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Study of Internal Credit Rating Model And Its Application on Textile Industry

Submitted in partial fulfillment of the requirements for PGDM (2010-2012)

SUBMITTED BY

Name: Suhail Gaziani (PGDM) Roll No. PG-10-75 Batch: (2010-2012)

IES Management College and Research Centre, Bandra, Mumbai

IES Management College and Research Centre Bandra, Mumbai


MAY JUNE 2011

Students Declaration
I hereby declare that this report, submitted in partial fulfillment of the requirement for the award for the Suhail Gaziani, to IES Management College and Research Centre is my original work and not used anywhere for award of any degree or diploma or fellowship or for similar titles or prizes.

I further certify that without any objection or condition subject to the permission of the company where I did my summer project, I grant the rights to IES Management College and Research Centre to publish any part of the project if they deem fit in journals/Magazines and newspapers etc without my permission.

Place

: Mumbai

Date

: 15th July, 2011 --------------------------------Signature

Name

: (Suhail Gaziani)
Class : (PGDM B)

Roll No. : PG-10-75

Certificate
This is to certify that the dissertation submitted in partial fulfillment for the award of PGDM of IES Management College and Research Centre is a result of the bonafide research work carried out by Mr. Suhail Gaziani under my supervision and guidance. No part of this report has been submitted for award of any other degree, diploma, fellowship or other similar titles or prizes. The work has also not been published in any journals/Magazines.

Date:

Industry guide Signature of the Industry Guide: ______________ Name of Industry Guide: ____________________ Company : _______________________ : _______________________

Place:

Designation

Faculty guide Signature of faculty Guide Name of the faculty guide : _________________ : __________________

Core Faculty IES Management College and Research Centre

ACKNOWLEDGEMENT In my endeavor to learn the basics of Credit Rating, I would like to thank Dena Bank for providing me an opportunity to work with their Bandra-Kurla Complex Branch, Mumbai. It would have been a difficult task to give shape to this project without the guidance, and encouragement of certain very important people. I hereby take this opportunity to thank my project guide, Mr Raj Kapoor, Chief Manager, Dena Bank, Bandra-Kurla Complex Branch, who has always been there to provide me with necessary inputs and keeping me motivated during the project. This project was possible purely because of her kind co operation. Further, I am extremely grateful to my Faculty Guide, Prof. Vijay Shahane who has taken great pains to assist me in my project by guiding me throughout from the time of deciding the project title till the very date of its submission. He has always been approachable and helpful and has been kind enough to clarify all my doubts. I would also like to thank the people at Dena Bank, Bandra-Kurla Complex Branch for their co-operation and for giving me a platform to hone my skills. Suhail Gaziani PGDM (Finance) 20010-12 15th July 2011

TABLE OF CONTENTS
List of Tables, Charts, Graphs, etc. List of Abbreviations.

EXECUTIVE SUMMARY With the growing trend of Indian exports and imports, India is slowly establishing itself as a global powerhouse for trade. The Government of India is taking up initiatives to encourage private and foreign investment in India in almost every sector today. Also a good number of financial institutions have stepped forward to provide funding for projects in various sectors. Banks see excellent opportunities in providing both project as well as trade finance in various sectors across the country.

Financing is absolutely crucial to the growth of the economy of the nation. It is the basis on which an entrepreneur can start up his new business, run is business or diversify his existing business. It is through financing that an entrepreneur can realize his dreams, can get a breakthrough with a new innovative Idea which can bring a revolution or become a mega trend in the nation. All that is required mainly to push a person to achieve unimaginable success can only be achieved if he has the blood (money) of the business which is exactly what financing is all about.

This project has been carried out with an aim to understand how working capital financing takes place and how banks do their credit risk management when it comes to financing Textile enterprises.

Firstly, one needs to understand the banking structure of the country, its working, the products and services provided today. Then one needs to focus on trade finance products, especially those provided by nationalized banks. It is important to understand the client who would be availing the loan. The type of the business plan he has, the kind of location where he would have his plant, the amount of experience the promoters have, the kind of financial background and would the business plan be successful not just in the existing conditions of the economy but also if the economic conditions go worse. Finally the bank should match his requirements with the clients requirement and avail the finance as requested by the client.

INDIAN BANKING INDUSTRY

The last decade has seen many positive developments in Indian Banking sector. The policy makers, which comprise the Reserve bank of India(RBI), Ministry of Finance and related Government and Financial sector, Regulatory entities have made several notable efforts to improve regulation in the sector.

The sector now compares favourably with banking sectors in the region on metrices like growth, profitability and non performing assets.

Economic Liberalization & Financial Sector reforms introduced in 1991 followed by Second Phase of Financial Sector reforms in 1997 ushered in an era of fast track growth in size, technology and deliverables of Banks in India.

The initial phase of financial sector reforms focused on modification in the policy frame work, improvement in financial health through prudential norms. The second phase laid emphasis on strengthening the foundations, streamlining procedures, upgrading technology, human resource. The financial sector reforms gradually moved the Banking Industry from a regulated environment to a deregulated market economy. In this process, banking operations transformed itself from its traditional intermediary role to a business of risk return trade off. Every micro and macro aspects of banking are put to Risk Return Matrix. The demand for Risk Adjusted Returns on Capital (RAROC) based performance measures will be used to drive pricing, performance measurement, portfolio management and capital management

Though the Sub-prime crisis that evolved in August 2008 and affected over 140 banks worldwide did not have much impact on Indian financial sector. However, the year 2010-11 has witnessed a turnaround in the performance of the economy. Companies in most sectors have posted good financial results. Alongside, the spectra of inflations has also become evident.

Banking industry passed through a phase of liquidity deficit arising from sharp acceleration in credit growth coupled with sluggish deposit growth. This prompted the Central bank to raise policy rates several times during 2010-11. In its midterm policy review in March2011, the RBI hiked Repo and Reverse Repo Rates by 25 basis points to 6.75% and 5.75% respectively.

As per CMIE Industrial production is estimated to grow by 9-10% in 11-12.Neither high inflation nor an increase in interest rate is expected to hurt the Industrial growth. Income of Indian consumers is expected to grow at much faster pace than inflation in 2011-12.

The corporate to grow by 16.3% in 2011-12 owing to healthy demand for goods and services. With these projections Banking Industry is expected to grow at 18.8% in 11-12 over an estimated growth of 15.4% in 10-11. Core Interest Income is expected to rise by 20.4 % in the year 11-12.

OVERVIEW OF DENA BANK Dena Bank was founded on 26th May, 1938 by the family of Devkaran Nanjee under the name Devkaran Nanjee Banking Company Ltd. It became a Public Ltd Company in December 1939 and later the name was changed to Dena Bank Ltd.

In July 1969 Dena Bank Ltd along with 13 other major banks was nationalized and is now a Public Sector Bank constituted under the Banking Companies (Acquisition & Transfer of Undertakings) Act, 1970. Under the provisions of the Banking Regulations Act 1949, in addition to the business of banking, the Bank can undertake other business as specified in Section 6 of the Banking Regulations Act, 1949.

Milestones
y

One among six Public Sector Banks selected by the World Bank for sanctioning a loan of 72.3 crores for augmentation of Tier-II Capital under Financial Sector Developmental project in the year 1995.

One among the few Banks to receive the World Bank loan for technological upgradation and training.

y y

Launched a Bond Issue of ` 92.13 crores in November 1996. Maiden Public Issue of ` 180 Crores in November 1996.

Dena Bank has been the first Bank to introduce:


y y y y y

Minor Savings Scheme Credit card in rural India known as "Dena Krishi Sakh Patra" (DKSP) Drive in ATM counter of Juhu, Mumbai Smart card at selected branches in Mumbai Customer rating system for rating the Bank Services

Financial Standings of Dena Bank

Financial results for year ended on 31st March 2011 (` in lacs) 31.03.2011 1 2 3 4 5 6 7 8 9 10 11 12 13 14 Interest Earned Other Income Total Income Interest expended Operating expenses Total expenditure Operating Profit Provisions (other than tax) & Contingencies Exceptional Items Profit(+)/Loss(-) from Ordinary Activities before tax Tax Expense Net Profit(+)/Loss(-) from Ordinary activities after tax Extraordinary Items (net of tax expense) Net Profit(+)/Loss(-) for the period 503353 53384 556737 327016 30884 434358 122379 32520 0 89859 28696 61163 0 61163 31.03.2010 401036 58863 459899 291033 22084 375841 122379 15379 0 68679 17554 51125 0 51125

There are three main sectors among which the lending services of a bank can be divided as follows: y y y Retail Lending MSME (Micro, Small and Medium and Enterprises) Project Financing (Industrial Financing)

INTRODUCTION TO PROJECT Credit Rating is an exercise of evaluation of credit worthiness of a borrower or of a credit request. The exercise aims to allocate scores / grades to various risk factors involved like macroeconomic Risk, Business Sector Risk, Management Risk, Financial Risk, etc. In case of borrowers on whom a bank already has exposure, certain factors like Banking Discipline, etc are also taken into account. Based on this analysis, each borrower is assigned a credit rating.

External Credit Rating Agencies (ECRAs), which were traditionally doing rating of Issues, have since started doing rating of Issuers also, with the introduction of New Capital Adequacy Accord. This is called Issuer Rating or Bank Facility Rating, Banks and Financial Institutions have commenced Internal Credit Rating system in 1999-2000. However, banks are generally required to do credit rating in a matter of few days from the receipt of a credit request or as and when need arises, on the basis of facts available with them.

Certain banks also use simplified credit rating systems called Credit Scoring Models, generally for smaller exposures and under scheme based financing.

Under Basel I, credit rating had no role to play in capital allocation for credit risk. All credit assets (irrespective of credit quality and including non-performing loans) were uniformly risk weighted at 100%. Thus, a one size fits all approach was the basic feature of Basel I.

Basel II, in a marked departure from Basel I, recognizes credit quality as a prime factor in risk weighting process. Non-performing loans are given separate treatment under Basel II. The capital allocation methodology for credit risk under Basel II provides for three approaches, each one increasingly more risk sensitive than previous one. The approaches are Standardised Approach, Foundation Internal Rating based Approach and Advanced Internal Rating based Approach.

Under Standardised approach, banks are not permitted to use their internal ratings and have to be guided by External ratings, as per RBI guidelines. Under the Internal Rating based approach, subject to regulatory permissions, banks may use their internal ratings.

Under Standardised approach, the use of external credit ratings is governed by certain rules to ensure that banks do not indulge in cherry picking. The applicability of the rules framed by Reserve Bank of India, in its final guidelines for implementation of the Basel II norms, makes it necessary for banks to adopt a board approved policy for the purpose.

Internal Credit Rating System for credit exposures was introduced in October, 2000. With the passage of time and need for necessary modifications, the Bank had adopted two credit rating models for all credit exposures of Rs. 10 lakhs and above, with approval of the Board. These models were, operationalised in January, 2004 and further improved in August 2005;

With the further passage of time and with a view to capture further possible risks under various categories of risk and to introduce more models for different types of borrowers or products, four different credit rating models were introduced with the approval of the Board with effect from 1st April, 2010. Three models were based on the size of limits and fourth model was for Infrastructure sector and large projects of size of over Rs. 100 crores.

Further, fifth model for projects (other than Infrastructure sector) of size up to Rs. 100 crores and five models for Retail Banking Products have been introduced with approval of the Board at its meeting held on 27.01.2011.

In the case of non-SLR investments, the time available for taking an investment decision is rather limited and the only available data source is the Offer Document or Prospectus. Therefore, it is necessary to use a very simplified credit rating model for such exposures. Accordingly a simplified credit rating model is in place based on Investment Policy of the Bank. However, external ratings wherever available, are also given due consideration in arriving at a decision.

OBJECTIVE AND SCOPE OF THE STUDY The project aims to study and analyze the Credit Rating Model adopted by Dena Bank for Credit Rating and its application on Textile Industry.

The objective of the study is to understand the parameters that play a key role in enhancing the ratings of borrowers obtained by this model. The project attempts to find the drivers of a good rating and how this information can be used by borrowers in reducing their interest burden.

The study focuses on the credit rating process undertaken by Dena Bank for the purpose of giving out loans and deciding upon the rate of interest to be charged.

RESEARCH METHODOLOGY http://www.txcindia.com/html/monthlyreport.htm For this study the following approach has been adopted:

Then, the rating officers and validators at Dena Bank in Mumbai were surveyed through face to face interactions that can help in generating good ratings for borrowers.

LIMITATIONS

This project has been undertaken in Mumbai and is, therefore, specific to the accounts handled by the rating officers of this region and their level of experience.

INDIAN TEXTILE INDUSTRY The Indian textile industry is one the largest and oldest sectors in the country and among the most important in the economy in terms of output, investment and employment. The sector employs nearly 35 million people and after agriculture, is the second-highest employer in the country. Its importance is underlined by the fact that it accounts for around 4% of Gross Domestic Product, 14% of industrial production, 9% of excise collections, 18% of employment in the industrial sector, and 16% of the countrys total exports earnings. With direct linkages to the rural economy and the agriculture sector, it has been estimated that one of every six households in the country depends on this sector, either directly or indirectly, for its livelihood.

A strong raw material production base, a vast pool of skilled and unskilled personnel, cheap labour, good export potential and low import content are some of the salient features of the Indian textile industry. This is a traditional, robust, well-established industry, enjoying considerable demand in the domestic as well as global markets.

The global textile and clothing industry is estimated to be worth about US$ 4,395 bn and currently global trade in textiles and clothing stands at around US$ 360 bn. The US market is the largest, estimated to be growing at 5% per year, and in combination with the EU nations, accounts for 64% of clothing consumption.

The Indian textile industry is valued at US$ 36 bn. The export basket includes a wide range of items including cotton yarn and fabrics, man-made yarn and fabrics, wool and silk fabrics, made-ups and a variety of garments. Quota constraints and shortcomings in producing valueadded fabrics and garments and the absence of contemporary design facilities are some of the challenges that have impacted textile exports from India.

Indias presence in the international market is significant in the areas of fabrics and yarn.

India is the largest exporter of yarn in the international market and has a share of 25% in world cotton yarn exports

India accounts for 12% of the worlds production of textile fibres and yarn

In terms of spindleage, the Indian textile industry is ranked second, after China, and accounts for 23% of the worlds spindle capacity

Around 6% of global rotor capacity is in India

The country has the highest loom capacity, including handlooms, with a share of 61% in world loomage.

TEXTILE INDUSTRY STRUCTURE Cotton textiles continue to form the predominant base of the Indian textile industry, though other types of fabric have gained share in recent years. In 1995-96, the share of cotton and manmade fabric was 60% and 27% respectively. More recently, cotton fabrics accounted for 46% of the total fabric produced in 2005-06, while man-made fibres held a share of 41%. This represents a clear shift in consumer preferences towards man-made fabric.

The Textile and Apparel supply chain

The fibre and yarn-specific configuration of the textile industry includes almost all types of textile fibres, encompassing natural fibres such as cotton, jute, silk and wool; synthetic / man-made fibres such as polyester, viscose, nylon, acrylic and polypropylene (PP) as well as multiple blends of such fibres and filament yarns such as partially oriented yarn (POY). The type of yarn used is dictated by the end product being manufactured.

The Man-made textile industry comprises fibre and filament yarn manufacturing units of cellulosic and non-cellulosic origin. The cellulosic fibre/yarn industry is under the administrative control of the Ministry of Textiles, while the non-cellulosic industry is under the administrative control of the Ministry of Chemicals and Fertilisers.

