SUMMER TRAINING REPORT

ON CREDIT RATING SYSTEM OF FEDERAL BANK LIMITED Report submitted in partial fulfillment of post graduate diploma in management(PGDM)

Under supervision of Ms. Anupama Tewari Asst. Manager

Submitted by Durga Devi Nag Roll No-69

Batch 2009-11
Submitted to

G.L BAJAJ INSTITUTE OF MANAGEMENT AND RESEARCH Plot no-2, Knowledge park III, Greater Noida-201306 Website: www.glbimr.org

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ACKWONLEDGEMENT

As a management student I dream it a privilege to have experience a panorama of Federal Bank Limited cherished and enviable legacy. I would like to thank all those who have directly or indirectly helped me to accomplish this project successfully. I would like to express my deep sense of gratitude to my corporate, project guide, Ms Anupama Tewari,Asst Manager, Bhubaneswar whose support and guidance helped me, in converting my conception into visualization and also for the continuance guidance throughout the project. Special thanks to my institute project guide Prof. Neeraj Saxena whose support and unflinching guidance and encouragement helped me a lot to go with the project.

Durga Devi Nag (PGDM 2009-11)

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DECLARATION

This is to certify that Miss Durgadevi Nag out of her project work presented in this entitled CREDIT RATING SYSTEM OF FEDERAL BANK LIMITED for the award of PGDM from G.L.Bajaj Institute of Management & Research under my supervision. The project embodies result of original work and studies carried out by Student herself and the contents of these do not form the basis for the award of any other degree to the candidate or to anybody else.

Ms. Anupama Tewari Asst. Manager

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TABLE OF CONTENTS

Page.No

CHAPTER:- 1

INTRODUCTION TO FEDERAL BANK LTD.

1-11

CHAPTER:-2

OBJECTIVE OF THE STUDY

12

CHAPTER:-3

CREDIT RATING SYSTEM

13-61

CHAPTER:-4

RESEARCH METHODOLOGY

62

CHAPTER-5

DATA ANALYSIS & INTERPRETATION(CASE STUDY)

63-88

CHAPTER:-6

RECOMMENDATIONS

89

CHAPTER:-7

CONCLUSION

90-91

BIBLIOGRAPHY

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EXECUTIVE SUMMARY

The project aims to develop a clear cut understanding of credit rating system being adopted by Federal Bank Limited. The credit appraisal system act as a successful tool for credit assessment in a bank and credit rating system is the backbone for assessing the risk inherent in a credit/investment exposure. Thus identification of credit worthiness of credit limit/measurement of credit risk can be achieved through a sound appraisal system and an appropriate credit rating system. At the initial stage through understanding was done as to get overview exposure as to how the credit rating is organized, and then the parameters that are unique to the credit rating system were identified. These factors create a major impact on the understanding of what credit should be given to a particular project, while there prevails intense competition in the banking sector. Credit rating has become very relevant to judge a projects status and thereby helping the bank to take important decisions. Various credit rating models are used by Federal Bank Limited to assign the appropriate rating to the borrower are also studied. The project focuses more on the models like what are the factors being used for credit rating One case analysis is done on Displayline ltd which had applied to find out appropriate rating for the applicant. As per the model the required parameters were consider to decide the credit rating.

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CHAPTER-1

INTRODUCTION TO FEDERAL BANK LTD.

Federal Bank is a private sector bank in India. The head office of this prestigious bank is located at Aluva, Kerala. By 2008, the Federal Bank India had successfully introduced 671 branches and 681 ATMs across the nation. In the month of March of 2008 alone, the bank had opened 26 branches across 11 Indian States. Federal Bank India is well recognized for facilitating even the smaller branches consisting of rural and partially-urbanized areas with technology enabled services.

BACKGROUND OF FEDERAL BANK:

Previously known as Travancore Federal Bank Limited, the Federal Bank Limited in its entire span of customer services has seen both ups and downs. The bank started with an auction-chitty business along with other banking transactions related to agriculture and industry. In the year 1945, the paid-up capital of the bank touched Rs.71000 and a new Board of Directors was constituted. During this period, the bank also incorporated new Articles of Association. The same year its branch was openedatAluva.

Subsequently, Federal Bank came with its branches in Angamally (1946) and Perumbavoor (1947). However, it came with a massive expansion plan in the years 1975 and 1976 by opening 53 and 42 branches respectively.

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From that time onwards till today, the bank has continued to incorporate the effective changes to ensure smooth banking experience for its customers.

HISTORY OF FEDERAL BANK:

The history of federal Bank dates back to the pre-independence era. Though initially it was known as the Travancore Federal Bank, it gradually transformed into a full-fledged bank under the able leadership of its Founder, Mr. K.P Hormis. The name Federal Bank was officially announced in the year 1947 with its headquarters nestled on the banks on the river Periyar. Since then there has been no looking back and the bank has become one of the strongest and most stable banks in the country. Vision: Develop into a stronger and more efficient and profitable financial institution with a growing share of the market, providing an expanding range of products and services to a growing clientele within and outside the country, adopting best industry practices and employing contemporary technology, and be counted among the top private banks in the country.

Mission:

Devote balanced attention to the interests and expectations of stakeholders, and in particular: Shareholders: Achieve a consistent annual post-tax return of at least 20% on net worth. Employees: Develop in every employee a high degree of pride and loyalty in serving the Bank. Customers: Meet and even exceed expectation of target customers by delivering appropriate products and services, employing as far as feasible, the single window, and 24-hour-seven-dayweek concepts, leveraging strengthening branch infrastructure , ATMs, and other alternative distribution channels, cross selling a range of products and services to meet customer needs varying overtime, and ensuring the highest standards of service at all times, pursue excellence in various facets of banking.

Adopt best industry practices.

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Develop, adopt, and review a well-conceived business plan for achieving realistic targets of growth, profitability, and market share over the medium term.

Operate within a well-defined, diversified, risk profile and adopt prudent risk-management norms and processes and effective control practices.

Employ and leverage appropriate modern information technology to: enhance the quality, speed, and accuracy of product/service delivery; provide anytime-anywhere banking facility; strengthen management information and control systems and processes; improve productivity; and reduce costs.

Increase awareness of the "Federal Bank" brand among targeted customer groups through cost-effective marketing.

Adopt a robust corporate governance code emphasizing a high degree of professionalism of the Board and the management, and accountability and disclosure to shareholders.

Decentralise decision making with accountability for decisions made, and assign cascading profit responsibilities to middle and junior management.

Develop a conducive and transparent work environment that fosters staff commitment, competence, initiative, innovation, teamwork and service-orientation. Future: Federal bank is the fourth largest bank in India in terms of capital base and can easily boast of a Capital Adequacy Ratio of 19.11%, one of the highest in the industry. This along with the existence in a highly regulated environment has helped the bank to tide over the recession with minimum impact to its financial stability. In fact it has been expanding organically over the past few months. It believes in extending its reach to its customers by making services available to all, 24x7. It has over 690 ATMs and 669 Branches across India in addition to the Representative Office at Abu Dhabi that serves as a nerve centre for the NRI customers in UAE. We are transforming ourselves, keeping our principles in tact, into an organisation that offers service beyond par. Being in the service industry we are conscious of our surroundings and what happens in the society. 1931: The Federal Bank Limited (the erstwhile Travancore Federal Bank Limited) was incorporated with an authorised capital of rupees five thousand at Nedumpuram, a place near Tiruvalla in Central Travancore on 28/4/1931 under the Travancore Company's Act. It started business of auction -chitty and other banking transactions connected with agriculture and
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industry.The bank though successful in the earlier periods, suffered set backs and was on the verge of liquidation. 1944: Shri K P Hormis, and his close relatives /friends obtained controlling interest in the Bank. 1945:The paid up capital was increased to Rs.71000.The Board of Directors of the Bank was reconstituted in 1945 and fresh Articles of Association adopted. On 18-5-1945, the Regd.Office of the Bank was shifted to Aluva and the Bank commenced business by opening its first branch at Aluva. 1946:The Bank opened its second branch at Angamally on 26-1-1946 1947:In the Board Meeting held on 24-3-1947, it was resolved to change the name of the Bank as "The Federal Bank Limited". The third branch of the Bank was opened at Perumbavoor on 18-41947 1959:The Bank was licensed under Sec.22 of the Banking Companies Act, 1949 on 11-7-1959. Bank floated several kuries one after another. It also introduced several new deposit schemes. These strategies helped the Bank to grow at a greater pace 1964:The Bank embarked for a massive take over bids, which accelerated its growth horizontally and vertically. In that process it took over the assets and liabilities of the following banks 1. The Chalakudy Public Bank Ltd., Chalakudy 2. The Cochin Union Bank Ltd., Trichur 3. The Alleppey Bank Ltd., Alleppey

1965:The St. George Union Bank Ltd. Puthenpally was merged with the Bank 1968:The Marthandom Commercial Bank Ltd. Trivandrum was amalgamated with the Bank 1970:The Bank became a Scheduled Commercial Bank in 1970, which also coincided with the Silver Jubilee Year, since the Bank commenced its operation in Aluva

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1972:Witnessed expansion beyond the home state. The Bank became an Authorised Dealer in Foreign Exchange in 1972.International Banking Department started functioning from Mumbai in 1973.Since then, the Bank could substantially increase its market share of the NRI business. The International Banking Department was later shifted to Cochin in 1982 as part of consolidation and centralisation of activities 1973 to 1977:During the period, the bank adopted a massive branch expansion and growth oriented programmes. To reflect the bank's approach towards the Industrial finance it adopted a new emblem -Farmer in action encircled by an industrial wheel. A few hallmarks of the period: In the year 1973,there was a quantum jump in deposits to the tune of 67% and in advances to the tune of 56% over that of the previous year. The deposits grew by 52% while the advances registered an increase of 45%. Increase in Priority sector advances was by 63%. 1975:Bank opened 53 branches and in 1976 it opened 42 branches. The total number of branches reached 276 from a position of 114 in 1973 1977:The paid up capital was increased to Rs.100 Lakhs from a position of Rs.10.66 Lakhs. 1980:Mr.V Verghese took over the reigns of the bank as Chairman and Chief Executive Officer on 2/7/1980.Having worked long years in State Bank of Travancore with well established traditions, systems and methods, he placed his faith in introducing time tested and well proven methods of organisation into the Bank

1983:1. Shri. V.K.Syamasundaran after long innings in Reserve Bank of India took over as Chairman and Chief Executive Officer of the Bank as a successor to Mr.V.Verghese on 16/7/83. 2. The foundation stone of the multi-storied Administrative Building was laid by the Founder Shri K.P.Hormis on 26-12-83 1984:As part of the organisation redesigning recommended by National Institute of Bank Management in November, 1984, Bank has introduced Three Tier Organisational Setup with Head Office, Regional Offices and Branches. Agricultural Finance Department was set up in Head Office with technically qualified personnel at central office and field level. Bank's
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performance in the field of agricultural and priority sector lending improved substantially thereafter. 1985: In tune with the NIBM recommendation, Personnel and Industrial Relations Department was set up in July, 1985. With the active assistance of Tata Consultancy Service, bank also set up its computer department. A WIPRO computer was installed at our Head Office on July, 1985 paving the way for computerisation of the Bank. Later, a PSI microcomputer was installed at our International Banking Department at Cochin. The first Advanced Ledger Posting Machine (ALPM-a Wipro banker) was installed at Br. Aluva-Bank Junction branch 1987: The long cherished dream of the Federal Family, the multi-storied administrative building complex was inaugurated by Shri. A Ghosh, Dy. Governor, Reserve Bank of India 1988: Shri. M.P.K.Nair , a seasoned commercial banker trained in the Union Bank of India assumed the captaincy of the Bank on 1-7-1988 as its Chairman and Chief Executive Officer 1989: Commenced Merchant Banking Operations 1992: Deposits crossed Rs.10,000 Million. Adopted profit sector banking as its slogan 1993: Roped in ICICI group as a shareholder through private placement

