PBF.

The financial viability of the borrower and its firm is analysed through firms CMA data
or through its proposed financial statements like audited and provisional balance sheet and
P/L account of previous years, current financial year and assessment year.
The objective of this project is to study various kinds of cash credit facilities provided by the
bank such as the three categories of cash credit followed by the bank are OCC(Open Cash
credit),MCC (Miscellaneous cash credit )and ETF-CC(Easy Trade Finance).Another
objective is to know how to assess the working capital limits to be sanctioned by the bank
depending upon drawing power of the borrower, fims turnover and holding level of the firm.
The most important part of this project is the case analysis of XYZ private limited.The
company is availing the different kinds of cash credit facilities.It gives the clear
understanding of financial ratios.It also explains the method used for assessing working
capital limit.The project also contains the CMA data of the firm.
During this internship period, it has given an insight to legal procedures which are needed to
be verified before considering the proposal such procedures are CIBIL report
generation,ECGC specific approval list, RBI defaulter list and willful defaulter list
verification and watch out investors website approval. Different types of cash credit
facilities ,term loans, methods of assigning working capital limits to the individuals and
firms, has been the integral part of the study during two months of internship program. The
whole two months period of internship gave me a richful experience of working in loans and
advances department with deep understanding of lending procedures followed at Indian
Overseas Bank.

OBJECTIVES
The project Credit Appraisals and Working Capital Finance deals with the procedures of
appraising a credit proposal and the methods to finance working capital required by the firms.
Appraising a credit proposal is an important activity carried out by the credit department of
the bank to determine whether to accept or reject the proposal for finance. The project deals
in banking such as working capital methods of assessment, appraisal of credit reports.
Working capital products include both fund and non-fund based products. The main
objectives of this project are:
To understand the entire process of sanctioning a credit proposal and various legal
procedures.
Study various types of working capital finance provided by banks. To know in details
the procedure of assessment of working capital finance extended by banks.
To study various kinds of cash credit facilities provided by the bank such as the three
categories of cash credit followed by the bank are OCC(Open Cash credit),MCC
(Miscellaneous cash credit )and ETF-CC(Easy Trade Finance).

 To get the understanding of financial statements like balance sheet and profit& loss
account of the borrowing firms and analyzing financials of the company through ratio
analysis
To understand the various lending facilities provided by the bank to borrower like
fund based (bank overdraft, term loan) and non fund based facilities (letter of credit
& letter of guarantee).
To know about various legal procedures required to be verified during appraisal of a
credit proposal like CIBIL report generation, ECGC approval list, RBI defaulter list
etc.
To apply these procedure at a practical level with the help of case studies

Chapter 1
Company Profile
1.1 Introduction
Indian Overseas Bank (IOB) was founded in February 10th of the year 1937
Shri.M.Ct.M.Chidambaram Chettyar, a pioneer in many fields Banking, Insurance and
Industry with the twin objectives of specializing in foreign exchange business and overseas
banking. Presently, there are 10 Directors on the Board of the Bank. Shri. M.Narendra
is the current Chairman and Managing Director of IOB.. Indian Overseas Bank has an
ISO certified in-house Information Technology department, which has developed the
software that 900 branches use to provide online banking to customers. The various periods
of company are :
At the dawn of Independence
2

IOB had 38 branches in India and 7 branches abroad. The Products & Services of the bank
includes NRI Services, Personal Banking, Forex Services, Agri Business Consultancy, Credit
Cards, Any Branch Banking and ATM Banking.
Pre-nationalization era (1947- 69)
During the period, IOB expanded its domestic activities and enlarged its international
banking operations. IOB was the first Bank to venture into consumer credit. It introduced the
popular Personal Loan scheme during this period.
At the time of Nationalization (1969)
IOB was one of the 14 major banks that was nationalized in 1969.On the eve of
Nationalization in 1969, IOB had 195 branches in India with aggregate deposits of Rs. 67.70
Crs. and Advances of Rs. 44.90 Crs.
Post - nationalization era (1969-1992)
In 1973, IOB had to wind up its five Malaysian branches as the Banking law in Malaysia
prohibited operation of foreign Government owned banks. This led to creation of United
Asian Bank Berhad in which IOB had 16.67% of the paid up capital.
Computeraization:
The Bank setup a separate Computer Policy and Planning Department (CPPD) to implement
the programme of computerization, to develop software packages on its own and to impart
training to staff members in this field.
IOB was one among the first to join Reserve Bank of India's negotiated dealing system for
security dialing online. The Bank has finalised an e-commerce strategy and has developed the
necessary Internet banking modules in-house. For the first time a Total Branch Automation
package developed in-house has been customised in one of the Overseas Branches of the
Bank. Most software developed in-house. During the year 2002-03, a new credit scheme
Shubh Yatra' was introduced to provide loans to those who undertake foreign travel for
tourism, employment and medical treatment. During the year 2004, the Government OF India
selected IOB for channelising government credit to other countries, which runs into billions
of dollars. And also in the same year the bank made tie up with Times Online Money to
launch an Internet-based remittance product, e-Cash Home, targeted at NRIs in the US
wishing to transfer money to India. IOB made pact with Chola for MF products. During the
year 2005, the bank joined hands with Visa to offer debit cards to its esteemed customers. In
the year 2006, IOB inked MoU with CRI Pumps. In September 2006, Indian Overseas Bank
(IOB) has finally taken control of Bharat Overseas Bank (BhOB), an unlisted private bank.
This is the first instance of a public sector bank taking over a strong private sector bank
without resorting to the moratorium route. During May of the year 2007, Indian rating agency
ICRA assigned an 'A1+' rating to the proposed 20 bln rupee certificates of deposit programme
of Indian Overseas Bank, citing the bank's consistent and measured growth, the improvement
3

in its asset quality through effective monitoring and collection systems, and improving core
profitability. During June of the year 2008, IOB launched two new products namely IOB
Gold' and IOB Silver' in savings account and IOB Classic' and IOB Super' under current
account. IOB have a network of more than one thousand eight hundred branches all over
India located in various metropolitan cities, urban, suburban and rural areas. IOB plans to set
up banking operations in Malaysia in a joint venture with two other India-based banks Bank
of Baroda and Andhra Bank with a minimum capital investment of RM320 million (US$100
million).

