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PROJECT

ON

WORKING CAPITAL ASSESSMENT


OF SMEs
IN MUMBAI

BY
AAKASH KAKKAD
PGDBM

A REPORT ON
WORKING CAPITAL ASSESSMENT
OF SMEs
IN MUMBAI

BY AAKASH KAKKAD
A REPORT SUBMITTED IN PARTIAL FULFILLMENT OF
THE REQUIREMENTS OF MBA OF
N.L DALMIA INSTITUTE OF MANAGEMENT STUDIES AND RESEARCH

CERTIFICATE
This is to certify that the project titled Credit Assessment & Market Scoping of SMEs in
Mumbai submitted by Mr. Aakash Kakkad in partial fulfillment of Post Graduate Diploma in
Management (N. L. Dalmia Institute of Management Studies and Research) is a bona-fide
record of work carried out by him under my guidance and supervision during his final year.

Chetana Asbe
(Faculty Incharge - NLDIMSR)

DECLARATION
I hereby solemnly declare that the project entitled Credit Assessment & Market Scoping of
SMEs submitted by me is a genuine and bonafide work based on my own understanding. This
project is done in partial fulfillment for the award of Post Graduate Diploma in Management
at N. L. Dalmia Institute of Management Studies and Research Mumbai

Aakash Kakkad
PGDBM
(N.L. Dalmia Institute Of Management
Studies And Research)

ACKNOWLEDGEMENT
Achievement is finding out what you would be doing rather than what you have to do. The
higher the summit the harder is the climb.
It has been rightly said that we are built on the shoulders of others. For everything I have
achieved, the credit goes to all those who had helped me to complete this project successfully.
I take this opportunity to express my profound gratitude to the management of N. L.
DALMIA INSTITUTE OF MANAGEMENT STUDIES AND RESEARCH for giving me
the opportunity to accomplish this project work.
I am very thankful to MS. NEHA GOENKA for her kind co-operation in the completion of
my project.
Finally, I wish to thank all my friends who directly or indirectly helped me in the completion
of the project and to my family without whose support, motivation and encouragement this
would not have been possible.

INDEX
Sr.no

Content

Page no.

1.

Scope of the Study

2.

Objective

3.

Research Methodology

10

4.

ING VYSYA BANK

11

5.

Introduction

14

6.

Nature of Finance Demand in the MSME Sector

17

7.

Definition of SMEs in India

18

8.

Wish List of SME

21

9.

Growth and Performance of SMEs

22

10.

Government Initiatives

26

11.

Opportunities in SME Sector in India

29

12.

Budget 2014 & MSME

31

12.

Problems faced by SMEs

33

13.

Working Capital

34

14.
15.
16.
17.

Basic Principles of Lending


Problems in Lending
Products Offered to SMEs
Credit Parameters

36
38
41
48

18.

Process of SME Financing

51

19.

Servicing

60

20.

Credit Proposal for SME

62

21.

Case Study

67

22.

SWOT of Textile Industry

87

23.

Market Scoping

89

24.

Conclusion

90

25.

Bibliography

91

SCOPE OF THE STUDY


The Micro, Small and Medium Enterprises (MSME) contribute nearly 8 percent of the
countrys GDP, 45 percent of the manufacturing output and 40 percent of the exports. They
provide the largest share of employment after agriculture. They are the nurseries for
entrepreneurship and innovation. They are widely dispersed across the country and produce a
diverse range of products and services to meet the needs of the local markets, the global
market and the national and international value chains.

BROAD CLASSIFICATION OF SMEs IN INDIA

There is a total finance requirement of INR 32.5 trillion ($650 billion) in the MSME sector,
which comprises of 26 trillion ($ 520 Billion) of debt demand and INR 6.5 trillion ($130
Billion) of equity demand.
The three main pillars of the enabling environment Growth of Finance in the MSME Sector
are (a) legal and regulatory framework (b) government support (c) financial infrastructure
support. MSMEs function in a highly competitive environment and require an enabling
environment to sustain growth. Well-rounded fiscal support, a strong policy framework, and
incentives promoting innovation by financial institutions can significantly increase the
penetration of formal financial services to the MSME sector.
Within the formal financial sector, banks account for nearly 85 percent of debt supply to the
MSME sector, with Scheduled Commercial Banks comprising INR 5.9 Trillion (USD 118
Billion). Non-Banking Finance Companies and smaller banks such as Regional Rural Banks
(RRBs), Urban Cooperative Banks (UCBs) and government financial institutions (including
State Financial Corporation and State Industrial Development Corporations) constitute the
rest of the formal MSME debt flow.

Given the size and scope of this market, the financial sector has a significant role to play in
expanding their reach to this segment in an enabling environment and facilitating sustainable
growth.
Thus the scope of this study is extensive and financial institutions such as banks have a very
crucial role to play.

OBJECTIVE
1) To understand the definition and classification of Small Medium Enterprise.
2) To understand the importance and significance of SME to the banking sector.
3) To study the business model of Bank in terms of SME financing.
4) To study the credit appraisal methods used by Bank for SMEs.
5) To comprehend reasons behind rejection of bank finance to an SME.
6) To understand the problems faced by SMEs in getting bank finance.
7) To understand people skills and interaction with clients and customers.

RESEARCH METHODOLOGY
Research methodology is systematic process which consists of series of action or steps
necessary to effectively carry out research and the desired sequencing of these steps. The
above project has been conducted through the use of both primary as well as secondary data
and experience that I have gained in these two months of valuable internship. The research
involved:
1) In-depth analysis of the balance sheets, income statements and cash flow statements
as done by the Relationship Manager.
2) Reading through the previous proposals for the various corporate credit products and
services offered by the bank and understanding the method of assessment and
appraisal.
3) Comprehensive study of the various types of products and services offered by the
bank to SMEs and their need and requirement for bank finance.
4) Understanding financial risk analysis and management risk analysis and industry risk
of the client as well as the sector as a whole.
5) Interaction with the various customers and clients of the bank and understanding the
insightful view of the industry experts on the sectoral growth and the business model.
6) Interacting with different employees at Bank and using the internal circulation of the
banks intranet for extracting the necessary secondary data.
In the process of completing this study, I have referred to several credible sources of data,
including existing research literature and industry publications. The data collected has proven
to be extremely valuable in coming to conclusions and developing inferences.

10

INTRODUCTION

Micro, Small and Medium Enterprises (MSME) sector has emerged as a highly vibrant and
dynamic sector of the Indian economy over the last five decades. MSMEs not only play
crucial role in providing large employment opportunities at comparatively lower capital cost
than large industries but also help in industrialization of rural & backward areas, thereby,
reducing regional imbalances, assuring more equitable distribution of national income and
wealth. MSMEs are complementary to large industries as ancillary units and this sector
contributes enormously to the socioeconomic development of the country.
Small and medium enterprises are central to economic development, particularly in emerging
markets. They are the backbone of a country which wants to project itself as a fully
developed nation with equitable socio-economic growth. Interestingly,
95% of all registered firms across the world are SMEs, and the number is as high as 99% for
regions like Europe.
SMEs therefore play an integral role in fueling the progress of any country, especially in
developing economies.
The fact that enterprises which are generally low capitalized and which use localized
resources can impact the employment scenario in such a significant manner, is truly
outstanding .The strongest differentiator for SMEs is the competitive business model, which
emphasizes the use of cost-effective and local resources, capital, processes and labor,
ensuring an effective ROI.
To fuel this competitive edge and ensure that SMEs fully optimize their resources and
opportunities, SMEs need timely and unrestricted access to financial services, which has
historically been severely constrained.

11

Banks are demonstrating that the MSME segment can be served profitably, provided it is
properly understood. But banks alone cannot be the savior of the MSME sector. They too
need a strong system to lean upon. RBI must ease the lending and NPA accounting norms for
banks who lend to the MSME sector. Such strong directives and support would have a very
positive impact on the morale of the MSMEs.
Recognizing the importance of the SME sector, RBI has issued the following guidelines:
1. Ensuring credit to the MSME sector as part of the priority sector lending by banks.
2. Earmarking credit for micro enterprises within overall lending to micro and small
enterprises.
3. Opening specialized SME branches.
4. Enhancing the limit for computation of the aggregate working capital requirements on the
basis of minimum 20% of the projected annual turnover.
5. Adopting a cluster-based approach for SME financing by banks.
6. Reviewing the progress in achieving at least 20% YoY growth in credit to SMEs by the
boards of banks.
MSME credit also allows banks to build a granular diversified portfolio, which helps in risk
mitigation and de-bulking.
Continuing to be earnest in its endeavors, the government has undertaken measures to support
SME access to finance. These measures include reforming existing legal/ regulatory barriers.
This may involve streamlining accounting requirements or formalizing processes for SMEs.
It could also mean reducing capital requirements in BASEL norms for SME portfolios. The
government helps in developing financial markets for SMEs and intervening in the market
directly to jumpstart lending to SMEs. Direct government intervention in the banking markets
includes direct lending through government-owned institutions and directed credit programs,
where the government provides capital to banks specifically for lending to SMEs. This has
also strongly motivated banks to lend more. The government also guarantees SME loans for
which the government shares a portion of the credit risk. The government operates through
NABARD and SIDBI.
Ministry of Micro, Small & Medium Enterprises (M/o MSME) envision a vibrant MSME
sector by promoting growth and development of the MSME Sector, including Khadi, Village
and Coir Industries , in cooperation with concerned Ministries/Departments, State
Governments and other Stakeholders, through providing support to existing enterprises and
encouraging creation of new enterprises.
SMEs always represented the model of socio-economic policies of Government of India
which emphasized judicious use of foreign exchange for import of capital goods and inputs,
labor intensive mode of production, employment generation, non concentration of diffusion
of economic power in the hands of few (as in the case of big houses), discouraging
monopolistic practices of production and marketing and finally effective contribution to
foreign exchange earning of the nation with low import-intensive operations.
12

SMEs developed in a manner, which made it possible for them to achieve the following
objectives:
1. High contribution to domestic production
2. Significant export earnings
3. Low investment requirements
4. Operational flexibility
5. Location wise mobility
6. Low intensive imports
7. Capacities to develop appropriate indigenous technology
8. Import substitution
9. Contribution towards defense production
10. Technology oriented industries
11. Competitiveness in domestic and export markets

NATURE OF FINANCE DEMAND IN THE


MSME SECTOR
Micro enterprises are also characterized with limited access to both immovable and movable
collateral, while the majority of financial institutions prefer collateral-based financing as risk
13

mitigation. These enterprises are mostly centered around entrepreneurs alone, which makes
them vulnerable because micro-entrepreneurs have often had limited training in resource
planning and are not always aware of all the potential financing avenues available.

The average credit requirement of a small enterprise across manufacturing and services
industries is estimated to be approximately INR 4 million. With limited access to immovable
collateral or assets, small enterprises especially in knowledge-based industries, are
handicapped in their ability to access adequate debt from formal financial institutions.
Although mature small enterprises (particularly knowledge-based enterprises) tend to use
bank instruments for most of their business transactions, cash continues to be preferred across
the overall small segment as entrepreneurs have limited incentive to maintain financial
records. Lack of financial documentation further increases the challenge of accessing finance
from formal financial institutions.
Small enterprises access finance from both formal and informal sources, but in case of formal
sources, these units tend to have relationships with 1-2 financial institutions.