1994: Tapped the Capital Market with a public issue in March, 1994. The issue oversubscribed by about 60 times. Started Leasing Business 1995: Registered 142.44% increase in PAT in FY 94-95.Bank registered a CAGR of 78.13% in PAT during the period 1991-96. Emerged as a perfect banking partner with diverse products, global reach and focus on automation and HRM. Deposits cross Rs.35,000 Million 1996: Shri. K Nandan, a veteran banker from State Bank of India took the stewardship on 1-11996: The bank had steady growth. The bank's business crossed Rs.100000 Million mark as on 31/3/98 for the first time 1997: Bank's first ATM was inaugurated at Ernakulam North on 27-02-97

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1999:1. On 1-1-1999, Shri. K.P.Padmakumar, the Executive Director of the Bank took over the baton from Shri. K Nandan. He thus became the first Chairman and Chief Executive Officer of the bank risen from the rank and file 2. Bank's 400th branch was inaugurated at Calcutta- Shakespeare Sarani on 19.2.1999. The total business of the bank exceeded Rs.110000 Million as on 31/03/99 2000:1. On 24.1.2000 Bank started Any Where Banking at Bangalore connecting all branches located in the Bangalore metro 2. Launched Depository Services in association with NSDL on 24.2.2000 3. The Bank has commenced Internet Banking 'FedNet' on 28th April 2000 with software support from Infosys Technologies Ltd 4. Federal Millennium CD is released on 18.9.2000 2001:In March 2001, Wide Area Network was launched connecting Regional Offices at Mumbai, Bangalore, Chennai, Ernakulam and Chennai F & I with Head Office 2002:1. All the 412 branches of the Bank were fully computerised (using FedSoft) as on 31.03.2002 2. The Installation of switch for networking all the ATMs, already installed/proposed to be installed, started from 17/08/2002 3. Dec 10 2002 Federal Bank introduces FedAlerts, and FedMobile, another first of its kind service among traditional banks in India. Real time transaction alerts across the globe, and customisable options make the service unique 2003: International Debit Cards launched January 2004: Federal Bank becomes the first traditional bank to network all its branches and attain 100% connectivity February 2004: Co-branded credit cards launched in association with ICICI Bank

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October 2004: RTGS is enabled in all branches of the Bank and becomes the first bank in India to implement RTGS facility in all the branches. Online Railway Reservation through FedNet launched. The First Kiosk inaugurated at the Marine Drive ( Kochi) branch December 2004:1. First Bank to launch automated telephone bill payment through Interactive Voice Response System (IVR). Bank launched an innovative product 'Fed-e-Pay' for automated payment of utility Bills 2. The Bank issued Bonus shares in the ratio of 2:1 February 2005: Federal Bank is awarded for Best Use of Information Technology in Retail Banking by IBA and Infosys. The runner up status reveals the strength and innovation in technology initiatives May 2005: Shri.M Venugopalan joined the Bank as Chairman and Chief Executive Officer Prior to joining the Bank, he was the Chairman and Managing Director of Bank of India, one of the leading public sector banks in India, from August 2003 to April 2005, and was an executive director of the Union Bank of India immediately prior to joining the Bank of India June 2005: Federal Bank in association with AMRITA super specialty hospital launches Fed+Amrita, an innovative online system for fixing medical consultation, Health check up, and inpatient payments from anywhere January 2006: Federal Bank becomes the first traditional bank to successfully issue GDR. While the issue of 18 million Global Depository Receipts realised $71.46 million, the green shoe option of 2 million GDR was also fully subscribed, bringing in a total of $80 million to the bank. The GDR, each representing an underlying equity share, were priced at $3.97 each working out to approximately Rs.175 per share. The issue was subscribed by major banks and Financial Institutions across the globe. February 2006: Federal Bank wins two prestigious awards for BEST USE OF IT IN RETAIL BANKING & BEST PAYMENTS INITATIVE from IBA and TFCI. This is the second consecutive time that the Bank has won the award for best use of IT in Retail Banking. More details available here

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September 2006:1. Amalgamation of Ganesh Bank of Kurundwad with Federal Bank 2. Banks Total No. of Branches crossed 500 November 2006: Bank entered into Life Insurance Joint Venture with IDBI & FORTIS January 2007: Bank won the award under category Best Clearing & Settlement System in the Banking Technology Awards 2006 instituted by IBA, Infosys & TFCI Mar 2007: A full fledged Data Center was set up by the Bank June 2007: Bank formed a Centralized Processing Centre for centralizing the account opening process to make it quick and efficient. September 2007:All branches/offices of the Bank were migrated to Centralised Banking Solution (CBS), Finacle January 2008:1. Successfully completed 1:1 Rights Issue 2. Opened first overseas Representative Office at Abu Dhabi, UAE. March 2008:1. Banks Total No. of Branches crossed 600 2. The Asian Banker, together with the Technology Advisory Council of The Asian Banker Summit, has affirmed Federal Bank as sole recipient of the Best Core Banking Project Award 2007 September 2008: Bank started providing Online Stock Trading facility to the customers in association with M/s Geojit Financial Services January 2009: Bank won the award under category 'Best Customer Relationship Achievement' in the Banking Technology awards 2008 instituted by IBA, Infosys & TFCI for the outstanding achievements in technology infusion and dissemination. The Bank was winning IBA-TFCI awards for the fourth time March 2009:1. Total Business of the Bank crossed Rs.50,000/- Crores 2. Bank becomes BASEL-II compliant
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August 2009: Bank has taken an important step in customer Service by dedicating 24 X 7 Contact Center to the customers. Started offering NEFT/RTGS facility through Internet Banking. Bank started offering Telebanking facility through a Toll-free number

PRODUCTS AND SERVICES OF FEDERAL BANK LIMITED:

Federal Bank launched its International Debit Cards in the year 2004. The same year, it also provided Real Time Gross Settlement (RTGS) facility in all the branches, followed by Online Railway Reservation (with the first kiosk at the Marine Drive branch of Kochi). One year later, the bank launched Fed+Amrita, an online system for fixing medical consultation, health check up, and in-patient payments, from anywhere. In 2006, Federal Bank issued GDRs, becoming the first traditional bank to do so.

Federal Bank also provides the following services:

Advances BSNL Bill Payment Cash Management Services Cash -On- Line Express Cash Remittance Credit Cards Depository Services Easy Pay-On-line Fee Payment System E-shopping Payment Gateway Export Credit Insurance Products in association with ECGC Express Remittance Facility from Abroad - FEDFAST General Insurance Products in association with United India Insurance Life Insurance Products, in association with ICICI Prudential Lock Box Service for NRI's in the US Merchant Banking Services NRI Services Online Kiosks for Customers
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Online LIC Insurance Payment Online Railway Reservation System Structured Derivative Products

The Firsts

First traditional bank in India to launch Internet Banking Service (FedNet) First traditional bank in India to have all its branches automated First and the only traditional bank in India to have all its branches inter-connected First bank to launch Electronic Telephone Bill Payment in India First and only one of the older banks with e-shopping payment gateway First traditional bank in India introduce Mobile Alerts and Mobile Banking service First bank in India to implement an Express Remittance Facility from Abroad

First bank in India to provide RTGS facility in all its branches

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CHAPTER-2
OBJECTIVE OF THE STUDY
Nowadays, everyone has become increasingly dependent upon credit, and therefore it's essential to understand what is a credit rating, why it is important, and how can we maintain a good credit rating. Most people finance their homes with mortgages and pay for their cars with loans. Young people often obtain loans to pay for college. And, of course, lots of people make purchases with credit cards.You can't expect to receive credit as a matter of course, however. You must apply for it. And just as you would hesitate to lend money to a stranger, banks, retailers, or finance companies will not grant you credit without knowing something about you. The main objective of the study of credit rating system is To understand about the credit rating system at Federal Bank Ltd. To know about various advances that Federal Bank Ltd. disburse to its customer. To determine the level of risk attached with an investment. To know about the various ratings policy used by the federal bank ltd. To know about the various rating agencies in india.

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CHAPTER-2 CREDIT RATING SYSTEM

A credit rating assesses the credit worthiness of an individual, corporation, or even a country. It is an evaluation made by credit bureaus of a borrowers overall credit history. Credit ratings are calculated from financial history and current assets and liabilities. Typically, a credit rating tells a lender or investor the probability of the subject being able to pay back a loan. However, in recent years, credit ratings have also been used to adjust insurance premiums, determine employment eligibility, and establish the amount of a utility or leasing deposit. A poor credit rating indicates a high risk of defaulting on a loan, and thus leads to high interest rates or the refusal of a loan by the creditor. Importance of credit ratings: Crediting a watch list Value investing Smart investing Learn about market Developing a trading plan Maximize your profits Choosing investment software Trading opportunities When to sell? Finding a broker Investment clubs
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 Gearing into a SMSF Stock selection Biotech market Private equity investing Protected equity loans Conservatives option strategies Evaluating new floats Tax implication Investing overseas Corporate governance 1. Trade cancellation policy

OBJECTIVES OF CREDIT RATING: The main objective is to provide superior and low cost information to investor for taking a
decision regarding risk return trade off, but it also helps to market participants in the following ways : Improve a healthy discipline on borrowers Lends greater credence to financial and other representation, Facilitates formulation of public guidelines on institutional investment Helps merchant bankers, brokers, regulatory authorities etc. in discharging their functions related to debt issues, Encourages greater information disclosure, better accounting standard and improve financial information (helps investors protection), May reduce interest cost for highly rated companys, Acts as a market tool

CREDIT RATING AGENCIES IN INDIA

1. Credit Rating Information Services India limited(CRISIL) 2. Investment Information and Credit Rating Agency of India(ICRA)
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3. Credit Analysis and Research(CARE) 4. Duffs Phelps Credit Rating Pvt. Ltd. (DCR India) and 5. Onicra Credit Rating Agency of India Ltd. is an established player in individual credit assesment and scoring services space in the Indian market.

CREDIT RATING AND INFORMATION SERVICES OF INDIA LTD. (CRISIL) is Indias leading Ratings, Research, Risk and Policy Advisory Company. CRISILs majority shareholder is standard &poors, a division of The MCGRAW-HILL Companies and the world's foremost provider of financial market intelligence. CRISIL offers domestic and international customers with independent information, opinions and solutions related to credit ratings and risk assessment; energy, infrastructure and corporate advisory; research on Indias economy, industries and companies; global equity research; fund services; and risk management. We began our journey as India's first rating agency. Today, we are a diversified global analytical platform with leadership positions in the ratings, research and advisory domains. Along the way, our growth has been closely intertwined with India's development milestones.