It is well-established that India possesses a natural advantage in terms of raw material availability. India is the largest producer of jute, the second-largest producer of silk, the third-largest producer of cotton and cellulosic fibre/yarn and fifth-largest producer of synthetic fibres/yarn.

The industry structure is fully vertically integrated across the value chain, extending from fibre to fabric to garments. At the same time, it is a highly fragmented sector, and comprises small-scale, non-integrated spinning, weaving, finishing, and apparel-making enterprises.

The unorganised sector forms the bulk of the industry, comprising handlooms, powerlooms, hosiery and knitting, and also readymade garments, khadi and carpet manufacturing units. The organised mill sector consists of spinning mills involved only in spinning activities and composite mills where spinning, weaving and processing activities are carried out under a single roof.

The competitiveness of composite mills has declined in comparison to the powerlooms in the decentralised segment. Policy restrictions relating to labour laws and the fiscal advantages enjoyed by the handloom and powerloom sectors have been identified as two of the major constraints responsible for the declining scenario of the mill sector.

Nonetheless, overall cloth production in the country has been growing at 3.5% per annum since 2000, with growth driven largely by the powerloom sector. Being the largest manufacturer of fabric in the country, the powerloom sector produces a wide variety of cloth, both grey as well as processed. According to the Ministry of Textiles, there are 1.923 mn powerlooms in the country distributed over 430,000 units. The sector accounts for 63% of the total cloth production in the country and provides employment to 4.815 mn people.

The handloom sector is the second-highest employer in the country after agriculture. The sector accounts for 13% of the total cloth produced in the country, not including wool, silk and handspun yarn. The production of handloom fabrics had gone up to 4629 mn sq mtrs in 2005, from 500 mn sq mtrs in the 1950s, representing an annual growth of around 4%. The sector is weighed down by several problems such as obsolete technology, unorganised production systems, low The Man-made textile industry comprises fibre and filament yarn manufacturing units of cellulosic and non-cellulosic origin. The cellulosic fibre/yarn industry is under the administrative control of the Ministry of Textiles, while the non-cellulosic industry is under the administrative control of the Ministry of Chemicals and Fertilisers. XV productivity, weak marketing links, overall stagnation in demand and competition from the powerloom and mill sectors.

TEXTILE ORGANIZATIONS The following are some governmental, semi-governmental, private bodies and associations, which are working for the smooth running of the commerce of textile in India.

The Ministry of Textiles: A Secretary who is assisted in the discharge of his duties by four Joint Secretaries and the Development Commissioners for Handlooms and Handicrafts, Textile Commissioner and Jute Commissioner heads this. The following are the principal functional areas of the Ministry: y y y y y y y y y y y Textile Policy & Coordination Man-made Fiber/ Filament Yarn Industry Cotton Textile Industry Jute Industry Silk and Silk Textile Industry Wool & Woollen Industry Decentralised Powerloom Sector Export Promotion Planning & Economic Analysis Integrated Finance Matters Information Technology

Advisory Bodies: y y y y All India Handlooms Board All India Handicrafts Board All India Power looms Board Advisory Committee under Handlooms Reservation of Articles for

Production y y y y Co-ordination Council of Textiles Research Association Cotton Advisory Board Jute Advisory Board Development Council for Textiles Industry

Export Promotion Councils: y y y y y y y y y Apparel Export Promotion Council, New Delhi Carpet Export Promotion Council, New Delhi Cotton Textiles Export Promotion Council, Mumbai Export Promotion Council for Handicrafts, New Delhi Handloom Export Promotion Council, Chennai Indian Silk Export Promotion Council, Mumbai Power loom Development & Export Promotion Council, Mumbai Synthetic & Rayon Textiles Export Promotion Council, Mumbai Wool & Woolen Export Promotion Council, New Delhi

Autonomous Bodies: y y y Central Wool Development Board, Jodhpur National Institute of Fashion Technology, New Delhi National Centre for Jute Diversification

Statutory Bodies: y y y Central Silk Board, Bangalore Jute Manufactures Development Council, Kolkata Textiles Committee, Mumbai

Textiles Research Associations: y y y y y y y y Ahmedabad Textiles Industrys Research Association Bombay Textiles Research Association, Mumbai Indian Jute Industries Research association, Kolkata Man-made Textiles Research Association, Surat Synthetic and art silk Mills Research Association, Mumbai Wool Research Association, Thane Northern India Textiles Research Association, Ghaziabad South India Textiles Research Association, Coimbatore

Public Sector Undertakings: y y y y y y y y y National Textile Corporation Ltd. (NTC) British India Corporation Ltd. (BIC) Cotton Corporation of India Ltd. (CCI) Jute Corporation of India Ltd. (JCI) National Jute Manufacturers Corporation (NJMC) Birds Jute Exports Ltd. (BJEL) Handicrafts and Handlooms Export Corporation (HHEC) Central Cottage Industries Corporation (CCIC) National Handloom Development Corporation (NHDC)

TRENDS IN PRODUCTION

TRADE SCENARIO According to the provisional DGCI&S data, textile exports during fiscal 2005- 06 stood at around US$17 billion, recording a 22% growth year-on-year. Except for man-made textiles, all segments in the textile industry, including handicraft carpets, wool and silk, have recorded a growth in exports during 2005-06 -- the first year since the phasing out of the quota system in the global market.

Readymade garments (RMG) is the largest export segment, accounting for a considerable 45% of total textile exports. This segment has benefited significantly with the termination of the Multi-Fibre Arrangement (MFA) in Jan 05. In 2005-06, total RMG exports grew by 29%, touching US$ 7.75 bn. In 2003-04 and 2004-05, the growth in RMG exports was 8.5% and 4.1% respectively. The jump in 2005-06 exports has been largely due to the elimination of quotas.

Exports of cotton textiles -- which include yarn, fabric and made-ups -- constitute over 2/3rd of total textiles exports (excluding readymade garments). Overall, this segment accounts for 26% of total textile exports. According to the Ministry of Textiles, in 2005-06, total cotton textile exports Source: Ministry of Textiles, GoI Source: Ministry of Textiles, GoI XVI were worth US$ 4.5 bn, implying a growth of 27% over the exports in 2004-05, which were worth US$ 3.5 bn.

Man-made textiles exports have witnessed a decline of 2.5% in 2005-06. Between 19992000 and 2002-03, man-made textiles exports were growing at around 30% per annum. The slowdown began since 2003-04 and have been on the decline since.

Major export destinations for Indias textile and apparel products are the US and EU, which together accounted for over 75% of demand. Exports to the US have further increased since 2005, post the termination of the MFA. Analysis of trade figures by the US Census Bureau shows that post-MFA, imports from India into the US have been nearly 27% higher than in the corresponding period in 2004-05.

Category Cotton Textiles Manmade Textiles Silk Wool Ready Made Garments Handicrafts Jute Coir & Coir Manufactures Total

2002-03 2003-04 2004-05 2005-06 3.62 1.53 0.49 0.29 5.75 1.42 0.20 0.08 13.37 3.68 1.86 0.56 0.35 5.92 1.11 0.25 0.08 13.80 3.54 2.05 0.59 0.42 6.02 1.01 0.28 0.11 14.03 4.49 2.00 0.69 0.47 7.75 1.24 0.29 0.13 17.08 Segment-wise Exports, 20022006 (US$ bn)

MAJOR TEXTILE PLAYERS Following are some major players in the field of Indian Textile Industry.

Arvind Mills: Arvind Mills is one of the major and fully vertically integrated composite mills player in India. It has large production in denim, shirting and knitted garments. It is now adding value by manufacturing denim apparel. Its sales are around US$ 300 million.

Raymonds: Raymonds has the large, diversified integrated business model, which is spread across the value chain from yarn to retail. It is specialized in Diversified woolen textiles. It already supplies to some US retailers.

Reliance Textiles: Reliance Textiles is one of the major Textile Companies that is in the business of fully integrated manmade fiber. It has capacity of more than 6 million tones per year. It has joint venture partners like, DuPont, Stone & Webster, Sinco (Italy) etc.

Vardhaman Spinning: Vardhman deals in spinning, weaving and processing segment of the industry. It is an approved supplier to global retailers like GaP, Target and Tommy Hilfiger. Its sales are little over US$ 120 million.

The following are some of the other major textile companies: y y y y y y Bombay Dyeing Ltd. (Composite and fully integrated) Welspun India (Manufactures terry towels) Oswal Knit India (Woolen Wear) Sharda Textile Mills (Man-made Fiber) Mafatlal Textiles (Fully integrated Composite Mill) LNJ Bhilwara Group (Diversified and vertically integrated denim producer with spinning and weaving capacity) y y y Alok Textiles (Cotton and Man-made Fiber Textiles) Indian Rayon (Man-Made Fiber) BSL Ltd. (Textiles)

y y y y

Century Textiles (Composite mill, cotton & Man-made) Morarjee Mills (Fully integrated Composite Mill) Hanil Era Textiles (Yarn, Cotton & Man-made Fiber) Filaments India Ltd. (Manmade Textiles)

INVESTMENTS Investments in the textiles sector can be assessed on the basis of three factors:
y

Plan schemes such as the Technology Upgradation Funds Scheme (TUFS), Technology Mission on Cotton, Apparel Parks, etc. -- Under the TUFS scheme, a total of Rs 916 bn has been disbursed for technology upgradation. There are around 26 Apparel Parks in eight states in India, with a total estimated investment of Rs 134 bn

Industrial Entrepreneurship Memorandums implemented from 1992 to Aug 06, amounting to Rs 263 bn

Foreign Direct Investments inflows worth US$ 910 mn have been received by the textile industry between Aug 91 and May 06, which account for 1.29% of total FDI inflows in the country.

Though significant investments are being made in the textiles segment, the bulk of them are in the spinning and weaving segments. A cumulative total of US$ 6.67 bn in investment is expected by 2008. Of this, more than two-thirds is expected in the spinning and weaving segments, while only 25% is expected in processing and garment units.

Source: Ministry of Textiles

GOVERNMENT INITIATIVES The Governments role in the textile industry has become more reformist in nature. Initially, policies were drawn to provide employment with a clear focus on promoting the small-scale industry. The scenario changed after 1995, with policies being designed to encourage investments in installing modern weaving machinery as well as gradually eliminating the pro-decentralised sector policy focus. The removal of the SSI reservation for woven apparel in 2000 and knitted apparel in 2005 were significant decisions in promoting setting up of large-scale firms. Government schemes such as Apparel Parks for Exports (APE) and the Textile Centres Infrastructure Development Scheme (TCIDS) now provide incentives for establishing manufacturing units in apparel export zones.

The new Textile Policy of 2000 set the ball rolling for policy reforms in the textile sector, dealing with removal of raw material price distortions, cluster approach for powerlooms, pragmatic exit of idle mills, modernisation of outdated technology etc. The year 2000 was also marked by initiatives of setting up apparel parks; 2002 and 2003 saw a gradual reduction in excise duties for most types of fabrics while 2004 offered the CENVAT system on an optional basis.

The Union Budget of 2005-2006 announced competitive progressive policies, whose salient features included:

A major boost to the 1999-established Technology Upgradation Fund Scheme for its longevity through a Rs 4.35 bn allocation with 10% capital subsidies for the textile processing sector

Initiation of cluster development for handloom sector

Availability of health insurance package to 0.2 mn weavers from 0.02 mn initially

Reduction in customs duty from 20% to 15% for fibres, yarns, intermediates, fabrics and garments; from 20% to 10% on textile machinery and from 24% to 16% in excise duty for polyester oriented yarn/polyester yarn

Reduction in corporate tax rate from 35% to 30% with 10% surcharge

Reduction in depreciation rate on plant and machinery from 25% to 15%

Inclusion of polyster texturisers under the optimal CENVAT rate of 8%

To meet the challenges of the post-MFA setup, the Government of India initiated a reforms process which aimed at promoting large capital investments, pruning cumbersome procedures associated with the tax regime, etc.

The Textile Vision 2010 was born as a result of interaction between the government and the industry which envisages around 12% annual growth in the textile industry from US$ 36 billion now to US$ 85 billion by 2010. Additionally, Vision 2010 also proposes the creation of an additional 12 million jobs through this initiative.

SWOT ANALYSIS Strengths of the Textile Industry: The following are few strengths of the Indian Textile Industry: y y y An Independent and self-reliant industry; Large and potential domestic and international market; Abundant Raw Material availability that helps industry to control costs and reduces the lead-time across the operation; y Availability of low cost and skilled manpower provides competitive advantage to industry; y Availability of large varieties of cotton fiber and has a fast growing synthetic fiber industry; y Promising export potential.

Weaknesses of the Textile Industry: The following are the few drawbacks of the textile industry, which it has to overcome: y y y y y The Industry is a highly fragmented Industry. It is highly dependent on Cotton. There is lower productivity in various segments. There is a declining in Mill Segment. Lack of Technological Development that affect the productivity and other activities in whole value chain. y y y y Infrastructural Bottlenecks and Efficiency such as, Transaction Time at Ports and transportation Time. Unfavorable labor Laws. Lack of Trade Membership, which restrict to tap other potential market.

DENA BANK LENDING SCHEMES The Dena Banks total exposure to textile sector as on 31.03.2006 was 4.62% as against the stipulated ceiling of 2.50% in Credit Policy. It is proposed to raise the ceiling to 5.50% in the Credit Policy.

There is a high level of NPA in the sector (16.44%). Therefore care should be taken while taking any new exposure in the sector. New exposure should be taken only in case of borrowers with high credit rating. It is proposed that the new exposure should be taken based on credit rating of borrowers as per Loan Policy guidelines.

Project viability study is to be taken up for any fresh unit or expansion plans in line with Loan Policy guidelines.

The incidence of NPA for Jute Sector is very high (88.56%). Although, our exposure in the sector is quite low, any new exposure in the sector should be undertaken on selective basis with the approval of General Manager and above.

In recent times, the Denim sector has experienced a downtrend. In view of the same, caution should be taken while taking any exposure in the Denim sector. Any fresh exposure to Denim Sector will require an approval at least at the level of Executive Director/ Chairman & Managing Director.

India has a great potential in Cotton Textile & Garment export segment. Bank should strive to take exposure in quality accounts in the sector.

The borrowers who require credit facilities for modernization/ upgradation of their units/ plants should be encouraged to take the benefits of TUF Schemes. In case of borrowers who want to take the benefit of TUF scheme, it should be ensured that all the provisions of the TUF scheme have been complied with.

Thrust should be on the advances to commercially viable SME units. It will help the bank in spreading the risk over a number of borrowers. SME units are also important in terms of the return, as the interest rate in case of SME units is generally high.

These provisions/ recommendation, if approved and adopted by the Board, will constitute the lending policy of the Bank in the Textile Sector. The provision specifically mentioned here will prevail over the Credit Policy of the Bank in case of any conflict. However, in case of other matters, the provisions of the Credit Policy of the Bank will be applicable.

BASIC PRINCIPLES OF LENDING When a bank lends money, it attempts to lend money to those applicants that are deemed as the best from the applicant pool. The process by which a lender appraises the creditworthiness of the prospective borrower is called credit appraisal. This normally involves appraising the borrowers payment history and establishing the quality and sustainability of his income. A bank assesses the credit risk of any borrower based on the following 5 C's of Credit:

Capacity to repay is the most significant of the five factors. The lender will have to determine the sources of income that the applicant possesses to repay the loan. The main consideration will be cash flow generated from the business.

Capital is the money that has been invested by the business owner into his/her business. The amount of invested capital by the owner is indicative of the owner's stake and confidence in the viability of his/her business.

Collateral is pledged assets to guarantee the security of a loan. Collateral is deemed as a second source to fall back in the event of borrowers defaults. Assets that are typically accepted as collateral are fixed assets of a business i.e. equipment, plant etc. and also third party securities. Banks also consider working capital like receivable and inventory to be feasible sources of collateral for the Prime security.