DEFINITION OF SMEs IN INDIA


Introduction
SME sector of India is considered as the backbone of economy contributing to 45% of the
industrial output, 40% of Indias exports, employing 60 million people, create 1.3 million
14

jobs every year and produce more than 8000 quality products for the Indian and international
markets. With approximately 30 million SMEs in India, 12 million people expected to join
the workforce in next 3 years and the sector growing at a rate of 8% per year, Government of
India is taking different measures so as to increase their competitiveness in the international
market.
There are several factors that have contributed towards the growth of Indian SMEs. Few of
these include; funding of SMEs by local and foreign investors, the new technology that is
used in the market is assisting SMEs add considerable value to their business, various trade
directories and trade portals help facilitate trade between buyer and supplier and thus
reducing the barrier to trade
With this huge potential, backed up by strong government support; Indian SMEs continue to
post their growth stories. Despite of this strong growth, there is huge potential amongst
Indian SMEs that still remains untapped. Once this untapped potential becomes the source for
growth of these units, there would be no stopping to India posting a GDP higher than that of
US and China and becoming the worlds economic powerhouse.
MICRO, SMALL & MEDIUM ENTERPRISES DEVELOPMENT (MSMED) ACT,
2006.
The Government of India has enacted the Micro, Small and Medium Enterprises
Development (MSMED) Act, 2006 on June 16, 2006 which was notified on October 2, 2006.
With the enactment of MSMED Act 2006, the paradigm shift that has taken place is the
inclusion of the services sector in the definition of Micro, Small & Medium Enterprises, apart
from extending the scope to medium enterprises. The MSMED Act, 2006 has modified the
definition of micro, small and medium enterprises engaged in manufacturing or production
and providing or rendering of services. The Reserve Bank as notified the changes to all
scheduled commercial banks. Further, the definition, as per the Act, has been adopted for
purposes of bank credit vide RBI circular ref.
RPCD.PLNFS. BC.No.63/ 06.02.31/ 200607 dated April 4, 2007.
SMEs can be classified into the following two categories:

MSME
MANUFACTURING

SERVICE

DEFINITION OF MICRO, SMALL AND MEDIUM ENTERPRISES

15

(a) Enterprises engaged in the manufacture or production, processing or preservation of goods

as specified below:
i. A micro enterprise is an enterprise where investment in plant and machinery does not
exceed Rs. 25 lakh;
ii. A small enterprise is an enterprise where the investment in plant and machinery is more
than Rs. 25 lakh but does not exceed Rs. 5 crore;
AND
iii. A medium enterprise is an enterprise where the investment in plant and machinery is more
than Rs.5 crore but does not exceed Rs.10 crore.
In case of the above enterprises, investment in plant and machinery is the original cost
excluding land and building and the items specified by the Ministry of Small Scale Industries
vide its notification No.S.O. 1722(E) dated October 5, 2006.
(b) Enterprises engaged in providing or rendering of services and whose investment in
equipment (original cost excluding land and building and furniture, fittings and other items
not directly related to the service rendered or as may be notified under the MSMED Act,
2006) are specified below:
i. A micro enterprise is an enterprise where the investment in equipment does not exceed Rs.
10 lakh;
ii. A small enterprise is an enterprise where the investment in equipment is more than Rs.10
lakh but does not exceed Rs. 2 crore; and
iii. A medium enterprise is an enterprise where the investment in equipment is more than Rs.
2 crore but does not exceed Rs. 5 crore.
These will include small road & water transport operators, small business, retail trade,
professional & selfemployed persons and other service enterprises.
Lending by banks to medium enterprises will not be included for the purpose of reckoning of
advances under the priority sector.
iv. Since the MSMED Act, 2006 does not provide for clubbing of investments of different
enterprises set up by same person / company for the purpose of classification as Micro, Small
and Medium enterprises, the Gazette Notification No. S.O.2 (E) dated January 1, 1993 on
clubbing of investments of two or more enterprises under the same ownership for the purpose
of classification of industrial undertakings as SSI has been exscinded vide GOI Notification
No. S.O. 563 (E) dated February 27, 2009.

Manufacturing Enterprises Investment in Plant & Machinery


Description
INR
USD($)
Micro Enterprises
upto Rs. 25Lakhs
upto $ 62,500
16

above Rs. 25 Lakhs &


upto Rs. 5 Crores
above Rs. 5 Crores &
Medium Enterprises
upto Rs. 10 Crores
Small Enterprises

above $ 62,500 & upto $


1.25 million
above $ 1.25 million &
upto $ 2.5 million

Service Enterprises Investment in Equipments


Description
INR
USD($)
Micro Enterprises
upto Rs. 10Lakhs
upto $ 25,000
above Rs. 10 Lakhs &
above $ 25,000 & upto $
Small Enterprises
upto Rs. 2 Crores
0.5 million
above Rs. 2 Crores &
above $ 0.5 million &
Medium Enterprises
upto Rs. 5 Crores
upto $ 1.5 million

WISH LIST OF SME


17

Despite the governments best efforts to patronize the MSME sector, there is scope for
improvement. The suggestions from the MSME beneficiaries resemble wish lists
encompassing tax benefits from RBI policies. Some of the common suggested schemes and
measures propagated by the SMEs are:
1) Tax Benefits
Differential taxation for SMEs:
Categorizing SMEs in the same bracket as large multinational corporations often leads to
SMEs under reporting profits to save tax, which in turn affects their ability to avail finance.
Collateral requirement of banks would reduce with better reporting, and bridging the
information asymmetry. It would also mean faster turnaround time for SME loans, as the
requirements are seasonal and erratic.
Decrease in number of taxes:
SMEs today have the same number of taxes as large corporates which include Sales Tax,
VAT, MAT, Excise and Income Tax. Since SMEs' operations are run mainly by promoters
themselves with little professional help, tax planning as a business activity takes most of the
time.
2) Credit Guarantees
CGTMSE/ECGC, routed through SIDBI and other nodal agencies, with an 18-month cooling
period, makes it impossible for banks to finance the scheme (as banks according to RBI
norms have to declare their NPAs in 90 days). Reduction in the cooling period could
incentivize banks to lend more. Along the same lines, easing claim formalities could also lead
to more lending.
Credit Rating Subsidy is again routed through NSIC which makes it cumbersome for SMEs
to claim. The same could be routed through banks which could make the subsidy much more
meaningful.
3) RBI policies to boost financing
The RBI should categorize SME lending as Direct Priority Sector Lending instead of Indirect
Priority Sector Lending. Better rating mechanism needs to be formulated jointly by RBI,
banks and credit rating agencies BASEL II does not recognize the difference in SME and
large corporate lending. Hence, SME rating takes a beating in banks. The Small and Medium
Enterprises Rating Agency (SMERA) rating is currently unacceptable in BASEL. SME rating
should include collateral, promoter net worth and vintage, since sole dependence on the
balance sheet for rating gives a lopsided view of the company.
4) Tax Sops
The government seeks to encourage entrepreneurship ventures by offering tax sops. There is
General Excise Exemption Scheme of the Central Excise Department wherein specified
goods are exempted from excise for SMEs. The government also offers tax holidays on
Export Oriented Units (EOU). SMEs are offered exemptions from Custom and Central
Excise duties on import and local procurement of capital goods, raw materials, consumables,
spares and packing material, among others. Tax holidays are also given for various small
scale industries and other IT, food processing, pharmaceuticals and energy. Tax holidays for
MSME are also given in specific under developed states and North Eastern region.

18

GROWTH AND PERFORMANCE OF SMEs

INTRODUCTION
Performance of Micro, Small & Medium Enterprises (MSME) sector is assessed by conduct
of periodic All India Census of the Sector. The latest census conducted was Fourth All India
Census of MSME. The Census was conducted with reference year 2006-07, wherein the data
was collected till 2009 and results published in 2011-12. Fourth All India Census of MSME is
the first census conducted post implementation of Micro, Small and Medium Enterprises
Development (MSMED) Act, 2006. Prior to implementation of MSMED Act, 2006, the
sector was defined, as per the provision of Industries Development and Regulation Act 1951,
as Small Scale Industries (SSI) sector and its constituent tiny and auxiliary units as per
periodic revision of criteria for defining such units. Third All India Census of SSI was
conducted with coverage and concepts as prevailing during 2001-02.
The scope and coverage of the MSME sector was broadened significantly under the MSMED
Act, 2006, which recognized the concept of enterprise and to include both manufacturing
and services sector, besides defining the medium enterprises under MSME sector. Thus the
entire non-agricultural sector of economy was brought under the coverage of MSME sector
subject to the revised criteria prescribed for defining Micro, Small and Medium Enterprises
separately for manufacturing and service sector.
There are over 6000 products ranging from traditional to high-tech items, which are being
manufactured by the MSME sector in addition to provide wide range of services. The leading
industries with their respective shares are as depicted below.

19

LEADING MSME SECTORS

It is well known that the MSME provide the maximum opportunities for both selfemployment and jobs after agriculture sector.
Some of the striking features of the MSME sector in the last few years can be observed as
follows:
A) Number of Enterprises in the MSME Sector:
There has been a gradual increase in the number of enterprises adding to the list of
number of SMEs. There has been a gradual increase in the number of working
enterprises from 361.76 lakhs in 2007 to 447.73 lakhs in 2012.

20

B) Employment in MSME Sector


The gradual increase in the number of enterprises has had a positive effect on the
employment generated over the years. This has certainly given a boost to the number of
employment generated over the years. As per the research the employment rose from
805.23 lakhs in 2007 to 1012.59 lakhs in 2013.

C) FIXED INVESTMENT IN MSME SECTOR


The investment in fixed income in the MSME sector has increased drastically. An
evident growth has been observed from 868543.79 crore in 2006 to 1776939.36 crore
in 2012.

21

D) Gross Output
With an overall increase in the number of enterprises, employment and investment in
fixed income the gross output has increased from 1351383.45 crore in 2006 to
1834332.05 crore in 2012.

22

GOVERNMENT INITIATIVES
Towards the development of the SME sector, Government of India has been extremely alert
and proactive. The Government's policy initiatives like enactment of the new Micro Small
and Medium Enterprises Development Act, 2006, pruning of reserved SSI list, advising FIs to
increase their flow of credit to the SME sector, are all initiatives towards boosting
entrepreneurship, investment and growth. The schemes comprise of bank credit facilitation,
Export credit Insurance, SME Credit Rating, Bill discounting schemes, Government stores
purchase programmes, infomediary services, facilitating marketing support, technology
support and other support services. The schemes have been formulated at both national as
well as International level.
There are certain schemes which National Small Industries Corporation carries forward to
assist small enterprises with a set of specially tailored schemes designed to put them in a
competitive and advantageous position. Besides NSIC the crucial role of the Confederation of
Indian Industry (CII) has been involved with the promotion of SME sector since inception.
CII strongly believes that employment will be best served by promotion of the small
sector. CII sets up special exhibition platforms at all its leading high-profile trade fairs such
as International Engineering and Technology Fair, DefExpo for defense industry, Auto Expo
for the automobile and components industry and many others throughout the year.
Besides these schemes, the Government of India also runs an International Cooperation
Scheme for Technology infusion and/or up gradation of Indian MSMEs, their modernisation
and promotion of their exports are the principal objectives of assistance under the
International Cooperation Scheme.
Among instruments of SME Financing, SIBDI, is the principal financial institution for the
promotion, financing and development of industry in the SME sector in the country. SIDBI
also provides appropriate support in the form of promotional and developmental services. In
order to improve the credit flow to the SME sector, it has tied-up with eight public sector
banks in the country. With these tie-ups, it has covered 150 SME clusters, out of the total 388
clusters identified across the country. Some of the major initiatives introduced to tackle the
problems faced by SMEs include:

Credit Guarantee Fund Trust for Small Industries- Government of India, in association
with SIDBI, has set up a Credit Guarantee Fund Trust for Small Industries (CGTSI) to
implement the guarantee scheme.

Venture Capital Funding- SIDBI, along with some other institutions, has taken a lead in
promoting venture capital funding in the country.

