in the same line of business activity for the last 15 years they are having very good
market contacts for the sales of the Finished Goods.
vi)
The orders worth Rs.2.50 crores is expected to be finalized by end of Agust, 2008 and
before commissioning of the plant as advised.
Proposal:
BSPATIL
(Rs. in Crores)
Year
Installed cap Qty.
(MT/pa.)
Net Sales Qty.
(approx) (MT)
Net Sales (Value)
(Export)
Operating profit
Profit before tax
2009
2520
2010
2520
2011
2520
2012
2520
2013
2520
2014
2520
1029
9.26
0.00
0.44
0.43
2016
19.77
0.00
1.18
1.17
2091
20.58
0.00
1.19
1.18
2142
21.09
0.00
1.23
1.22
2217
21.82
0.00
1.31
1.30
2268
22.34
0.00
1.33
1.32
4.64
5.92
5.73
5.78
5.96
5.91
0.29
0.78
0.79
0.82
0.87
0.88
Cash accruals
0.66
1.10
1.09
1.15
1.24
1.32
PBDIT
1.20
2.04
1.96
1.97
2.02
2.05
Paid up capital
0.95
0.95
0.95
0.95
0.95
0.95
1.23
2.01
2.80
3.62
4.49
5.38
1.73
4.11
2.51
2.50
3.30
1.67
4.12
1.19
4.99
0.88
5.88
0.66
Current ratio
2.64
1.34
1.80
1.52
1.27
1.53
0.92
1.53
0.81
1.57
0.62
1.81
NWC
1.01
1.71
2.40
2.57
2.74
3.28
Adjusted TNW
TOL/TNW
TOL/Adjusted TNW
BSPATIL
31.03.2009
0.95
0.29
2.25
2.00
0.50
31.03.2010
0.95
1.07
2.25
1.60
0.50
5.99
6.37
2.67
0.37
2.30
2.67
0.69
1.98
1.73
1.85
0.15
0.14
2.13
2.40
0.15
0.12
0.10
0.31
0.23
0.67
3.66
4.36
0.03
5.99
0.03
6.37
Projected
31.03.2009
0.00
0.29
0.95
-0.01
Opening TNW
+ PAT
+ Inc. in Equity / Premium
+/- Change in Int. Assets
+/- Adj. of prior year exp.
- Dividend payment
Closing in TNW
1.23
31.03.2010
1.23
0.78
31.03.2011
2.01
0.79
2.01
2.80
(Rs. in crores)
BSPATIL
Projection
31.03.2009
0.16
0.14
0.03
0.33
WC Int.
TL Int.
LC
BG
Bill
Others loan processing
Total
Projection
31.03.2010
0.27
0.29
0.01
0.57
Company's
level as on
31.03.2009 @
1.34
4.11
2.64
2.54
2.01:1
1.15:1
-
Nil.
None
BSPATIL
Company's level as
on 31.03.2010
1.52
2.50
1.80
2.54
1.03:1
0.64:1
-
Age
46
Brief Background
Sri Prahaladbhai Hargovandas Patel is the
main partner in M/s Umiya Polymers with 30
share. Sri Prahaladbhai is SSC and have 10
years of experience as Production Manager
in Asia Woven Sacks Ltd., Kadi who are
engaged in similar activity. M/s Umiya
Polymers are engaged in plastic waste
recycling at Kadi.
43
35
44
42
48
Commercial viability :
Year ending 31
March
st
2008-09
2009-10
(Rs.in crores)
2010-11
BSPATIL
2011-12
2012-13
2013-14
Total
9.26
0.29
0.66
0.16
0.82
0.00
0.16
0.16
5.13
2.54
19.77
0.78
1.10
0.27
1.37
0.40
0.27
0.67
2.04
2.75
20.58
0.79
1.09
0.22
1.31
0.40
0.22
0.62
2.11
2.73
21.09
0.82
1.15
0.16
1.31
0.40
0.16
0.56
2.34
2.88
21.82
0.87
1.24
0.11
1.35
0.40
0.11
0.51
2.65
3.10
22.34
0.88
1.32
0.05
1.37
0.40
0.05
0.45
3.04
3.30
6.56
0.97
7.53
2.00
0.97
2.97
3.28
(Amt in Cr)
BSPATIL
FBL
NFBL
Year
Sales
PBT /
Sales
%
TOL /
TNW
CR
Ahmedabad Packaging
Industries Ltd.
3.30
1.20
2007
23.11
2.16
1.47
1.16
6.70
--
2010
15.19
6.52
2.90
7.44
1.00
2008
22.98
4.53
3.14
Akshat Polymers
4.25
--
2010
19.77
5.92
2.50
1.90
1.08
1.52
Raw material The major raw material for this plant is HDPP in the form of granules. This raw
material is available locally by sales & distribution network of the major suppliers as under:
The raw materials are purchased from the suppliers against the advance payment only and cash
discounts are offered resulting in the increase n profitability. Any variation in the cost of raw
material is proposed to be passed on to the finished products and will not affect the profitability.
Analysis:The firm is into manufacturing of HDPP woven sacks which are widely used as
packaging material in cement, fertilizer, etc.
As per ICRA report, grading and research services (2006) Flexible packaging sector is
expected to grow at the rate of 12.40%.
BSPATIL
The promoters have sufficient experience in the line of activity. The promoters had
already made negotiations of the some of the industries as detailed under for selling the
HDPP woven sacks:
The orders worth Rs.2.50 crores is expected to be finalized by end of Agust, 2008 and
before commissioning of the plant as advised.
The companys borrower rating is SB-6 based on projected financials as on 31.03.2010
(the first full year of operations).
Projected financials are in line with the financials of the some of the unit in similar line of
activity and production level.
The promoters are having experience of more than 15 years in the line of the activity.
The affairs of the firm are expected to be managed on professional lines based on their
past experience.
The conduct of accounts of associate with the existing bankers has been satisfactory.
The short and medium term outlook for the industry is stable
Availability of collateral security reflected in collateral coverage of 50.566%.
Gross average DSCR of 2.54.
Average security margin of 48%.
The company has adequate management skills and production/marketing infrastructure in
place to achieve the projected trajectory. There is steady demand for the product.
Chapter-9
Findings
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