Conditions focus on the intended purpose of the loan. Also banks consider the local market and economic conditions both within your industry and other industries that affect your business e.g. your suppliers and customers.

Character is the personal impression that a prospective borrower makes to a potential lender or investor. A person's educational background, industrial experience and credit history with other creditors will be considered.

NEED FOR CREDIT ANALYSIS

Credit risk is defined as the possibility of losses associated with diminution in the credit quality of borrowers or counterparties. Credit analysis is done in order to lessen the credit risk faced by a bank. In a bank's portfolio, losses stem from outright default due to inability or unwillingness of a customer or counterparty to meet commitments in relation to lending, trading, settlement and other financial transactions. Alternatively, losses result from reduction in portfolio value arising from actual or perceived deterioration in credit quality. Credit risk emanates from a bank's dealings with an individual, corporate, bank, financial institution or a sovereign.

Credit risk may take the following forms:


y y

In the case of direct lending, principal and/or interest amount may not be repaid. In the case of guarantees or letters of credit, funds may not be forthcoming from the constituents upon crystallization of the liability.

In the case of treasury operations, the payment or series of payments due from the counter parties under the respective contracts may not be forthcoming or ceases.

In the case of securities trading businesses, funds/securities settlement may not be effected.

CREDIT APPRAISALS The bank will ensure that the borrower obtains clearance certificate from Pollution Control Board and other statutory environmental requirements of the Government of India wherever applicable and the concerned department of the State Government before releasing of credit limits.

Pre-sanction visit/inspection will be conducted by the Banks branch level officials to ascertain the facts about infrastructure facilities available at the site of the unit/project and assess all other aspects of the project.

In case of multiple/consortium arrangements close co-ordination with other banks/financial institutions at the time of the appraisal and disbursement and follow up of advances should be ensured so that timely exchange of data/information is made for effective monitoring and control of advance.

The Bank shall carry out dynamic financial analysis by scrutinizing the audited accounts for previous years so as to ascertain the trend of growth in production, sales, profitability and improvement/impairment in all important financial parameters in order to know the overall health of the borrower account.

The Bank will follow a policy of appraising financial position of a borrower (for sanction of new limits/enhancement of existing limits and for renewal/ review) based on the audited financial statements of the borrower for previous financial year after analyzing the trend as well as comparison of actuals with the corresponding projections. Further, Bank follows a system of introducing disincentives to borrowers who fail to submit audited accounts in time by levying interest rate applicable to next credit rating than the one assigned to the borrower beyond six months from closure of a financial year for which audited accounts are not submitted.

Appraisal of financial health of a borrower (for sanction of new limits/ enhancements of existing limits and for renewal/review) has been based on receipt of unaudited financial statements immediately. In considering the project feasibility and viability, i.e. while doing the credit appraisal, the following points have to be taken into account:

y y y y y y

Managerial Appraisals Technical Feasibility Financial Feasibility Market Appraisal Economic Appraisal Organizational Feasibility

1. Management Appraisal It is nothing but evaluation of entrepreneur and management. Management appraisal is related to following: y y y y y Promoters qualification, experience etc. Family reputation in the market. Credit report on the promoters and the company Scrutiny of IT and WT returns The technical and managerial competence, integrity, knowledge of the project.

The promoters should have the knowledge and ability to plan, implement and operate the entire project effectively. The past record of the promoters is to be appraised to clarify their ability in handling the projects.

2. Technical Feasibility The technical feasibility of a project is normally examined by the Engineers in the bank. The Detailed Project Report (DPR) furnished by the borrower is critically examined.

Technical Appraisal of a project is essential to ensure that necessary physical facilities required for production will be available and the best possible alternative is selected to procure them.

Technical feasibility analysis is the systematic gathering and analysis of the data pertaining to the technical inputs required and formation of conclusion there from. The availability of the raw materials, power, sanitary and sewerage services, transportation facility, skilled man power, engineering facilities, maintenance, local people etc. are coming under technical analysis. This feasibility analysis is very important since its significance lies in planning the exercises, documentation process, and risk minimization process and to get approval.

3. Financial feasibility One of the very important factors that a project team should meticulously prepare is the financial viability of the entire project. Under this the viability of the project is evaluated from the financial angle. This involves the preparation of cost estimates, means of financing, financial institutions, financial projections, break-even point, ratio analysis etc.

The cost of project includes the land and sight development, building, plant and machinery, technical know-how fees, pre-operative expenses, contingency expenses etc.

4. Market Appraisal The weakest link in any project under appraisal is the ability to sell the product/service being planned under the project. Therefore, Market analysis of the product/services is a very important part of the project.

In the commercial appraisal many factors are coming. The scope of the project in market or the beneficiaries, customer friendly process and preferences, future demand of the supply, effectiveness of the selling arrangement, latest information availability an all areas, government control measures, etc. The appraisal involves the assessment of the current market scenario, which enables the project to get adequate demand. Estimation, distribution and advertisement scenario also to be here considered into.

5. Economic Appraisal Economic appraisal is done to ascertain how far the project contributes to the development of the sector, industrial development, social development, maximizing the growth of employment, development of new technology, ancillary development, pollution and ecological consideration, earner of foreign exchange and also to know the gestation period required in relation to size of investments and benefits etc. are kept in view while evaluating the economic feasibility of the project.

6. Organizational feasibility It is done to ascertain the following: y y y Adequate arrangement for procurement of materials and services. Reasonableness of the terms of purchase. Whether arrangements have been made to obtain license from the municipalities. The State and central government for location facilities, supply of water and power, foreign exchange, capital issues, import of equipment and stores. y Whether there are any performance agreements with consultancy firms, contractors, suppliers etc.

SECURITY REQUIRED FOR GRANTING THE LOANS

Normally Term loans are granted against the first Charge (No other prior charge on the security) or Pari Passu charge in case of joint finance (i.e. When there are multiple banks financing a particular project) on the existing and future fixed assets (Land, Building, machinery), other tangible assets of the concern.

However on the availability of working capital finance also from banks, the second charge in favor of bank on the fixed assets mortgaged is also taken into consideration.

Securities for term loans also depend on the risk perception of the individual account.

In case of infrastructure projects such as Power Projects, Road Projects, etc. Term loans are also secured against first charge on the future cash flows of the project along with a first charge on the entire fixed assets of the project.

Nature of Mortgage

Banks ideally insist on registered mortgage of land and buildings.

However, these days to minimize the expenditure and delay in releasing of the term loan banks do not insist, except in rare cases and allow the term loan on equitable mortgage of land and buildings and hypothecation of plant and machinery wherever original documents are available.

Therefore, banks except that only unencumbered assets having clear and marketable title deeds are offered as security.

OTHER MEASURES OF PRECAUTION 1. Personal Guarantee 2. Collateral security 3. Third party Guarantee 4. Credit Guarantee trust

Personal Guarantee

In addition to the charge on the existing as well as proposed assets, the banks also secures the loan by taking personal guarantee of the promoter, partners and directors.

In case where the project is considered risky or where net worth of the promoters is not adequate, 3rd party guarantee is also taken of persons of repute.

Collateral security

The collateral security may be full value of loan, or reduced amount depending upon the risk perception. The property furnished for collateral should be easily marketable/mortgage-able having clear title and should not be an agricultural land.

Third party Guarantee/Collateral security This may be waived for deserving cases and those limits which are covered under credit risk guarantee trust for micro and small enterprise (CGTMSE).

CREDIT PROPOSAL The financial consultants of the bank prepare credit proposal. The company approaches the bank and briefs them about their requirement (term loan, cash credit etc.) based on which the credit proposal is prepared.

Before the work starts on the proposal the company requires a set of documents. These documents are as follows: 1. Audited balance sheet for the last three years 2. Brief background of the company 3. Profile of the directors 4. Share holding pattern of the company 5. Group details of the company with regards to sales, profitability, net worth etc. 6. Borrowing arrangements a. Working capital b. Term Loans 7. Details of security provided and Net worth of the guarantors 8. Next 2 years financial projections 9. Project report in case of term loan a. The purpose of the present requirement

After receiving the above documents the work on the credit proposal starts. The main sections of a credit proposal are as following:

1. Nature of request This section lists out the request of the company. This section lists out the fund based and non-fund based requirements of the company. In the fund based requirements there is cash credit limits or working capital demand loan, export credit limits, bill-discounting limits etc. In the non-fund based limits there is bank guarantee limits, letter of credit limits etc.

2. Basic details of the borrower y Name of the company and the group it belongs. If the borrower is a group concern then the bank can get corporate guarantee from the main company. y Constitution of the company to know if the company is public or private limited and its date of incorporation. y The corporate office address and the location of its manufacturing units if the borrower is a manufacturing concern. y The line of activity of the company detailing the products it manufactures or trades and the industry it belongs. y If the company has been dealing with the bank then the date from which the company is availing the facilities from the bank. These basic details provide some necessary information to start the credit appraisal process.

3. Management of the company This section tells about the top administration that manages the company. As they are the major decision makers for the firm a proper investigation about the management of the firm becomes necessary. This section details the board of directors/partners and the various positions they hold in the company. A brief note is also written on the background of these directors/ partners, which is in general their qualification and experience in business. The management of the company is of great importance to the credit appraisal team and especially for SMEs.

The main points looked into are: y y y Is the management competent enough on running the firm Is there any type of differences between the partners/directors of the firm Is there any major director/partner planning to leave the firm as there may be a chance that many customers may move with the director/partner to other firms. y Is any director/partner in the defaulter list of RBI or CIBIL.

4. Ownership Pattern This section tells about the percentage shares held by the promoters, the financial institutions, foreign institutional investors, public and others.

5. Stock market perception If the borrowing company is a public limited company then its important for the credit analyst to know what the stock market feels about the company.

6. Background of the company This section tells about the promoters of the company and the main purpose to start the firm. This section tells about the profile of the products it manufactures or trades as well as the market standing of these products. The various overseas ventures or any other business collaboration that may have effects on the performance of the company are mentioned in this section.

7. Group details and profile This section details about the group concerns and a brief note about their financial performance. For example, certain important information about the sales, net profit, net worth of the company, the gearing ratio and the current ratio.

8. Borrowing arrangements This section gives a detail of the current borrowing arrangements of the firm. It specifies the working capital arrangement as well as the term borrowing arrangements.

Working capital arrangements

In the working capital arrangements, the current WC limits of each bank are given detailing the fund based and non- fund based limits the existing and proposed. A note on the primary security offered as well as the collateral security offered is also mentioned. For a loan for working capital or cash credit limit the above section is important. The credit analyst looks at the various banking arrangements the company has. He also looks into the

actual need or the maximum permissible bank finance as per the estimates to determine if the banks are over funding the firm. If there is excess funding then the company might use the funds for some other purpose other than the business.

Term Loan arrangements

The credit analyst looks the term loan arrangement of the borrower with other banks. Here the limit extended by different banks and the outstanding amount along with the repayment schedule is given in this section. The analyst looks into the conduct of the account to see if there is any default by the borrower at any stage of the loan period. The analyst takes default in payment very seriously and the reasons are probed deeply.

9. Industry analysis Apart from a micro analysis of the company, the overall assessment of the industry in which the company works is important. This assessment gives the credit analyst an insight into the macro environment and the potential risk for the company. As the economic and business environment in which a company is working is constantly changing it becomes all the more important for the bank to assess the industry.

The industry is assessed in four parameters: y y y y Demand Supply gap Government policies Input related risks Extent of competition

After assessing the industry, the analyst sees how the company is geared to tackle the future risks of the business. The analyst also sees how proactive the company is, to take advantage of the opportunities on offer.

10. Business analysis Product profile In this section the product profile of the company is looked into. The main products of the company are noted and sales in value and volume terms for each product are noted. The data collected should be at least for the last two years. The analyst looks into the composition of the products and the percentage share of each product. This will help in knowing which product is doing well in the market and which one is not.

The analyst can also look into the production capacity of the company to see if the company is fully utilizing its existing capacity.

Sales growth Here the sales growth and the PBDIT growth of the company are analyzed. The data presented should be for at least three years. The recent growth rates are calculated and the reasons for the variations are looked into. The recent growth rates and the industry outlook form the basis of the future sales projections of the company. The analyst sees that the sales projection given by the company is realistic or not.

11. Financial analysis The financial analysis forms the main part of the assessment of any company. A detailed analysis of the financial statements as well as ratio analysis is done to ascertain the financial standing of the company. These financial statements are not studied in isolation nor are they studied for one year. A trend analysis is done to analyze the deviation or movement of the company.

The financial statements scrutinized are: y y Balance sheet Income statement/P & L statement

The tools for financial analysis are y y Ratio analysis Cash flow analysis

BALANCE SHEET ANALYSIS Balance sheet is a statement showing the assets and the liabilities of the firm at a particular point of time. In simple terms, balance sheet means a list of everything a firm owns and owes at a particular point of time. Normally the values shown are at historic cost but where the current market price is less than cost the valuation is made on the net realizable value.

Liability side Net worth: It is made up of share capital and reserves.

Share capital: The bank is interested in the paid up capital as this constitutes the amount actually collected by the company from its shareholders.

Reserves and surplus: Reserves arise out of undistributed past profits. For the banker, reserves are at par with owned funds. The banks look whether the reserves are retained in the business or the funds are deployed outside. Revaluation reserve is not included by the banks as it doesnt result in any inflow of funds.

Secured loans: Here the banks look at the security offered by the company and the repayment schedule. All short term loans are also treated as current liability. Loans by directors to the company are treated as quasi equity and added to net worth of the company.

Unsecured loans: The bank would be interested in the maturity profile of these loans to ascertain the liquidity position of the company.

Current liabilities and provisions: It forms an important part of the working capital and a very important constituent while calculating the working capital limits by the bank. Working capital loan is treated as a current liability and is deducted from the secured loans.

Contingent liability: These are possible liabilities on the occurrence of a certain event. These include claims against the company not acknowledged as debt, bills discounted but not matured, guarantee issued etc. They are given as a footnote in the balance sheet. Some contingent liabilities occur in the natural course of business but some contingent liabilities like huge disputed taxes should be looked into.

Asset side Fixed assets: Assets are normally shown at their original cost less depreciation. The bank makes sure that the assets are depreciated regularly and funds are set aside so that they are available at the time of replacement of assets.

Investments: Huge funds blocked in investments are not taken lightly by the bank as those funds are used by others.

Current assets and loans and advances: Sunk inventory is excluded from the closing inventory as also the debtors due for more than six months. They are treated as non-current assets.

Miscellaneous expenditure: The amount appearing under this head is deducted from the owners fund to determine the owners stake in the business.

INCOME STATEMENT ANALYSIS It is a statement showing the income and expenses of the firm at a particular period of time. It shows the amount of profit or loss the firm has earned at the end of the year but a deeper analysis is necessary as there could be a loss but it could be for valid reasons. Likewise there can be substantial profits but it could be from income arising from other than core business of the firm. Therefore a complete reliance on the income statement may give misleading conclusions. So apart from the P/L figures, the bank scrutinizes the efficiency of the unit in the capacity utilization, streamlining of expenses, increase in sales volume, cash generation capacity etc.

Analysis of the income statement should involve the financial statements of at least three years so that it gives a clearer picture of the current position. The trends could be reasonably established and future projections estimated.

Sales: Sales should show an upward trend but the reasons should be ascertained.

Cost of sales and gross profit: Gross profit of the last three years may be compared and it may also be compared with the industry level. Among the various heads of expenses, consumption of raw materials is analyzed. Levels of closing stock should be watched and normal holding levels ensured.