We started in 1987 as a credit rating agency, at a time when lending rates in India were fixed, and there was, therefore, little demand for credit ratings. We firmly established ourselves as the country's leading rating agency, respected for our fiercely independent, highly credible, and analytically rigorous views. Shouldering the mantle of a pioneer and a market leader, we facilitated the development of India's credit market and built investor confidence in our risk assessment capabilities.

India's transformation into a market-led economy greatly increased its need for capital, and required extensive reforms and institution building. Accordingly, we diversified into the infrastructure advisory and business research domains, and quickly built up a reputation for
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independent, reliable and incisive information, research, models and advisory services. Today, our services are key inputs in informed decision-making and the shaping of public policy in India.

With increasing globalization, we also focused on making our income streams more global. We acquired Irevna, a pioneer in the investment research outsourcing space; Irevna has since been voted no.1in high-end investment research and analytics outsourcing by the US-based Brown and Wilson Group two years in a row in 2006 and 2007. We have a thriving business that meets increasing global demand for better understanding of the Indian business environment, through the services offered by our research and advisory groups.

Guided by our core values of integrity, independence, innovation, analytical rigor and commitment, we are proud to have built a globally-acknowledged institution of repute over these 20 years. We have facilitated the setting up of credit rating agencies in several countries around the world. Our association and integration with standard & poors has further enhanced our capabilities and opened up newer vistas of opportunity, for our businesses and people.

The macro environment trends, both in India and globally, present myriad business opportunities. At a youthful 20, we are ideally positioned to service the needs of our expanding client base by maintaining our focus on our mission: Making markets function better Helping clients manage and mitigate business and financial risks Shaping public policy

CRISIL GROUP businesses: Ratings Research Advisory

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CRISIL Ratings
CRISIL Ratings is the only ratings agency in India to operate on the basis of sectoral specialization. It reflects our sharpness of analysis, the responsiveness of the process and the large-scale dissemination of opinion.

CRISIL Ratings plays a leading role in the development of the debt markets in India. The Rating Criteria & Product Development Centre, responsible for policy research, new product development and ratings' quality assurance, has developed new ratings methodologies for debt instruments and innovative structures across sectors.

CRISIL Ratings provides technical know-how to clients worldwide. We have helped set up ratings agencies in Malaysia (RAM), Israel (MAALOT) and in the Caribbean.

CRISIL Research
CRISIL Research is India's largest independent integrated research house providing accurate and reliable research, analysis and forecasts on the Indian economy, industries and companies to over 500 Indian and international clients across financial, corporate, consulting and public sectors. CRISIL Research leverages on its unique, integrated research platform and capabilities spanning the entire economy-industry-company spectrum to deliver superior perspectives and insights to
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its clients, through both, subscription products and customized solutions. CRISIL Research also offers consistent, high quality financial data analysis to users within and outside the CRISIL group, enhancing the efficacy of the conventional financial analysis frameworks adopted in the marketplace

CRISIL FUND SERVICES :

CRISIL Fund Services is India's leading provider of fund evaluation services and risk solutions to the mutual fund industry. Through innovative analytics, benchmarks and analytical tools, CRISIL Fund Services plays a significant role in shaping investor confidence and facilitating the introduction of best practices in the mutual fund industry. Widely reputed as the industry standard, CRISIL Fund Services is the official provider of valuation tools and market benchmarks.

THE CENTRE FOR ECONOMIC RESEARCH The Centre for Economic Research is uniquely positioned to provide benchmarks and analyses for India's policy and business decision makers. Manned by a team of senior economists, the Centre applies economic principles to live business applications, creating conceptual and contextual linkages that are unique to CRISIL.

The Centre also works with other CRISIL businesses, contributing to both the range and depth of products, services and consulting assignments that CRISIL offers.

INVESTMENT RESEARCH OUTSOURCING

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Irevna CRISIL added equity research to its wide canvas of work, by acquiring Irevna, a leading global equity research and analytics company.

Irevna, a division of CRISIL, provides high-end customized equity research and analytics, and knowledge process outsourcing, to the world's leading financial institutions, investment banks, private equity firms and consulting companies, helping them achieve sustainable competitive advantage. Irevna offers investment research services to the world's leading investment banks and financial institutions. Founded in 2001, Irevna pioneered the 'outsourced research' concept, where the firm helps large financial institutions to carry out investment research, at a time when accepted wisdom did not consider this possible. POLICY, REGULATORY AND TRANSACTION ADVISORY CRISIL INFRASTRUCTURE ADVISORY Our Infrastructure Advisory enhances CRISIL's franchise in the areas of policy-making and economic development. Our spectrum of activities includes catalyzing economic development through creation of appropriate policy frameworks, sector reforms, regulatory support, project structuring and global competitive bid process management for large and complex projects. CRISIL Infrastructure Advisory blends the best global practices with analytical excellence and a deep understanding of the local environment to provide policy, regulatory and transaction level advice to governments and leading organizations across sectors.

We work closely with our clients to facilitate an environment for public-private partnerships and ensure the success of projects undertaken. INVESTMENT AND RISK ADVISORY

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Investment and Risk Management Services CRISIL Risk Solutions business provides integrated risk management solutions and advice to Banks and Corporate by leveraging the experience and skills of CRISIL in the areas of credit and market risk.

Taking cognizance of the market needs for integrated solutions that quantify and manage complex risks, CRISIL Risk Solutions uses cuttingedge research and methodologies. Also, the Group brings together the experience of all business teams to offer modular or integrated solutions and advisory services that are customized to meet client needs. Credit rating is useful for the determination of the risk--A credit rating is important, if not the most important measure o f the financial health of a company. It gives an indication of how the company is performing in absolute terms and is also makes it possible to compare a company credit worthiness against other companys in similar markets or industries worldwide. It gives indication of how a company in similar markets or industries company expected to perform in the future and whether it is well placed to repay its debts downgrade can see a company share price tumble as markets are particularly sensitive to news of his nature a downgrade can also result in higher costs of capital lowering profitability which can also lower the share price. Credit ratings agency uses different alphanumeric and alphanumeric scales to rate companies (such as AAA, Aaa for the highest rated companies,BB+,Ba1,for medium risk and D for the lowest ). However, it is relatively easy to compare the ratings of different agencies to see if there is any difference in the assessment of the same company. In addition, most ratings include an outlook forecast such as stable, positive, or negative giving a signal as to which direction the credit ratings is likely to move in the future.

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Essentially, there are two kinds of credit ratings. The more traditional rating agencies put out what are known as qualitative ratings- these ratings are essentially opinions about a companys financial health by analysts who use a combination of financial data, company interviews and ither market information to determine a rating. These ratings are more subject to bias as they involve an analysts opinion in their determination- in the Enron debacle traditional ratings agencies and investment houses came under intense scrutiny and criticism for failing to spot the problems at the energy giant, with some even recommending the company as good investment just months prior to its collapse. The qualitative ratings market is dominated by only few major global player who are entrenched with very strong brand names.

CREDIT RATING BY FEDERAL BANK LIMITED

Credit rating of Banks deposits and Debt instrument: The rating factors in the long standing track record of the bank, high level of capitalization added by the successful GDR issue and internal accruals, strong solvency position, higher profitability and improving risk management systems and technology orientation. Shorty term deposits: P1 + by CRISIL: This rating p indicates that the degree of safety regarding timely payment on the instrument is very strong. The + (plus) sign for ratings reflects a comparatively higher standing within the category. Certificate of Deposits: P1+ by CRISIL The Certificate of deposit issued by the bank are rated P1 + by CRISIL. This rating P indicates that degree of safety regarding timely payment on the instrument is very strong. The + (plus) sign for ratings reflect a comparatively higher standing within the category.
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Long term debt- AA- (ind) by FITCH AA national ratings denote a comparatively low credit risk relative to other issuers or issues in the country. The credit risks inherent in these financial commitments differ only slightly from the countrys highest rated issuers or issues. The suffix (ind) refers to national ratings assigned by Fitch India.

CUSTOMER RELATIONS:
Ever since its inception, Federal bank has constantly being striving to make your banking experience as enjoyable and comprehensive as possible. Even while embracing the latest in technology to offer you state of the art services like ATM, Internet banking , Mobile banking and any branch banking , we at federal bank have always take utmost care to retain the vital element touch in our relationship with customers. Be in 24*7 phone banking service; or the opening of representative office at Abu Dhabi , which turn out to be a boon to the large number of NRIs in the middle east; or the implementation of the modern concept of customer relationship management(CRM) and priority banking with dedicated relationship managers; or the ambitious branch expansion plan undertaken by the bank ; or the recent launch of the innovative facility of online account opening; the business initiative of federal bank has consistently been customer oriented. Coupled with this, our dedicated and customer friendly staff ensures you a banking experience that is unmatched.

FINANCIAL STANDING:
Financial risk are measured by taking into consideration the borrowers liquidity, financial strength, loan serving capability and the ability of the unit in generating optimal returns from the capital employed Here, the financial ratio of the firm and its operating efficiency are evaluated and analyzed for the rating. Some of the factors are discussed here which may vary from companies to companies depending on the type of the industry and its operations.

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Current ratio is very important to judge the liquidity of the borrower. Low ratio gives poor signal for the company, thus making it to get less mark in rating. But at the same time, it also depends on type of industry & business. Return on capital employed is an indicator of managerial effectiveness and method of earning by the borrower. Higher ratio is good for the company. It gives the capital convertibility capability of the firm. it is the ratio between profit before interest and tax to the total capital. This ratio should be as a general rule of thumb more than the interest rate on the long term borrowed capital. PAT/net sales indicated the ultimate accretion to the net worth. It shows the strength and potential for the future growth. Total liabilities/tangible net worth determines the overall financial strength of the company .gearing over 4 times should be regarded as critical risk. The ideal risk, however, differs from industry to industry which needs to be kept in mind while appraising. Interest service coverage ratio in volatile markets, it is essential to estimate the number of times the gross earning cover the interest payable. It is measure of comfort that the profitability of the unit provides to the lender. Debt services coverage ratioit gives the number of times earning of the firm cover payment of interest and repayment of the principal. Basically it tells us the capacity of a firm to pay loan out of its profit. It indicates the margin of safety which exists for the bank and is a very important parameter in case of term loans. Management parameters: Here the managerial capability of the promoter with the commitment to the company the data is collected from both past and present records. In brief it judges the quality and goodwill of the company. Bank evaluates the policies and measures for the management of inventory and receivables on monthly basis. The transparency in accounting statements is also judged from different angle of

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the firm to have a fair picture in the banks point of view. The firm transaction with bank, if it is an existing account is also analyzed to draw a clear picture of the borrower with the bank.