1.2 Corporate Social Responsibility

M Narendras commitment to serve the rural India is evident from the fact that the bank that
he heads Indian Overseas Bank has over 70 per cent of its branches in rural areas.
Narendra has treaded the uncharted territories owing to his passion to help the socially and
economically underprivileged. Narendra has identified 30 villages in association with Friends
of Tribal Society in the Nilgiris, to set up one school each for tribal children providing them
with vocational training. The Bank has, always, supported worthy social causes and
endeavours. During the year, the Bank contributed Rs. one crore each to two states, viz.,
Andhra Pradesh and Karnataka, towards the respective Chief Minister's Relief Funds to give
relief to the flood affected people in these two states. Apart from these, the Bank also made
donations to other organizations serving the community at large. Awards has Given away in
presence of Mr P Chidambaram, Honble Home Minister; Mr Montek Singh Ahluwalia,
Honble Deputy Chairman, Planning Commission; and, Dr C Rangarajan, Honble Chairman,
Economic Advisory Council on 27th Day of March 2012 at New Delhi.
Several other CSR initiatives are:
Upgradation of Farmers
A special grant of 25 million rupees has been earmarked for five farmers schools to
provide skill development and skill upgradation to farmers. Education academies have
been set up in identified villages to support students who are weak in subjects like
math and science. Narendras efforts in providing support to various cancer societys
have saved many life.
IOB-Sampoorna Project - A Total Village Development Project
The Bank launched an innovative rural development project aiming at Total Village
Development called IOB-Sampoorna in Kuthambakkam and Padur Villages in
TiruvallurDistrict, Kameshwaram village in Nagapattinam District, Dhaliyur Village
in CoimbatoreDistrict and Innambur village in Thanjavur District of Tamil Nadu.
IOB-Sampoorna is an unique Project encompassing several livelihood initiatives in
the villages to ensure all-inclusive growth of rural population.
Sakthi Memorial Trust
4

The Trust set up jointly by the Management of the Bank, Indian Overseas Bank
Officers Association and All India Overseas Bank Employees' Union, to perpetuate
the memory of Banks Founder Shri M.Ct.M. Chidambaram Chettiar, continued to
provide entrepreneurial development training to women thereby empowering them
socially and financially.The Trust has so far conducted 44 Entrepreneurial
Development Programmes (EDPs) exclusively for women at various centres,
benefiting 1,601 women. For the women entrepreneurs and Self Help Groups, 1013
Sakthi Bazaars' were organized at many branches, for exhibition cum sale of their
products.
Rural Self Employment Training Institutes (RSETIs)
In line with the guidelines issued by Ministry of Rural Development, Govt of India,
Bank had set up RSETIs at Thiruvananthapuram (Kerala State), Tirunelveli,
Thanjavur and Trichy (Tamilnadu State) to provide training to farmers, members of
SHGs, beneficiaries under SGSY, Educated Unemployed Youths, Artisans and
Beneficiaries belonging to weaker sections.One Rural Training Centre was set up by
the Bank (jointly with NABARD and Indian Bank)at Karaikudi (Sivaganga District,
Tamil Nadu).
Financial Literacy and Credit Counselling Centres (FLCCC) viz., SNEHA
With a view to promoting financial education and awareness among general public
the Bank set up two FLCCCs at Nagercoil and Trichy during the year under review.
These centres will educate the people in rural and urban areas with regard to various
financial products/ services available from formal financial sector, provide face-toface financial counselling services and offer debt counselling to indebted individuals.

1.3 Social -Economic Responsibilities

Rajbhasha (Official Language Policy)
The Bank has taken all efforts to implement the Official Language Policy of Government of
India during the year 2012-13. During the year 160 Staff members who do not possess
working knowledge of Hindi were trained in IOB Praveen and Banking Pragya Courses.
Minutes of all meetings of all board level committees were translated in Hindi. Banking
terminology has been provided on IOB ONLINE for the benefit of staff members. Training
has been given to 1614 staff members for the use of Hindi in computers. Script Magic
packagehas been provided in all branches for issuing pass books, statement of account, DD
&Deposit receipts in Hindi. Four issues of quarterly Hindi Magazine "VANI" inprint as well
as in digital form. Bank's website has been made available in Hindi also.
Green Initiatives:
The Bank has been taking various initiatives towards saving precious natural
resources and energy by adopting the latest technological advances. Video
5

Conferencing is very widely used both for Top Management level meetings /
promotion interviews /performance reviews and for virtual classrooms.
Paperless Banking Initiatives: As a step towards paperless banking initiative, Bank
has implemented Microsoft SharePoint which enables the Board members to access
the Agenda papers through their IPADs using Wi-Fi. All agenda papers are ported on
the website and no paper notes need be carried by the members.

Biometric Solutions
With a view to increase Security, Biometric solutions were procured and implemented across
all our branches facilitating foolproof operational safety at all our branches. The solution
envisages authenticating the user every time he logs into the CBS with biometric as 3rd
authentication. IOB is one of the first banks to implement biometric authentication
successfully.
Contributing towards society
IOB has provided many other solutions that serves to the society like GENNEXT Branch to
cater to the needs of techsavy younger generation, Aadhar registration through the branches
has been enabled, Bank has also introduced direct remittance facility at their overseas
branches.
Industrial Relations
In order to maintain good Industrial Relations climate in all offices of the Bank, guidelines
are issued from time to time regarding enforcement of discipline, policies to be followed in
recruitment, promotion etc., which has led to reduction of cases The industrial relations
environment for the Bank remained cordial and conducive for achieving organization's
objectives.

Chapter 2
Introduction to the project
2.1 Meaning of credit Appraisals
Credit appraisal is an important activity carried out by the loans and advances department of
the bank to determine whether to accept or reject the proposal for financing its project. The
project deals in credit facilities such as working capital methods of assessment, compilation
of credit reports. The methods that are used by the banks in order to calculate the loan limits
are Turnover method, MBPF system and Cash budget system. The financial viability of the
borrower and its firm is analysed through firms CMA data or through its proposed financial
statements like audited and provisional balance sheet and P/L account of previous years,
current financial year and assessment year. The firms financial performance is analyzed
through ratio analyses.