Operating profit: It is an indicator of profits generated through main business of the firm. Therefore it is the operating profit figure which is important to bankers for their credit decision.

Net profit/loss: Banks check the income and expenses to make sure that they are incurred in the normal course of the business. Any intention to divert from the main activity should be looked into. The study of the appropriation account is equally important. Whether the management is strengthening their reserve position or declaring higher dividends despite forbidding financial position shows their attitude towards the business.

COMPLIANCE TO FINANCIAL PARAMETERS Ratio Analysis Interpreting and analyzing financial statements enables to discover what a companys financial position is. Ratio analysis is a device which is used to y y y y y y Compare the performance of a company this year with last year Compare the performance of a company with its competitors. Detect specific weaknesses Determine a companys liquidity (ability to meet debts) Determine a companys profitability Provide an indicator of trends.

Financial ratios can be divided into five categories 1. Liquidity ratios 2. Turnover ratios 3. Leverage ratios 4. Profitability ratios 5. Valuation ratios

Liquidity Ratios: Liquidity refers to the ability of a firm to meet its obligations in the short-run, usually one year. Liquidity ratios are generally based on the relationship between current assets (the sources for meeting short-term obligations) and current liabilities.

The Current Ratio: A simple measure that estimates whether the business can pay debts due within one year from assets that it expects to turn into cash within that year. A ratio of less than one is often a cause for concern, particularly if it persists for any length of time. Current Ratio = Current Assets Current Liabilities

Assessment Method Turnover method Modified MPBF method: WC limit up to 10 crore WC limit above 10 crore

Ratio (Indicative) 1.10:1

1.17:1 1.25:1

Quick Ratio: Not all assets can be turned into cash quickly or easily. Some notably raw materials and other stocks must first be turned into final product, which is then sold and the cash collected from debtors. Quick Ratio = Current Assets Stock Current Liabilities

Turnover Ratios: Turnover ratios, also referred to as activity ratios or asset management ratios, measure how efficiently the assets are employed by a firm. These ratios are based on the relationship between the level of activity, represented by sales or cost of goods sold, and levels of various assets. The important turnover ratios are: inventory turnover, average collection period, receivable turnover, fixed assets turnover, and total assets turnover.

Stock Turnover Ratio: Stock turnover measures how fast the inventory is moving through the firm and generating sales. Inventory turnover reflects the efficiency of inventory management. Stock Turnover = Cost of Goods Sold Average Inventory

Debtors Turnover Ratio: This ratio shows how many times sundry debtors (accounts receivable) turnover during the year. Debtors Turnover = Net Credit Sales Average Sundry Debtors

Average Collection Period: The average collection period represents the number of days worth of credit sales that is locked in sundry debtors. Average Collection Period = Average Sundry Debtors Average Daily Credit Sales

The average collection period and debtors are related as follows: Average Collection Period = 365 Debtors Turnover

Fixed Assets Turnover: This ratio measures sales per rupee of investment in fixed assets. Fixed Assets Turnover = Net Sales Average Net Fixed Assets

Total Assets Turnover: Akin to the output-capital ratio in economic analysis, the total assets turnover is defined as: Total Assets Turnover = Net Sales Average Total Assets

Current Assets Turnover ratio: This ratio will indicate the turnover of the current assets in a year. Generally this will be above 1.75.

Leverage Ratios: Leverage ratios help in assessing the risk arising from the use of debt capital. Two types of ratios are commonly used to analyze financial leverage i.e. structural ratios and coverage ratios. Structural ratios are based on the proportions of debt and equity in the financial structure of the firm. The important structural ratios are debt-equity ratio and debt-assets ratio.

Coverage ratios show the relationship between debt servicing commitments and the sources of meeting these burdens. The important coverage ratios are interest coverage ratio, fixed charges coverage ratio, and debt service coverage ratio.

Debt Equity Ratio: The debt equity ratio shows the relative contributions of creditors and owners.

Debt Assets Ratio: The debt-asset ratio measures the extent to which borrowed funds support the firms assets.

Interest Coverage Ratio: It is also called as the times interest earned. This ratio enables to know whether a firm can easily meet its interest burden even if profit before interest and taxes suffer a considerable decline or not. Interest Coverage Ratio = Profit before Interest and Taxes Interest The ratio should be minimum 1.5:1.

Fixed Charges Coverage Ratio: This ratio shows how many times the cash flow before interest and taxes covers all fixed financing charges. Fixed Charges Coverage Ratio = Profit before Interest & Taxes + Depreciation Debt Interest

Debt Service Coverage Ratio: The debt service coverage ratio is defined as: Debt Service Coverage Ratio = Profit after Tax + Depreciation + Interest Interest +Installments for repayment of loan

The Bank normally considers projects having average DSCR between 1.5 and 2 same as the policy adopted by FIs.

Profitability Ratios: Profitability reflects the final result of business operations. There are two types of profitability ratios i.e. profit margins ratios and rate of return ratios. Profit margin ratios show the relationship between profit and sales. The most popular profit margin ratios are: gross profit margin ratio and net profit margin ratio. Rate of return ratios reflect the relationship between profit and investment. The important rate of return measures are return on assets, earning power return on capital employed and return on equity.

Gross Profit Margin Ratio: This ratio tells us something about the business's ability consistently to control its production costs or to manage the margins its makes on products its buys and sells. Gross Profit Margin Ratio = Gross Profit Net Sales

Net Profit Margin Ratio: This ratio shows the earnings left for shareholders as a percentage of net sales. It measures the overall efficiency of production, administration, selling, financing and pricing. Net Profit Margin Ratio = Net Profit Net Sales

PBIT to Total Assets: To have a better insight about the utilization of assets, this ratio needs to be examined to find out the comparative performance of the unit over a period of time.

Return on Assets: ROA is an odd measure because its numerator measures the return to shareholders whereas its denominator represents the contribution of all investors. Return on Assets = Profit after Tax Average Total Assets

Earning Power: It is a measure of business performance which is not affected by the interest charges and tax burden. It abstracts away the effect of capital structure and tax factor and focuses on operating performance. Earning Power = Profit before Interest and Taxes Average Total Assets

Return on Capital Employed: ROCE is the post-tax version of earning power. It considers the effect of taxation, but not the capital structure. It is internally consistent. Return on Capital Employed = Profit before Interest and Tax (1 Tax rate) Average Total Assets

Return on Equity: It measures the profitability of equity funds invested in the firm. It is a very important measure because it reflects the productivity of ownership (or risk) capital employed in the firm. Return on Equity = PAT Preference Dividend Equity Share Cap. + Reserves & Surplus

Valuation Ratios: Valuation ratios indicate how the equity stock of the company is assessed in the capital market. Since the market value of equity reflects the combined influence of risk and return, valuation ratios are the most comprehensive measures of a firms performance. The important valuation ratios are price earnings ratio, yield and market value to book value ratio.

Price Earnings Ratio: The price earnings ratio or the price earnings multiple is a summary measure which primarily reflects growth prospects, risk characteristics shareholder orientation, corporate image and degree of liquidity. Price Earnings Ratio = Market Price per share Earnings per share

Yield: This is a measure of the rate of return earned by shareholders. Yield = Dividend + Price change Initial Price

Market Value to Book Value: This ratio reflects the contribution of a firm to the wealth of society. Market Value to Book Value = Market Value per share Book Value per share

Sensitivity Analysis In case of term loans of ` 5 crore and above, sensitivity analysis should be worked out. It is clarified that sensitivity analysis is required to be carried out for Term loans for funding projects and the same is not required for Short term loans, unsecured loans approved by the banks. (As per Dena bank policy, in case of advances to Public sector undertakings including the State Electricity Boards/Corporations, the sanctioning authority may waive conducting sensitivity analysis on case to case basis.)

Historical and Peer Group Analysis Useful information can be obtained by comparing ratios from the same company over time (from historical data) or comparing the same ratios in similar companies (from industry studies from sources such as ratings agencies). These techniques help to establish whether a company is becoming more or less efficient over time and more or less efficient than the competition.

The advantage of using historical ratio analysis from the same company is that the information is easily obtained and directly comparable. The disadvantages include the fact that the results may have been influenced by different economic conditions, different production methods, inflation, or changes in accounting policies.

For peer group analysis, it is often difficult to find similar companies with which to make a comparison. Smaller companies may have adopted different accounting policies or have different product ranges. Typically a bank compares the financial ratios calculated on the spreadsheet with published data, such as lists of industry standard ratios. Another approach is that banks use the data published by credit rating agencies or financial databases available in the market which enables the analysis of the company vis--vis its competitors.

CASH FLOW ANALYSIS A firm basically generates cash and spends cash. It generates cash when it issues securities, raises a bank loan, sells a product, disposes an asset, etc. It spends cash when it redeems securities, pays interest and dividends, purchases materials, acquires an asset etc. The activities that generate cash are called sources of cash and activities that absorb cash are called uses of cash.

Companies can be profitable with negative cash flows and loss making with positive cash flows. A company can report a large profit for a year in which the cash balance may have fallen, perhaps as a result of heavy expenditure on fixed assets. Likewise, a company can be losing money and generating cash via asset disposals. It is important to understand that cash and profit are different.

The purpose of cash flow statement is therefore to report the net change in the cash balance and to help explain how the surplus or deficit in cash arose.

Summary of cash flow statement y y Reports the financial effect of all transactions during the accounting period. Mixes capital and revenue transactions and is entirely backward looking.

Cash flow statements are used to y Assess the long term risks in a lending situation

Test the assumptions of a given project

Standard terms and conditions (general) for credit arrangements (Fund based and non-fund based) Limit: While showing the total limit, mention sub-limits, if any, within total sanctioned limits. Sub-limits are to be separately shown in case of different types of securities such as raw materials, finished goods, stores & spares, packing materials, book-debts in case of single C.C. limit and in case of BP/BD (DP/DA) limits for BD-DA limits, in case of L/C (DP/ DA) limit, for DA-LC limit. Margin: To be quoted as % of invoice / market value whichever is lower. Mentioned be made separately for margin in respect of different types of securities such as raw materials, goods under process, finished goods, imported materials, book-debts etc. in case of cash credit arrangements /limits. In case of BP/BD limits, as % of value of the bill, shown simply as "%". In case of Guarantee Limits: For Performance Guarantees: % by way of cash / FDR/SDR duly discharged with letter of set-off. For Financial Guarantees : Normally, all financial guarantees are covered by 100% margin in various forms of securities such as cash/FDR/SDR duly discharged with letter of set off, and/or extension of charge on current and/or fixed assets of the borrower, or as may be decided on case to case basis.

Interest: % per annum with monthly rest along with Interest Tax as applicable at the rate

of % per annum ( In case of Fixed Interest Rate) / % per annum over and above /below the published Dena Bank Prime Lending Rate (DBPLR), the present rate being % per annum (floating rate) with monthly rests along with interest tax as applicable. Penal Interest : For non/late submission of Stock Statements and Financial Follow up Report I (FFR-I) and Financial Follow up Report II (FFR II), MMS Statement. i. Submission of Stock statement Where the borrower defaults in submission of stock statement, then the Penal Interest @2% p.a. over applicable rate to be charged on outstanding in working capital limits till the date of submission of the statement. However, following relaxations are permitted:a. If there is delay once in a year, then no penalty to be charged. b. If there is second time delay in submission of statement in a year, then caution notice to be given to the borrower. c. If there is next delay in submission of stock statement, then penalty @ 2% p.a. over applicable rate be charged from the due date of submission of stock statement. Relaxations are subject to the following conditions :a. Where assets classification of the borrower is standard and operations in the account are satisfactory. b. the proposal is not overdue and not pending for renewal.

Relaxation / waiver in respect of penal interest for adhoc limits, excess over limits, overdue term loan installments, overdue bills / cheques purchased / discounted can be granted at the level of Regional Manager in respect of the proposals sanctioned at Branch level. In case of proposals sanctioned at the level of Regional Office and above the same can be permitted by the respective sanctioning authority. ii. Submission of Financial Follow-up Reports

Where the borrower defaults in submission of FFR-1 and / or FFR-II, then the interest @2% p.a. over the applicable rate be charged on availed Fund Based Working Capital Limit till the date if submission of these statements. Penal Interest for Non / Late submission of Renewal Papers. Where the borrower defaults in submission of full set of renewal papers including financial statements, then penal interest @ 2% p.a. over the applicable rate should be charged from the due date of submission. Till the actual date of submission of full set of renewal papers. However, the sanctioning authority on the specific recommendations of Branch Manager and on merits can waive/relax penal interest in following cases:a. Assets classification of the borrower is standard and operations in the accounts are satisfactory. b. The default is not more than two months from the due date of submission of renewal papers.

Penal Interest for exceeding Cash Credit Hypothecation Where there is exceeding in Cash Credit Account and /or drawing power is not available, penal interest @ 2% p.a. should be charged as under:a. In case of exceedings in Cash Credit Account, penal interest @2% p.a. will be charged on the amount exceeded over and above the sanctioned limit from the date of exceeding till the date of regularization. b. Where drawing power is not sufficient to cover the outstanding amount penal interest @ 2% is to be charged on the uncovered amount till the date of availability of adequate drawing power in the account. Penal Interest for Non / Late Repayment of Monthly/Quarterly Interest / Installments of Term Loan/Demand Loans. Where Monthly/Quarterly Interest / Installments of Term Loan/Demand Loans are overdue, penal interest @2% is to be charged on the overdue

interest/installments and not on the full outstanding of Term Loan/Demand Loan. The penal interest is to be charged till actual date of payment of Monthly/ Quarterly interest /installments. Penal Interest for overdue bills In case of overdue bills, penal interest 2% p.a. to be charged as under:In case of DA and Supply Bills, penal interest is to be charged on the entire amount of overdue bills for the overdue period i.e. from the due date till date of realization of bills. Penal Interest on Devolvement of LC (IBRs) In addition to the normal rate of interest as applicable to the Working capital facilities or commercial rate where the client does not enjoy Working Capital facility, penal interest on devolvement of LCs (IBRs) is to be charged as under:-

Penal Interest of 2% above normal rate /commercial rate as the case may be, where the devolved LC liability (IBRs) is outstanding for a period of one month. Penal interest of 3% above normal rate /commercial rate as the case may be, where the devolved L/C liability (IBRs) is outstanding for a period of more than one month. Maximum Penal Interest chargeable for more than one default For each default a penal interest @2% p.a. to be charged. However, if there are more than one default as mentioned above, then maximum penal interest @2% p.a. to be charged to the borrower on aggregate amount of irregularities. Exemptions Exemption may be extended to units which are closed and not able to submit statements in time on account of sickness (including industrial relation problems) and those units affected by a. political disturbances b. riots c. natural calamities However, waiver of penalty in such cases should be considered by

Regional Manager on case to case basis. Delegation of Waiver of Penal Interest Except as mentioned above, Executive Director and Chairman & Managing Director will have powers to waive/relax penal interest on the specific recommendations of Operational General and on merits of the case.

Adhoc Facilities Charge additional interest @ 2% p.a. above the regular rate of interest will continue. However, if adhoc facility is not liquidated on due date, then penal interest @2% will be charged with additional interest @2% p.a. within the maximum rate of interest prescribed by the Bank from time to time. Clearance Certificate from Pollution Control Board In case of industrial borrower, certified true copy of clearance certificate from Pollution Control Board and other statutory environmental requirements of the Government of India wherever applicable and the concerned Department of the State Government should be obtained before releasing of credit limits. Commission: a. In case of inland BP/BD limits b. In case of foreign BP/BD limits c. In case of Inland / Foreign (DP/DA) letters of credit limits d. In case of performance / financial guarantee limits i. Performance Guarantees: 0.75% per quarter or part thereof with a minimum of ` 250/- for the guarantee period and claim period. ii. Other than Performance Guarantees: 1 % per quarter or part thereof with a minimum of ` 250 for the guarantee period and claim period.