Firm standings:
Various aspects of the firm is analyzed under this heading. Like the age of the firm which determines its experiences in the industry, reputation with customers and suppliers, the firms credit track record. Technology also plays an important role over here. It shows whether the firm is also improving according to the whole industry or not. The firms ability to raise funds, its reputation with bank, supplier quality and concentration customer quality and concentration are also analyzed. Accordingly scores are given based on the parameters. Customer dealing with BANK/compliance: The behavior of the customer as reflected in the books of Bank to be taken into account as a likely behavior in the future and hence they are factored into. It is desirable to minimize subjectivity while allocating marks under this head. In case of new borrowers, item may ignore and accordingly marks allotted there of needs to be deducted from the total assigned score to work percentage then accordingly allot appropriate rating. Score obtained and rating to be assigned Based on the scores, various ratings are given to the project for example: Score obtained 80% &above 65% to 79% 50% to 64% Below Ratings to be assigned AAA AA A B

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Description of the ratings: AAA Quality of lending is considered to be high and risk is at minimal. Probability of default and perceived loan loss is minimal. Historically, it is recorded that the borrower is maintaining liquidity and financial strength consistently for the last 3 to 4 years. Business is having enough potential to service the debt and interest there on. Management is known for the sharing the factual position of business happenings with bank honoring their commitments in time. Risk mitigators are sound enough to safe guard bank interest in the unlikely event of default. AA Well established borrowers with the financial liquidity, strength and stability. The probability of default and risk perception among this group of clients is a little higher than the of AAA borrowers. They share business results freely with the bank and are to honor to their commitments in a reasonable time. Risk mitigators value is lower than on case of AAA customer. A This group belongs to the lower end quality range. Their financial liquidity, financial strength and stability are relatively weak. Lending to such borrowers is, no doubt, sound but temporary disruptions. More likely to be affected by fluctuation in business cycles and thereby may look for intermittent support by way of additional funds etc. they demand for constant monitoring. B The borrowers are average liquidity, financial strengths and stability. Unless they are with bank for long with satisfactory dealings it cannot be said they are risk free. LIMITATIONS OF MODELS: The existing model at that time was evaluated by risk management consultants as a part of setting up credit risk management system. And it was found out that those models have some limitations like:G.L.B.I.M.R Page 30

 Those models were mainly judgmental models wherein the parameters & weight ages were fixed by the sharing of experience of staff involved in the model designing. Number of rating was four with one upgrade (AAA to prime). There should be at least 6 performing & 2 non-performing risk grades, to ensure granularity. The predictive power of models needed to be improved. The risk score model didnt take into account qualitative factors crucial for proper credit evaluation for small accounts like i. ii. Assessment of management skills & reputation Business condition

In small business, experience suggests that quality of financial information may not be up to a desired level and this needed to be factored into the model. Thus, in 2005, as a part of the risk management consultancy some rating models have been developed which have been demonstrated better predictive power. These credit risk models have been developed on the basis of banks own data and have also been validated on banks data. The rating models have been classified according to the limits sanctioned to the borrower (both fund & non-fund based taken together). i. ii. Large corporate market Mid segment model ( fund/non-fund based limits of Rest. 1 crore & above but not exceeding Rs 5 crore & turnover below Rs 50 crores) iii. SBS (including SSI up to the limits specified) Model (fund/non-fund based limits of Rest. 10 lacs & above but not exceeding Rest. 1 crore.

LARGE CORPORATE MODEL: It is a statistical model (using multiple discriminant analysis) developed using banks own data. It was affected from 01. From 01.11.2006.

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This model is applicable to the following categories of borrowers All domestic exposures for which credit limit (fund/non-fund based) is Rs 5 crore & above or turnover of the borrower is Rs 50 crore or above. ECBs (External commercial borrowings and) Syndicate loans. The following advantages are not covered by the model Certain agriculture/ other priority sector advances. Advances against deposits/NSC/LIC policies/relief bonds etc. Advances to stock brokers ( only for stock exchange branch) PARAMETERS OF THE MODEL: The model considers both quantitative (financial) & qualitative parameters. Quantitative parameters like generic ratios which give financial information, while qualitative parameters like management risk. Firm standing & industry risk are considered in this model. QUANTITATIVE PARAMETERS: Generic ratio Leverage Parameter Remarks

Tangible net worth/ TNW: Equity/preference capital + free reserves + P&L total liabilities (TNW/TOL) outside Ac- Misc. Expenditure (Intangible assets) + unsecured loans (long-term unsecured loans from promoters)

Liquidity

Net

working Long term profitability (measures the extend of financing total assets through internal accruals. A higher ratio shows a higher level of historical profitability & greater financial resilience in the face of an economic downtown)

capital/total assets Long-term profitability Retained earnings/total assets

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profitability

Earnings before tax &interest/ total

assets (EBIT/TA) Efficiency Sales/ Total assets The ratio (commonly known as asset turnover ratio) shows how efficiently the firm uses its assets to generate sales. Higher levels indicate greater efficiency)

QUALITATIVE PARAMETERS: Parameters 1. Management risks A. Management character a. Integrity (willingness to pay) B. Management capacity a. key managerial persons (promoters & key persons) competence b.Diversion of funds b.Key managerial persons (promoters & key persons) Business experience c. Business environment d. payment record of group cos. With the bank. e. corporate governance c. Industrial/ employee relations d. Internal control e. Business planning f. financial strength/ Group support g. Intra company/Group conflicts C. Management succession a. Succession planning b. succession preparation

II. Firm standing a. Age of firm b. Reputation with the customers & suppliers c. Competitive position of firms d. Technology
G.L.B.I.M.R

III. Industry risk a. Industry phase b. Competition impact on GP margin c. Regulatory issues/ fiscal policy risk d. Technology dependence.
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e. Customer quality & concentration f. supplier quality & concentration g. Ability to raise funds (next 12 months) h. reputation with bank i.Business loan history j. credit track record

e. Environmental concern f. Demand supply situation

The values of the quantitative & qualitative parameters are combined to arrive at a discriminant score which is mapped to the different risk grades (on the basis of relationship established through discriminate analysis). The model consists of 10 borrowers risk grades from LC1 to LC10. The risk grades represent as follows LC1 & LC2 LC3 & up to LC5 LC6 LC7 & up to LC10 Good quality credit No immediate concern Require intensive monitoring NPA/ could turn NPA over the midterm term

The minimum grade for considering sanction of advance (including additional limits) to a borrower other than PSU is LC5. For PSU the minimum grade for considering sanction is LC7. As these borrower risk grades will be used as a basis for calculating probability of default, which will be an input of capital charge calculation under the advanced approaches of Basel II, It is very important that all eligible borrowers be rated. The credit rating grades will also represent the risk of the asset. The borrower risk grade is to be input as credit rating of the borrower in the CCIS returns.

Adjusted borrower grade:

For existing accounts the account operation will impact the Borrower risk grade & the adjusted borrower grade will be arrived at by upgrading/downgrading the borrower risk grade based on
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the monitoring parameters. While borrower risk grade will be used for entry level as mentioned above & for arriving at the probability of default, the adjusted borrower grade will be considered for monitoring. Various monitoring factors proposed to be considered for adjusted borrower grade are: Number of days delay in receipt of Installments (principal/equated) Interest Submission of progress reports/stock statements Compliance with sanctioned/disbursement conditions Key employee turnover Conduct of the account Comments during site visits Number of time rescheduling/relief obtained from lending institutions

The spreads for fixing rate of interest for the risk grades will be as follows Grade LC1 to LC2 Quality Representation Good quality credit Spread applicable As applicable to existing AAA accounts LC3 to LC4 No immediate concern As applicable to existing AA accounts LC5 No immediate concern As As applicable applicable to to existing existing A A

accounts LC1 to LC2 Require intensive monitoring

accounts LC1 to LC2 NPA/couls turn NPA over the As applicable to existing B rated medium term accounts

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SBS Model: This is a scoring model with immediate effect. SBS model is applicable to all borrowers with aggregate limits less than Rs1 crore including the following: Small business & services (SBS) borrowers who are involved in trade & services & manufacturing with aggregate limits between Rs 10 lacs to less than Rest 1 crore Small Scale Industries (SSI) accounts with aggregate limits between rest 10 lakhs & less than 1 crore The model doesnt cover the following advances: All advances up to Rs 10 lacs (fund based + non-fund based) Certain agriculture/other priority sector advances. Advances against deposits/NSC/LIC policies/Relief bonds etc. All staff loans All other personal loans Education loans Final risk score is calculated from financial, management & business score & is risk graded on a 1 to 10 scale as specified in the score sheet attached. SBS1 to SBS 3 SBS 4 to SBS 6 SBS 7 SBS 8 to SBS 10 Good quality credit No immediate concern Require intensive monitoring NPA/ could turn NPA over the medium term

The following risk grades are to be treated as minimum grades for considering sanction of advance to a borrower For SBS obligors, an entry grade of SBS 5.5 (total score of 196) For SSI obligors, an entry grade of SBS 5.0 (total score of 180) The spreads for fixing rate of interest for the risk grades will be as follows:

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Grade SBS 1 to SBS 3

Quality Representation Good quality credit

Spread applicable As applicable to existing AAA accounts

SBS 4 to SBS 6

No immediate concern

As applicable to existing AA accounts As applicable to existing A accounts

SBS 7

Require intensive monitoring

SBS 8 to SBS 10

NPA/could turn NPA over the As applicable to existing B medium term accounts

SBS model (Accounts less than 1 crore):

This model uses three components i.e. financial, management, industry parameter which is giving different weightings (given below) & converted into a risk score by multiplying the factor by respective weight assigned to that factor. Components Financial risk score Management risk score Business risk score Weight age 24% 52% 24%

The aggregate score is then used to arrive at the final grade of the borrower. A. Financial risk score Sales growth Profitability: PBDITA/sales Leverage:TOL/TNE Liquidity: Current ratio Coverage I. II.
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DSCR Interest coverage

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Each parameter is filled in by considering 1 as the best tier & 4 as the worst tier. Each financial factor is given a weight age of 4%. B.Management risk score:

Management factors Management character

Sub factors Diversion of funds Integrity Business environment

weight age 4 4 4 4 2 2 2 2 4 4 4 4 8

Management capacity

Financial strength Competence Business expertise Internal control Employee quality

Management succession

Successor identification Successor preparedness

Management reputation

Business loan history Credit track record Firms age

Reputation with customer & 4 supplier 52 C.Business risk score: Business factors Customer quality & concentration Supplier quality & concentration Impact of competition on GP margins Sales trend Regulatory/ fiscal risk weight age 4 4 4 4 4

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Technology dependence (product) Environmental impact (product)

2 2 24

Parameters

Measure

Assigned Score

I. Financial Risk Based on latest Balance Sheet(audited/provisional) 1. Sales Growth 15% & above increase over previous 1 year 5% & above but below 15% increase 2 over previous year 0% & above but below 5% increase 3 over previous year Negative over previous year 2. Profitability (PBDITA/SALES)*100 4

25% & above increase over the 1 previous year 15% & above but below 25% increase 2 over previous year 0% & above but below 25% increase 3 over previous year Negative over previous year 4 1 2 3 4 1 2

3. Liquidity (Current ratio)

1.33 & above Less than 1.33 but more than 1.25 1.24 to 1.1 Less than 1.1

4. leverage ( TOL/ TNW)

0 above but below 1 1 & above but below 3

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3 & above but below 4 4 & above 5. Coverage

3 4

Debt service coverage 2 & above ratio 1.5 & above but below 2 1 & above but below 1.5 -1 & above but below 1. Interest Service Coverage 2 & above Ratio 1.5 & above but below 2 1 & above but below 1.5

1 2 3 4 1 2 3

-1 & above but below 1.

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SUB TOTAL OF FINANCIAL RISK SCORE (A1TO A5 ABOVE) (B) Management risk score (1) Management character

(i)Diversion of funds

There is no possibility of diversion of 1 funds & there are no group companies. Diversion of funds is unlikely, though 2 there are group entities, marginal amounts may be divided for personal use. Diversion of funds is likely on a 3 regular basis to group entities & for personal use. The borrowing entity is only a front for 4 diversion to the rest of the group or for personal use.