Financial requirements for project finance and working capital purposes are taken care of at
the credit department. Companies that intend to seek credit facilities approach the bank.
Primarily, credit is required for following purposes:1. Working capital finance
2. Term loan for projects
Credit appraisal is a means of an investigation/assessment done by the bank prior before
providing any loans & advances/project finance & also checks the commercial, financial &
technical viability of the project proposed its funding pattern & further checks the primary &
collateral security cover available for recovery of such funds. Credit Appraisal is a process to
ascertain the risks associated with the extension of the credit facility. It is generally carried by
the financial institutions which are involved in providing financial funding to its
customers.Credit appraisal decides everything. It is the process by which a lender appraises
the creditworthiness of the prospective borrower. It is a very important step in determining
the eligibility of a loan borrower for a loan. As has been mentioned, the eligibility of a
borrower for a loan depends on her/his creditworthiness.
Creditworthiness of a customer lies in assessing if that customer is liable to repay the loan
amount in the stipulated time, or not. Here also, every bank has their own methodology to
determine if a borrower is creditworthy or not. It is determined in terms of the norms and
standards set by the banks. Being a very crucial step in the sanctioning of a loan, the
borrower needs to be very careful in planning his financing modes. However, the borrower
alone doesnt have to do all the hard work. The banks need to be cautious, lest they end up
increasing their risk exposure. All banks employ their own unique objective, subjective,
financial and non-financial techniques to evaluate the creditworthiness of their customers.

2.2 Credit Appraisal Process FIGURE 1

Receipt of application from applicant

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

Pre-sanction visit by bank officers

Verification of legal procedures

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

Preparation of CMA data

Proposal preparation

Assessment of working capital limits to be sanctioned

(Turnover method or MBPF method)

Sanction/approval of proposal by appropriate sanctioning authority

Documentations, agreements, mortgages

Disbursement of cash credit limits or term loan

Chapter - 3
Working capital finance
3.1 Introduction
Working capital is the fund invested in current assets and is needed for meeting day to day
expenses. It occupies an important place in a firms Balance Sheet. Working capital financing
is a specialized area and is designed to meet the working requirements of a business. The
main sources of working capital financing are trade credit, bank credit, factoring and
commercial paper. Out of all these, the project deals with only bank credit which represents
the most important source for financing of current assets. The firms generally enjoy easy
access to the bank finance for meeting their working capital needs. But from time to time,
Reserve Bank of India has been issuing guidelines and directives to the banks to strengthen
8

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

3.2 Operating cycle:

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

Operating Cycle- FIGURE 2

Cash
9

Purchase of

Receipt from

Raw material

debtors

Creation of

Creation of

Receivables (Debtors)

A/c payable
(Creditors)

(Debtors)

Sales of

Payments to creditors

Finished Goods

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

Warehousing
Of Finished Goods

3.3 WORKING

Office, selling,
distribution and other
expenses
CAPITAL FINANCING
BY BANKS

A commercial bank is a business organization which deals in money i.e. lending and
borrowing of money. They perform all types of functions like accepting deposits, advancing
loans, credit creation and agency functions. Besides these usual functions, one of the most
important functions of banks is to finance working capital requirement of firms. Working
capital advances forms major part of advance portfolio of banks. In determining working
capital requirements of a firm, the bank takes into account its sales and production plans and
desirable level of current assets. The amount approved by the bank for the firms working
capital requirement is called credit limit. Thus, it is maximum fund which a firm can obtain
10

from the bank. On the basis of the estimates submitted by the company, the bank may decide
the amount of assistance which may be extended, after considering the margin requirements.
This margin is to provide the cushion against the reduction in the value of security. If the
company fails to fulfil its obligations, the bank may be required to realize the security for
recovering the dues. Margin money is meant to take care of the possible reduction in the
value of security
.

3.4 Form of Assistance:

After deciding the amount of overall assistance to be extended to the company, the bank can
disburse the amount in any of the following forms:
Fund Based
Non-Fund Based Lending
3.4.1 FUND BASED LENDING
In case of Fund Based Lending, the lending bank commits the physical outflow of funds. As
such, the funds position of the lending bank gets affected. The Fund Based Lending can be
made by the banks in the following formsCash credit
Cash Credit is granted by banks for meeting daily business expenses keeping a certain
percentage of the current assets value as margin money. The Cash Credit facility is generally
granted for one year and it is subject to review at the expiry of one year. At the time of first
time sanction of Cash Credit or Renewal of Cash Credit, borrower is required to give to the
bank a Cash Credit Proposal along with CMA DATA, through which bank assesses the
Working Capital Gap of the borrower that can be funded by the bank.
Indian Overseas Bank offers three types of cash credit products, they are
Open Cash Credit (OCC) for SME, Manufacturers etc.
Miscellaneous cash credit (MCC) for contractors.
Easy Trade Finance Cash Credit (ETF-CC) for small traders, retail traders etc.
Loan: In this case, the entire amount of assistance is disbursed at one time only, either in cash or by
transfer to the companys account. It is a single advance. The loan may be repaid in
instalments, the interests will be charged on outstanding balance.
Overdraft
Overdraft is a credit facility in the nature of a Credit Account from which the borrower can
avail the funds anytime at his convenience but whose Upper Limit is fixed depending on the
value of the security offered by the borrower to the bank. Overdraft can be availed against
11

any financial assets like Fixed Deposits, Bonds, Shares Securities, Gold & Silver Jewelry or
Physical Assets like Motor Car, Pool of Vehicles, Immovable Properties like Factory Land
etc.Overdraft helps you meet your short-term funding needs and allows you to leverage every
business opportunity that comes your way against the security of residential or commercial
property.
Bills purchased or discounted
This facility enables the company to get the immediate payment against the credit bills raised
by the company. The bank holds the bill as a security till the payment is made by the
customer. The entire amount of bill is not paid to the company. The Company gets only the
present worth of the amount of bill, the difference between the face value of the bill and the
amount of assistance being in the form of discount charges. On maturity, bank collects the
full amount of bill from the customer.
Packing Credit
This type of assistance may be considered by the bank to take care of specific needs of the
company when it receives some export order. Packing credit is a facility given by the bank to
enable the company to buy the goods to be exported. If the company holds a confirmed
export order placed by the overseas buyer or a letter of credit in its favour, it can approach the
bank for packing credit facility.