THE FUND BASED FACILITIES

Cash credit

Cash/credit facility is granted to the customers to bridge working capital gap i.e. funding for the stocks of inventories, work-in-progress, finished goods and receivables.

The key risk points assessed are as following: a. The cash flows should be positive. b. If it is a running account, the conduct should be good. c. Utilizing the current limits sanctioned. d. Cash cycle of the company. e. Quality of inventory i.e. the percentage of sunk inventory to total inventory etc. f. Projected sales vis--vis existing capacity.

Bills discounting

When the parties to the trade transaction i.e. seller/buyer are not willing to part possession of cash/goods, as the case maybe, before receipt of the equivalent consideration, drawing of bills is restored. For the sale proceeds of the goods to be recovered from the buyer, the seller draws a bill known as Bill of Exchange (BOE) directing the buyer to pay to a named person the amount thereof.

Short Term Finance:

The banks offer short-term loans for a period ranging from 3 months to 12 months to sound corporate for meeting their specific short-term working capital requirements. The Bank provides short-term facility for purpose of bridging temporary cash flow mismatches arising due to various reasons like non-realization of receivable in time, routine, capex etc.

The facility is extended to that Corporate who have sound financials and have adequate internal accruals to pay off the facility out of the earnings, which can be substantiated with

cash flow statements. The key risk points assessed is the cash flows of the company, the cash profits generated of the company, the conduct of the account etc.

Export financing - Pre shipment

Pre-shipment advance in the form of packing credit is made available to eligible exporters for the purchasing, manufacturing, packing and shipping of goods meant for exports against lodging an irrevocable LC established in giver of the exporter through a reputed bank, confirmed order/contract placed by the buyer for exports from India.

Packing credits can be availed on a running account basis. The advance is generally given for a period up to 180 days and may be extend up to 360 days with the approval of RBI.

Export financing Post shipment

Post shipment advance is extended in the form of negotiation/purchase/ discount of export bills drawn under letters of credit, confirmed orders/ export contracts. The bills are negotiated/purchased/discounted at the Banks bill buying rate prevailing on the date of negotiation, which is extremely competitive/attractive to the exporter. The maximum usage permission for the export bills is 180 days.

NON FUND BASED FACILITIES The non-fund based business is very profitable proposition for the banks as it gives substantial revenue without deployment of the funds. The major objectives of the non-fund based facilities are:1. To overcome shortage of funds. 2. To increase the profitability 3. To increase the liquidity

4. To have easy monitoring 5. To facilitate international trade 6. For optimum utilization of funds

The non-fund based facilities are 100% substitute for fund based facilities. The contingent liability can become a current liability if it is not crystallized/ paid on the due date. They are all 100% risk weighted assets for which the bank has to keep the required quantum of Capital Adequacy ratio. This fact necessitates the importance for proper appraisal of proposal of the borrower.

Although non-fund based facilities are lucrative businesses, to the bank considering the risk involved, it is necessary to take utmost precautions and special care while sanctioning these facilities to the customers. Generally these facilities are to be sanctioned to the parties who are enjoying fund based facilities with the banks.

CREDIT RISK MANAGEMENT Credit risk assessment of the MSME exposures is different from that of large corporates. This stems from differences in the default behavioral patterns, granularity of exposures and higher collateral usage to mitigate credit risk.

Main Risk elements: y y y y y Early mortality Industry specific risks Lack of professionalism Threat from bigger players Absence of data on industry

Sources of Credit Risk: 1. Direct lending risk: It lies in the products like loans and advances, overdrafts, bills discounted, etc. It is the risk that the dues will not be paid on time.

2. Contingent lending risk: It lies in products like letters of credit, guarantees, etc. It is the risk that contingent exposures get converted into actual obligations and that these obligations may not be repaid on time.

3. Issuer risk: It is the risk of financial loss due to the degradation in the credit rating of the issuer of the debt instrument. It is also the risk that the bank may not be able to sell the instrument within a predetermined holding period.

4. Pre-settlement risk: It is the risk that the counter-party with whom the bank has a reciprocal agreement may fail before settlement of the contract. As a result the bank faces the risk of default on the settlement date and hence may have to undertake fresh transactions, leading to replacement cost.

5. Settlement risk: It is the risk where the bank delivers its part of the contract but the other bank does not fulfill its obligation. This risk arises out of time lags in settlement of another currency in another time zone.

The bank needs to identify all sources of credit risk and monitor aggregated exposures to a borrower or counter-party on a bank-wide basis.

SOME OF THE RISK MITIGATION TECHNIQUES

DUE DILIGENCE Due diligence is done for the property that is being kept as collateral security with the bank against which the loan is to be given. It is to be done for all the security. This is being done to make sure about the viability of the security.

Hence number of parameter is being looked in to like we check the value of the security for which the customer is required to get the valuation report of the collateral from an authorized valuer who checks and gives the value of the property based on the market rate (this valuation of the property is to be done every three years), condition of the property etc.

We also look about how the surrounding area of the security is whether it is progressive or not, we check about what is the type of the property like whether it residential, industrial or commercial.

We check the size that is area of the property, whether the property is under the BMC, we also check the landmark around the security, whether the marketability of the property is fair or not.

Due diligence of is also done for the individuals where in bank inquires about the individual behavior from other people.

REPORTS FROM CIBIL The credit history of borrowers of MSME sectors will be available from CIBIL (Credit Information Bureau of India Limited). Availability of information of clients loan repayment histories shall help Bank to reduce time, cost and default rate.

CIBIL collects the information, then collates and disseminates both positive & negative Credit Information pertaining to individual borrowers in the form of Credit Information Report (CIR). It contains credit history of commercial (Public ltd, Private Ltd companies, Partnership, proprietary firms) and consumer borrowers (Individual borrowers).

Beneficial to Bankers: Reports from CIBIL facilitates bankers in improving speed, confidence and reducing cost at the time of processing the proposal. It also helps the banks to make informed, objective, transparent and faster credit decisions.

Beneficial to Borrower: Reports from CIBIL facilitates the customers to get faster and more competitive services at better terms.

CREDIT RATING FRAMEWORK (CRF) Credit analysis includes financial and non-financial factors and these factors are all interrelated. These factors include: y y y y y y The environment The industry Competitive position of the firm Financial risks the company has Management/business risks Loan structure and documentation issues.

Every credit proposal, whether for an existing borrower or a new borrower, for additional/new on or off balance sheet exposure has inherent credit risk. A systematic assessment of such inherent credit risk is essential before a credit decision is taken. The method of such assessment is termed as Credit Rating Framework (CRF). Such an assessment is required for a variety of reasons as under:

To set up benchmarks for levels of risk to enable a bank to decide upon Entry level risks and/or assuming additional risks involved.

To set up benchmarks for levels of risk to enable a bank to decide upon Exit levels from current exposures.

y y y

To suitably price an exposure commensurate with the risk involved. To facilitate portfolio level analysis. To facilitate surveillance, monitoring and to generate internal MIS.

All advanced techniques for credit risk management like analysis of credit rating migration, estimation of expected and unexpected losses from credit portfolio etc. are based on CRF. CRFs are primarily driven by a need to standardize and uniformly communicate the judgment in credit selection procedures and are not intended to be a substitute to vast lending experience of the banks professional staff.

It is observed from the market that most corporates and other large constituents get themselves rated by external credit agencies. Thus their bonds issues are rated along standard rating scales of rating agencies so that an intending subscriber to the issue is made aware of the risks associated with the issue. However, such ratings available are only in respect of a specific issue of equity shares or bonds or specific instruments only. However, a bank requires rating of the entity itself and hence adoption of CRF by banks is necessary.

Credit rating frameworks may be designed separately for different sectors or levels of exposures. Commonly, the banking industry has been found to adopt a rigorous and detailed credit rating system for large exposures while a simple version as Credit Scoring Models are used for smaller exposures like retail banking areas.

CREDIT MIGRATION Deterioration in quality of credit does not take place all of a sudden or overnight except in cases where external environment (like major policy changes by Government of India, politico economic changes in own/other countries etc.) acts as a major influence.

Deterioration is generally gradual and a vigilant banker gets adequate warning signals in advance. While a careful monitoring of conduct of account/operations in account itself is capable of throwing up a number of signals, the credit worthiness of a constituent also deteriorates over a period of time. Tracking the movement of a borrower upward or downward in credit rating scales is an important means of understanding how a credit asset will behave in near future.

An analysis of movement of a borrowers credit rating is termed as Credit Migration. It indicates the direction and extent of changes in credit worthiness of a borrower measured as a change in credit rating. Credit migration analysis seen along with standard migration tables (developed and continuously updated by international credit rating agencies) is useful in estimating unexpected losses from credit portfolio. Basel II Accord requires banks to make

provision against such unexpected losses also in addition to provisions based on prudential norms.

CREDIT RATING SYSTEM IN DENA BANK Credit risk in a Banks credit portfolio is defined by Reserve Bank of India as the possibility of losses which may arise out of default due to inability or unwillingness of borrower or counter party to meet the commitments in relation to lending, trading, hedging, settlement and other financial transactions.

Credit rating system (CRS) was first introduced in Dena Bank in 1996. Credit rating models cannot be a one time formulation and is required to be modified and updated from time to time to factor in the changes in the risk scenario, economic environment etc. apart from incorporation of regulatory prescriptions, if any. Therefore Credit rating system was further revised in year 2000.

The feedback received from Credit Officials at all levels showed that the system basically was prone to subjective ratings due to the very design of the system itself. During October 2002, Reserve Bank of India circulated Guidance Notes on Credit Risk Management that shed more light on the approach of the Regulator towards credit rating in tune with the international practices.

Based upon feedback obtained internally and keeping in view regulatory guidelines, the Bank has revised its CRS extensively and the revised system was introduced in the year 2004.

CUT OFF LEVEL

In case of existing borrowers, whose credit rating score is less than 55, no enhancement is to be considered by any authority.

In such cases, borrower should be informed of the weak factors as per Credit Rating Sheet and advised to take necessary steps for improving the Credit Rating score within 3 months from the date of confirmation of the Credit Rating.

Within the said period, the borrower should submit unaudited /provisional Balance Sheet as at a recent date and also establish actions taken. Branch has to do Interim Credit Rating exercise on the basis of provisional Balance Sheet within 15 days from the end of the 3 months time allowed.

If the rating has improved, then Bank may continue the limits. Otherwise, he should be advised to repay Banks dues within 1 month from the end of aforesaid 15 days.

If he is not willing to take any steps for improvement, he should be advised to repay Banks dues within 3 months from the date of confirmation of the Credit Rating.

In case of new borrowers, branches and regional offices should not entertain any loan application whose internal credit rating score is less than 70%. However, in special cases, where the applicants market reputation is very good and financials are sound, request may be entertained with prior permission of Executive Director.

CREDIT RATING MODELS There are in all 6 models of credit rating. Each models applicability varies depending upon the borrowers limit.

CREDIT RATING MODEL 1: It is applicable for SME borrowers having total limits of over ` 10 lacs and up to ` 5 crores and for Non SME borrowers with total limits of over ` 10 lacs and up to ` 2 crores (Covering assessment under Turnover method)

CREDIT RATING MODEL 2: It is applicable for SME borrowers having total limits of over ` 5 crores and up to ` 10 crores and for Non SME borrowers with total limits of over ` 2 lacs and up to ` 10 crores (Covering assessment under Modified MPBF method)

CREDIT RATING MODEL 3: This model is applicable to all borrowers having total credit limit of over ` 10 crores.

CREDIT RATING MODEL 4: This model is applicable to infrastructure projects and other large size projects with size of over ` 100 crores.

CREDIT RATING MODEL 5: This model is applicable to projects (other than infrastructure sector) with size up to ` 100 crores (including size of ` 100 crores).

CREDIT RATING MODEL 6: This model is applicable to borrowers with total credit limit of over 2 lacs and up to 10 lacs and also for the review of rating of these borrowers.

Bank's Internal Credit Rating System provides for 9 slabs of ratings (AAA to E), on the basis of score obtained as indicated in the following table :

Sl. No. 1 2 3 4 5 6 7 8 9

Marks scored 94.51% and above 89.51% to 94.50% 84.51% to 89.5% 79.51% to 84.50% 74.51% to 79.50% 69.51% to 74.50% 64.51% to 69.50% 59.51% to 64.50% 54.51% to 59.50%

Credit Risk Rating Grade AAA AA A BBB BB B C D E

Grade description Prime High Prime Medium Prime Low Excellent Best Better Very Good Good Satisfactory

Internal Credit Rating administration : In case of new borrowers who are subject to credit rating, credit rating exercise will be done on the basis of both last audited balance sheet and unaudited balance sheet as at the end of recent quarter (for listed companies) or half-year end (for others). This will be vetted by the designated Credit Rating Desk and confirmed by the competent authority. This will be done pre-appraisal stage with a view to avoid delay in communicating the rejection, if the rating happens to be non-investment grade.

Further, higher of the interest rates as per the above mentioned two credit ratings will be applicable, till next credit rating exercise is done on the basis of the next audited balance sheet, unless a concession is granted by competent authority.

All Credit exposures eligible for credit rating shall be rated as per the extant system in force by the end of 7th month from the date of Balance Sheet to ascertain the credit quality on annual basis on the basis of audited Balance Sheet. However, in case of listed companies, enjoying total credit limits of `.1 crores & above from the Bank, rating will be done biannually, on the basis of Balance Sheet as at the end of Half-year, which has been subjected to Limited Review, as per SEBI guidelines. This exercise shall be independent of review / renewal.

In case, borrower fails to submit the audited Balance Sheet within 7 months from the date of the balance sheet, concession, if any, in the interest rates or credit risk premium shall be discontinued and maximum rate of interest shall be charged.

Interim Credit Rating Exercise : Wherever signs of irregularities are observed either in the operations in the limits or performance of the borrower, Branches shall do the Facility Rating by updating the score for risk groups and put up the same to the sanctioning authority.

When the borrower is utilising credit limits with more than one branch, rating exercise will be the responsibility of the designated office having jurisdiction over the main branch to do the credit rating exercise.

Acceptance / tolerance level for Rating grade : 1. For new borrowers, acceptance level will be 60%. If credit rating score of a new borrower is less than 60%, his loan request will not be considered. 2. For existing borrowers, tolerance level will be 55%.

a. If any existing borrower gets credit rating score less than 55%, Bank will not increase the exposure and will stipulate requisite conditions in terms of sanction such as increase of capital funds, reduction of outside liabilities, etc so that credit rating score increases above the tolerance level. b. If he is not willing to take any steps for improvement, all possible steps will be taken to exit the account.

Charging of Interest : In compliance to the regulatory requirement, the interest rate, linked to Base Rate / BPLR (as may be applicable), will be based on overall risk score and risk grade on a graduated scale ranging from AAA to E in 9 categories for standard accounts eligible for credit rating. For Non-Performing Assets, rate of interest will be based on the decision of competent authority, as per extant guidelines applicable to NPA accounts. RBI guidelines shall be followed regarding calculation / application of interest.

On the basis of credit rating, rate of interest applicable to borrowers will be fixed / changed in accordance with the H.O. circulars in force / as per terms of sanction, wherever concession has been granted. Change will be effective from 1st of next calendar month.