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G.L.B.I.M.R

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(ii) Integrity

Well

established

member

of

the 1 is

community

whose

integrity

unquestionable. Generally respected by peers & by the 2 community. Does not always act in an upright & 3 honest manner. Should impaired, cooperate repayment capacity may or be 4 not no

management with lender

information could be obtained about managements integrity. (iii) Business commitment Promoter is highly in this business, has 1 long standing exposure in the business contributes significantly to his overall business environment. Promoter is fairly committed to this 2 business but has substantial investment in other business. This business occupies only small 3 portion of his time & investment & his most significant business interest lies elsewhere. No involvement by the promoter, 4 business merely a legacy or promoter diversifying into other areas where his involvement will increase in future or unable to gauge commitment.

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B1 SUB TOTAL MNAGEMENT CHARACTER SCORE (2)Management capacity

(i)

Financial strength

Financial very strong : high net worth 1 & flourishing group entities (if any) Good financial strength: minor group 2 entity may not be doing well or short term personal problems. Financial strength is ok: however poor 3 group entity could the borrowing entity. Very poor financials Or financial 4 strength couldnt be ascertained or widely differing opinions obtained.

(ii)

Competence

Management is very good: person is 1 well organized & knowledgeable about the company & the industries in which he operates. Person has reasonable management 2 skills but weakness in one or two areas is evident. Tasks are performed

satisfactory. Person exhibits limited managerial 3 skills. Individual doesnt have a

complete understanding of a business. Person exhibits a total lack of skills. 4 Decisions are illogical & loan

repayment could be at risk.

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(iii)

Business experience

Several

years in

of the

sound same

business 1 line &

experience

extremely successfully. Fairly long experience in the same line 2 of business with limited success. Fair experience but related line of 3 business Very short or no experience in any 4 business. (iv) Internal controls Internal control is fairly good & is 1 dependent standing employees. Internal control is not very light & 2 employees have too much discretion Internal control is totally dependent on 3 the owners presence in the business location & his personal supervision. No internal control at all the owner 4 does not have a clue to what is happening. on the owners with long his

relationship

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(v)

Employee quality

Motivated & loyal employees who 1 have a sound understanding of the business. Employees are loyal but dont have 2 much experience. Employees are not motivated & dont 3 contribute their best. Employees are neither motivated nor 4 competent.

B2 SUB TOTAL OF MANAGEMENT CAPACITY SCORE (2)Management succession

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(i)

Succession identification

Well defined succession plan in place, 1 business not dependent in one person. Business dependent on one person at 2 present. Succession is not addressed adequately 3 & hence dealing with a change in the management team could adversely affect the companys performance however the damages can be obtained. Succession is not addressed & in the 4 event of incapacitation of the key person, the business would suffer financial setbacks.

(ii)

Successor preparedness

Successors have far more than the 1 necessary skills, experience &

knowledge about the business. Successors have adequate skills, 2

experience & knowledge. They have some skills. But a lot of 3 learning adjustment needed to be fully capable of replacing current

management. Successors are poorly prepared for 4 assuming the role of current

management & are not currently, nor could they be made capable of replacing current management.

B3

SUB TOTAL OF MANAGEMENT SUCCESSION SCORE (3(i) TO

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3(ii) (i) Business history Obligation to creditors are met before 1 or within agreed terms. Payments are extended beyond agreed 2 upon terms of an infrequent basis. Often borrower allows bills to extend 3 60-9- days beyond permanent date Credit checks indicate the borrower is 4 consistently late without cause in paying its suppliers. (ii) Credit track record Company has never violated any terms 1 & condition of its loan agreement Company rarely does not meet all 2 terms & conditions of its loan

agreement. Now & then the company breaches a 3 significant term of condition of the credit agreement. Company consistently violates loan 4 agreement covenants. (iii) Firms age More than 10 years More than 5 years More than 2 years Less than 2 years (iv) Reputation 1 2 3 4

with Excellent relationship with suppliers 1 with no disruption of suppliers.

customers & suppliers

Excellent relationship with customers resulting in growth & timely payments.

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Good relationship with suppliers with 2 some disruption of suppliers. Fair reputation with customers resulting in growth & generally timely payments. Fair relationship with suppliers with 3 frequent disruption of suppliers. Fair relationship with customers but

increase in credit period & some defaults. Poor relationship with suppliers. Poor 4 relationship with customers but

substantial increase in credit period & high defaults. (4) Management reputation

SUB TOTAL OF MANAGEMENT REPUTATION SCORE B4 SUB TOTAL OF MANAGEMENT RISK SCORE Business/industry Risk Score

(i)

Customer

quality

& Diversified reasonable

customer size, stable

having 1 Purchase

concentration

pattern from the firm & likely to pay outstanding invoices on a timely basis.
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Generally diversified customer based 2 that may not have either a reasonable size or a stable purchase pattern from the firm but is likely to pay

outstanding invoices on a timely basis. There may be a few large customers. Customer has neither reasonable size 3 nor a stable purchase pattern from the firm but is likely to pay outstanding invoices on a timely basis. The firm may have only a few customers with little product diversification. Customers are not expected to pay on 4 time. The firm may have only 1-2 customers. (ii) Supplier quality & Firm has a choice of suppliers 1

concentration

supplying quality goods & services. Firm has a choice of suppliers 2

supplying average quality of goods & services. Firm has very few suppliers supplying 3 quality goods & services. Quality of goods & services isnt very good. Monopolistic situation with no control 4 over quality. (iii) Impact of competition on Current industry structure not expected 1 GP margins to lead to decline in GP margin. Industry competition may result in 2 marginal decline in margins. Industry competition has resulted in 3

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significant decline in margins. GP margins have declined significantly 4 due to competition & expected to decline further. (iv) Sales trend (product) Product have no substitutes, regulatory 1 threats demand will remain stable or grow. Product has limited substitute & 2 regular threats. Demand for product may be affected 3 by lower price substitutes &

regulation. Demand faces serious threats due to 4 substitutes & regulation. (v) Regulatory/ fiscal risk There are no foreseen changes in the 1 direct/ indirect tax structure or

import/export restrictions which could impact the industry profitably. While some changes in the direct/ 2 indirect tax structures or import/ export restrictions which impact the industry are fore seen, these may have some impact on industry profitability. Some changes are foreseen in the 3 direct/indirect import/export tax structure or

restrictions

which

impact the industry. These may have major impact on industry profitability & affect viability of marginal players.

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Significant changes are foreseen in the 4 direct/indirect import/export tax structures or

restrictions

which

impact the industry. These may have significant impact on industry

profitability & viability players. (vi) Technology dependence Technology is tested & not expected to 1 change in the long run. Technology is tested & not unlikely to 2 change in the medium term Technology is tested but likely to 3 change in the medium term. Outdated technology or tech. subject to 4 very fast obsolescence or technology as yet untried/untested. (vii) Environmental impact Unlikely to face pollution related 1 problems in future. Limited likelihood to face pollution 2 related problems in future. Polluting industry but complies with 3 current norms which are subject to change. Polluting industry & doesnt comply 4 current norms. SUB TOTAL BUSINESS/ INDUSTRY RISK SCORE (C(i) to (vii) above

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VBA MODEL (VERY LARGE BORROWER ACT) This model is for an amount of 5 crore or above credit. It helps in quantification of certain qualitative factors, which are very crucial in determining the credit worthiness of a borrower. Though the quantification is not so accurate but it is precise one. Various factors consider in this model are: 1. Financial risk 2. Management risk 3. Business risk 4. Monitoring risk

FINACIAL RISK Sales Sales generated in connection with the principal operation of the business should be entered in this head. Trading sales should be clubbed with gross sales. Income & revenues from other source should be included with other operating income. GST/VAT/Turnover tax/National security levy Excise duty GST/VAT/Turnover tax/National security levy or any other indirect tax. Excise duty paid on sales. If sales are shown net of excise duty then this should be left blank. Raw material and consumables used Expenses arising out of material & related expenses used to produce finished goods. Example of account names raw material consumed, packing material, trading purchases. Changes in inventories of finished goods and WIP
G.L.B.I.M.R

This head relates to change in opening & closing stock of finished goods &
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goods in progress or work in progress.

Other direct expenses

This head relates to other direct expenses incurred during production or break up of expenses isnt given then cost of sales fig. may be input here. Example of account names- power & fuel, coal costs, repairs & maintenance on plant & machinery etc.

Employee expenses

Expense arising out of the payment of wages & or salaries. Example of accounts- salaries, wages, bonus, allowances, contribution to provident fund, gratuity, employee welfare.

Selling and distribution expenses

All operating expenses relating to selling & marketing efforts, example of account names- sales expenses, sales commission, marketing expenses, advertising expenses, sales mans salaries, bad debt written off, freight outward.

Administrative expenses and establishment expenses

All general & administrative operating expenses not specially identified & it shouldnt include any depreciation & amortization expenses. Example of accounts names-office expenses, insurance, supplies, donations, repairs, & maintenance on office & travel.

Other operating expenses

All other operating expenses.

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Work performed by enterprise and capitalized

All revenue expenses incurred before commencement of commercial borrowings. Example of accountsinterest on long-term loans, cash credit, debentures, loss of foreign exchange fluctuations etc.

Lease expenses

Total interest expense incurred on lease obligations.

MANAGEMENT RISK INTERGITY (WILLINGNESS TO PAY) Excellent Promoter/group well known to meet its commitment even under adverse circumstances. Good Known group/promoter who generally meets its commitment. Marginal Known group/promoters who doesnt always meet its commitment? Doubtful No information could be obtained about managements integrity or promoter already in default with some institutions. 4 3 2 SCORES 1

DIVERSIION OF FUNDS Excellent Good No diversion of funds was observed in the past. Minor diversion of funds was observed in the past. Marginal Diversion of funds has been a regular affair in the past. Doubtful The borrowing entity has been the front for diversion to funds.
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SCORES 1 2

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BUSINESS COMMITMENT Very high Promoter is highly involved in this business, has long standing exposure in the business & the business contribute significantly to his overall business investment. High Promoter is fairly committed to this business but has substantial investment in other business. Marginal This business occupies only a small portion of his time & investment & his most significant business interest lies elsewhere. Low No improvement by the promoter, business merely a legacy or promoter diversifying into other areas where his involvement will increase in future or unable to gauge commitment.

SCORES 1

KEY MANAGERIAL PERSONS-BUSINESS EXPERIEENCE Excellent Excellent business experience & management skills in the same line of business. Good Adequate business experience & requisite management skills in the same line of business. Marginal Limited business experience or managerial skills in the same line of business. Inadequate Very little business experience or weak managerial skill in the same line of business.

SCORES 1

KEY MANAGERIAL PERSONS-COMPETENCE Excellent Excellent business experience & management skills in the same line of business. Good Adequate business experience & requisite

SCORES 1

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management skills in the same line of business. Marginal Limited business experience or managerial skill in the same line of business. Inadequate Very little business experience or weak managerial skill in the same line business. 4 3

INDUSTRIAL/EMPLOYEE RELATION Excellent No labour problems in past 2 years & cordial relationship. Good Minor labor problems in past 2 years & cordial relationship. Marginal Labour problems in past 2 years lending to disruptions. Weak Frequent labour problems & weak relations.