3.4.2 Non Fund Based Lending

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

Bank Guarantee:
Suppose Company A is the selling company and Company B is the purchasing company.
Company A does not know Company B and as such is concerned whether Company B will
make the payment or not. In such circumstances, D who is the Bank of Company B, opens
the Bank Guarantee in favour of Company A in which it undertakes to make the payment to
Company A if Company B fails to honour its commitment to make the payment in future. As
such, interests of Company A are protected as it is assured to get the payment, either from
Company B or from its Bank D. As such, Bank Guarantee is the mode which will be found
typically in the sellers market. As far as Bank D is concerned, while issuing the guarantee in
favour of Company A, it does not commit any outflow of funds. As such, it is a Non-Fund
Based Lending for Bank D. If on due date, Bank D is required to make the payment to
Company A due to failure on account of Company B to make the payment, this Non-Fund
Based Lending becomes the Fund Based Lending for Bank D which can be recovered by
Bank D from Company B. For issuing the Bank Guarantee, Bank D charges the Bank
Guarantee Commission from Company B which gets decided on the basis of two factors12

what is the amount of Bank Guarantee and what is the period of validity of Bank Guarantee.
In case of this conventional for of Bank Guarantee, both company A as well as Company B
get benefited as it is able to make the credit purchases from Company A without knowing
Company A. As such, Bank Guarantee transactions will be applicable in case of credit
transactions. In some cases, interests of purchasing company are also to be protected.
Suppose that Company A which manufactures capital goods takes some advance from the
purchasing Company B. If Company A fails to fulfil its part of contract to supply the capital
goods to Company B, their needs to be to be some protection available to Company B. In
such circumstances, Bank C which is the banker of Company A opens a Bank Guarantee in
Favour of Company B in which it undertakes that if Company A fails to fulfil its part of the
contract, it will reimburse any losses incurred by Company B due to this non fulfilment of
contractual obligations. Such Bank Guarantee is technically referred to as performance Bank
Guarantee and it ideally found in the buyers market.

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

Chapter -4
Working Methodology
This is analytical research area where we analyses information with cause and its effects
relationship. This analysis leads to the simple conclusions of whether to provide assistance of
13

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

Analytical

Source of Data

Primary and Secondary

Sample Unit

Industries applying for loan

Sample

Case studies

Sample Technique

Allocation of Case

Analysis Tool used

Financial Analysis

Primary Data:
Observation, Discussion with the company guide at the bank.

14

The company profile , its guidelines and principles.

Secondary Data:
Secondary data relating to the procedure of assessment of working capital finance, old
sanction proposals, RBI guidelines etc., financial statements have been sourced from
the branch and referenced books.

4.1 Procedure of Credit Appraisal at IOB

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

CREDIT APPRAISAL FIGURE 3

PRE SANCTION
15

PROCESS

Preparation of CMA data

Assessment of Working
Capital Limits

APPRAISAL &
RECOMMANDATION

16

1. PRE SANCTION PROCESS: When a customer required any credit facility or working capital loan he is required to
complete application form and submit the same to the bank.Also the borrower has to submit
the required information along with the application form.
Pre sanction process requires following documents and information which are analysed prior
to raising the credit proposal

Audited balance sheets and profit and loss accounts for the previous three year
Estimated balance sheet for current year.
Projected balance sheet for next year
Profile for promoters/directors, senior management personnel of the company
Obtain Guarantors statement
Examine for preliminary appraisal
RBI guidelines and Policies
Prudential exposure norms and bank lending policy
Industry exposure restriction and related risk factors.
Obtain RAM rating ,CRISIL rating
Compliance regarding transfer of borrowers accounts from one bank to another bank
Government regulation / legislation impact on the industry
Acceptability of the promoter and applicant status with regards to other unit to
industries.
Credit report of accounts running with other banks
Arrive at the preliminary decision.
Evaluation of prime and collateral security
Examine/analysis /assessment
Financial ratio & Dividend policy.
Depreciation method
Revaluation of fixed assets.
Records of defaults (Tax, dues etc.)
Pending suits having financial implication (Customs, excise etc.)
Check for RBI defaulter list, Willful defaulter list, ECGC specific approval list,CIBIL
report.
Qualifications to balance sheet auditors remarks etc.
Trend in sales and profitability and estimates /projection of sales.
Production capacities and utilization: past & projected production efficiency and cost.
Estimated working capital gap W.R.T acceptable build-up of
inventory/receivables/other current assets and bank borrowing patterns.
Assess MPBF determine facilities required
Companys structure and system
Profitability factor, Inventory/Receivable level, Capacity utilization

2. Preparation of CMA data

17

Credit Monitoring Arrangement (CMA) data is a very important area in the process of credit
appraisals. It is a critical analysis of current & projected financial statements of a loan
applicant by the banker. CMA data is a systematic analysis of working capital management of
a borrower and objective of this statement is to ensure the usage of long term and short term
fund have been used for the given purpose.CMA data is also beneficial for analysing financial
indicators .CMA data at Indian Overseas Bank is prepared in main 3 components statements.
Balance sheet - Balance sheet analysis for the current & projected financial years is the first
statement in CMA data. This statement gives the detailed analysis of Current & noncurrent
assets, fixed assets, cash & bank position, current & noncurrent liabilities of the borrower.
Also this statement indicates the net worth position of the borrower for the projected years.
Balance sheet analysis gives a complete financial position of the borrower and cash
generating capacity during the projected years. Below is the snapshot of CMA data of XYZ
Media Ltd. Co. prepared at IOB as a part of the project.