23

Micro Credit- Realising the potential of micro finance in stimulating economic growth,
SIDBI, has laid emphasis on increasing the capacity of the sector to handle credit and growth
in the disbursements of micro finance. SIDBI Foundation for Micro Credit has been
established.
Small and Medium Enterprises Fund- The most important amongst the sectoral initiatives
taken by the Government of India and SIDBI is an SME Fund, with a view to giving impetus
to the fund flow to the SME sector. Under the Fund, assistance is being provided to SMEs at
an interest rate of 200 basis points below the Bank's PLR. Direct assistance is being extended
to SMEs through SIDBI's own offices at 9.5 per cent rate of interest as also by way of
providing refinance to the primary lending institutions.
Udayami Helpline- Besides this, the Government has also set up the Udayami Helpline
which will provide all the relevant information and details to the interested entrepreneurs
regarding the scope of the business operations they may want to venture into, loan facilities,
government schemes and other modalities of setting small units. This will further strengthen
the reach of the government all across the country.
IPR Facilitation Center- Apex industry chamber, FICCI, launched an IPR facilitation centre
in association with the ministry of Micro-Small and Medium Enterprises (MSME). In
addition to providing general advisory about IPRs, such as, patents, trademarks, designs and
copyrights, these centres will also provide services related to patent searches, patent drafting,
patent prosecution, facilitation in commercialisation of inventions, prosecution matters etc.
Marketing Intelligence cell- The National Small Industries Corporation (NSIC) has set up
the MSME Marketing Intelligence cell for the assistance of micro, small and medium
enterprises in the country. This Marketing Intelligence cell will collect and circulate domestic
as well as international marketing intelligence to MSMEs which would improve their market
capabilities and further boost their competitiveness.
SMERA-To help the SMEs grow better, the government has started the Small and Medium
Enterprise Rating Agency (SMERA), a joint venture between SIDBI, Dun & Bradstreet and
11 leading banks operating in SME segment. SMERA is the first rating agency in India which
focuses on the Indian SME Segment, providing ratings that are independent, comprehensive
and transparent. SMERA is the country's first rating agency that focuses primarily on the
Indian SME segment. SMERA's primary objective is to provide ratings that are
comprehensive, transparent and reliable. This would facilitate greater and easier flow of
credit from the banking sector to SMEs.

24

SMERA offers the following:


1) SMERA Credit Ratings provides a comprehensive and independent third-party
evaluation of the overall condition of the applicant. Currently, SMERA offers Obligor
Ratings which takes into account the financial and non-financial factors that have
bearing on the credit worthiness of the applicant.
2) At present, SMERA offers following products:
1. MSME Rating
2. Greenfield & Brownfield Grading
3. Microfinance Institutions (MFI) Rating
4. Green Rating
5. Risk Management Solutions
6. Maritime Training Institutions (MTI) Rating
3) SMERA Rating endeavors to enhance the market standing of the applicant amongst
lenders, trading partners and prospective customers.
Various Schemes-The Ministry of Micro, Small and Medium Enterprises (MSME) is
implementing the promotional schemes for the development of micro, small and medium
enterprises. The schemes and programmes generally focus on capacity building in states and
regions; nevertheless, there are a few schemes and programmes, which are individual
beneficiary-oriented.
Scheme of Surveys, Studies and Policy Research
Entrepreneurship Development Institution Scheme
Scheme of Fund for Regeneration of Traditional Industries (SFURTI)
Rajiv Gandhi Udyami Mitra Yojana (RGUMY)
Marketing Assistance Scheme (Implemented through NSIC)
Performance and Credit Rating Scheme (Implemented through NSIC)
Prime Minister's Employment Generation Programme (PMEGP) (Implemented
through KVIC)
Product Development, Design Intervention and Packaging (PRODIP) (Implemented
through KVIC)
KhadiKarigarJanashreeBima Yojana for Khadi Artisans (Implemented through KVIC)
Interest Subsidy Eligibility Certification (ISEC).
25

OPPORTUNITIES IN SME SECTOR IN INDIA


INTRODUCTION
Small industry has been one of the major planks of Indias economic development strategy
since independence. India accorded high priority to SMEs right from independence and
pursued support policies to make these enterprises viable and vibrant and over time, these
have become a major contributor to the GDP of the nation. Despite numerous protections and
policy measures, SMEs remained mostly small, technologically backward and lacked
competiveness.
The decade of 1990 was characterized by policy changes, nationally as well as
internationally. These policy changes took place at the three levels global, national and
sectoral, which had the major implication on the functioning of small industry of India as
well as their performance. The policy marked: 1) the beginning of end of protective measures
for small industry and 2) promotion of competitiveness by addressing the basic concerns of
the sector; namely technology, finance and marketing. These resulted in the decline of
number of items reserved exclusively for small industry, to be brought down from 842 in
1991 to 239 in 2007. These policy changes led to the radical change in the environment for
the functioning of small industry.
In the recent past the SMEs have performed better than their larger counterpart. Between
2001 and 2006, net companies with the net-turnover of Rs 1 Crore 50 Crore had a higher
growth rate of 701% as compared to 169% for large companies with turnover of over Rs.
1000 Crore. After a steep fall in the production between 1991 and 2000, there are has been a
continuous growth in number of units, production, employment as well as the exports of the
sector.
Today the scenario of Indian SMEs has changed completely. Some of the SMEs are acquiring
companies abroad as part of the globalization process. The SME sector has transformed
themselves to the need of large local manufacturers and suppliers to global manufacturers.
SMEs have also started investing in R&D activities in order to compete in the global market.
SMEs now occupy a position of strategic importance in the Indian economic structure due to
its significant contribution in terms of output, exports and employment. The small scale
industry accounts for over 40% of gross industrial value addition and over 50% of the total
manufacturing exports. Further, there are approximately 30 million SME units, that are
26

spread all over the country and account for production of over 8000 different types of the
products, right from very basic to highly sophisticated. They have also become the biggest
employment generating engine in the country, providing employment to over 60 million and
adding over 1.3 million jobs each year.
With the positive outlook of Indian economy, Indian SMEs plan to increase their capital
expenditure and hire more staff in the coming months. To add to this there is an increasing
number of SMEs that are eyeing offshore expansion for their businesses.
Research findings indicate that number of Indian SMEs conducing international business
activities is expected to rise from 31% to 56% by 2013. The increase is driven by the
domestic SMEs, 24% of which plan to go international by 2013. With the initiatives that are
being taken by the government and other SME organizations, the future definitely looks
bright for Indian SMEs.

India is among the three most attractive FDI destinations in the world
India has evolved as one of worlds leading technology centers
India has highest return on foreign investment in the world
By 2032, India will be among the three largest economies in the world
India is a developed country as far as Intellectual Property is concerned
The Indian market has two core advantages an increasing presence of
multinationals and an upswing in the IT exports.
These factors indicate the current the outlook of the world economy towards the
investments in India. The Government of India has always given top priority to the Indian
SMEs, leading to their growth and has contributed heavily to the growth of the Indian
economy. The government too has introduced incentives for the SMEs in order to make
them competitive in the international markets. In order to enable SMEs get easy access to
the finance, government has also introduced priority sector lending and has made
mandatory on the domestic and foreign banks to lend 40% and 32% of their Net Bank
Credit (NBC) to the SMEs.
The opportunities exists for foreign SMEs looking to expand in the Indian market in the
field of technology transfer, setting up the new business in the country, obtaining the subcontracting rights, out-sourcing to their Indian partners etc

27

BUDGET 2014-15 & MSME

Industry body CII today said the Budget proposals are likely to provide a major impetus
to the development of micro, small & medium enterprises (MSME) sector and create
jobs.
"The Finance Minister has duly recognized that SMEs form the backbone of the country's
industrial output and employment and rightly underscored the importance of promoting
entrepreneurship and start-up enterprises," Co-Chairman of CII National MSME Council
T T Ashok said. "The focus of Budget on providing infrastructural support like power and
land for the MSMEs under various schemes in rural India, is going to spur the growth of
the sector, create a large number of jobs and revive the economy," he added.
Finance Minister Arun Jaitley yesterday unveiled a slew of measures to revitalise the
micro, small and medium enterprises sector, laying special thrust on promotion of startups. Presenting the Budget 2014-15 proposals in Parliament, he said a Rs 10,000 crore
venture capital fund will be set up for the sector. "CII welcomes the proposal to set up a
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Rs 10,000 crore fund that will act as a catalyst to private capital by way quasi-equity, soft
loan, and other risk capital for start-up companies," the chamber said.
Jaitley also announced that the definition of MSME will be reviewed to provide for a
higher capital ceiling. "The decision to revisit definition of MSME by providing for a
higher capital ceiling was most awaited which has been our recommendation for the last
five years," CII said. Jaitley also said a programme to facilitate forward and backward
linkages with multiple value chain of manufacturing and service delivery will be put in
place.

Moreover, the Finance Minister said an entrepreneur-friendly legal bankruptcy framework


will be developed for SMEs to enable easy exit. Besides, he said, a nationwide "District
level Incubation and Accelerator Programme" would be taken up for incubation of new
ideas and providing necessary support for accelerating entrepreneurship.
"The proposal of the Finance Minister to set up a trade facilitation centre and a craft
centre and a museum with an outlay of Rs 50 crore to develop and promote handloom
products is a welcome step for the development of the micro enterprises in India and is
going to help them showcase at a global scale," Ashok said. "Setting up of a committee to
examine the financial architecture for MSME Sector, remove bottlenecks and create new
rules and structures and give concrete suggestions in three months is a step forward to
address financing problem of MSMEs," he added. Moreover, he said, the amendment of
the Apprenticeship Act will encourage MSMEs to avail of the benefits under the scheme
and help in getting skilled manpower for the sector.

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PROBLEMS FACED BY SMEs


Some of these hurdles comprise of inefficacy of SMEs to access continued development and
success.
Lack of Finance: It has emerged as the most critical barrier for perfect capacity
utilization and competing in the market. SMEs are not able to raise adequate funds
from banks, especially for high risk projects. Insufficient basic infrastructure facilities
like irregular power and water supply, bad road and railway connectivity etc. are some
of the factors that are hampering the growth of SMEs in India.
Lack of Technology: One of the crucial factors that prompts in the success or failure
of enterprise is technology. The best use of technology no doubt enables enterprise in
reducing cost of production, maintain consistency in quality, improve productivity and
finally develop the competitiveness of the enterprise.
Lack of Planning: Another problem that is mainly faced by SME sector is the proper
division of time, which is usually the outcome of improper planning and strategy.
Moreover, if you are in debt then you have to be careful from your bankers and
suppliers and off course your employees who will be on your nerves on the salary day.
Lack of Marketing Assistance: One of the chief problems that they do not have
marketing expertise or not in a position to hire someone who can jazz up their sales.
Paucity of marketing support and limitation of the resources is a characteristic of all
SMEs. When it comes to marketing of products or services internationally, any small
or medium company is always constrained by its scarcity of budgets, which in turn
limits its growth. A B2B marketplace not only solves companies problem of reach to
the buyers worldwide, the online marketplace also support their communication needs
and help them display an array of products.
Lack of Knowledge: Lack of knowledge and information about the various schemes
announced by the government.

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Lack of Right Staff: Last but not the least SMEs are largely dependent on their
staffs, if you fail in the recruitment process, you fail indeed. SMEs must hire right
employees, who give their best and support the enterprise through their
performances.

WORKING CAPITAL
INTRODUCTION
Working capital is the fund invested in current assets and is needed for meeting day to day
expenses. Working capital is the fund invested in current assets. 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.
The firms generally enjoy easy access to the bank finance for meeting their working capital
needs. But from time to time, Reserve Bank of India has been issuing guidelines and
directives to the banks to strengthen the procedures and norms for working capital financing.
It is important to assess 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 operating
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.

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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. It is in this context that bank financing assumes significance in the
working capital financing of industrial concerns.