SCORES 1

SUCCESSION PREPARATION Excellent Successors have far more than necessary skills, experience & knowledge about the business. Good Successors have adequate skills, experience & knowledge about the business even though there would be some learning & adjustment needed to be capable of replacing current management. Marginal Successors are somewhat prepared for assuming the role of current management but are expected to be capable of replacing current management. Inadequate Successors are weakly prepared for assuming the role of current management & are not currently, nor could they be made capable of replacing current management.

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INTERNAL CONTROL Excellent Internal control is fairly good or has obtained international certification like ISO certificate etc. Good Internal control is adequate or the company has applied for international certificate like ISO certificate. Marginal Internal control is totally dependent on the managements presence in the business location & their personal supervision. Inadequate No internal control at all. The management doesnt have a clue to what is happening.

FINANCIAL STRENGTH/ GROUP SUPPORT Excellent Financially very strong, high net worth & flourishing group entities. Good Good financial strength; few group entities maynt be doing well. Marginal Financial strength is adequate; however, group situation may affect the borrowing entity adversely. Inadequate Weak financial or financial strength couldnt be ascertained or widely differing opinions obtained.

SCORES 1

PAYMENT RECORD OF GROUP COMPANIES Excellent All the group companies are meeting their commitments without any delay. Average Group companies are meeting their commitments. However delays of < 1 quarter

SCORES 1

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are observed in some companies. Weak Group companies are delaying payments beyond 1 quarter. Not applicable If there are no group companies with the bank. 4 3

BUSINESS PLANNING Excellent Management is highly committed in strategic planning & has a long track record in meeting targets. Good Management is committed in strategic planning & has a reasonable track record in meeting targets. Marginal Management is committed in strategic planning but has short comings in meeting targets. Inadequate Management is unable to develop strategic plan & the company lacks future direction.

SCORES 1

CORPORATE GOVERNANCE Above average The company has complied with all the conditions of corporate governance. Average The compliance with the condition of corporate governance as stipulated. Below average The compliance with the condition of corporate governance as stipulated. Not applicable The company is not a listed company & no information is available.

SCORES 1

INTRA COMPANY / GROUP CONFLICTS Excellent

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SCORES 1
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The relationship among promoters/directors is

excellent. Good The promoters/directors enjoy good understanding. Marginal There have been instances of conflicts between promoters/ directors, which could affect the performance of the company. Weak Major differences between promoters/directors, which is adversely affecting the performance of the company. 4 3 2

FIRM STANDING AGE OF FIRM >10 5-10 years 2-5 years <2 years REPUTATION WITH CUSTOMERS AND SUPPLIERS Excellent Excellent relationship with the supplier with no disruptions of supplies. Excellent reputation with customers resulting in growth & timely payments. Good Good relationship with the suppliers with some disruptions of supplies. Good reputation with customers resulting in growth & generally timely payments. Marginal Fair relationship with the suppliers with frequent disruption of supplies. Fair reputation with customers but increase in credit period & some defaults. Unfavorable
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SCORES

1 2 3 4 SCORES 1

Poor relationship with the supplier. Poor

4
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reputation with customers resulting in substantial increase in credit period & high defaults.

BUSINESS LOAN HISTORY Excellent Obligation to the creditors are met before or within agreed terms. Good Payments have extended beyond agreed terms on an infrequent basis. Marginal Often companies delay bills to the extent of 6090 days beyond payment days. Weak Credit checks indicate the company is consistently late, without cause in paying its suppliers or information couldnt be obtained on how the borrower handles its payment responsibility.

SCORES 1

CREDIT TRACK RECORD Excellent Companies have never violated any term & condition of its loan agreement. Good Companies sometimes break terms & conditions of its loan agreement which are not significant. Marginal

SCORES 1

Now & then the company breaches a significant 3 term or condition of the credit agreement.

Weak

Company regularly violates loan agreement covenants.

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COMPETITIVE POSITION OF THE FIRM Very high A significant player & has strong ability to increase or maintain market share. High A significant player with adequate ability to maintain market share. Marginal A marginal player with moderate ability to maintain market share. Low Low market share & not likely to withstand the market competition.

SCORES 1

TECHNOLOGY- FIRM STANDING Excellent Latest proven technology, which is leading to efficiencies. Good Widely accepted technology which is fairly efficient. Marginal Technology is likely to be phased out in the medium term. Unfavorable Outdated technology.

SCORES 1

CUSTOMER QUALITY AND CONCENTRATION Excellent Diversified customer base having reasonable size & stable purchase pattern from the firm. Good Generally diversified customer base that may not have either a reasonable size or a stable purchase pattern from the firm. There may be a few large customers. Marginal Customer has neither reasonable size nor a stable purchase pattern from the firms. There may be only a few customers with little product

SCORES 1

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diversification. Unfavorable Customer concentration is high. 4

SUPPLIER QUALITY & CONCENTRATION

SCOR ES

Excellent

Firm has a choice of suppliers supplying quality goods & services.

Good

Firm has a choice of suppliers supplying average quality goods & services.

Marginal

Firm has a very few suppliers supplying goods 3 & services. Quality of goods & services is not very good.

Unfavorable

Monopolistic situation with no control over quality.

REPUTATION WITH BANKERS/FINANCIAL INSTITUTION

SCOR ES

Excellent

Excellent reputation with bankers for timely payments of commitments.

Good

Good reputation with bankers for timely payment of commitments.

Marginal

Fair reputation with bankers. However there are some delays in meeting commitments.

Unfavorable

Poor reputation with bankers or no information.

BUSINESS RISK INDUSTRY PHASE Growth Stable Uncertain Industry is in growth phase. Industry is in stable phase. Industry susceptible to unfavorable changes in SCORES 1 2 3

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the economy. Decline Industry is in declining phase. 4

COMPETION IMPACT ON GP MARGIN Excellent Current industry structure (including substitutes/entry barriers) not expected to lead to decline in GP margin. Good Industry competition may result in marginal decline in margins. Marginal Industry competition has resulted/may result in significant. Unfavorable GP margins have declined significantly due to competition & expected to decline further.

SCORES 1

REGULATORY ISSUES/ FISCAL POLICY DEPENDENCE Low There are no foreseen changes in the regulations, which could affect the industry profitability. These changes include direct/indirect tax structure, import/export restrictions etc. Moderate Some changes in the regulation, which affect the industry, are foreseen. These may have some impact on industry profitability. High Some changes are foreseen in regulations. These may have a major impact on industry profitability & affect viability of marginal players. Very high Significant changes are foreseen in regulations. These may have a major impact industry

SCORES 1

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profitability & viability of players.

TECHNOLOGY DEPENDENCE Low Technology isnt expected to change in the long-term. Moderate Technology is unlikely to change in the medium term. High Very high Technology is likely to change in short term. Outdated technology or technology subject to very fast obsolescence or technology as yet untried/untested.

SCORES 1

3 4

DEMAND SUPPLY SITUATION Excellent Demand exceeds supply & the situation is unlikely to change in medium term. Good Demand is likely to match supply in the medium term. Marginal Moderate oversupply in the industry & low demand growth envisaged in the medium term. Unfavorable Significant oversupply in the industry, which is unlikely to change in medium term.

SCORES 1

MONITORING RISK SUBMISSION OF PROGRESS REPORTS Within due date <=15 days <=30 days >30 days Within 15 days Within 30 days Over 30 days SCORES 1 2 3 4

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COMPLIANCE WITH SANCTIOND/DISBURSEMENT CONDITIONS Excellent Good Marginal Not complied Complied fully-security & financial covenants Complied with creation of security. Complied with financial covenants only. The sanctioned/disbursement conditions have not been complied.

SCORES 1 2 3 4

KEY EMPLOYEES TURNOVER Low No significant change in the key employees in 1 year, other than for a valid reason. Medium Few changes in the key employees in last 1 year. High Moderate change in the key employees in the last 1 year. Abnormal Frequent change in the key employees in the last 1 year.

SCORES 1

COMMENTS IN OPERATIONS / ASSETS DURING SITE VISITS Excellent No adverse comments & turnover greater than 90%. Good Normal adverse comments & turnover between 75% to 90%. Marginal Major adverse comments & turnover between 50% to 75%. Unfavorable Comments causing anxiety or turnover below 50%.

SCORES 1

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CHANGE IN ACCOUNTING PERIOD DURING THE LAST FIVE YEARS Not done Once Twice More than twice 1 2 3 4

NO. OF TIMES RESCHEDULING / RELIEFS OBTAINED FROM LENDING INSTITUTIONS Not done Once Twice More than twice 1 2 3 4

NO. OF TIMES OVERLIMIT / AD-HOC LIMIT ALLOWED Two times Four times Six times >six times Twice a year Four times a year Six times a year More than six times or exceeding six months total in a year.

SCORES 1 2 3 4

NUMBER OF CHEQUES/BILLS RETURNED <6 per year <12 per year <24 per year > 24 per year Less than 6 per year Less than 12 per year Less than 24 per year More than 24 per year

SCORES 1 2 3 4

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CHAPTER-4 RESEARCH METHODOLOGY

The research was mainly of secondary research consisted of literature search and internet search. Regarding the research on the topic credit rating system of federal bank ltd. I have used all the methods adopted by credit rating agency i.e CRISIL for calculating credit rating . The methods include:-

I.

Credit rating methodology Bond/debenture rating Equity rating Commercial paper rating Fixed deposits rating Individuals rating Mutual fund rating Rating structure obligations

II.

Credit rating process Receipts of information Analysis of information

III.

The major ratios computed Coverage ratio Financial leverage ratio Liquidity ratio Cash flow ratio Profitability ratio

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CHAPTER-5
DATA ANALYSIS & INTERPRETATION (CASE STUDY)
ABC Pvt. Ltd had applied for a loan above an amount of 1 crore. Thus, on the basis of the amount one credit rating model was applied to find out the appropriate rating for the applicant. As per the model, the required parameters were considered to decide the credit rating. Those parameters are Financial standing Information system Financial discipline General observations in conduct of the account & ancillary business. Based on these factors scores were given & according to the score obtained, the rating was done.

ASSESSMENT OF WORKINGCAPITAL REQUIREMENTS OF ABC PVT. LTD.

Amounts in Rs Lakhs Last 2 years actual Table-5.1 Year Current year Estim. 31st Mar 07 1. Gross sales i. ii. iii. Domestic sales Export sales Other operating/revenue income Total 2. Less Excise duty 310.95 310.95 438.24 438.24 647.79 647.79 906.90 906.90
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(As per audited a/cs) 31st Mar 08 31st Mar 09 31st Mar 10

310.95 -

438.24 -

647.79 -

906.90 -

3. Net sales (1-2)

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4. % rise (+) or fall (-) in net sales as compared to previous year (annualized) 5. Cost of sales i. Raw materials (including stores & other items used in the process of manufacture) a) Imported b) Indigenous ii. Other spares a) Imported b) Indigenous iii. iv. Power & fuel Direct labour (factory wages & salaries) v. vi.

N/A

40.94%

47.82%

40.00%

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

Other manufacturing expenses 279.31 Depreciation Other costs 1.15 280.46 0.00

390.03 1.35 391.38 0.00

578.19 1.22 579.41 0.00

780.56 1.03 781.59 0.00

vii. viii.