SNAPSHOT - 1
Type of Financials
Year ended

Audited
2011
BALANCE SHEET

Audited
2012

Provisional
2013

Projected
2014

1.ASSETS
1.1CURRENT ASSETS
I. Inventories
Raw Materials
Stock in process
Finished Goods
Consumable Spares

198.59
0.00
0.00
0.00

240.45
0.00
0.00
0.00

160.00
0.00
0.00
0.00

110.00
0.00
0.00
0.00

TOTAL INVENTORIES

198.59

240.45

160.00

110.00

II. Trade Debtors

Domestic Debtors over six months
Domestic Debtors less than six months

0.00
701.89

0.00
990.10

0.00
1,000.00

0.00
1,100.00

Export Debtors over six months

Export Debtors less than six months
TOTAL DEBTORS

0.00
0.00
701.89

0.00
0.00
990.10

0.00
0.00
1,000.00

0.00
0.00
1,100.00

III. Other Current Assets

Cash and Bank Balance
Prepaid Expenses
Advance Tax
Deposits with Excise and Sales Tax
Loans and Advances
Others/Dep margin with Bank/cenvat input

11.32
0.00
0.00
750.75
0.00
0.00

20.11
0.00
0.00
831.84
0.00
0.00

19.97
0.00
0.00
900.00
0.00
0.00

25.67
0.00
0.00
850.00
0.00
0.00

Total Other Current Assets

762.07

851.95

919.97

875.67

18

SUB- TOTAL (a)

1,662.55

2,082.50

2,079.97

2,085.67

1.2 FIXED ASSETS

I. Land & Buildings
II. Plant & Machinery
III. Sundries

0.00
0.00
394.33

0.00
0.00
506.79

0.00
0.00
600.00

0.00
0.00
700.00

Gross Fixed Assets

Less: Depreciation to date

394.33
85.87

506.79
131.91

600.00
180.00

700.00
240.00

Net Fixed Assets (b)

Capital Work in Progress

308.46
0.00

374.88
0.00

420.00
0.00

460.00
0.00

0.00

136.51

91.00

91.00

0.00
0.00
0.00
56.51
0.00

0.00
0.00
0.00
120.13
0.00

0.00
0.00
0.00
140.00
0.00

0.00
0.00
0.00
145.00
0.00

56.51

120.13

140.00

145.00

56.51
0.00
0.00

256.64
0.00
0.00

231.00
0.00
0.00

236.00
0.00
0.00

2,027.52
2011

2,730.97
2012

2,781.67
2014

31-Mar-11

2,714.02
2012
31-Mar12

31-Mar-12

31-Mar-14

312.35
0.00
0.00
312.35

439.76
0.00
0.00
439.76

440.00
0.00
0.00
440.00

500.00
0.00
0.00
500.00

1.3 NON-CURRENT ASSETS

I. Investments in/Loans to subsidiaries/associates
II. Others Non Current Assets
Investment in other companies
Loans and Advances
Overdue debitors
security and other deposits
Non-Moving Inventories
Others
Total Other Non Current Assets
SUB-TOTAL (c)
Deferred Tax Asset (d)
1.4 INTANGIBLE ASSETS (e)
TOTAL ASSETS (a+b+c+d+e)
Year ended
2. LIABILITIES
2.1.CURRENT LIABILITIES
I.
Borrowings from IOB
From other Banks
Commercial Paper
sub- total
II.
Creditors for Purchases
III. Other Current Liabilities
Creditiors for Expenses
Provision
TL due within one year
Outstanding Expenses
Others/Advances taken

3.35

9.31

10.00

12.00

0.00
14.50
42.70
0.00
91.61

0.00
26.00
16.67
0.00
67.37

0.00
23.00
29.00
0.00
72.25

0.00
28.00
66.00
0.00
65.30

Total Other Current Liabilities

148.81

110.04

124.25

159.30

19

IV. Creditors on Capital Account

SUB-TOTAL (e)
2.2.DEFERRED LIABILITIES
I.
Term Loan from IOB
II.
Term Loan from institutions

0.00

0.00

0.00

0.00

464.51

559.11

574.25

671.30

97.51
84.16

65.00
100.00

56.00
80.00

0.00
70.00

III. Other Long Term Liabilities

Preference Shares
Long-term loans from other banks
Foreign currency loans
NCD borrowings
Others
Other Long term liability which have been taken as
Quasi Equity

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
0.00
0.00
0.00
0.00

159.35

621.14

600.00

550.00

Total Other Long Term Liabilities

159.35

621.14

600.00

550.00

SUB-TOTAL (f)

341.02

786.14

736.00

620.00

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

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

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

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

2.3.CAPITAL AND SURPLUS

I.
Paid up Capital
II. Reserves and Surplus
III. Revaluation Reserves
Share Application Money
SUB-TOTAL (g)
Deferred Tax Liability (h)
TOTAL LIABILITIES (e+f+g+h)
Off Balance Sheet Debt
Current Portion of Long Term Debt

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

31-Mar-11

31-Mar-12

31-Mar-13

31-Mar-14

1,470.58
0.00
0.00
0.00
1,470.58

1,976.42
0.00
0.00
0.00
1,976.42

2,400.00
0.00
0.00
0.00
2,400.00

2,600.00
0.00
0.00
0.00
2,600.00

0.00
0.00
774.15

0.00
0.00
997.87

0.00
0.00
1,260.00

0.00
0.00
1,325.00

20

Opening stock RM - Imported

Add Purchases RM - Indigenous
Add Purchases RM - Imported
Stores consumed
Manufacturing Expenses
Depreciation
Add:Purchases Finished Goods
Less Closing stock finished goods
Less closing stock WIP
Less closing stock RM - Indigenous
Less closing stock RM -- Imported
Cost of Sales
Cost of Production

0.00
0.00
0.00
0.00
51.99
45.31
0.00
0.00
0.00
0.00
0.00
871.45
871.45

0.00
0.00
0.00
0.00
56.91
46.34
0.00
0.00
0.00
0.00
0.00
1,101.12
1,101.12

0.00
0.00
0.00
0.00
95.20
55.00
0.00
0.00
0.00
0.00
0.00
1,410.20
1,410.20

0.00
0.00
0.00
0.00
105.10
60.00
0.00
0.00
0.00
0.00
0.00
1,490.10
1,490.10

3. GROSS PROFIT(+)/LOSS(-) (1-2)

4. SELLING & ADM. EXP.
5. INTEREST & FIN.CHARGES

599.13
498.37
63.83

875.30
735.02
81.02

989.80
845.40
87.00

1,109.90
954.25
97.00

Total (4+5)