Charging of interest in case of Consortium arrangements : Where our Bank is the Leader of Consortium, Credit Rating exercise will be done and vetted by the Credit Rating Desk and confirmed by competent authority. Prior approval for the rate of interest to be charged in line with the decision of the Consortium, shall be obtained from sanctioning authority, when the rate is less than the rate as per our credit rating. In case of Management Committee proposals, approval from Chairman & Managing Director or in his absence from the Executive Director should be obtained

Where our Bank is not the Leader of consortium, attempt will be made to align the rate of interest with the decision of the consortium. In such cases also, credit rating exercise should be done as per our model. Where the interest agreed by the Consortium is less than the interest rate as per our Banks rating grade, approval should be obtained from the competent authority for the concession involved. In case of proposal falling within the power of the Management Committee, the Chairman & Mg. Director or in his absence, the Executive Director will be competent authority to give such approval.

For borrowers enjoying export credit limits, either exclusively or along with other limits, credit rating exercise will be done as stated above. However, interest rates on export credit limits will be as per Bank's guidelines circulated from time to time by the Head Office, while on other limits, interest rates will be charged as per Credit Rating System, as enumerated above.

In case of Retail Banking Product customers, credit rating will be done for the purpose of selection of borrowers and also to assess the quality of our borrowal accounts as well as portfolio. Interest rates for these borrowers will not be linked to the credit rating, but will be stipulated and charged as per the circulars issued by Retail Banking Department from time to time.

Unabated (continued) use of Internal Credit Ratings : As prescribed by the Reserve Bank of India, Bank has adopted Simplified standardized approach for credit risk under implementation of the Basel II norms from 31st March 2009. Under this approach, external credit ratings are used for capital allocation as prescribed by the Reserve Bank of India for compliance.

External credit ratings will be used for the purpose of risk weighting under Standardized approach and also in credit appraisal. Internal Credit ratings will be used for risk management purpose and also for preparing for migration to advanced approaches.

Overview Of Textile Industry

CASE STUDY 2. PROFILE: Name of the borrower: M/S XYZ Pvt. Ltd. Region: Standard B list: Mumbai Yes as list of March 2011

Willful defaulter list: No as list of September 2010 RBI defaulter list: Line of Activity: No as list of September 2010 Spinning of cotton yarn, knitting of specially knitted fabrics and processing of specially knitted grey fabrics. Key person/promoter: Mr. PQR Multiple/Consortium: Consortium Leader Bank: Our share: Andhra Bank FB 6.75% NFB 0.38% Activity: Risk Weightage: Provisioning: Textile 100% 40% 46.25 crores 0.15 crores

Credit Risk Rating External by Fitch as on 31.3.2009: Long term: BBB+ (Adequate credit risk) Short Term: F2 (Satisfactory Capacity) Internal rating : D Good 60.14% as per credit rating based on audited B/S March-2010 (Vetted by IRMD,HO)& E (satisfactory) 55.07% based on the provisional Balance Sheet dt 31.03.2011 (subject to vetting by IRMD,HO) Personal Guarantee: Available Collateral: Available in form of 2nd charge on fixed assets (Our share Rs 43.64 Crores)

3. Major Shareholders as on 30.09.2010 Particulars Promoters Associates Private Corporate Bodies Total Number of shares held 1413590 258825286 84873724 345112600 % holding 0.41 75.00 24.59 100.00

4. EXPOSURE: Borrower EXPOSURE CCH Adhoc limit Non Fund Based Forward Cover Total Credit Exposure Investments Other Commitments Total Exposure GROUP EXPOSURE Fund Based Non Fund Based Forward Cover Total Credit Exposure Investments Other Commitments Total Exposure 255.77 1.00 0.00 256.77 0.00 0.00 256.77 Existing 39.50 5.90 0.50 0.00 45.90 0.00 0.00 45.90

[Rs in crores] Proposed# 46.25 -0.15 0.00 46.40 0.00 0.00 46.40 Variation(+/-) +6.75 -5.90 -0.35 0.00 +0.50 0.00 0.00 +0.50

254.65 1.00 0.00 255.65 0.00 0.00 255.65

-1.47 0.00 0.00 -1.47 0.00 0.00 -1.47

# Proposed limit is considering regularization of group accounts.

COMPLIANCE TO PRUDENTIAL / INTERNAL EXPOSURE LIMITS (Rs. in Cr) As per RBI guidelines As per Internal Guidelines 500.00 1000.00 No

Individual Group Whether the limits proposed exceed the prudential exposure norms (Individual / Group)

575.50 1534.68 No

In case of exceeding, details of permission from the competent authority

Nil

7. BRIEF HISTORY OF SANCTIONS INCLUDING REVIEWS AND ADHOCS DURING THE PAST TWELVE MONTHS. Sanction Date 31.12.2010 20.12.2010 Gist

Adhoc limit of Rs.5.90 crores Renewal of the existing working capital credit facilities of Rs.40.00 crore

8. PRESENT PROPOSAL: To permit the following: I. Status of existing and proposed limits Facility Existing Limi t O/S as DRA WIN G POW ER** (Rs in crores) Irregul ar/ Overd ue amoun t A Fund Based 1 CCH CCH (Adhoc limit) 2 WCDL 29.6 0 Total 45.9 0 b) Non - Fund Based 1 BG Total 0.50 45.9 0 # The overdue amount consist of adhoc amount of Rs 5.90 crores due on 30.04.11 and application for the interest for the month of April-2011. The company has assured to clear the interest overdue amount within 3-4 days and adhoc amount before release of enhanced facility. 0.15 45.55 45.40 0.00 0.00 0.15 46.75 +0.50 45.40 6.41# 46.25 -0.35 29.95 29.60 0.35 9.90 5.90 * 15.98 15.80 0.18 5.90 -5.90 +0.00 46.25 * +6.75 Proposed Limit Variati

Margin on 06.05.1 (%) 1

Margin on (%)

*RM & FG: 25%, WIP: 40%, BD: 50% ** Drawing Power has not been allocated by Lead bank.

Note: in compliance of credit delivery system part WC limit is bifurcated as WCDL however most of the bank in consortium is maintaining single account. Hence we propose single CC account in line with consortium for operational / monitoring purpose.

II. a) Nature

SECURITY / DOCUMENATION Prime security (Rs. in crores) Value Basis

Existing & Proposed Joint hypothecation of Stock & Book Debts ranking pari passu with working capital financing banks. Our Share for FB Limits=6.40% Stock- Rs.405.66 Book Debts-Rs.481.70 Total = Rs. 887.36 Rs. 56.79 As per stock statement for the month of Feb-11

b) Nature

Collateral Security

(Rs. in crore) Value Basis

Existing& proposed Second charge on entire fixed assets of the company, both present & future, wherever situated, on pari passu basis with other working capital financing Banks Total Net Fixed Assets =Rs. 937.98 Term Loan =Rs 256.04 Residual Value Rs.681.94 Our Share=6.40% Rs.43.64 Audited Balance Sheet as on 31.03.10.

The company has provided collateral of Rs 20 crores value against adhoc limit. Tthis security shall discontinue with liquidation of adhoc amount of Rs 5.90 crores.

i) Percentage coverage of collateral security: (Rs. In crore) 1 2 Total value of Fixed Assets Of which our share (6.40%) Rs. Rs. 681.94 43.64

3 4

Total limits proposed from our Bank Collateral coverage

Rs.

46.40 94.05%

i)

Reasons in case of dilution of security coverage: N.A

Date of creation of Charge: Prime security  Joint Document executed on: 25.03.2009 and last charge modified on 04.05.2010 (Charge ID:80011094 for Rs.616.75 crores working capital limits under consortium)  Mortgage Created at Delhi vide Memorandum of entry dated 03.11.2009 in favour of IL&FS trust Company Ltd on behalf for working capital lenders (Charge ID: 10190603) and charge created for 2nd charge holders on 18.02.2010 (Charge ID:10206944).

d)

Date of subsequent modification of charge: N.A

e)

Date of vetting of documents by legal officer /Panel Advocate: Security trustee i.e IL&FS trust Company Ltd dated 16.11.2009 has confirmed the enforceability of Documents.

f) Name of Guarantors & their net worth (Rs. in crore) Name Shri Pravin Kumar Tayal Shri Sanjay Kumar Tayal Shri Naveen Kumar Tayal Relationship Guarantor Guarantor Guarantor Net Worth 5.46 5.86 6.25 As of 31.03.10 31.03.10 31.03.10 Basis Personal Balance sheet with ITR

III. CREDIT RATING & Pricing: Pricing Credit Rating Score Based on ABS Existing D Good* 60.14% [Mar 10] Proposed E Satisfactory 55.07%(Prov 31.03.11) Applicable interest rate as per Credit Rating Base Rate i.e 9.95% +7.80% , i.e 17.75% p.a Interest rate presently Charged and Proposed Base Rate i.e 9.95% +4.80% , i.e 14.75% p.a Concessions, if any Interest Rate charged by Lead Bank (Andhra Bank) Commission on NFB Limits Processing Charges As per H.O guidelines As per H.O guideline 3.00% BPLR Base Rate i.e 9.95% +8.30% , i.e 18.25% p.a Base Rate i.e 9.95% +4.80% , I.e 14.75% p.a 2.50% BPLR

Credit Rating Work Sheet furnished as Annexure 1

*Vetted by IRMD, HO As per existing sanctions, it was stipulated that in case security creation as per sanction terms are not perfected by March-2011 and/or routing of transaction does not improve in commensurate with our share in consortium, all concession extended to the company shall be withdrawn w.e.f 01.04.201l. However we propose to increase interest rate above the existing rate of interest at present with existing concession.

a) Factors contributing to the upgradation / slippage in credit rating:   Banking Discipline (11marks out of 30 marks) due to continuous exceeding, delay in servicing interest and installment. Poor routing of transactions.

b) Justification for proposing lower rate of interest/concession in charges/process fees:   Though concessions are proposed, our rate of interest is higher than lead banks rate. The company has been rated F2 (Satisfactory Capacity) for non fund based limit and BBB+ (Adequate Credit risk) for cash credit limit by Fitch in Sep-2010.

IV. Permissions for Deviations, Issue of NOCs etc & Concessions in service charges: N.A

V. Terms and conditions as specified in annexure 2

9.

Ratifications required for actions, exceeding permitted etc. beyond discretionary powers: N.A

10. COMPANY PROFILE (in brief) (DETAILS OF MANAGEMENT, PRODUCTS MANUFACTURED, USER INDUSTRIES & COMPANYS MAJOR CUSTOMERS) The Company was incorporated as a Private Limited Company on 23.08.1982 under the name of Krishna Knitwear Industries Pvt. Ltd. It was converted into Deemed Public Limited Company with effect from 09.09.1994. The Companys name was changed to Krishna Knitwear Technology Ltd. (KKTL) on 17.02.2000.

MANAGEMENT: The Company is managed by a Board of Directors comprising experienced professionals from the industry including a nominee of LIC. The day-to-day affairs of the Company are looked after by the Managing Director under the supervision, control and direction of the Board of Directors. The identified functional areas in each plant location including those in the Corporate Office are headed by experienced professionals from the respective fields. The core management team forms a cohesive force to achieve the organizational goals and objectives.

Shri Naveen Kumar Tayal, Chairman, having experience in marketing and export of yarn and knitted fabrics, looks after, inter-alia, marketing as well. The technical affairs at the

Companys plants are looked after and coordinated under the supervision of MD stationed at the manufacturing plant. The Company has a team of Chartered Accountants and other qualified professionals to look after Accounts & Finance, while marketing of the Companys products like yarn, fabrics, etc. are looked after by Shri Vipul Mehta, Export Manager, who has about 17 years experience in textile business and Shri S.D. Joshi, (Local Sales) who has experience of 17 years in Textile business.

PRODUCTS MANUFACTURED / USER INDUSTRIES / COMPANIES AND MAJOR CUSTOMERS / MARKET SHARE / PROSPECTS. The Companys products, viz., cotton yarn and fabrics, are marketed throughout the country. Mercerized single jersey and mercerized jacquard fabrics, marketed by the Company, are used for manufacture of cotton knitwear, and enjoy dominant position in leisure, casual and sports wear segments with a near monopoly in body wear segments. Besides, knitted fabrics etc also enjoy good markets in India at centers like Mumbai and other parts of the country as also in the overseas markets where there has been a change in customers preference for knitted fabrics.

The Company has, in its books, well-established garment manufactures/ garment manufacturer-exporters like Proline, Madura Coats, RUFF, GINNY & JHONNY, VIP, Colours, Sportiff, Park Avenue, Oxygene and Hats off. The Company also manufactures garments for international brands such as Givenchy, Wilson, Savante, Bert Pulitzer, C & A, Brooks Apparels, Van Heusen and Chesterfield.

The Group has been supplying processed knitted fabrics mainly to garment manufacturerexporters. With a view to having a foray and limited presence in the garments market and getting a feel of the same (not to compete with other garment manufactures, who happen to be customers for the Companys processed fabrics), the Company has recently launched two brands of its own readymade garments - League and ICON. While League caters to the requirements of gents in the premium and medium-range segments, consisting mainly of T-

shirts and official wear shirts, ICON is the brand for under garments for gents and ladies in the premium range segment. League is available in Mumbai at well-known Departmental Stores like Crossroads, Eternia, Sheetal, Options, etc. and, as per the Companys plans, will be available at all the leading retail stores all over India in the near future.

11. INDUSTRY SCENARIO a. Industry Categorisation b. Demand and supply situation of the product present and projected (ITO Division (Ministry of external affairs) maintained by DISNET & FICCI April-2011 Demand and supply situation of the product The Indian Textiles Industry has an overwhelming presence in the economic life of the country. Apart from providing one of the basic necessities of life, the textiles industry also plays a pivotal role through its contribution to industrial output, employment generation, and the export earnings of the country. During 2009-10,Indian textiles industry is pegged at US$ 55 billion, 64% of which services domestic demand. The textiles industry accounts for 14% of industrial production; employs 35 million people and accounts for nearly 12% share of the country's total exports basket. Textile

The Textiles sector is the second largest provider of employment after agriculture. Thus, the growth and all round development of this industry has a direct bearing on the improvement of the economy of the nation.

The Indian textiles industry is extremely varied, with the hand-spun and hand-woven sector at one end of the spectrum, and the capital intensive, sophisticated mill sector at the other. The decentralized powerlooms/ hosiery and knitting sectors form the largest section of the TextilesSector. The close linkage of the Industry to agriculture and the ancient culture, and traditions of the country make the Indian textiles sector unique in comparison with the textiles industry of other countries. This also provides the industry with the capacity to produce a

variety of products suitable to the different market segments, both within and outside the country.

The major sub-sectors that comprise the textiles sector include the organized Cotton/ ManMade Fibre Textiles Mill Industry, the Man-made Fibre/ Filament Yarn Industry, the Wool and Woollen Textiles Industry, the Sericulture and Silk Textiles Industry, Handlooms, Handicrafts, the Jute and Jute Textiles Industry, and Textiles Exports. c. Major players & their market share Bamani Aman Eurotex Industries & Export Limited Gangotori Textile Kandagiri Spinning Mills Limited Nitin Spinner Limited GTN Industries Limited. d. Banks exposure in this industry (Textile Industries) e. NPA position as per March-2011 f. Cyclical trends g. Govt. policies h. Whether the product is an import substitute, if so, what is the landed cost of import and what is the production cost of the indigenous manufacture Rs. 34.25 crores (2.88%) N.A Favourable N.A Rs.1231.35 crores

i.