WORKING CAPITAL FINANCING BY BANKS


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

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BASIC PRINCIPLES OF LENDING


Credit Appraisal is the process by which a lender appraises the technical feasibility, economic
viability and bankability including creditworthiness of the prospective borrower. Credit
appraisal process of a customer lies in assessing if that customer is liable to repay the loan
amount in the stipulated time, or not. Here 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 nonfinancial techniques to evaluate the creditworthiness of their customers.
In the credit appraisal process, the decision maker attempts to find answers to two questions.
First, whether the entrepreneur requires funds and also what are his credentials. If the answer
to the first question is positive, the second question is all about the extent of his requirement
and the ways and means to fund the requirements.
The bank assesses credit risk of any borrower based on the 5 "C's" of Credit:

1. Capacity:
Capacity to repay is the most significant of the five factors. The lender will have to
determine the sources of income that the applicant possesses to repay the loan. The main
consideration will be cash flow generated from the business. The lender will also
consider contingency sources of income i.e., marketable securities, money market
accounts and other assets that can be quickly liquidated into cash.
2. Capital:
Capital is the money that has been invested by the business owner into his/her business.
The amount of invested capital by the owner is indicative of the owner's stake and
confidence in the viability of his/her business.
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3. Collateral:
Collateral is pledged assets to guarantee the security of a loan. Collateral is deemed as a
second source of income in the event that the borrower cannot repay the loan. Assets that
are typically accepted as collateral are fixed assets of a business i.e., equipment, plant
and property. Banks typically will file a UCC (Uniform Commercial Code) lien on
collateralized assets. Banks also consider working capital like accounts receivable and
inventory, to be feasible sources of collateral. But, typically banks will usually discount
the value of working capital (being that the market value is neither fixed nor certain) at a
certain percentage of estimated market value.

4. Conditions:
Conditions focus on the intended purpose of the loan. How will the proceeds from the
loan be utilized i.e. to purchase equipment, working capital? Will the use of the loan
contribute to the future economic growth of the business? Also banks consider the local
market and economic conditions both within your industry and other industries that
affect your business e.g., your suppliers and customers
5. Character:
Character is the personal impression that a prospective borrower makes to a potential
lender or investor. This is the more subjective of the five credit factors. A person's
educational background, industrial experience and credit history with other creditors will
be considered.

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PROBLEMS IN LENDING
Banks have to ensure that the lending process is extremely foolproof and safe. Any default in
payment of the loan amount will result in increasing Non Performing Assets. Banks are very
concerned about adding credit risk exposures to commercial loan portfolios. A recession
creates enormous market challenges for SMEs. Bankers need to develop an enhanced sense
of confidence in the management and business prospects of an SME before it will extend
credit.
Bankers actively seek SMEs that are run by focused and capable managers. SMEs that can
demonstrate effective risk management skills and an awareness of the challenges and
opportunities present in their market will find that bankers are more than willing to extend
new credit facilities to them. Bankers will have greater confidence in these SMEs if they
understand and believe in the SME business model. Bankers lend with confidence when they
understand how businesses can generate sufficient cash flow and profits to pay back loans.
Bankers need confidence that credit risk is being mitigated. SMEs enhance banker confidence
that they are a good credit risk by demonstrating a strong risk management and corporate
governance culture.
These obstacles are as follows:
a. Informational Asymmetries
Informational asymmetries are always present in enterprise financing transactions.
Entrepreneurs typically possess privileged information on their businesses that cannot
be easily accessedor cannot be accessed at allby prospective lenders or outside
investors. This leads to two problems. First, the lender/investor may not be able to
differentiate adequately between high quality and low quality companies and
projects. In that case, price variables (i.e. interest rates) may not work well as a
screening device, because high interests may lead to an excessively risky portfolio.
Second, once the lenders/investors have supplied the funding, they may not be able to
assess whether the enterprise is utilizing the funds in an appropriate way. To mitigate
these problems, bankers and outside investors may adopt precautionary measures,
such as requiring that financing be collateralized. Ultimately, they may simply turn
35

down the request for financing. Informational asymmetries tend to pose more severe
problems for SME, than for larger business. The information that SME can
realistically provide to external financiers (in the form of financial accounts, business
plans, feasibility studies, etc.) often lacks detail and rigor. This problem is often
aggravated by the low level of education of small entrepreneurs, who may not be in
the position to adequately articulate their case. This problem is particularly acute in
developing countries. The information supplied to bankers and outside investors by
family-owned SME is often not fully accurate and realistic, and opaque behavior may
prevail. Under these conditions, outside financiers tend to adopt a very cautious
attitude towards SME, and either reduce the amount of financing sought or refuse it
altogether.
b. Risk Profile
Another approach ascribes the difficulties faced by SME in accessing finance to their
higher risk profile. Bankers regard SME as riskier enterprises for a number of reasons.
First, SME face a more uncertain competitive environment than larger companies
they experience more variable rates of return and higher rates of failure. Second, SME
are comparatively less equipped in terms of both human and capital resources to
withstand economic adversities. Third, there is the problem of inadequate accounting
systems, which undermines the accessibility and reliability of information concerning
profitability and repayment capacity. In developing countries, there is the added
problem of a more volatile operating environment, which has a negative impact on the
security of transactions. There is a greater risk that lenders/investors will not get paid,
or that assets will not be properly registered.
c. Transaction Costs
Irrespective of risk profile considerations, the handling of SME financing is an
expensive business. The cost of appraising a loan applicationor of conducting a due
diligence exercise in view of a possible equity investmentis largely independent
from the size of the financing under consideration. For all practical purposes, the
following costs are fixed: (i) administrative costs; (ii) legal fees; and (ii) costs related
to the acquisition of information, such as the purchase of a credit profile from a
specialized agency. In the case of smaller loans or investments, it is more difficult to
recoup these costs. Similar considerations apply to the costs that outside financiers
must incur after disbursement, when conducting field inspections, or attending board
meetings. Again, the problem is more severe in developing countries for the following
reasons:
(i) the lack of adequate management information systems in financial institutions; (ii)
the undeveloped state of the economic information industry; and (iii) the poor state of
certain public services, such as the registration of property titles and collaterals. To
some extent, the problem can be solved by raising the cost of financing through a
higher interest rate or closing fee. This is indeed the approach adopted by many micro
lending schemes, but it is possible only up to a certain point.
36

d. Lack of Collateral
In the case of debt financing, lenders typically request collateral in order to mitigate
the risks associated with the moral hazard. The lack of collateral is probably the
most widely cited obstacle encountered by SME in accessing finance. The amount of
collateral required in relation to the loan size is a measure frequently adopted to
empirically assess the severity of the financing gap. In some cases, the enterprise may
be unable to provide sufficient collateral because it is too newbecause it is not
firmly enough established. In some cases, the lender may deem the collateral
insufficient in view of the size of the loan requested. In other words, the proposed
expansion project may be too large in comparison with the current size of the firm. In
other cases, the collateral may be insufficient simply because the managers-owners
tend to siphon off resources from the company for personal or other purposes.

Demand-side Considerations
The behavior of financial institutions is not the only reason that SME have problems
accessing financing. Constraints on the demand side also have an impact. Indeed, while
SME advocates loudly lament the inaccessibility of external finance, bankers and venture
capitalists often decry the shortage of bankable or investable firms. In this connection, the
following three factors play a significant role:
a. Poor Quality of Projects
One demand side constraint has to do with the quality of projects submitted for financing,
which is often well below minimum standards. The poor quality of projects is frequently
invoked as an excuse by conservative bankers, but the problem is often acknowledged also by
independent parties, such as members of the scientific community.
b. Inability to Exploit Existing Opportunities
A second constraint is that promoters are often unable to make the best use of available
opportunities, irrespective of the intrinsic quality of the projects. This relates not only to their
limited ability to convincingly articulate business ideas, but also to the unwillingness of many
small entrepreneurs to waste time in dealing with financial institutions. Certainly, there are
examples of promoters who have been able to cultivate a strong relationship with venture
capitalists or business angels, and who have been able to gradually build a relationship of
trust and familiarity that could compensate for other factors. However, in many cases, high
tech promoters tend to concentrate exclusively on technical aspects and are not inclined to
invest time in creating financing opportunities. Even in the case of well-established
businesses, there are indications that knowledge of financial instruments is limited6. Business
associations and incubators can sometimes help in overcoming this attitude, but so far, this
has not always been the case.
c. Negative Attitude towards Outside Investors

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A third problem has to do specifically with equity financing and relates to the unwillingness
of enterprises to relinquish control over the company to outsiders.

PRODUCTS OFFERED TO SMEs


For running an establishment two types of capital are required:
1. Fixed Capital: Money for acquiring fixed assets such as land, building, equipment, etc.
2. Working Capital: Money for purchasing/Stocking raw materials, payment of salary,
power etc. and for financing the interval between the supply of goods and receipt of payment
post sales i.e. finance to meet the costs involved during the operating cycle or working capital
cycle.
The following are the PRODUCTS with the company to fund the SMEs.
A. Fund Based
B. Non-Fund based.

WORKING
CAPITAL

NON FUND
BASED

FUND
BASED

FUND BASED:
The lending of funds can be by way of Demand Loan repayable on demand or Term Loan
repayable over a period of time at agreed intervals. It can also be by the way of Overdraft
where credit limit up to the amount to be lent is set in the current account or a Cash Credit
account, where against the security of stocks or receivables a limit up to sanctioned level of
38

lending is made available to the borrower in the form of running account allowing
withdrawals up to the limit as per his requirement. Lending can also take the form of Bill
Discounting where the bank lends against bill of exchange drawn in favour of the borrower
but payable at a future date by placing the amount of the bill less discount charges at the
disposal of the borrower by discounting the bill.

Overdraft
When a customer maintaining a current a/c is allowed to more than the credit balance in
the account, such facility is called as an overdraft facility. At the request and requirement
of the customer temporary overdrafts are allowed. However against securities, regular
overdraft limits are sanctioned. Salient features of this type of account are as under:
a) Overdraft is a running account and hence debits and credits are freely allowed.
b) Interest is applied on daily product basis and debited to the account on monthly basis.
c) Overdrafts are generally granted against the security of government securities, shares
& debentures, LIC policies and bank's own deposits etc. and also on unsecured basis.
d) Temporary overdrafts should be allowed only on written request of the customer. A
letter of recording should be obtained from a customer when a temporary overdraft is
granted to him. However, temporary overdrafts should be granted sparingly to meet the
short term requirements of customers.
e) In case it is decided to withdraw/reduce overdraft facility to the customer, sufficient
notice of the same should be given to the customer.
Cash Credit
A cash credit is an arrangement to extend short term working capital facility under which
bank establishes a credit limit and allows the customer to borrow the money upto a
certain limit. The bank sanctions the limit called cash credit limit to each borrower upto
which he is allowed to borrow against the security of stipulated tangible assets i.e. stocks,
book debts, etc. The customer need not draw at once the whole of the credit limit
sanctioned but can withdraw from his CC account as and when he needs the fund and
deposit the surplus funds from the sales proceeds, etc into the account. Besides this the
facility of frequent and unrestricted transactions is available. Interest is calculated on
daily product basis and for the credit balance lying in the cash credit account, no interest
is payable. Salient features of cash-credit system are as under:
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a) Sanction of limit: Cash-Credit limit is sanctioned after taking into account several
factors detailed later in the product note. The drawings are restricted up to the sanctioned
limits or available Drawing Power (whichever is lower) and should be only for the
purposes for which the limit has been sanctioned.
b) Running account: A cash-credit account is an active running account. There are no
restrictions as regards number of debit and/or credit transactions in the account. It is
expected that all sales/ purchase/other transactions of the borrower should be routed
through this account. In fact a healthy chum rate in the account to be encouraged, the
account may move freely between debit and credit balances as well.
c) Repayment: Cash-credit facility is technically repayable on demand and there is no
specific date of repayment. Quarterly behavior scoring shall indicate the health of the
account and a annual review to be conducted to decide on account renewal.
d) Application of interest and service charges:
i. Interest is calculated on daily product basis, applied on calendar monthly basis
ii. For credit balance lying in cash-credit account, no interest is payable as cash-credit
account is in nature of current account.
iii. Service charges as per current account rules are to be levied.
e) Calculation of drawing power: Based on the value of security charged to the bank and
other applicable factors, the stipulated margin is reduced and the advance value is
calculated subject to overall limits. No drawings in cash-credit accounts beyond the
drawing power should be allowed. However, interest and other charges may be force
debited exceeding drawing power. Changes in drawing power are done on a monthly
basis based on the stock/debtors statements submitted by the borrower.
Demand Loan
A demand loan is a loan sanctioned for the period upto 35 months repayable on demand.
The loan is disbursed by way of single debit to the account. The amount needs to be
repaid in installments. Salient features of demand loan are as follows:
a) Further debits: Demand loan is not a running account and as such no further debits to
an account are made subsequent to the initial advance except for interest, cheque bounce
charges and other sundry/ incidental charges.
b) Further credits: No restrictions on credits in the account as they would go towards
repayment of the demand loan outstanding.