Sub- total (i-vi) Add: Opening stock in process Sub-total (vii-viii)

280.46 -

391.38 -

579.41 -

781.59 -

ix.

Deduct: Closing stock in process

x. xi.

Cost of production Add: Opening stock of finished goods Sub- total (x-xi)

280.46 0.00

391.38 0.00

579.41 0.00

781.59 0.00

280.46 -

391.38 -

579.41 -

781.59 -

xii.

Deduct: Closing stock of finished goods

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xiii.

Sub- total (Total cost of sales)

280.46 22.00

391.38 34.96

579.41 43.93

781.59 76.72

6. Selling, general & administrative expenses 7. Sub- total (5+6) 8. Operating Profit before interest (3-7) 9. Interest 10. Operating profit after interest (8-9) 11. i. Add: Other non- operating income a) Sold of old newspapers b) Comm. Received from ABC ltd. c) Fly high incentive & incentive Dharitri d) Rent research & mis.income Sub- total ( income) iii. Deduct: Other non- operating expenses iv. Net of other non- operating income /expenses

320.46 8.49 1.48 7.01

426.34 11.90 2.00 9.90

623.34 24.45 2.50 21.95

858.31 48.59 3.25 45.34

0.03 0.22

0.03 0.00

0.05 0.00

0.04 0.00

0.00

0.57

0.00

0.00

0.00

0.42

0.00

0.00

0.25

1.02

0.05

0.04

0.00

0.00

0.00

0.00

0.25 12. Profit before tax/ loss 11(iii)) 13. Profit for taxes 14. Net profit/loss (12-13) 15. A) Equity dividend paid amount (already paid + B.S prov.) B) Dividend rate (%) 16. Retained profit (14-15) 7.26 7.26 (10+ 7.26

1.02 10.92

0.05 22.00

0.04 45.38

10.92 -

22.00 -

45.38 -

10.92

22.00

45.38

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17. Retained profit/ net profit (%)

100%

100%

100%

100%

ANALYSIS OF BALANCESHEET LIABILITIES

Amounts in Rs. Lakhs Last 2 year actual Table-5.2 Year (As per audited a/cs) 31st Mar 07 CURRENT LIABILITIES 1. Short-term borrowing from banks (including bill purchased, discounted & excess borrowing placed on repayment basis) i. ii. iii. From applicant bank From other banks (of which BP & BD) Sub- total (i+ii) (A) 2. Short term borrowings from others 3. Sundry creditors (trade) 4. Advance payments from customers/ deposits from dealers 5. Prov. For taxation 6. Dividend payable 7. Other statutory liabilities (due within 1 year) 8. Deposits/ installments of term loans/ DPGs/ debenture etc. 1 year ) ( due within 1.41 2.88 6.17 12.50 6.63 1.00 52.87 20.00 2.00 88.14 20.00 2.50 111.82 20.00 2.50 108.00 6.63 20.00 20.00 20.00 31st mar 08 Current Estimated year 31stMar 09 year 31st Mar 10

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9. Other current liabilities & Provisions (due within 1year) a. Liabilities for exps b. Branch division Sub- total (2-9) (B) 10. Total current liabilities (A+B) TERM LIABILITIES 11. Debentures ( not maturing within 1 year)

2.22

2.60

3.30

7.00

1.95 0.27 57.50 64.13

2.60

3.30

7.00

95.62 115.62

123.79 143.79

130.00 150.00

12. Preference shares (redeemable after 1 year) 13. Term loans (excluding installments payable within 1 year) 14. Deferred payment credits (excluding installments due within 1 year) 15. Term deposits (repayable after 1year) 16. Other term liabilities 17. Total term liabilities (11-16) 18. Total outside liabilities (10-17) NET WORTH 19. Ordinary share capital 20. General reserve 21. Revaluation reserve 22. Other reserves (excluding provision) 23. Surplus (+) or deficit (-) in profit & loss A/C 24. Net worth 25. Total liabilities (18+24) 11.67 77.39 11.67 1.59 65.72 1.59

1.06

0.63

0.20

1.06 116.68

0.63 144.42

0.20 150.20

17.58 -

30.68 -

66.06 -

17.58 134.26

30.68 175.10

66.06 216.26

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ANALYSIS OF BALANCESHEET ASSETS

AMOUNTS IN Rs LAKHS Last 2 years actual Table-5.3 Year (As per audited b/s) 31st Mar 07 Current Assets 26. Cash & bank balances 27. Investments (other than long-term) i. ii. Govt. & other trustee securities Fixed deposit s with banks 0.11 0.22 0.13 0.18 31st Mar 08 Current Year 31st Mar 09 Estimated Year 31st Mar 10

1.65 28. i. Receivables other than deferred & exports (including bills purchased & discounted by banks) iii. Export receivables (including bills purchased & discounted by banks) 29. Installments of deferred receivables (due within 1 year) 30. Inventory: i. Raw materials (Including stores & other items used in the process of manufacture) a) Imported b) Indigenous ii. iii. iv.
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2.42

2.42

2.42

66.68

121.50

162.28

203.77

Stock in process Finished goods Other consumable spares Page 74

a) Imported b) Indigenous 31. Advances to suppliers of raw materials & stores/spares 32. Advance payment of taxes 33. Other current assets 34. Total current assets (26-33) Fixed Assets: 35. Gross block (land, building, machinery, work-in-progress) 36. Depreciation to date 37. Net block (35-36) Other Non- current Assets: 38. Investments/book debts/advances/deposits which are not current assets. i. a) Investments in subsidiary companies/affiliates c) others ii. Advances to suppliers of capital goods & contractors iii. Deferred receivables (Maturity exceeding 1 year) iv. Others 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 1.15 5.64 1.35 6.08 1.22 5.36 1.03 4.89 6.79 7.43 6.58 5.92 1.71 0.00 71.75 4.04 0.00 128.18 4.91 0.00 169.74 5.00 0.00 211.37 1.50 0.00 0.00 0.00

0.00 39. Non- consumable stores & spares 40. Other Non-current assets (including -

0.00 -

0.00 -

0.00 -

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dues from directors) 41. Total other noncurrent assets 42. Intangible assets (patents, goodwill, prelim, expenses) 43. Total assets (34+37+41+42) 44. Tangible net worth 45. Net working capital (34-10) Adjusted TNW 46. Current ratio (34/10) 47. Total Outside liabilities/ tangible net worth (18/44) 48. Total term liabilities/ tangible net worth (17/44) 49. TOL / adjusted TNW 5.63 6.64 4.71 2.27 0.41 0.06 0.02 0.00 77.39 11.67 7.62 11.67 1.12 5.63 134.26 17.58 12.56 17.58 1.11 6.64 175.10 30.68 25.95 30.68 1.18 4.71 216.26 66.06 61.37 66.06 1.41 2.27 -

FUNDSFLOW STATEMENT OF ABC PVT. LTD.

Amounts in Rs lakhs Table-5.4 Year 1. Sources a. Net profit b. Depreciation c. Increase in capital d. Increase in term liabilities (including public deposits) e. Decrease in i. ii. f. Others Fixed assets Other non-current assets 0.85 0.66 10.92 o.20 5.91 22.00 -0.13 13.10 45.38 -0.19 35.38 Last year 2008 Prov. Current year 31st Mar 09 Estimated year 31st Mar 10

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g. Total 2. Uses a. Net loss b. Decrease in Term liabilities (including public Deposits) c. Increase in i.Fixed assets ii.Other Non current assets d. Dividend payments e. Others f. Total 3. Long-term surplus (+)/ Deficit (-) 4. Increase/decrease in current assets (As per details given below) 5. Increase/Decrease in current liabilities other than bank borrowings 6. Increase/decrease in working capital gap 7. Net surplus/Deficit(-) 8. Increase/ decrease in bank borrowings 9. Increase / decrease in Net sales 10. Increase/decrease in Receivables a) Domestic b) Export 11. Increase/decrease in other current assets Total

17.03

35.82

81.23

0.53

0.43

0.43

0.64 0.00 0.00 10.92 12.09 4.94 56.43

0.00 0.00 22.00 22.43 13.39 41.56

0.00 0.00 45.81 45.81 35.42 41.63

38.12

28.17

6.21

18.31 -13.37 13.37 127.29

13.39 0.00 0.00 209.55

35.42 0.00 0.00 259.11

54.72 0.00 1.71 56.43

40.78 0.00 0.78 41.56

41.49 0.00 0.14 41.63

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Given below is the model which is used in the case analysis. Table-5.5 Parameters Measure Assigned score

I. Financial Risk (Static) Based on latest Balance Sheet(audited/provisional) Current Ratio 1.33& above Less than 1.33 but more than 1.25 1.24 to 1.1 Less than 1.1 Total liabilities to tangible net worth Less than 2 2 to 3 3 to 4 More than 4 Interest service coverage ratio More than 3 3 to 2 1.99 to 1.5 Less than 1.5 PAT/Net sales (%) 5% & above Average between 4% & 5% Between 3% & 4% Less than 3% Loss 2 0 5 4 2 0 5 4 2 1 5 3 2 1 0 5 4

II. Financial Risk - moving averages (Dynamic) (Based on last 3 years' balance sheets) Current ratio 1.33& more than during last 3 4 years with increasing trend 1.33 & more during last 3 years with uneven or decreasing trend Between 1.33 & 1.1 during last 3 years with increasing 2 3

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trend Between 1.33 & 1.1 during last 3 years with uneven or decreasing trend All others Total liabilities to tangible net worth 3 & less during the last 3 years with decreasing trend 3 & less during the last 3 years with uneven or increasing trend More than 3 but less than 4 during the last 3 years with decreasing trend More than 3 but less than 4 during the last 3 years with uneven or increasing trend All others Interest service coverage ratio 3 & more during last 3 years with increasing trend 3 or more during last 3 years with uneven or decreasing trend Between 3 & 2 during last 3 years with increasing trend Between 3 &2 during last 3 years with uneven or decreasing trend All others Net sales Increasing trend & last year achievement more than 90% 0 5 1 2 3 0 4 1 2 3 0 4 1

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of projection Uneven or decreasing trend & 4 last years achievement more than 90% of projection Increasing trend & last years achievement more than 75% of projection but less than 90% Decreasing/uneven trend & last years achievement more than 75% of projection but less than 90% Others III. Market Risk 1. Competition including threat from imports Monopoly situation/highest market shares Increasing market shares Supply exceeds demand yet the unit has a niche market of its own Low capacity utilization 7 company with insignificant market share / high threat from imports 2. Industry cycle Fairly stable industry cycles; with long-term prospects Susceptible to unfavorable changes in the market/industry cycle on the upswing/downswing 0 2 0 2 1 3 0 2 3

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3. Regulatory risk

Not affected by regulatory frame work Regulatory 7 legislative issues likely to create stress but company has got capacity to tackle them properly Regulatory changes likely to threaten viability

4. Technology

Proven technology; not subjected to changes in the immediate future/ leading technology in the industry

Technology likely, to undergo 1 changes & the company is capable of surviving the change Outdated technology/technology not tested/substitutes are many IV. Managerial Risks 1. Expertise Promoters directors/owners of 5 the unit are highly qualified professionals or employing qualified professionals Owner managed with no professionals but by persons with experience Owner managed (with no professionals)/ new company/ firms 0 3 0