Availability of raw materials, labour, infrastructural advantages

Raw material is cotton, which is to be procured from the domestic markets. The volatility in the prices is the key factor for stocking up the cotton. Considering the expertise of existing management in textile business, Company is expected to effectively manage the raw material sourcing. The Company is planning to maintain inventory of 3 months for cotton during operations phase.

j.

What are internal & external advantages 1. Self reliant industry producing the entire supply of the borrower/technology used chain fiber/cotton to garments/ home textiles. 2. Large and growing domestic market. 3. Experience of the promoters in the line 4. Low labour cost and availability of skilled and technical labour force. 5. Excellence in fabric and garment designing. a. What are the weaknesses Cotton availability is vulnerable to erratic monsoon and low per hectare yield. a. What are the relative opportunities 1. End of quota system and full integration of the textile industry. 2.Shift in domestic market towards readymade garments, and domestic textile consumption increasing with growing disposable income b. What are the threats 1. Large scale operations in the unorganized Stiff competition resulting in pricing process. 2. Increase in regional trade could reduce share of market opened for India, China and other countries. c. Any other information Nil

12. PRODUCTION CAPACITY 2009 (Actual) Installed Capacity(TPA) Spinning Knitting Processing Production (Quantity) Capacity Utilisation 42000 31000 41000 10489.5 92% 42000 31000 41000 117947.49 103.46 % 2010 (Actual ) 2011 (Provisional)

69197 45080 41000 140000 91%

13. MARKET CAP: N.A

14.

FINANCIAL INDICATORS Audited Audited

[Rs in crores] Estimates Provisional Estimated 31.03.11 345.11 514.34 0.00 926.95 424.06 1.53 1.69 1494.99 923.97 2307.52 48.69 224.28 31.03.12 345.11 532.59 0.00 945.20 430.71 1.40 1.55 1684.82 1045.54 2642.13 100.00 234.36

31.03.09 31.03.10 31.03.11 i. Capital ii. Reserves & Surplus iii. Intangible Assets Tangible Networth Net Working Capital Current Ratio Adjusted Current Ratio Gross Block Net Block Net Sales of which exports PBDIT 312.61 440.30 0.04 752.87 358.71 1.73 1.86 1248.72 852.82 1837.77 62.41 164.38 345.11 502.45 0.26 914.80 354.74 1.38 1.64 1402.88 937.97 2069.12 36.27 159.02 345.11 519.86 0.00 932.47 379.98 1.41 1.53 1684.82 1123.36 2345.47 80.00 207.48

Gross Profit (PBDT) Net Profit / Loss (PAT) Depreciation Cash Accruals PBDIT/ Gross Sales Gross Profit Margin Net Profit Margin TDER (TOL/TNW) Interest Coverage Ratio Current Asset Turnover Ratio

89.48 29.96 55.56 85.52 8.94% 4.87% 1.63% 1.21 2.14 2.44

82.13 4.39 76.84 81.23 7.69% 3.97% 0.21% 1.04 2.06 2.36

120.15 25.34 89.62 114.96 8.85% 5.12% 1.08% 1.39 2.32 2.20

135.11 12.43 122.63 135.06 9.72% 5.86% 0.54% 1.20 2.51 2.27

119.88 21.58 93.88 115.46 8.87% 4.54% 0.82% 1.39 2.01 2.22

(Detailed Financial Indicators provided in Annexure - 3) The party has submitted Provisional Balance Sheet.

Quarterly Result: N/A as 1st quarter of 2011-12 is still running.

Investment: Particulars

(Rs. in crores) As on 31.03.2009 As on 31.03.2010 As on 31-03.2011

Krishna lifestyle Tech Ltd Eskay knit (India) Ltd Tayal Energy Ltd Total

7.92 5.08 0.51 13.51

7.92 5.08 0.51 13.51

7.92 5.08 0.51 13.51

15. Comments on financial indicators, in brief: I. Positive Indicators Net Sales: Sales have increased 12.59% in FY 2010 over previous year on account of recovery of textile market in current financial year. The company has utilised 103% of its production capacity and production has increased 12.50% over previous year. Price of finished good has increased 5.54% over previous year.Sales growth during 2010-11 is 11.52%.

TNW: The TNW of the company increased as of March-2010 on account of issuance of share of Rs. 3.25 crores at a premium of Rs.20.77 per share and retention of profit.

TDER (TOL/TNW): The ratio has increased as of March-2011 because of raising of unsecured loan of Rs 35 Crores. & TL Rs120 Crores. II. Negative Indicators: Net Profit: Net profit has decreased in FY-2009-10 mainly on account of pressure of economic scenario and increase in various expenditure like Manufacturing Expense, Interest & Finance charges, Selling & Administrative Expense, Depreciation from Rs. 359.10 crores in FY 2008-09 to Rs.461.43 crores in FY 2009-10. Current Ratio: Current ratio has decreased as of March-2010 on account of current expansion of the company. Company has utilised internal cash accrual toward capex. Current ratio as of 31.03.2010 is as per Banks benchmarks but liquidity is poor as there is high level of stocks and book debts. Current Asset to Turnover Ratio: The ratio deetorated in FY-2010 on account of building up higher inventory level & Book debts. Interest Coverage Ratio: the ratio is slightly low from previous year on account of higher provision form previous year.

Gross Profit Margin and Net profit margin: Margin is lower on account of lower profit in FY 2009-10 however the sale has increased.

III. Auditors remarks and Management replies. : Nil IV. Contingent Liabilities: 31.03.2011 (Rs. In crores) Bank guarantee Rs. 2.88

V. Current performance trends: Estimated sales turnover for the year Achievement till 31.12.2010 Pro-rata achievement(Annualised)

(Rs in crores) NA

VI. INTER-FIRM COMPARISON as on 31.03.10 (Rs. In crores) Particulars M/s Krishna Knitwear Tech Ltd Sales Gross Profit Net Profit Net worth Current ratio 2069.12 82.13 4.39 914.80 1.38 Nahar Industrial Enterprises Ltd 1017.46 166.52 19.47 553.69 9.43 4311.17 737.40 346.35 2716.19 1.26 Alok Industries Ltd

16. ASSESSMENT OF WORKING CAPITAL REQUIREMENTS A. Projection of sales as per last CMA DATA for the year ended 31.03.2010 Rs.2050 crores against Actual sales for the year ended 31.03.2010 Rs.2069.12 crores. (Rs. in Cr) Audited 31.03.09 Audited 31.03.10 Estimates 31.03.11 Provisional Estimated 31.03.11 31.03.12

Net Sales Total Current Assets Less Current Liabilities (other than Bank Borrowing for working capital) Working Capital Gap Min Stipulated Margin 25% of current assets/ projected NWC whichever is higher Max Permissible Bank Fiance Total existing Working Capital Limits Excess borrowing if any to be converted into WCTL

1837.77 776.66

2069.12 907.99

2345.47 1093.20

2307.52 1035.51

2642.13 1212.36

23.22 753.44

21.27 886.72

28.22 1064.98

15.71 1019.80

31.65 1180.71

358.71

354.74

379.98

424.06

430.71

394.73

531.98

685.00

595.74

750.00

394.73

531.98

685.00

595.74

750.00

B INVENTORY AND RECEIVABLE LEVELS: Audited

(Rs in crores) Audited Estimates Provisional Estimated 31.03.11 31.03.12

31.03.09 31.03.10 31.03.11 Amount wise Raw Materials WIP Finished Goods Receivable - Domestic - Exports Stores & Spares Creditors 184.43 79.52 81.13 404.00 404.00 0.00 1.75 9.36 205.18 130.96 87.19 452.76 452.76 0.00 1.73 8.40 298.86 104.23 135.32 524.08 504.08 20.00 2.19 9.00

305.65 102.66 101.58 502.96 502.96 0.00 2.37 6.37

337.19 107.27 150.58 591.33 566.33 25.00 2.45 10.72

Month wise Raw Materials WIP Finished Goods Receivable - Domestic - Exports Stores & Spares Creditors 1.51 0.56 0.57 2.64 2.73 0.00 0.01 0.08 1.48 0.80 0.53 2.63 2.67 0.00 0.01 0.06 1.97 0.56 0.74 2.68 2.67 3.00 0.01 0.06 2.01 0.53 0.53 2.62 2.67 0.00 0.02 0.04 1.96 0.52 0.73 2.69 2.67 3.00 0.01 0.06

Raw Material: The Company is required to build-up sufficient quantity of raw cotton of particular varieties/quality of homogeneous nature, to ensure consistent quality of the product, i.e., yarn. The Company has also to procure high grade raw cotton, which is available for a short period from October to April, in large quantities and that too, mostly on spot payment basis to derive price advantage. The Company has informed that there is need for build up of adequate stocks of raw cotton to last for about 2 months. Keeping in view the scale of operations in the context of implementation of Expansion Project, and average holding by the company, the estimates and projections may be accepted.

Semi-finished goods: The Companys WIP is at 0.80 months level as on 31.03.10 on account of expansion of present capacity. However the estimate is in line with past trend and hence may be accepted.

Finished goods: Fabrics of different designs / shades / varieties / counts are required to be made available in adequate quantities. Further, when one single large order contains yarn of different qualities, dispatch of the goods cannot be affected unless the entire order is executed. This requires holding of finished goods, which would be sufficient to cater to the requirements of various customers.

Having regard to the Companys expanded scale of operations and its efforts to increase the clientele base, the Company has to keep at all times sufficient quantity of finished goods to cater to the requirements of customers, besides keeping some ready stock of regular off-theshelf dispatch also.

Hence the estimates and projections are little higher. For reasons submitted as above the inventory estimates and projections are acceptable.

Receivables: The estimates and projections are little higher however they are in tune with past trend and comparable and hence acceptable.

Stores and Spares: Due to the increased levels of production, the increased price of Furnace Oil (for captive use, in power plant) along with some spares required for imported machinery, and also stocks of dyes and other printing materials required for more production of garment, the level of consumable spares is acceptable

Creditors: The Company estimate/projection are in tune with past trend and comparable and hence can be accepted.

COMMENTS ON ASSESSMENT OF WORKING CAPITAL WITH

JUSTIFICATION: The Company has submitted us the CMA data based on the audited balance sheet as on 31.03.10 along with estimates for 2010-11.The lead Bank i.e Andhra Bank has assessed fund based working capital limit Rs. 685.00 crores and non fund based working capital limit of Rs. 40 crores for FY-2010-11 against previous year assessment of FB limit of Rs.585 crores and NFB limit of Rs. 40 crores. The same has been discussed in meeting held on 27.09.2010 and approved by the consortium. We have proposed increase in W/c Limit in order to maintain our share in consortium.

19. a. Views/comments on the conduct of the account: Mentioned below A. Comments on utilisation of both fund and Non fund based limits Yes upto Feb-2011

Whether stock statements are submitted every month. If not submitted regularly mention the date of last stock statement Whether operations are within sanctioned limits

*Because of overdues in the account the company was apprehensive that the banks would recover their dues of interest & instalment from the deposits made in the accounts. Hence the company stopped routing transaction in their CC hypothecation account. However, after taking up the matter with the company as well as in consortium meeting the company has started routing transactions in the account but not proportionally to our share in consortium limits.The promoter during meeting with our executives has assured to route the transactions proportionate to our share Frequency of inspection of stocks. Date of the last inspection and irregularity/adverse features, if any observed and steps taken to set right the same. 04.07.2010 by Lead Bank i.e Andhra Bank. No adverse feature assessed

Insurance cover - Whether securities adequately insured and in force.

Yes Particulars Stock Stock Stock Stock Stock Total

(Rs. in crores) Amt 27.60 4.00 2.00 4.00 15.00 52.60 Valid up to 08.01.11 07.12.10 27.11.10 30.09.11 17.11.11

Particulars

Amt

Valid upto 08.01.11 07.12.10 27.11.10 30.09.11 17.11.11 17.10.11

Fixed Assets 232.40 Fixed Assets 139.00 Fixed Assets 28.00 Fixed Assets 188.00 Fixed Assets 10.00 Fixed Assets 29.00 Total 626.4

Company has assured to submit renewed insurance policy. Whether terms and conditions of previous sanction have been complied with, if not, specify time frame to complete (with explanation) & permission obtained from competent authority No, -Stock Audit for FY-2011 is pending -2nd Charge on fixed assets is pending -Routing of transaction is almost nil -DP is not advising by Lead Bank Whether certificate from Pollution control Board has been obtained. Whether the borrower is facing any litigation from banks / FIs /creditors/ Govt. Dept/ Statutory bodies etc., if so, state in brief. No Yes.

In case of consortium advance, whether our bank is getting proportionate share of business Additional / temporary limits sanctioned subsequent to the last regular sanction and whether same is liquidated on due date or not Whether limits are utilised optimally /satisfactorily:

No

Yes, Rs.5.90 Crores upto 30.04.2011

Whether sales and purchase figures match with the turnover in the account Comments: Because of overdues in the account the company was apprehensive that the banks would recover their dues of interest & instalment from the deposits made in the accounts. Hence the company stopped routing transaction in their CC hypothecation account. However, after taking up the matter with the company as well as in consortium meeting the company has started routing transactions in the account but not proportionally to our share in consortium limits.The promoter during meeting with our executives has assured to route the transactions proportionate to our share.

(Rs in crore) Particulars Sales Estimated Purchases-estimated Credit Summation Debit Summation Minimum Balance Maximum Balance FY-2009-10 2069.12 1610.64 87.75 87.58 (8.34) 10.02 FY 2010-11 2345.47 -39.48 46.13 (8.09) 10.10 Mentioned above

Whether sales and purchase figures match with the turnover in the account

B.

Income value of account FY-2009-10

(Rs. in crores) FY-2010-11 0.10

Process Fee recovered

0.25

Interest earned Total

5.51 5.76

5.22 5.32

B. Adverse features affecting credit decision and action proposed: Operations in the account are not commensurate with our proportionate share in the total working capital sanctioned by the consortium. There is delay in servicing of interest too. However as on date, there is no overdue in the account. Problems faced The company faced liquidity crunch due to following reasons: y The company has undergone expansion programme during 200910 and 2010-11. y Company brought in their contribution expecting disbursement from term lenders y Though sanctions of Term lenders were in place, term lenders did not disburse the loan. Company went ahead with the ongoing expansion. y There was delay in sanction/release of the working capital duly assessed by lead bank and approved by consortium. y The raw material (cotton) prices have increased substantially. y To complete the ongoing projects, short term funds have been used for project expansion. Developments y Achieved turnover of Rs 1702.88 crores till Dec-10 against corresponding previous year sales of Rs 1506.53 crores and estimated Rs. 2345.47 crores for the full year. y y y Unit was visited on 02.12.2010 by DGM, PNB. The unit is running in full swing in 3 shifts. Lead Bank has allocated Drawing Power for March 11 based on stock statement of Feb-11. Stocks/ DP are adequately available. y In addition to prime security of stock and book debts, working capital lenders are having 2nd charge on fixed assets and on the

basis of residual value as of 31.03.10, collateral coverage is 94.10% y All banks have supported the company by extending additional working capital fund / loan as under: Name of the Bank Facility Granted Punjab National Bank Andhra Bank UCO Bank Bank of India Date of Sanction Sanctioned ( Rs.in crs) 9.50 16.00 75.00 100.00

Working Capital 21-Sep-10 Working Capital 5-Jan-11 Mortgage Loan 7-Jan-11 Mortgage Loan 7-Mar-11

Jammu and Kashmir Bank Mortgage Loan 26-Mar-11 2.50 Total y y The group is dealing with our Bank since 2002. The conduct of account has been satisfactory till the company faced liquidity problem in recent past. y The company has been advised to route proportionate transaction through our Bank. y As per CIBIL report, the account has been classified as substandard by Syndicate Bank y Group company i.e K-life styles Technology has been classified under doubtful category. Our Central Statuary Auditors have classified two group account i.e M/s Global Softech ltd and M/s Eskay Knitwear Technology Ltd as NPA as of March-2011. y Additional point The company has regularized the overdue / exceeding amount of our Bank. y SEBI had restrained certain Group Companies from dealing/ trading in stock market y y Promoters are in process of filling consent terms. The company is expecting to short out the matter shortly. 203.00

d. MAJOR INSPECTION / AUDIT IRREGULARITIES POINTED OUT IN THE LAST INSPECTION REPORT S. No 1 Internal Inspectors Reports Brief details of irregularities reported Group Account overdrawn since long The 3 group accounts have been regularized and other account is expected to be regularized shortly 2 3 RBI- Inspection Statutory Auditors (M/s Gandhi Minocha & Co in LAFR-201011 4 Stock Auditors for FY 2010-11 The same has allotted by lead Bank. However stock audit report from lead bank is yet to be received. Incorporated in Annexure 9 LAFR for FY-2010-11 is yet to be finalized Compliance Status

Credit Auditor

Observations: The company is not routing the transactions through the accounts

Compliances The company has been advised for routing the transaction through the account

Exceeding in accounts are continuous from Oct-2010 Mortgage is not done as advised by panel advocate.