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c) Repayment: Although all demand loans are payable on demand, repayment schedule is
fixed by way of Equated Monthly Installments. Lump sum payments are also allowed.
d) Interest: Interest is calculated on debit products on daily product basis and applied on
calendar monthly basis.
e) Granting of additional loan:
i. A fresh loan account should be opened for every new advance sanctioned and a new DP
Note be taken.
ii. When a further loan/facility is proposed to be sanctioned against the same security or
to the same borrower, the existing facility nature and the behaviour thereof must be
documented in the CAM (Credit Approval Memo).
Term Loan
A term loan is an advance allowed for a fixed period either in lump sum or in installments
and which is repayable according to a schedule of repayment as against on demand and at
a time.
a) Period: A term loan is granted for a period exceeding 3 years but not exceeding 5 years.
b) Purpose: Term loans are generally granted to meet the need of capital expenditure i.e.
acquiring of fixed assets like land, building, plant & machinery etc. for the purpose of
setting up of new units or expansion, modernization, renovation, replacement of existing
units, adding more bays in the service station, more floors in a departmental store etc.
c) Repayment: A monthly repayment schedule is fixed and accordingly loans repaid in
installments. Interest: Interest is as per the EMI schedule calculations.
d) Security: Term loans are granted against the security of immovable properties, plant &
machinery, vehicles, acceptable liquid securities, etc.
Bill Purchase/Discounting
This represents advances against the bills of exchange drawn by the customers on their
clients. Bills are either purchased or discounted. Demand bills are purchased and usance
bills are discounted. Bills may be clean or documentary. Bills accompanied by the title of
the goods are called documentary bills and bills without such documents are called clean
bills. The seller of the goods draws the bill lf exchange on buyer, as per payment terms of
the goods supplied. Such bills can be routed through the banker of the seller to the banker
of the buyer for effective control.
Demand bills: When the bill of exchange is made payable on demand or sight,
such a bill is called Demand bill. The buyer is expected to pay the amount of the
bill immediately at sight.

41

Usance Bills: When the bill is drawn payable after certain period or on a specified
date, the bill is called Usance bill. The bill is presented to the buyer once for
acceptance, when he accepts to pay the bill on due date and on due date the bill is
presented again for payment.
Bill Purchase facility is extended against the clean demand bills whereby the
bank lends money to the payee of the cheque or the draft and to the drawer of the
bills by purchasing the same against tendering of such bills by the payee or
drawer. The bank in turn sends the bills for collection, preferably to its own
branch at the place of drawee or its correspondent bank or to the buyers bank.

Bills discounting facility is extended against the Usance bills. In such cases, the
seller tenders the usance bill drawn by him usually along with documents to title
to goods, to his banker who discounts the bill i.e. levies discount charges for the
unexpired portion of the duration of the bill to collecting bank at the centre of the
drawee either to its own branch or drawees bank, with instructions to release the
documents to the title against acceptance and thereafter, to recover the bill amount
on due date. Sometimes the accepted Usance bills are also tendered and
discounted by the bank.

Export Finance
Export finance is broadly classified into:
1. Pre-shipment finance and
2. Post-shipment finance
Pre-shipment finance: Financial assistance extended prior to the shipment of goods shall
fall under pre shipment finance.
Post-shipment finance: Financial assistance extended subsequent to the shipment of
goods shall fall under the purview of post shipment finance.

NON FUND BASED:


There are certain types of advances which do not involve deployment of funds at least in the
initial stage. These are called Non-Fund Based Credit. A Performance Guarantee issued by
the bank on behalf of a customer to third party for fulfillment of terms of contract, Letter of
Credit issued by the Bank on behalf of its customer favouring the third party in India or
abroad is some of the examples of this type of finance. Even though funds are not involved at
the initial stage, bank is taking risk, and on failure of its client to fulfill terms of guarantee or
letter of credit, we will have to pay out funds to the beneficiary on behalf of the customer and
recover it later from him.

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Bank Guarantee
We come across a guarantee in two capacities. One as a beneficiary when somebody
guarantees the payment of debt of banks borrower in case of default and the other as a
guarantor when the bank itself promises to pay the dues or discharges the liabilities of its
customers in favor of a third party. While in former case bank is a creditor and in the
latter case bank is the debtor.
Types of Guarantees:
Guarantees issued can be broadly classified into two categories viz. Advance and
Performance Bank Guarantee
A. Advance Guarantee: The bank takes the guarantee on behalf of the customer that, the
customer will execute the contract. If the customer fails then the bank is responsible for
making the payment under the guarantee.
B. Performance Guarantee: Performance guarantees are issued on behalf of constituents
guaranteeing their performance as per the contracts entered into. Hence in the event of the
default of the customer to perform the obligations undertaken by him, the bank will make
payment under the guarantee.
Letter of Credit
Ideally any seller of goods/services would like to receive payment before the delivery of
goods / services to a buyer. Similarly the buyer would also like to ensure that the
goods/services bought are as per his specifications and deliveries are affected in time,
before parting with the money. If the buyer and seller are at two different, far away
stations, both the factors cannot be satisfied simultaneously.
As a compromise, services of third party as an intermediary are utilized. This
intermediary is usually a bank who issues a letter of assurance to a seller at the request of
a buyer for payment of cost of goods / services sold on certain terms and conditions. Such
an assurance letter is named as a "Letter of Credit".
A letter of credit is a written instrument issued by a banker at the request of a buyer
(applicant) in favor of the seller (beneficiary) undertaking to honor the documents or
drafts drawn by the seller in accordance with the terms and conditions specified in the
credit, within a specified time.
Parties to a letter of credit
Following are the parties to the letter of credit:

Applicant

The buyer of the goods / services


(borrower)
The Bank / Branch which lends its name /
credit
Opening bank's branch or another bank at
beneficiary's place to whom the Letter of

Opening Bank
Advising Bank

43

Credit is sent for onward transmission to


the beneficiary
The party to whom the credit is addressed
(seller or supplier of the goods / services)
Opening bank's branch or another bank
who negotiates the documents
The bank adding confirmation to the letter
of credit

Seller/Beneficiary
Negotiating Bank
Confirming Bank

KINDS OF CREDITS
The letters of credits which banks generally issue are:
1. Inland L/C: An L/C where all the parties to an L/C are located within the country.
2. Foreign L/C: An L/C where either the opener or the beneficiary is located outside
the country of issue and arising out of export or import of goods/services out of/into
the country of issue.
Other types of letter of credits are as follows:
3. Revocable Credit: A credit that can be cancelled or amended at any time without
the prior knowledge of the beneficiary.
4. Irrevocable Bank: It is a definite undertaking of the issuing bank to honour
documents strictly drawn as per terms and conditions of credit which cannot be
amended or cancelled without the agreement of all the parties to the credit, in
particular the beneficiary. In practice, LCs is almost always irrevocable.
5. Confirmed Credits: Where credits carry the confirmation of the advising bank. It
constitutes a definite undertaking of such confirming bank in addition to that of the
opening bank.
6. Transferable Credits: A transferable credit is a credit under which the beneficiary
(first beneficiary) may request the bank authorised to pay, incur a deferred payment
undertaking, accept or negotiate (the "Transferring Bank"), or in the case of a freely
negotiable credit, the bank specifically authorised in the credit as transferring bank, to
make the credit available in whole or in part to beneficiary (ies) second
beneficiary/beneficiaries
7. Acceptance Credits: Where the payment is to be made on the maturity date in
terms of the credit.

44

8. Revolving Credits: Which provide that the amount of drawings made there under
would be reinstated and made available to the beneficiary again and again for further
drawings during the currency of credit, up to a certain sum subject to certain
conditions specified therein.

CREDIT PARAMETERS
Business banking department at Bank considers the following credit parameters:
A) Financial Stability: It analysis the balance sheet of the particular SME. It looks at
the profit and loss statement. The relationship manager works out different ratios to
find out the progress of the SME. The ratios that are important in this business is as
follows:
1) Gross margin ratio: It helps us to find out the efficiency of the company. It
enables us to know the impact of the rising cost on the gross profit.
2) Net profit ratio: It enables us to know the profit earning capacity of the firm. If
this is rising year on year basis (Y-O-Y), it means that the firm is performing well
and so we are less hesitant to give the loan.
3) Current ratio: It helps us to know the liquidity position of the SME.
4) Interest coverage ratio: It enables us to know the interest paying capacity of the
SME. If it is good as per industry averages then we are confident in giving loan to
such customer as they would be capable enough in paying our interest. It is one of
the most important ratios considered by us before giving working capital loan to
any SME.
5) Debt Service Coverage Ratio (DSCR): It helps us in knowing the capability of
the firm in repaying its principal amount. It is another most important ratio
considered by us before giving loan to any of the SME.
6) Debt to Equity ratio: It enables us to know the ratio in which the firm uses debt
and equity.
7) Leverage: It enables us to know the level of debt w.r.t the equity.

45

8) Debtor Days: It enables us to know the debtors collection period. Banks only
consider the debtors of less than 90 days.
9) Creditor days: It helps us in knowing the days within which the SME can make
payment to its customer.
10) Inventory days: It helps us to know their stock holding period. Bank Considers
only the stock of less than 180 days.
11) Return on capital employed: It enables us to know the returns earned by the
SME on the total capital employed by them.
12) Current assets to sales ratio: If this ratio is high then it means that the inventory
or debtor days have increased and if it is low then it means that the inventory or
debtor days have decreased, which is good for the bank.

B) Security: The next important thing the bank looks for is the security that the SME is
willing to give. There is primary security and collateral security. The primary security
includes hypothecation of stock and book debts and the collateral security includes
mortgage of the property. Both these securities are of necessity for any kind of facility
that has been availed for. Apart from these securities personal guarantee (PG) by the
directors and the promoter is also mandatory. Clients have to be convinced so as to
give the personal guarantee as some of them are unwilling to give as they are already
giving us the guarantee in the form of primary and collateral security. But personal
guarantee is taken so as to be sure that the people applying for the loan have the
intention to carry out the business. This is because if the person gives PG then he has
the intention to carry out the business and repay the money back to the bank but if he
is unwilling to give the PG then even if he may be willing to repay the money back to
the bank but bank is not assured that the customer will repay the money back and so
bank carries out all the due diligence to be on the safer side. In case of the collateral
security the fixed assets is of the SME is mortgaged. The valuation report of the
mortgaged property has to be submitted by the SME to the bank. The mortgage
property provided could be residential, commercial or industrial property. The value
of the hypothecation and mortgage could higher or lower than the value of the facility
provided.
C) Banking Details: This is another important aspect that has to be considered by the
bank for giving credit. This enables the bank to know following based on the existing
facility that the SME have with the XYZ bank:

46

Churning percentage: This helps the bank to know the receipts that the SME routes
through the bank. Bank expects minimum churning percentage of 80-90%. For
example:
MONTHS
CREDIT TOTAL OF SALES CHURNING
BANKSTATEMENT
(%)
MARCH 2013
850
1000
85%
Churning= (Credit Total/ Sales)*100
Overdrawing: It means the amount overdrawn by the SME over and above
the facility granted by the bank. For example, if the facility provided was RS.
500 lacs and money utilized is Rs. 501 lacs then the amount overdrawn is Rs.
1 lacs.
Repayment Track: It enables the bank to know the repayment track record of
the bank. Bank expects it to be prompt.
LC devolvement: LC is devolved when the SME fails to repay the amount to
the bank on maturity. Bank expects that the devolvement should be Nil.
Cheque conditions: It enables the bank to find out whether any of the cheque
issued by the SME has ever bounced.