562.20

816.04

932.40

1,051.25

36.93

59.26

57.40

58.65

2.35
0.00
0.00
6.74

5.10
0.00
0.00
11.82

0.00
0.00
0.00
16.20

7.00
0.00
0.00
15.00

Total Other Income

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

9.09

16.92

16.20

22.00

0.00
0.00
0.00
0.00

0.00
0.00
0.00
0.00

6.00
0.00
0.00
10.00

0.00
0.00
0.00
0.00

Total Other Expenses

Other Income Net of Expenses

0.00
9.09

0.00
16.92

16.00
0.20

0.00
22.00

8.PROFIT BEFORE TAX/LOSS

46.02

76.18

57.60

80.65

9.INCOME-TAX PROVISION

14.50

26.00

23.00

28.00

10.NET PROFIT AFTER TAX/LOSS

31.52

50.18

34.60

52.65

91.33
155.16
76.83
0.00
0.00
31.52
76.83

122.52
203.54
96.52
0.00
0.00
50.18
96.52

112.60
199.60
105.60
0.00
0.00
34.60
105.60

140.65
237.65
112.65
0.00
0.00
52.65
112.65

6.OPERATING PROFIT/LOSS
7.I.OTHER INCOME
Sale of Scrap
Interest Received
Profit on Sale of FA / INV
Others

11.N.P.BEFORE DEP.&TAX
12.N.P.BEFORE DEP.TAX&INT.
13. CASH GENERATION
14.DIVIDEND
15. PREFERENCE DIVIDEND
16.RETAINED PROFIT
17.NET CASH ACCRUAL

21

Analytical and comparative Ratios- Ratio Analysis is a form of Financial Statement

Analysis that is used to obtain a quick indication of a firm's financial performance in several
key areas. The computation of ratios facilitates the comparison of firms which differ in size.
Ratios can be used to compare a firm's financial performance with industry averages. In
addition, ratios can be used in a form of trend analysis to identify areas where performance
has improved or deteriorated over time.
SNAPSHOT - 3
Year ended

31-Mar-11

31-Mar-12

31-Mar-13

31-Mar-14

ANALYTICAL AND COMPARATIVE RATIOS

I.FINANCIAL INDICATORS
1.TANGIBLE NETWORTH
2.TOTAL OUTSIDE LIAB.TO TNW
(TOL-USL)/(TNW+USL)
3.FUNDED DEBT TO TNW

1,222.24
0.66
0.30
0.28

1,368.78
0.98
0.26
0.57

1,420.72
0.92
0.27
0.52

1,490.37
0.87
0.32
0.42

4.NET WORKING CAPITAL

5.CURRENT RATIO

1,198.04
3.58

1,523.39
3.72

1,505.72
3.62

1,414.37
3.11

6.STOCK HOLDINGS
6.1.RAW MATERIALS
R.M. HOLDING (IN MTHS)

0.00
198.59
3.08

0.00
240.45
2.89

0.00
160.00
1.52

0.00
110.00
1.00

6.2.STOCK IN PROCESS
SIP HOLDING (IN MTHS)

0.00
0.00

0.00
0.00

0.00
0.00

0.00
0.00

6.3.FINISHED GOODS
FG HOLDING (IN MTHS)

0.00
0.00

0.00
0.00

0.00
0.00

0.00
0.00

6.4.CONSUMABLE SPARES
CON.SPARE CONSUMED
CON.SPARE HOLD(MTHS)

0.00
0.00
#DIV/0!

0.00
0.00
#DIV/0!

0.00
0.00
#DIV/0!

0.00
0.00
#DIV/0!

7.SUNDRY DEBTORS (DOMESTIC)

SUNDRY DEBTORS (EXPORT)
GROSS SALES (DOMESTIC)
GROSS SALES (EXPORT)

701.89
0.00
1,470.58
0.00

990.10
0.00
1,976.42
0.00

1,000.00
0.00
2,400.00
0.00

1,100.00
0.00
2,600.00
0.00

5.73

6.01

5.00

5.08

RECEIVABLES HOLD(MTHS) (EXPORT)

#DIV/0!

#DIV/0!

#DIV/0!

#DIV/0!

8. CREDITORS FOR PURCHASES

PURCHASES
CREDIT AVAIL (MONTHS)

3.35
0.00
#DIV/0!

9.31
0.00
#DIV/0!

10.00
0.00
#DIV/0!

12.00
0.00
#DIV/0!

II. PROFITABILITY RATIOS

9. NET SALES
INCREASE/DECR.SALES
10.PERCENT.INCR. SALES
11.GROSS PROFIT TO SALES
12.OP.PROFIT TO SALES

1,470.58
#REF!
#REF!
40.74
2.51

1,976.42
505.84
34.40
44.29
3.00

2,400.00
#REF!
#REF!
41.24
2.39

2,600.00
200.00
8.33
42.69
2.26

RECEIVABLES HOLD(MTHS) (DOMESTIC)

22

13.N.P.BEFORE TAX TO SALES

14.N.P.AFTER TAX TO TNW
15. TOTAL BANK BORROWINGS
16. NPAT/Sales

3.13
2.58
312.35
2.14

3.85
3.67
439.76
2.54

2.40
2.44
440.00
1.44

3.10
3.53
500.00
2.03

3. Assessment of working capital limits - A unit needs working capital funds mainly to
carry current assets required for its operations. Proper assessment of funds required
for working capital is essential not only in the interest of the concerned unit but also
in the national interest to use the scare credit according to production requirements.
When a borrower demands for a credit facility from the bank, the bank has to assess
the limits of working capital to be sanctioned. Proper assessment of working capital
requirement may be done as underi.
TURNOVER METHOD (Nayak Committee Recommendations)
a. Mainly used for SMEs (Small and Medium Enterprises).
b. Not appropriate for manufacturing and big trading companies.
ii.

iii.