The account has been regularized on 08.04.2011 The same has been taken up with company and consortium leader.

Stock audit not considered as directed Credit opinion of Praveen Tayal and Naveen tayal are not on record Process fee on renewal of credit facilities in May-2010 and Dec-2010 not recovered FFRs not submitted by the company. 6 Concurrent Auditor M/s Yardi Prabhu & Associate observed in Feb-2011 report Group Account overdrawn since long.

The same has been complied with. The same has been taken from CIBIL Consumer site. There is not defaulter party. As per policy, review is taken once in year. The same has been complied. The same has followed up with the company. The account has been regularized 08.04.2011.

Certain observations on conduct of account were received by way of a letter from RBI and reply the same has been submitted. Details are given in Annexure 9

e. Directors name figuring in RBI/ Wilful Defaulters / CIBIL / SAL ECGC list and comments thereon. Impact on taking exposure where names are appearing in the defaulters listStandard B List (MarchYes Willful Defaulter List (Sep- No RBI Defaulter List (Yes-10) No Yes. As per CIBIL report, the account has been classified as Commercial CIBIL substandard by Syndicate Bank (23.04.2011) Group company i.e K-life styles Technology has been classified under doubtful category. Our Central Statuary Auditors have classified two group account f. Position of statutory dues and incentives receivables: As per audited B/S-March 10, company is regular in deposited the provident fund & Employee state insurance dues with the appropriate authorities. There were no undisputed amount payable in respect of income tax, sales tax, wealth tax, excise duty and custom duty which were O/S as at 31th March,2010 for a period of a period of more than Six months from the date they become payable.

g.Group dealings/experience & desirability of further exposure: Operations in the account are not satisfactory. All group accounts are under stress assets category. h. RISK ASSESSMENT Risk factor Routing of transaction is inadequate. Though in past one year, routing of transaction is negligible, before that also routing was just to service the Mitigation Prior to 2010-11, the group companies were crediting the amount to service the principal / interest. After SEBI restrictions, lenders stopped/ deferred fresh / additional sanctions / disbursements. Therefore with fear of

principal / interest

adjustment of overdue amount by release of additional fund by lenders, company started directly trading with arhatiyas under barter system. Further while visiting the unit, it has been found that units are running well.

Since the company is able to run the business / unit without transacting much through banking channel, there is possibility to continue with barter system despite additional sanctions, Therefore we are stipulating that additional amount shall be released after ensuring adequate routing on proportionate basis atleast for one month. As per RBI guidelines for wilful defaulter, inadequate routing of transaction / routing of transaction through other banks, amounts for diversion of fund. The company has agreed in the consortium meetings several times that due to SEBI restrictions lender have squeezed their hands for extending further sanction / disbursement. ABS Balance sheet has been analysed and necessary comment is given. Further, Drawing is permitted as per advise of leader of WC lenders. The accounts are classified under Standard B category for last one year. Our Central Statuary Auditors have classified two group account i.e M/s Global Softech ltd and M/s Eskay Knitwear Technology Ltd as NPA as of March-2011. Since continuous exceeding in the account and negligible routing of transactions, the accounts were being reported as Standard B. However, the company has regularised most of the accounts and has assured to clear the overdue amount in term loan accounts (Global Softech and Eskay Knit). Since presently conduct of account is not satisfactory, accounts are classified as Standard B, however, after compliance of same, the accounts shall be upgraded as Standard category. Insurance expired The company is being followed up regularly. Renewed copy awaited. Enhanced credit facilities shall be released after ensuring adequate insurance coverage with banks

clause The company is procuring raw materials through arhatiyas. The payment to the supplier is made directly by the suppliers. The companies are not having documentary evidence like Excise duty, sales tax return etc to verify the genuineness of turnover It is stipulated that Bank shall obtain opinion from companys statutory auditors regarding acceptance of such transaction as per IT act before release of enhanced facility. The companies are dealings with manufacturing of threads / fabrics etc where Excise duty is not applicable. The matter has been discussed in consortium meetings and promoters have explained. However, it is stipulated that VAT return shall be obtained in order to ensure genuineness of turnover and fresh limits shall be released after ensuring that atleast 75% of VAT return figure matches with turnover reported in the balance sheet. The company is maintaining account with ICICI Bank (erstwhile Bank of Rajashthan) and non consortium member banks Few accounts have been closed with ICICI Bank. However, the companies have opened recently account with Corporation Bank, lower Parel (other than consortium member banks). It is stipulated that an closure certificate shall be obtained from the banks (other than consortium members) and notarised affidavit shall be obtained from the company to the effect that accounts with other banks have been closed and they shall not operate with any other bank without written permission from consortium member banks. The companies have invested substantial amount in ongoing expansion projects of group from its own resources The company has under gone for capex in order to increase their capacity or to build up real esate properties. However after SEBI restrictions, promoter continued infusion of their contribution but lenders became shaky for disbursement / sanction. The group companies have got sanctions of fresh loan in the form of mortgage loan in last quarter of 2010-11 and in most of the cased

disbursement are not fully made.

Since the group has undergone capital expenditure from their own resources, this might have negatively impacted on current ratio / Net working capital for textile business. It is stipulated that company shall maintain current ratio at minimum 1.25 during currency of loan. Maintenance of books of accounts at factory site or godowns are inadequate Group companies are classified as NPA with Syndicate Bank, Federal Bank in M/s. Krishna Knitwear Technology Ltd, M/s. KSL & Industries Lts and K-Life Style Industries Ltd There are overdue in group accounts Except Term loan accounts, all CCH accounts are within sanctioned limit. Term Loan account shall be regularised with release of enhanced credit facilities. Securities are not perfected despite regular persuasions The matter has been discussed in consortium and company has also been followed up. Additional exposure shall be released after getting NOC from respective banks/ Joint document. External Credit Rating not renewed. Due to SEBI restrictions and irregularities in the account, company has not got renewed the credit rating. It is stipulated that in case, external credit rating is not received by September -2011, penal interest @1% pa shall be levied. The company has been advised to get the ERP package. An undertaking shall be obtained to maintain the accounts under ERP package by September -2011. It is stipulated that our enhanced facility shall be released after getting exchange of information with standard accounts for all group accounts banking with our Bank.

As per existing sanctions, in case security creation as per sanction terms are not perfected by March2011 and/or routing of transaction does not improve in commensurate with our share in consortium, all concession extended to the company shall be withdrawn w.e.f 01.04.2011.

The status of the company has improved. However, routing of transaction through CCH account is inadequate. The company has assured to route the transactions proportionately. Hence, we are proposing 1% additional interest rate.

20. COMPLIANCE OF RBI / BANK LOAN POLICY GUIDELINES Deviations from Norms /Loan policy: Nil Compliance of takeover norms: N.A

21.

MODIFICATION IN EXISTING TERMS OF SANCTION IF ANY: N.A

22.

VIEWS/RECOMMENDATIONS OF THE CREDIT COMMITTEE: Cleared on 13.05.2011.

23.

DISCRETIONARY POWER FOR SANCTION AND FOR APPROVAL OF DEVIATION, IF ANY: Management Committee.

24.

RECOMMENDATION  The group has 3 decades experience in textile industry.  Performance of the company is satisfactory. Company has delayed in servicing of interest/Instalment  The company is dealing with us since Sep, 2002.  Its four associate concerns are also enjoying working capital facilities with us under consortium arrangement and conduct of a/c is unsatisfactory.

 Personal guarantee of promoters (Mr.Sanjay Kumar Tayal, Mr. Navin Kumar Tayal, and Mr. Pravin kumar Tayal) are available.  The company has been rated F2 (Satisfactory Capacity) for non fund based limit and BBB+ (Adequate Credit risk) for cash credit limit by Fitch in Sep2010.  As per CIBIL Report dated 23.04.2011, Asset category of M/s Krishna Knitwear Technology Ltd has been classified substandard category and group concern M/s Krishna Life Style Ltd has been also classified under doubtful category. However account with us has been standard as on 31.03.2011.  The company has deposited Rs 2.74 crores from Dec-10 onward and has cleared overdue till Mar-11, and have suured to clear the overdue of Apr-11 before release of enhanced facility. In all group companies, total credit from Dec-10 onwards is Rs 25.61 crores. Promoters have assured to clear overdue amount of all group companies including adhoc amount before release of enhanced facility.  Out of total 5 group baming with us, 2 accounts (namely M/s. Global Softech and M/s Eskay Knit) have degraded as Sub standard category as of March 2011. Promoters have deposited cheque of Rs 5.95 crores on 13.05.2011. After its relalisation, these accounts are likely to be upgraded to Standard Category.  Enhanced credit facility shall be released after ensuring that group accounts are standard with al consortium member banks in all group companies.

In view of the above, we recommend for Proposal for 1) Enhancement of Cash Credit Limit from Rs. 45.40 crores (Including Adhoc limit of Rs. 5.90 Crores) to Rs. 46.25 crores out of consortium limit of Rs 685 crores for 2010-11 2) Renewal of Bank Guarantee Limit of Rs 0.15 crores at O/S level out of consortium limit of Rs 40 crores for 2010-11 Concessions:

3) Continuation of Rate of interest Base rate (9.95%) + Spread (5.80%) i.e. 15.75% p.a. at present as against applicable Rate of interest Base rate 9.95%+Spread 7.80% i.e. 17.75% at present as per internal credit rating based on ABS 31.03.2010. Existing CCH & WCDL limits to be merged & kept as CCH facility in line with consortium.

CREDIT RATING REPORT

Name of the Borrower Branch Region Sanctioning Authority Date of sanction / renewal Basis of Credit Rating

Krishna Knitwear Technology Limited Corporate Business Head Office Management Committee 14-12-2010 Audited B/S as of 31.03.2011

CREDIT FACILITIES ENJOYED : Prese Sl. No. Nature of Arrangement nt Limit s 1 2 3 4 5 Total Fund based limits 6 7 8 Bank Guarantee 39.5 0.5 39.5 0.5 CCH 39.5 39.5 Propose d limits

(Rs. In Crores)

Limit proposed

39.5

39.5 0.5

9 10 Total Non-fund based limits TOTAL 0.5 40 0.5 40 0.5 40

SUMMARY OF RISK SCORE : Sr. No. Max. score Applica ble max. score Score obtained Percenta ge Gra de

Parameters

Industry Score (CRISI II III IV V INFAC) Industry Risk Market Risk Management Risk Financial Risk BORROWER RATING VI Banking Discipline Security aspects / Risk VII VIII IX mitigators Value of the account Negative score FACILITY RATING OVERALL RATING $ Subject to vetting by IRMD,HO 55 150 50 138 15 10 13 10 7 4 -4 14 76 28.00% 55.07% $ 10 15 5 15 50 95 30 10 15 5 15 43 88 27 4 14 1 14 29 62 7 70.45%

Sl. No.

Risk Category / Risk Parameters

Max. Score

Applied Score

Awarded score

I A II 1 2

Industry Score (Macro-economic) CRIS-INFAC Score (for specified industries) Industry Risk (Unit specific) Pollution aspect Rail / Road connectivity

10 10 15 2 2

10 10 15 2 2

4 4 14 2 2

3 4 6 7 II 1 2

Power supply Water supply Skilled Labour Technology Market Risk (Unit specific) Input materials Key material susceptibility

3 2 3 3 5 3 2

3 2 3 3 5 3 2

3 2 3 2 1 1

0 III 1 Experience of promoters in the same line of business Management Risk 15 3 15 3 14 3

2 3 4 5 6 7

Board / Promoters include Management Team Succession planning for promoters Succession plan for key functions Management initiatives Labour Management

2 2 2 2 2 2

2 2 2 2 2 2

2 2 2 2 1 2

IV 1 2

Financial Risk Achievement of gross sales projection Achievement of projected production (in no. of units)

50 4 4

43 4

29 3

Trend in actual production (last year compared to previous year)

3 4 5

Stock Turnover efficiency Book-debts Turnover efficiency Achievement of projected net profit Trend in Net Profit (last year compared to previous year)

2 2 3

2 2 3

2 2 0

6 7 8 9 10 11

Current Ratio Trend in Current Ratio Total Debt Equity Ratio Trend in TDER LT Debt Equity Ratio Trend in LTDE Ratio

3 2 3 2 3 2

3 2 3 2 3 2

3 2 3

12

Total DSCR

13 14 15

Interest Coverage Ratio PBTD to Net Sales Return on Capital employed

3 3 3

3 3 3

3 1

16

Unhedged exposure

0 0

17

Letter of Credit / Bank Guarantee

V 1

Banking Discipline / Facility Rating Compliance of sanction terms

30 3

27 3

0 2 Submission of renewal papers 3

3 4

Submission of Balance Sheet and Profit & Loss a/c 2 Submission of Stock / B.D. statement No. of instances of delay / default 2

2 2

2 2

5 6

Submission of F.F.R. I & II Interest payment on working capital limits during last 12 months

3 3

3 3

Instalment & interest payment on Term Loans / Demand loans during last 12 months

0 8 Operations in the limits during the last 12 months 3 3

Cheques returned / bills dishonoured

1 0

10

Turnover in the account

11

Inspection observations on stock and security

VI

Security aspects / Risk mitigators : Primary Security :

15

13

Availability of Stock for CC / Book-debts

Availability of fixed assets for Term Loan and maintenance thereof

Collateral Security : 3 I charge on unit's Land & Building and Plant & Machinery OR 3 3

Eligible financial collateral (Basel II) 0

I charge on immovable properties of Directors / partners / proprietor / Third Party(ies) / group concerns

Personal guarantee of all promoter-Directors/ Third Party(ies) / Guarantee of group concerns

Financial support of group entities / concerns

VII 1 2

Value of the account Utilisation of operative limits (fund based) Level of other Income by the Bank

10 4 4

10 4 4

4 4

Any kind of deposits of (a) self / family members of promoters (b) group concerns salary accounts of any of the group concerns

2 0

VIII 1 2

Negative Marks : Erosion in value of collateral security Delay in payment of interest or repayment of instalments

-7 -2 -1

-7 -2 -1

-4

-1

Exceeding in CC accounts (TOD / Ad hoc limit)

-2

-2

-2

Account with other bank/s or outside consortium or Multiple Banking system

-1

-1

-1

Group concerns appearing in RBI Defaulters' List / 5 Wilful Defaulters' List or in the report of any approved Credit Information Company like CIBIL with default history -1 -1