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2. Track record

Financially disciplined; commitments to lenders honored timely & no defaults in the group companies Accounts are regular but repayment s is slightly delayed. Group companies are not doing well but mgt. co-operates in settling them Repayments are delayed but account continues to be standard; overall performance of group companies is average No financial discipline; poor adherence to sanction terms; accounts are frequently irregular, group companies in default

V. Security Value 1. Assets (including collaterals, cash margins etc.) coverage ratio % (this is to total exposure including NFB limits) 2. Guarantees Central Govt./ reputed scheduled banks Promoter Directors guarantee/3rd party guarantee No guarantee VI. Capital Market Perception
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>175 >150 but <175 >100 but <150 <100

4 3 2 0 2

1. Dividend payment

Continuously for the last 3 years 2 years Less than 2 years 2 1 O 2

2. P/E ratio

Above sector/ industry average At average < average

1 0

VII. Contingent Risk 1. Balance sheet practices Unqualified audit report for the past 3 years 2 years Other cases 2. Contingent liabilities (% to <10 total net worth) (only such liabilities which may affect net worth/profit of the borrower to be taken into account) 3. Reliability/accuracy of data including QIS etc. furnished No deviation/deviation moderate Deviation to considerable extent VIII. Compliance 1. Submission of stock statements. Various statements under QIS & MSOD Timely submission Delayed /Irregular submission up to 30 days Non-submission /delayed submission beyond 30 days 2. Submission of audited
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1 0 2 1 0

>10<30 >30

2 1

Timely submission i.e. at least

2
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balance sheet & P/L A/Cs & financial data in CMA forms

1 month before due date of review Delayed/ irregular submission (within 2 months after due date of review) Non-submission /delayed submission beyond 2 months after due date of review 0 1

3. Over limit business

No occasions generally for over limits/adhocs/drawals beyond sanctioned/drawing limits without prior approval/no return of cheques for financial reasons Occasions for over limits/adhocs/drawals beyond sanctioned/drawing limits without prior approval/return of cheques for financial reasons, for not more than twice in a year Occasions for over limits/adhocs/drawals beyond sanctioned/drawing limits without prior approval/return of cheques for financial reasons, for more than twice in a year

4. Compliance with terms Complied with no deviation of sanction Major terms/creation of securities complied
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3 2

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Major terms pending

Risk rating parameter

Max. score

Max. applicable score(B)

Marks scored(c)

Financial risk static Financial risks-dynamic Market risks Managerial risks Security value Capital market perception Contingent risks Compliance Total

20 17 9 9 6 4 5 10 80

Percentage on risk factors= C/B*100

IX. Additional Factors to determine price 1. General observations in conduct & ancillary business Extent conduct of account , trouble-free nature of operations, group business /all the business routed through us Satisfactory conduct of account with some ancillary business diverted to others with or without banks approval Unsatisfactory conduct of account with some ancillary business diverted to others 0 2 5

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with or without banks approval 2. Length of satisfactory relationship More than 10 years More than 5 years but less than 10 More than 3 years but less than 5 Less than 3 years 3. Share in non-fund based business 100% share with our bank Proportionate to our share in fund based limits Others 4. Collateral coverage available for total limits (%) More than 100% cover Between 90% & 100% Between 70% & 90% Others 5. Threat of loss of business due to competition 6. Raters perception about long-term benefit to bank from the borrower/group Not large but definite benefits expected Others 7. overall image/reputation of the company/group Excellent image No adverse factors Others 0 2 1 0 1 Significant Not much significant No threat Substantial large 0 3 2 1 0 2 1 0 2 0 3 2 1 3 2

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Grand summary for pricing Table-5.6 Parameters Max. marks Marks applicable to the particular customer (B) Risk factors (items 1 to 7) Additional factor for pricing (item 9) Total 100 20 80 Marks secured (c)

Percentage obtained=(C/B)*100 Table-5.7 Percentage obtained 80% above 65% & above but below 80% 50% & above but below 65% Below 50% Final rating AAA AA A B

CALCULATIONS:

According to the information, all above parameters analyzed & scores have been given to them. 1. Financial Risk (static): a) Current ratio= C.A/C.L=169.74/143.79= 1.18

b) Total liabilities to tangible Net worth=TOL/TNW=175.10/30.68=5.70

c) PAT/Net sales (%)=22/647.79=3.39%

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Table-5.8 Parameters Current ratio Total liabilities to tangible Net worth PAT/Net sales (%) 3.39% 2 Measure 1.18 5.70 Assigned score 2 0

2. Financial Risk (Dynamic): a) Current ratio= (1.12+1.11+1.18)/3=1.14 b) Total liabilities to tangible Net worth 2007 77.39/11.67=6.63 2008 134.26/17.58=7.63 2009 175.10/30.68=5.70

Avg. = (6.63+7.63+5.70)/3=6.65

Table-5.9 Parameters Current Ratio Total liabilities to Tangible Net worth Measure 1.14 6.65 Assigned score 1 0

3. Market Risk: Table-5.10 Parameters Competition Industry cycle Regulatory risk Measure Increasing market share Fairly stable Not affected by regulatory framework Technology Technology likely to go under changes
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Assigned score 2 2 2

4. Management Risk: Table-5.10 Parameters Expertise Track record Measure Highly qualified Repayments are slightly delayed Assigned score 5 3

5. Security value: Table-5.11 Parameters Assets Guarantee Measure >175 Promoter- directors Assigned score 4 1

Security= Principal+ collateral security/ Facility & security covered (proposed) = 1455.95 +156.75/647.79 =248%

6. Capital market perception: a) Dividend payment- No score is given b) P/E ratio- No score is given

7. Contingent risk:

a) B/S practices- Other cases-0 b) Contingent liabilitiesc) Reliability:- No deviation- 1

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8. Compliance Table-5.12 Parameters Submission of stock statement Submission of audited B/S & P/L A/C Over limit business Compliance with terms of sanction Table-5.13 Risk rating parameter Financial risks-static Financial risksdynamic Market risks Managerial risks Security value Capital market perception Contingent risks Compliance Total 5 10 80 3 10 60 1 10 36 9 9 6 4 9 9 6 0 7 8 5 0 20 17 Max. score Max. applicable score 15 8 4 1 Marks scored No occasions No deviation 3 3 Timely submission 2 Measure Timely submission Assigned score 2

Percentage on Risk factors= (36/60)* 100= 60%

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9. Additional factors: Table-5.14 Parameters General observation in conduct of business Length of satisfactory relationship Share of non-fund based business Collateral coverage available for total business Threat of loss of business due to competition Raters perception about long-term benefit to bank from the borrower Overall image of the company No adverse factors 1 Not large but definite benefits expected 1 Significant 2 More than 3 years but less than 5 Proportionate to our share in fund-based limits Others 0 2 1 Measure Satisfactory Score 3

Collateral/Total business= 156.75/647.79=24.19%

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Grand summary of pricing: Table-5.15 Parameters Max. marks (A) Marks available to the particular customer (B) Risk factors (item 1 to8) Additional factor for pricing (item 9) Total 100 80 46 20 20 10 80 60 36 Marks scored (C)

Percentage obtained=Marks scored/marks available to a customer(C/B)*100 =(46/80)*100=57.5% Table-5.16

Percentage obtained 80% & above 65% & above but below 80% 50% & above but below 65% Below 50%

Final rating AAA AA A B

Thus, the final rating for ABC pvt. Ltd. was found to be A

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ANALYSIS OF THE CASE:

From the above analysis we came to know that credit rating plays an important role to evaluate the credit worthiness of an individual or corporation. It tells a lender or investor the probability of the subject being able to pay back a loan. Almost every financial dealing that everyone undertake will involve credit in some manner. Hard, liquid cash is obsolete and credit worthiness is what helps lenders decide how much credit to extend and to whom. This reality has brought out the need for a universally accepted and standardized means of evaluating a person's credit worthiness. Here we have calculated credit ratings from the financial history and balance sheet of ABC Ltd. And finally we rated Ato the company as it has scored 57.5%. A good credit rating system helps a lender or an investor against bankruptcy. It helps for the easy understability of the investment proposal and in choosing profitable investment security. It also saves resources i.e time and money of investors as the rating task is performed by the credit rating agency like CRISIL in the above example. Providing independent objective assessments of the credit worthiness of companies and countries, a credit ratings company helps investors decide how risky it is to invest money in a certain country and/or security. A credit rating is a useful tool not only for the investor, but also for the entities looking for investors. An investment grade rating can put a security, company or country on the global radar, attracting foreign money and boosting a nation's economy. Indeed, for emerging market economies, the credit rating is key to showing their worthiness of money from foreign investors. And because the credit rating acts to facilitate investments, many countries and companies will strive to maintain and improve their ratings, hence ensuring a stable political environment and a more transparent capital market

As investment opportunities become more global and diverse, it is difficult to decide not only which companies but also which countries are good investment opportunities. There are advantages to investing in foreign markets, but the risks associated with sending money abroad are considerably higher than those associated with investing in your own domestic market. It is important to gain insight into different investment environments but also to understand the risks and advantages these environments pose. Measuring the ability and willingness of an entity which could be a person, a corporation, a security or a country - to keep its financial

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commitments or its debt, credit ratings are essential tools for helping you make some investment decisions.

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CHAPTER-6

RECOMMENDATIONS
In any business, the first & foremost thing is to acquire the right customers. It is always important to target right customers. Thus, the bank must try to get to know its customer, their business & occupation details. Asking questions where they find problems in surety. Sharing the information of the products & services that the customer is interested in is very much necessary. Ensuring all the relevant literature is provided to the customer upfront. A customer who makes an informed decision is much more likely to stay with the bank.

Time is always an important factor. Every customer wants his/her job to be over in the earliest possible time. Bank must try to ensure that by the use of modern technologies the customers must be served in time. So that it will be easy to retain the existing customers.

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CHAPTER-7 CONCLUSION
Generally a bank is found to be of sound health, if its credit portfolio is also sound. An effective credit portfolio of a bank largely concentrates on the achievement of the following 3 benchmarks

Qualitative deployment of credit to ensure maximum yield. Containment of fresh generation of NPA through their monitoring follow up and timely action in all levels. Up gradation & reduction of NPAs

An ideal advance is one which is granted to a reliable customer for an approved purpose in which the customer has adequate experience, safe in knowledge that the money will be used to advantage & repayment made will be within a reasonable period from trading receipts or known maturities does on or about given data. So emphasizing on the above all points discussed Federal bank limited have also designed its loan policy document and manual of instructions with a broader concept maximizing its credit facilities to the right borrower. The bank, before sanctioning a loan, the bank officials have to follow all instructions and guide from the loan policy document, which is reviewed every year. The bank have to try all is effort to look into that the advances made should not turn into NPAs in future. The credit department is also having a proper and systematic approach for the supervision, monitoring and follow up of advances. For this reason Federal bank have given lot emphasis on the credit appraisal system and credit rating system before sanctioning and disbursement of any type of loans whether it is retail finance, cash credit, term loan or any nonfund based credit facilities.

Bank has given a huge effort to make its credit appraisal system a successful tool for its credit assessment.

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BIBLIOGRAPHY: www.Google.com www.federalbank.co.in www.wikipedia.com www.scribd.com

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