CASH BUDGET SYSTEM

a. Mainly used for service sector companies
b. Cash inflow Cash outflow = Bank finance in form of WC
TONDON COMMITTEE RECOMMENDATIONS
a. It has three methods of lending.
b. Out of 3 methods recommended, method II also known as Maximum
Permissible Bank Finance (MPBF) is mainly used by the banks for assessment
of WC finance
4. Appraisal and Recommendation

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

Chapter 5
ANALYSIS
The project involves the following tools for analysing the given project proposal:
Working capital analysis
23

 Ratio analysis

5.1 Working capital analysis

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

5.1.2 Factors for Deciding Working Capital Limits

Drawing power of the borrower
Security

24

1. DRAWING POWER OF THE BORROWER

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

5.1.3 Assessment of working capital limit:

In order to calculate net working capital & maximum permissible bank finance, it is
necessary to have proper classification of various items of current assets & current liabilities.
All illustrative lists of current assets & current liabilities for the purpose of assessment of
working capital are furnished below:
25

TABLE - 2
Current Assets
Cash and bank balances
Investments
Receivables
Inventories
Advance payment
Prepaid expenses
Sundry debtors

Current Liabilities
Short term borrowings
Unsecured loan
Sales-tax, excise, etc.
Deposits
Interest and financial charges accrued
Provision for taxes
Sundry creditors

5.1.4 Methods of financing working capital

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

1. Tondon Committee (Operating cycle Method)

Reserve Bank of India constituted a 'Study Group' with Shri Prakash Tandon as Chairman in
July, 1974 to frame necessary guidelines on bank credit for commercial banks for follow-up
& supervision of bank credit for ensuring proper end-use of funds. Its main
recommendations related to norms for inventory and receivables, the approach to lending,
style of credit, follow ups & information system.
As per the recommendations of Tondon Committee, the corporates should be discouraged
from accumulating too much of stocks of current assets and should move towards very lean
inventories and receivable levels. The committee even suggested the maximum levels of Raw
Material, Stock-in-process and Finished Goods which a corporate operating in an industry
should be allowed to accumulate These levels were termed as inventory and receivable
norms. Depending on the size of credit required, the funding of these current assets (working
capital needs) of the corporates could be met by one of the following methods:
First method of lending
Banks can work out the working capital gap, i.e. total current assets less current liabilities
other than bank borrowings (called Maximum Permissible Bank Finance or MPBF) and
finance a maximum of 75 per cent of the gap; the balance to come out of long-term funds,
26

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

2. Nayak committee (Turnover Method)

Reserve Bank of India constituted a Committee on 9 December 1991 under the Chairmanship
of Shri P.R. Nayank, Deputy Governor to examine the difficulties confronting the small scale
industries (SSI) in the country in the matter of securing finance. The representative of the SSI
associations had earlier placed before the Governor, Reserve Bank of India, various
problems, issues and the difficulties which the SSI sector had been facing.
Turnover method can be illustrated as:
i.
ii.
iii.
iv.
v.
vi.
vii.

Lets say ,sales or Turnover is X

Now, calculate 25% of X
Also, Calculate 5% of X
Now,Net Working Capital Available
Take Y as the maximum of (iii or iv)
Subtract Y from (ii),lets say this amount as Z.
Therefore Z is the amount that would be financed by the banks.

The level of credit limits to be assessed by turnover method ' has since been increased to Rs.
2.00 crores for all categories of borrowers and further to Rs. 5.00 crores for SSI units. The
banks have further been given discretion to apply this method upto any level of limits not
below the limits specified by Reserve Bank of India and frame a suitable policy in this
regard.
27

5.2 Ratio analysis

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

PROFITABILITY RATIOS
Net Sales
Gross Profit to Sales
Operating profit to Sales
NPBT To sales
NPAT to TNW
NPAT To Sales

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

Chapter 6
CASE STUDY
XYZ Media Ltd.

28

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

March 2006

Enjoying Credit facilities since

Names of
Directors

Designation Age

Worth (Rs in
lacs)

Experience (in brief)

Amount As on
Mr. X

Director

54

102.69 31.01.13 He has experience of more than a

decade in the field of advertising. Has
rich experience in the field of real estate,
hospitality & timber imports.

Mr. Y

Director

27

25.55

31.01.13 More than four years of experience in

advertising field.

29

Mr. Z

Director

45

34.60 31.01.13 Worked as director in MNC. He is

associated with advertising field for
more than 9 years.

REQUIREMENT OF:
Enhancement in cash credit limits & LG limit to Rs.5.00crs & Rs.2.60crs respectively
with projected sales of Rs 26 crores for the year 2013-14
To raise term loan of 6.60 crores
PURPOSE:

In 2010, company acquired two major tenders for a term of five years from DMRC.
For the same purpose we issued a bank Guarantee of Rs 216.00lacs on behalf of the
subject company in favour of DMRC.
Company requires term loan to erect 42 super structures at Gwalior for advertising

Security
Prime Security

Total value:

Collateral security

Total value:

-Stocks- Rs 160.00 lacs

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

Forced Sales Value of property (FSV)

Agra- 35.00 lacs
Faridabad- 156.00 lacs
IP Extn. Delhi- 115.00 lacs
Gujarat-60.00 lacs
Fixed Deposit- 57.00 lacs
Collateral Coverage: 51%
Rs. 423 lacs

Banking Arrangement:

30

Subject is presently enjoying CC limit of Rs 330.00lacs, Term loan of Rs 175.00lacs and LG

of Rs 230.00lacs, from IOB, Vanasthali branch. Limits are utilized judiciously and operations
in the account are reported to be satisfactory.