D) Debtors and Creditors: It forms very important part in deciding about the credit that
has to be given to the SME. If the debtors of the SME is reputed and the value to be
received from that debtor is a huge amount then bank is not hesitant in giving loan to
that particular SME and in the same way if the suppliers are big and reputed firms
giving credit to the SME then bank is sure about the credibility of the SME and are
not hesitant in sanctioning the loan amount. Bank prefers to have top five suppliers
and customers list from that particular SME.
E) Business Model: It gives details about the business carried out by the firm, the
technology used by them, turnover achieved by them, etc. It also gives details about
the employee strength of the firm along with the composition of the skilled and
unskilled employees. It gives details about the process followed by the firm in giving
the final output. Most importantly it gives information about the operational factors
such as availability of raw materials, price fluctuations in raw material, product range,
power availability and skilled staff. This is considered to be important because it
reflects the profitability of the firm. For instance if the prices of the raw material
increases then the margins of the business is expected to be impacted if there are large
number of competitors in the market and thus will have an impact on the interest
coverage ratio.

47

F) Industry Analysis: It enables the bank to know the growth prospect available in the
particular industry.

PROCESS OF SME FINANCING


SOURCING

MEETING THE CUSTOMER

INITIAL DOCUMENT COLLECTION

PRINCIPAL APPROVAL

DOCUMENT COLLECTION AS PER LOGIN CHECKLIST


48

PROPOSING TO CREDIT DEPARTMENT WITH BUSINESS APPROVAL

JOINT MEETING BETWEEN RM, CUSTOMER AND CREDIT DEPARTMTNET

CREDIT DECISION

SANCTION

DISBURESMENT IN LIASON WITH OPERATION DEPARTMENT

PROCESS OF SME FINANCING


1) SOURCING:
LEAD GENERATION is the most important function of Business Banking. It is the
preliminary stage of SME financing. The process of sourcing is carried out in four ways at
bank.
a) Branch Networks:
Every RM is tagged to a few branches. The RM is based out of these branches. The RM
interacts with the branch staff (Branch Manager, Sales Manager, Trade and Forex RM,
Business Development staff) and explains to them the various business banking products.
The best way to source customers is to tap the existing relationships of the branch i.e
customers who already hold savings or current accounts with the bank or is taking any other
banking services. Cross Selling techniques are used under this method. These customers
could also be all together a new client who approaches the banks for the needs of working
capital or walk in customers.
b) Cold Calling:

49

Cold Calling is the art of approaching someone, professionally, openly and meaningfully,
with a sensible proposition. Cold calling typically refers to the first telephone call made to a
prospective customer. Also a popular method used by many RMs. An authentic data base is
made and calls are made to prospective clients. Another method of cold calling includes
sourcing clients on fields. A RM would visit a company and ask for working capital
requirement arbitrarily to source clients. This is an indirect method of sourcing clients.
c) Existing Client References:
Each Relationship Manager (RM) is given their own territory wherein they have to tap the
SMEs. Once they are well established in their sector they start to form a chain of client in
the same industry with reference of an existing client. This method of sourcing clients is
called Referencing. The RM networks through the existing client to get information about
new clients. The positive aspect of this method is that the RM gets primary information
about the new client and he is well informed about the credibility of the client due to the
intense network. The negative aspect of this method is that the client base of the RM gets
restricted to a particular sector. Any macro impact on the sector therefore affects the overall
client base of the RM.
d) Consultants:
Another popular method used by the RMs are through Consultants. There are various
consultants in the market mostly known as Direct Selling Agents who help the clients who
are in need of working capital financing get in touch with the Relation Manager. These
Direct Selling Agents are mostly reputed Chartered Accountants who offer consultancy
services to the clients and help the bank generate new business. These consultants are aware
of the market conditions and help in the smooth process of SME financing.

2) MEETING THE CUSTOMER:

After the Relationship Manager gets the leads through various methods of sourcing they
conduct an initial meeting with the client. At this stage only the Relationship Manager
meets the client. The Relationship Manager understands the history of the business,
product line and the business model from inception. A detailed review of the background
of the business, promoter etc is undertaken. The RM also understands the current position
of the business, the profitability and the future growth prospects of the client. By
conducting a comprehensive analysis of the business model of the client the RM also
guides the client on the best mix of products and services that the bank offers and is ideal
for the client. The RM also strives to understand the problems the customer is facing with
the existing banker.
Initial talks about the current bankers if any are also undertaken and the process of loan
takeover is discussed. The security cover, collaterals obtainable from the client and the
percentage of collaterals against the limits are also understood by the RM and the client.
Typically the following aspects are covered in the first meeting with the client:
History of Business
History of Promoter
Current Position of Business
Problem with existing bank
50

Reasons and Need of Working Capital requirements


Security Cover
Collaterals
Banking
Takeover from existing banker

3) INITIAL DOCUMENT COLLECTION


The following documents are collected and analyzed by the RM to understand the
financial position of the client.

KYC Documents
Latest Sanction letter of existing bank
Last three years audited balance sheet and profit and loss A/c
Bank statements for last six months
Reference Checks: At this stage the RM also conducts a reference check of the client in
order to understand the credibility and goodwill of the customer in the market.

4) PRINCIPAL APPROVAL
This stage of approval is the initial or the preliminary approval. Once the RM conducts
the meeting and collects the documents RM will analyze the case as to whether the
particular case is doable or not. This case is discussed by the RM with his superiors and
team to analyze its feasibility. If he finds the case to be doable based on its financials and
other criteria the he starts working on the preparation of the Credit Assessment
Monitoring (CAM).

5) DOCUMENT COLLECTION AS PER LOGIN CHECKLIST


Once the RM is convinced about the proposal and finds the case to be feasible he further
asks for the following documents to take the proposal to the next stage. The RM prepares
an entire file for that one particular case ensuring all the following documents. The
following lists of documents are collected:
Company Profile including details of product, shops, business model.
Background on promoters & directors of the company.
Duly filled and signed copies of Net worth Statements of all Directors and
Guarantors in banks Format.
Month wise Sales and Purchase figures.
Last 6 months Stock statements.
Last 12 months VAT Returns copies along with VAT audit report.
List of Fixed Asset with Written Down Value (WDV).
51

List of Directors and Shareholders along with Shareholding pattern on companys


letter
head. (Duly stamped and signed by Director or authorized signatory).
Stock and property insurance copies.
Top 10 debtors and creditors along with company name, contact person name and
contact numbers and Sales and Purchase amount.
Export Import code certificate copy. (If Applicable)
CRISIL Report, Export house etc certification copy (if any with the company).
Pollution control board certificate if applicable. (Latest copy).
Details about strength of Staff bifurcated into Marketing, Finance, Accounts, and
Factory in charges etc.
List of Countries where company is exporting and also countries list from where
company is importing. (If Applicable).
Photocopies of property documents along with Share certificates, Latest Tax paid
receipts, Latest Maintenance receipts, Approval Plan Copy, CC copy and OC copy
etc.
Photocopies of all the chain agreements copies.

6) PROPOSING TO CREDIT DEPARTMENT WITH BUSINESS APPROVAL


At this stage the RM prepares the Finspread, understands financial ratios and finalizes the
CAM note. The RM fills in various financial and numerical details of the company in the
Finspread and rolls out various ratios and policy compliance parameters of the client. The
RM also prepares a CRR Calculation Sheet wherein the RM rates aspects such as:
1) Suppliers
2) Customers
3) Liquidity
4) Leverage
5) Sales Growth
6) PBDIT/Sales
7) DSCR
8) Integrity
9) Family standing/History
10) Financial Standing
11) Management Competence
12) Management Standing
13) Employee Quality etc.
CREDIT ASSESSMENT MONITORING (CAM)
After analyzing all these aspects, the CAM is prepared for the particular case. CAM is a
very crucial document for the risk analysis since it provides comprehensive details of
the case.
PROPERTY ESTIMATOR
52

The role of estimator is also crucial at this stage. He gives his valuation of the proposed
collateral. This helps the bank evaluate the appropriate value of the collateral provided by
the customer. The CAM is sent to the credit department who goes through the proposal
made by the RMs.

RISK ANALYSIS
A bank faces different types of risk while lending to a customer.
LENDING RISKS FOR BANK
1) Credit Risk
Credit risk refers to the probability where the counterparty or the borrower may
fail to fulfill its obligations as per the agreed terms. It involves inability or
unwillingness of a borrower or counter party to meet commitments in relation to
lending, trading, hedging, settlement and other financial transactions.
Credit risk faced by the bank depends on both external and internal factors.
External factors are those which are out of the control of banks and internal
factors are those which can be easily controlled by the bank. In case if the loans
have to be given to the client who is into the manufacturing of the chemicals, then
we will have to consider the raw materials included in manufacturing the final
product. This is because if the prices of the raw materials are facing lot of
volatility then this will affect the margin of our client and may have the impact on
the amount the interest and principal repayment of the client. Such a risk is known
as external risk and the banks have to mitigate for the same.
SOURCES OF CREDIT RISK
1. Direct lending risk: It lies in the products like loans and advances, overdrafts,
bills discounted, etc. It is the risk that the dues will not be paid on time.
2. Contingent lending risk: It lies in products like letters of credit, guarantees,
etc. It is the risk that contingent exposures get converted into actual obligations
and that these obligations may not be repaid on time.
53

3. Issuer risk: It is the risk of financial loss due to the degradation in the credit
rating of the issuer of the debt instrument. It is also the risk that the bank may not
be able to sell the instrument within a predetermined holding period.
4. Pre-settlement risk: It is the risk that the counter-party with whom the bank
has a reciprocal agreement may fail before settlement of the contract e.g. In
forwards, futures and options. As a result the bank faces the risk of default on the
settlement date and hence may have to undertake fresh transactions, leading to
replacement cost.
5. Settlement risk: It is the risk where the bank delivers its part of the contract but
the other bank does not fulfill its obligation. This risk arises out of time lags in
settlement of another currency in another time zone.
The primary source of credit risk is business risk and borrower risk. Any business
entity is influenced by its macro and micro environmental factors. The macro
factors are government policy, global competition and political instability. The
micro factors are specific to the industry and enterprise
.
2) BUSINESS RISK
The important sources of business risk are
Industry risk
It is concerned with the industry to which the particular SME belongs. If the
condition of the industry to which the customer belongs is unfavourable then it
will have strong influence on the customers ability to service its interest and the
principal amount. Thus it becomes necessary for the bank to evaluate the trends
involved in the indstry.
Operating risk
Operating risk is the likely decline in profits due to decline in sales. The existence
of fixed operating expenses in the firms income stream results into operating
leverage. Operating leverage is the firms ability to use fixed operating cost to
magnify the effect of changes in sales on its earnings. Higher the fixed operating
leverage higher the operating risk.
Financial risk
It refers to the debt financing strategy used by the firm. Higher the debt used by
the firm higher the financial risk involved with the firm. There for while assessing
the credit risk, financial risk assessment is very crucial. The financial ratios are
effective e tools in quantifying the financial risk.
Fiduciary risk
The principal source of fiduciary risk is non-fund based facilities such as letter of
credit and bank guarantee. These are contingent liabilities, capital structure and
operating cash flows remain unaffected. If the firm fails to meet the bills under
letter of credit on due date or the guarantee is invoked, this results into unexpected
outflow of funds.
BORROWER RISK
54

It aims to assess the risk of the promoters and management. This risk is discussed
in the section of credit proposal and in the section of basic principles of lending.