Past Performance:
Sales of the company are increasing continuously over the last 3 years. It achieved sales of Rs
910.74lacs in 2009-10 compared to Rs 884.70lacs in 2008-09, which translated in increase of
2.94% over previous year. In FY2010-11 they achieved sales of Rs 1470.58lacs i.e. 73.53%
of their projections (`2000.00lacs). In FY 2011-12, company has estimated sales of Rs
2200.00lacs

FINANCIAL ANALYSIS
TABLE -4
BRIEF FINANCIAL INDICATORS OF SUBJECT COMPANY:
31.03.11

31.03.12

31.03.13

(Rs in lacs)
31.03.14

(audited)

(audited)

1,470.58

1,976.42

2,400.00

2,600.00

2,800.00

Operating Profit

36.93

59.26

57.40

58.65

83.95

Net Profit after Tax

31.52

50.18

34.60

52.65

72.95

Cash Accrual

76.83

96.52

105.60

112.65

137.95

1,198.04

1,523.39

1,505.72

1,414.37

1,460.32

3.58

3.72

3.62

3.11

3.20

1,222.24

1,368.78

1,420.72

1,490.37

1,581.32

TOL/TNW

0.66

0.98

0.92

0.87

0.81

(TOL-USL)/(TNW+USL)

0.30

0.26

0.27

0.32

0.30

31.03.13

31.03.14

31.03.15

Net Sales

Net Working Capital

Current Ratio
Tangible Networth

(Provisional) (Projections)

31.03.15
(Projections)

Abridged financial position

31.03.11

Capital & Reserves

Long Term Liabilities

31.03.12

(audited)

(audited)

1,222.24

1,368.78

1,420.72

1,490.37

1,581.32

341.02

786.14

736.00

620.00

620.00

31

(Provisional) (Projections)

(Projections)

Current Liabilities
TOTAL
Fixed Assets
Non-Current Assets
Current Assets
Intangible Assets
TOTAL

464.51

559.11

574.25

671.30

662.35

2,027.77

2,714.03

2,730.97

2,781.67

2,863.67

308.46

374.88

420.00

460.00

500.00

0.00

0.00

0.00

0.00

0.00

1,662.55

2,082.50

2,079.97

2,085.67

2,122.67

0.00

0.00

0.00

0.00

0.00

2,027.52

2,714.02

2,730.97

2,781.67

2,863.67

RATIO ANALYSIS
1. Financial Ratios
TNW- Tangible Net Worth
A measure of the physical worth of a company, which does not include any value derived
from intangible assets such as copyrights, patents and intellectual property.
Tangible Net Worth = Total Assets Liabilities Intangible Assets.
TNW of the company is increasing continuously over the last 4 years. This can be seen from
the table given below (in lacs):
31.
03.
201
1

31.
03.
201
2

31.03
.2013

31.
03.
201
4

TN
W

122
2.2
4

136
8.7
8

1420.
72

149
0.3
7

+
NP
AT

50.
18

34.
60

52.65

72.
95

(Ad
diti
ons
)

96.
36

17.
34

17.00

18.
00

TN
W
for
Ne

136
8.7
8

142
0.7
2

1490.
37

158
1.3
2

32

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

TNW(in lacs)
1600
1400
1200
1000
800
600
400
200
0

1222.24

2011-12

1368.78

1420.72

1490.37

2012-13

2013-14

2014-15

GRAPH - 1

TOL/TNW - Total outside Liabilities / Tangible Net Worth

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

33

TOL/TNW
1.2
1
0.8
0.6
0.4
0.2

0.98

0.92

0.87

2012-13

2013-14

2014-15

0.66

0
2011-12

GRAPH 2

34

 Funded debt to TNW

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

Funded debt to TNW

0.6
0.5
0.4
0.3
0.2
0.1

0.57

0.52

0.42

0.28

0
2011-12

2012-13

2013-14

2014-15

Net Working Capital

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

GRAPH-4

Net Working Capital (in lacs)

1600
1400
1200
1000
800
600

1523.39

1505.72

1414.37

2012-13

2013-14

2014-15

1198.04

400
200
0
2011-12

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

GRAPH -5

Current Ratio
3.8
3.6
3.4
3.2

3.58

3.72

3.62

3.11

2.8
2011-12

2012-13

2013-14

2014-15

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

GRAPH- 6

Net Sales(in lacs)

3000
2500
2000
1500
1000
500

1470.58

1976.42

2400

2600

2013-14

2014-15

0
2011-2

2012-13

Gross profit Ratio

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

GRAPH-7

Gross Profit to Sales

45
44
43
42
44.28

41
40
39

42.69
41.24

40.74

38
2011-2

2012-13

2013-14

2014-15

Operating Profit ratio

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

Operating Profit to Sales

3.5
3
2.5
2
1.5
1

2.51

2.39

2.26

2013-14

2014-15

0.5
0
2011-2

2012-13

GRAPH-8
NPBT TO Sales (Net Profit Before Tax)
GRAPH -9

NPBT to Sales
5
4
3
2

3.85

3.13

2.4

3.1

0
2011-2

2012-13

2013-14

2014-15

NPAT to TNW (Net Profit After Tax)

GRAPH-10

NPAT to TNW
4
3.5
3
2.5
2
1.5
1
0.5
0

3.67
2.58

2011-2

3.53
2.44

2012-13

NPAT TO SALES -

2013-14

2014-15

GRAPH 11

NPAT to Sales
3
2.5
2
1.5
1

2.14

2.54
1.44

0.5

2.03

0
2011-2

2012-13

2013-14

2014-15

Working Capital Assessment

A. Acceptability of projected level of operation (Sales & Profitability)

Sales: Sales of the company are increasing continuously over the last 3 years,which is
acceptable.
Profits: Profits are satisfactory to accept the proposal.
B. Acceptability of inventory holding
Particulars

31.03.2011

31.03.2012

31.03.2013

31.03.2014

31.03.2015

(Audited)

(Audited)

(Provisional)

(Projected)

(Projected)

Stocks

3.08

2.89

1.52

1.00

0.87

Sundry Debtors

5.73

6.01

5.00

5.08

5.14

Sundry Creditors

0.05

0.11

0.10

0.11

0.13

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

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

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

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

Rs (in lacs)
Total Current Assets
Total current Liability(OTBB)

2085.67
105.30

Working Capital Gap

1980.37

Margin (25%of TCA)

521.42

Actual/Projected NWC

1480.37

MPBF

500.00

Assessment Of Term Loan

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

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

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

CONCLUSION
Credit appraisal is done to check the commercial, financial & technical viability of the project
proposed its funding pattern & further checks the primary or collateral security cover
available for the recovery of such funds

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

REFERENCES
1. Real Estate Advances-Guidelines.ADV (2009),ADV/422/2010-11 ,BOI Advances General Instructions ,volume 2.
2. RBI. Management of advances(2012).RBI recommendations,Annexture 1,para 2.7

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