55

CREDIT RISK ASSESSMENT AND RATING FOR SMEs


The credit risk refers to the inability of the borrower to repay the interest and the principal
amount as per the agreed terms. The bank takes due diligence in assessing the risk involved
in lending the money to the client. The bank has to take two important decisions of assessing
the credit risk of the client and assessing the credit limit to be given to the client. The bank
focuses majorly on the assessment of the credit limit to be given to the client. Bank uses
MPBF method, sales projection method and various other methods to assess the credit limit
involved in different types of instruments that has to be given to the client.
The bank also undertakes the grading procedure for the prospective client. This process
helps in giving particular rating to the SME. The grading process is carried out by
considering various factors. These factors include grading on the basis of management,
business criteria, financials, financial trends, and banking behavior. These factors help banks
in providing a particular rate to the SME. This rating helps to indicate whether the particular
SME is capable of repaying its debt on not.

7) JOINT MEETING BETWEEN RM, CLIENT AND THE CREDIT


DEPARTMENT
After the preparation of the documentation and financials, a joint meeting is conducted
by the RM, client and the credit team to understand a comprehensive view of the case.
All minute details and the feasibility of the case is analyzed at this stage.
Collateral Visits: At this stage the Credit/Risk team goes on various collateral visits
especially on factory visits to authenticate the data. If a company has offered a factory
as collateral against the loan the risk team takes special efforts to visit the factory,
validate the said machineries, workers etc. If the client has offered a factory as
collateral and the client claims it to be self occupied the collateral visits helps the credit
team confirm its authenticity.

8) CREDIT DECISION

56

The credit team at Bank are dedicated involved in conducting the risk analysis of the
various clients and customers. At this stage they check every minute detail incorporated
in the CAM. They will go through the financials, banking details, collateral details,
product details, production capacity, details about sister concerns, etc. If they find it to
be proper then the CAM is finalized but if it is not proper then the query will be raised
by the credit department. This query will have to be cleared by the RM by interacting
with the customer and revert the same to the credit department. If again the credit
department finds it to be doubtful then again the query will be raised and it has to be
cleared again by the RM. The credit department is liable to check the credit worthiness
of the client and to finalize the proposal made by the RM. The credit department is
more concerned about the ICSR and DSCR as we are providing working capital loan
and term loan to the customer. This stage is the approval or the rejection stage. After
thorough research and risk analysis is undertaken the credit team may either reject or
accept the proposal. The DECISION SHEET prepared by the RM has to be accepted by
the credit team so that the case is further processed and finally the loan can be
approved.

9) SANCTION
Credit Arrangement Letter (CAL) is a letter that contains the following details:
Sanctioned limits to the client and its terms
Rate of interest / commission
Other Terms and conditions specific as well as general
Collateral details and the percentage of the collateral to be maintained
RM gets the CAL signed by the authorized signatory and takes the approved CAL to the
client for his acceptance. It is a binding that the loan will be disbursed by the bank and
the client will accept the given loan. At this stage the loan is at the sanction stage. If all
the terms are acceptable to the client he will give his acceptance by providing a signed
copy of the same CAL. Once the client accepts the sanction communication it is the
responsibility of the RM to collect the processing fee cheque from him.

10) DISBURSEMENT
DEPARTMENT

IN

LIASION

WITH

THE

OPERATION

After the sanction letter is accepted by the customer, the RM initiates the
disbursement process in liaison with the operations department. The RM also initiates
account opening with the help of the branch. The operation team completes the
disbursement documentation and disburses the loan as per Bank guidelines. The initial
disbursement is always upto the existing banks sanctioned amount.
CONCLUSION:
Following is the end-to-end process that Bank follows in order to source clients,
disburse loan and undertake servicing process.

57

SERVICING
The relationship with the client is not contained only till the loan is disbursed the
Relationship Manager has to ensure the smooth functioning and relationship even after the
client has availed the loan facility. Till one year the Business RM looks after the entire
servicing of the account. After one year the maintenance of the account is transferred to the
service RM who further ensures that the client has good banking relation with the bank and
continues the relationship. The following services are undertaken by the business and service
relationship manager.
A) DRAWING POWER CALCULATION:
Drawing Power is the amount of Working Capital funds the borrower is allowed to
draw from the Working Capital limit allotted to him because the working capital limit
is usually allotted to a borrower against security of Stock and Book Debts. The
amount of funds a borrower is allowed to draw is calculated by considering the total
value of Stock plus total value of Book Debts for the month after deducting the
margin. Margin is the component of funds raised from long term sources such as
Share Capital and Term Finance (Long Term Loans). It is for this purpose that the
borrower must regularly submit monthly Stock and Book Debts Statement and
Statement of Trade Creditors to the bank.
Working Capital funds are a kind of Short Term Finance mostly used to purchase Raw
Material. Trade Creditors (Sundry Creditors) are those from whom the company
purchases raw material on credit basis. Thus, in a way Trade Creditors also finance
the borrower's stock and hence the stock purchased under credit being unpaid stock,
cannot be provided as security to Bank. Hence total amount of trade credit received
by a company in a month must also be deducted from total stock value to find out the
actual value of stock available to the Bank as security.
At Bank Margin is 25% on Stock and 40% on Book Debts.
This concept can be further explained through the following example:
Suppose the Stock Position of a Company 'X' as on 31.03.2013 is as follows (Rs in
lacs):
1. Total Value of Stock(S): 100.00
2. Total Value of Trade Creditors(C): 50.00
3. Total Value of Debtors (D):200.00 out of which 150 is for less than 90 days and 50
is above 90 days.
Margin is 25% on Stock and 40% on Book Debts
Calculation of Drawing Power= Drawing Power of Stock + = Drawing Power of
Debtors
1) Drawing Power of Stock
STOCK
100
(-) CREDITORS
50
NET STOCK
50
MARGIN @25%
12.5
DP OF STOCK
37.5.. (A)
58

2) Drawing Power of Debtors


DEBTORS
150
MARGIN@40%
60
DP OF DEBTORS
90. (B)
Therefore the Drawing Power for company X for the month of March 2013 is:
37.5+90= 127.5.
This drawing power is calculated monthly by the Business RM for every client for
one year and the same is further continued by the Service RM to ensure optimum
utilization of funds. This DP is updated in the Query Management System (QMS)
very month at Bank.

B) TER/ADHOC/CMR/ADELENDUM CAL:
There are further enhancements that the bank offers to their clients in the form of loan
enhancement. If the customer wants is have additional funds only for a period of less
than 15 days the bank offers the (TER) Temporary Excess Requirement facility.
If the client is in need of funds for a period of more than 15 days the bank offers
Adhoc facility to the client.
There are certain covenants that the bank and the client agree to before they enter into
the agreement. If the client wants to amend certain covenants the Credit Modification
Request is offered to the client.
For certain minute detail amendments the Adelendum CAL is offered to the client.
C) REVIEW/RENEWAL/ENHANCEMENT
Each individual credit exposure has to be placed for Review by the Approval
Authority at least once in a year. This exercise is conducted by the Relationship
Management team from Business Units and presented to the Approval Authority.
In addition to such reviews, accounts are grouped based on the type of facility,
product, industry, sanctioning authority, etc. and analyzed with respect to the risk
involved.
The risk rating of Clients gives a fairly good idea of the risk associated with the
portfolio. Thus, review of the risk rating is needed to understand the risk of the Banks
portfolio.
The credit team does periodic review of all the clients to ensure that the clients are
using the funds to their optimum level. The bank also ensures yearly renewal of the
existing limits of the clients depending upon their current level of requirement and
usage. Along with renewal the client may also ask for enhancement in a particular
product that he is currently using.

CREDIT PROPOSAL FOR SMEs


59

The Relationship managers prepare credit proposal. The company approaches the bank and
briefs them about their requirement (term loan, cash credit etc.) based on which the credit
proposal is prepared.
Before the work starts on the proposal the company requires a set of documents. These
documents are
1. Audited balance sheet for the last three years
2. Brief background of the company
3. Profile of the directors
4. Share holding pattern of the company
5. Group details of the company with regards to sales, profitability, networth etc.
6. Borrowing arrangements
a. Working capital
b. Term Loans
7. Details of security provided and Networth of the guarantors
8. Next 2 years financial projections
9. Project report in case of term loan
a. The purpose of the present requirement
After receiving the above documents the work on the credit proposal starts. The main sections
of a credit proposal are
1. Nature of request
This section lists out the request of the company. For example:
Nature of proposal

Fresh sanction
Existing

Proposed

+/-

Fund Based (Working Capital)

Fund Based (Others)

Non Fund Based (Working Capital)

Non Fund Based (Others)

Total (FB + NFB)

Limits (Rs. in lacs)

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

2. Basic details of the borrower

60

This section lists out the some of the details about the company. They are
a. Name of the company and the group it belongs: If the borrower is a group concern then the
bank can get corporate guarantee from the main company.
b. Constitution of the company to know if the company is public or private limited and its
date of incorporation.
c. The corporate office address and the location of its manufacturing units if the borrower is a
manufacturing concern.
d. The line of activity of the company detailing the products it manufactures or trades and the
industry it belongs.
e. The products newly introduced by them in the financial year, when they have applied for
the loan.
f. Monthly sales turnover achieved by them.
g. If the company has been dealing with the bank then the date from which the company is
availing the facilities from the bank.
3. Management of the company
This section tells about the top administration that manages the company. As they are the
major decision makers for the firm a proper investigation about the management of the firm
becomes necessary. This section details the board of directors/ partners and the various
positions they hold in the company. A brief note is also written on the background of these
directors/ partners, which is in general their qualification and experience in business.
The management of the company is of great importance to the credit appraisal team and
especially for SMEs.
The main points looked into are:
a. Is the management competent enough on running the firm?
b. Is there any type of differences between the partners/ directors of the firm?
c. Is any major director/ partner planning to leave the firm as there may be a chance that
many
customers may move with the director/ partner to other firms?
d. Is any director/partner in the defaulter list of RBI or CIBIL?
e. The experience of managers in running the business.
f. The involvement of the management in running the business.

4. Ownership pattern
61

This section tells about the percentage shares held by the promoters, the financial institutions,
foreign institutional investors, public and others.
5. Stock market perception
If the borrowing company is a public limited company then its important for the credit
analyst to know what the stock market feels about the company. The following details are put
in this section.
a. Par value of the share.
b. Name of the stock exchange where the scrip is listed.
c. Current market price of the share.
d. 52 week high and low
e. P.E. ratio of the company
f. P.E. ratio of the industry
g. Volumes traded in a day
6. Background of the company
This section tells about the promoters of the company and the main purpose of starting the
firm. This section tells about the profile of the products it manufactures or trades as well as
the market standing of these products. The various overseas ventures or any other business
collaboration that may have an effect on the performance of the company is mentioned in this
section. It also tells us about the core business undertaken by the firm. Thus it helps us to
assess the client majorly on the core business carried out by the firm.
7. Group details and profile
This section details about the group concerns and a brief note about their financial
performance. For example, certain important information about the sales, net profit, net worth
of the company, the gearing ratio and the current ratio. It helps in comparing the profitability
made in both the firm. This will help us to get it clarified from the customer if there is huge
difference in the profits made by the firms. This also helps us in understanding the
involvement of the management i.e. whether it is high, moderate or low.

8. Borrowing arrangements
62

This section gives a detail of the current borrowing arrangements of the firm i.e. the working
capital arrangement as well as the term borrowing arrangements with the various banks.
9. Industry analysis
Apart from a micro analysis of the company, the overall assessment of the industry in which
the company works is important. This assessment gives the credit analyst an insight into the
macro environment and the potential risk for the company. As the economic and business
environment in which a company is working is constantly changing it becomes all the more
important for the bank to assess the industry.
The industry is assessed in four parameters
a. Demand Supply gap
b. Government policies
c. Input related risks
d. Extent of competition
e. Raw material price volatility
10. Business analysis
a. Product profile
In this section the product profile of the company is looked into. The main products of the
company are noted and sales in value and volume terms for each product are noted. The data
collected should be atleast for the last two years. The analyst looks into the composition of
the products and the percentage share of each product. This will help in knowing which
product is doing well in the market and which one is not.
The analyst can also look into the production capacity of the company to see if the company
is fully utilizing its existing capacity.
The bank also looks after the raw material consumed in the manufacturing of the product so
that the fluctuations in the price of raw materials can be noted and the same can be mitigated
by the customer.
b. Sales growth
Here the sales growth and the PBDIT growth of the company are analyzed. The reason for the
growth or the fall in the sales is analyzed and the same is been explained in the proposal so
that the credit department is satisfied with the reason explained. The fall in sales may have
taken place due to the recessionary pressure or due to the trends prevailing in the industry.
The data presented should be for atleast three years. The bank also analyzes the projected
sales given by the customer and also takes the reason from the client so as to be confirmed as
to whatever projected figure is been provided is realistic.

11. Financial analysis


63

The financial analysis forms the main part of the assessment of any company. A detailed
analysis of the financial statements as well as ratio analysis is done to ascertain the financial
standing of the company. These financial statements are not studied in isolation nor are they
studied for one year. A trend analysis is done to analyze the deviation or movement of the
company.
The financial statements scrutinized are
1. Balance sheet
2. Income statement/ P & L statement
The tools for financial analysis
1. Ratio analysis
2. Cash flow analysis

64

CASE STUDY
Application No.
Borrower Name
Banking arrangement
Line of activity
Constitution
Sub-section for PSA
Type of Exposure
Approval Authority
Limits valid till
No of Policy deviations

Region
Business Segment
Parent Name
CRR of Parent
Relationship Manager
RM Contact Number

Exposure
CRR

Control Information
Application date
M/s ABC
Sole Banking
Asset Classification
Traders of yarn
Priority Sector
Private Ltd Co.
Banking with IVBL since
Manufacturing
Service Enterprise
Micro
Renewal
Review
Enhancement
Fresh
ZH & ZCM
Last approval on
30/04/2013
Mid review date (if any)
1
Group

Legal One Obligor Group


West Mumbai
Branch
Business Banking
Parent Account Manager
NA
Parent Risk Country
NA
PAM Office
XYZ
Author
Author Contact
Number

10/05/2013
Standard
No
New Relationship
Small
Ad hoc
Others
NA
NA
NA

Goregaon (E)
NA
India
NA
XYZ

Exposure to Borrower/ Group and CRR


Existing
Proposed
Borrower
Group
Borrower
Group
NA
NA
650.98
650.98
NA
NA
4
4

65

CONTENTS OF

1
2
3
4
5
6

Credit Submission + Annex


Basic Information Report
Appraisal Note
Borrower Credit Rating / FRR Rating grid
Last relevant minutes
Summary Fact Sheet

1
2
3
4
5
6
7

Financial Worksheets
Account Relationship & Monitoring sheet
Call Reports
Credit Investigation Report
Org Chart on Credit Base
Transaction Flow Chart
Stock Market / Rating Chart

1
2
3
4

External Rating Report


Industry / Sector Reports
Published Financials
Other information

CREDIT EXPOS (CE)


Enclosed Pages
Comments
(Y/N)
Part I
Attached in File
Yes
Yes
Attached in File
Yes
Attached in File
Yes
Attached in File
Yes
Yes
Part II
Yes
Attached in File
NA
Yes
Attached in File
Yes
Attached in File
NA
NA
NA
Part III
NA
NA
NA
Yes
Attached in File

66

Date: 10/05/2013
Time Chart
Particulars
Date of Receipt of proposal at RO
Date of Receipt of proposal at ZO
Date of Receipt of proposal at CO
1.
i.
Sr.
No

Date:
10/05/2013
10/05/2013
10/05/2013

PURPOSE OF APPLICATION:
Credit facilities recommended: Initial Credit Application (INR in Lakhs)

Nature
of
facility with
Bank of India

Cash Credit

1.1

PCFC/PCL/PS
L/EBRD

2.

Term Loan

TOTAL

Existing
Limit

O/s as on
12/04/2013

500.00

70.00

Proposed
limit with
IVBL

Terms- RoI, margin,


commission details, etc
Existing

tenor,

usance

period,

Proposed

600.00

(200.00)

50.98

570.00

50.98

650.98

ii. Other requests

Permission to have current account with PQR Bank for regular statutory payment and for collection
purpose where IVBL is not present. RM to scrutinize quarterly bank statement.

One of the properties offered by the customer as collateral is new and the occupancy certificate for the
same is not available. Thus the customer has requested to create EM on the said property on as is where
is basis.
iii.

2.

Other Information :
Company is banking with PQR since the last 5 years and the account conduct of the company with
them is satisfactory.
In Jan 2013, the customers Cash Credit limit was reduced from INR 500.00 Lakhs to INR 250.00
Lakhs as the Bandra Branch of PQR Bank (where the account is parked) is headed by the AGM and as
per his powers he could allow only INR 250.00 Lakhs on debtors.
BORROWER BACKGROUND
M/s ABC is a private limited company started in October 2003. It has 3 directors namely Mr. A, Mr. B,
and Mr C. All the directors are from the same family.
The company is engaged in the trading of all types of cotton yarns, bamboo natural blends yarn, mlange,
lycra, dyed yarn etc. The company deals with most of the big, medium and small customers of Mumbai
region including manufacturers of towels, shirting, knitting, denims, home furnishing and industrial
fabrics.
The family started yarn business in the year 1993 in the name of M/s KYA, a proprietorship company of
Mr. M. However due to increase in the business, the company was converted into private limited company
with the directors Mr. M and Mr. R (Business Associate). Later Mr. R retired as director and in his place
Mr. A (son of Mr. R) was appointed as director. Later in 2004, Mr. A retired as director and Mr. G (father
of Mr. M) was appointed as a director. Mr. G looks after the accounts of the company. In the year 2012,
Mr. N (son of Mr. M) was appointed as a director in the company.

67

The company has its registered office at Mumbai.


The company has a team of six employees 3 in finance/accounts department and 3 in marketing
department.
The company intends to enter the business of yarn exports in the near future.
Company keeps its stock at a warehouse based out at Bhiwandi. The company uses the warehouse
premises on contract basis where the company is charged on the basis of number of parcels. The company
maintains very less inventory as most of its stock is sold out.

Business Model:

The company is engaged in the trading of all types of cotton yarns, bamboo natural blends yarn, mlange,
lycra, dyed yarn etc. The company deals with most of the big, medium and small customers of Mumbai
region including manufacturers of towels, shirting, knitting, denims, home furnishing and industrial
fabrics.
The company has two types of business model
o Trading:
In this model the company acquires its product from its suppliers and sells the same to
manufacturers of cloth. The entire turnover reflected in the books of the company is through the
trading model. The company gets a credit period of 5 days to make the payment to its suppliers and
it allows 45 days credit to its customers.
o

Agency Business:
This is a pure commission business. The company acts as a commission agent between the buyer
and the seller. It arranges for the two parties to meet and negotiates the deal for them face to face.
The company gets a commission of 1-1.5% for the deal. All the sales made under this model is not
reflected in the books of the company, however only the commission portion reflects in the
companys balance sheet. There are 2 models in the agency business:

Commission - In this model only the deals are made through the company as a commission
agent, whereas payments & billings are directly between the buyer and the seller. The
company gets a commission on that.
Commission with Payment In this model, the deals is made through the company as a
commission agent. However, in this model the company funds its buyers i.e it makes Cash
Payment to its sellers (within 5 days of dispatch) on behalf of its buyers and provides a credit
of 45 days to its buyer. The company gets a cash discount of 2% from its sellers. The company
also gets a commission of 1-1.5% for the deal. In this model too, the billing is directly
between the seller and the buyer.
The trading to agency ratio would be 1:2.
The company sells yarn to reputed companies.

Promoters/key personnel
Mr. M:
Mr. M is the main promoter / director of the company. He is 53 years of age and is a B.Com Graduate. He
looks after the day to day activities of the company. Promoter is having sound background in the industry
and was into the trading of yarn business from last 20 years.
Mr. G:
Mr. G, father of Mr. M, is also a director in the company since 2004. He is 84 years of age and has passed
SSC. He looks after the accounts of the company. He has business background of more than 30 years.
Mr. N:

68

Mr.N is the son of Mr. M. He is 26 years of age and is a MBA from NMIMS. He has one year of experience
each with a reputed organization in the export department and in strategic management. He joined the
company in 2012 and assists his father in the day to working of the company.

a.

Interest of directors
Is Section 20(1) of the B R Act
Applicable to the Proposal ?
(Loans to directors of our Bank/
other Banks etc.)

If yes, provide details

Yes

No

Name of Director

Name of Bank

Post held

Is it a related party transaction?

Yes

(Are any of the Directors of IVBL/ Other


Banks on the Board of the Borrowing entity/
Holding Company / subsidiary of Borrowing
entity

If Yes, explain

Banking arrangement details (INR in Lakhs)


Existing
FB
NFB
Our Bank

No

Proposed
FB

Total

NFB

Nil

Nil

Nil

650.98

Nil

Other Banks

550.98

Nil

550.98

Nil

Nil

Total

550.98

Nil

550.98

650.98

Nil

3.

Total
650.9
8
Nil
650.9
8

CREDIT BASE

Company has long term relationship with the supplier and also with the retailers.
Company is having good experience and having good relationship with their customers.

Top 5 Creditors (INR in lakhs)

Sr No.

Purchases in FY
2011-12

Name of Supplier

% of Total
Purchases

2267.33

46.81%

473.35

9.77%

69

318

6.57%

210.14

4.34%

158.97

3.28%

136.55

2.82%

96.06

1.98%

95.96

1.98%

87.62

1.81%

10

80.58

1.66%

3924.56

81.03%

Total

Total Purchases in FY 2011-12

4843.63

Payment terms: Procurement terms are approximately 5 days.

Top 5 debtors
(INR in lakhs)
Sr. No.
1
2
3
4
5
6
7
8
9
10

4.

Sales in FY
% of Total
2011-12
Sales
288.95
5.58%
234.65
4.53%
224.58
4.34%
224.07
4.33%
176.25
3.40%
175.2
3.38%
174.57
3.37%
104.29
2.01%
103.3
2.00%
95.22
1.84%
1801.08
34.79%
5176.65

Name of Debtor
Z
Y
X
W
V
U
T
S
R
Q
Total
Total Sales in FY 2011-12

Customer: They sell their products to manufacturers of cloth. Credit period offered is approximately 4560 days and all payments are received within time.
RELATIONSHIP/BUSINESS RATIONALE

70

i.

ii.

Relationship Experience
New Relationship
Business Rationale
The group is in this line of activity since 20 years and has very good market reputation. This is their main
business. The promoters are handling day to day activity of the Company.
Entire facility is covered by collateral security i.e. residential and commercial properties valued at
approximately INR 495.00 Lakhs.

Bank will earn processing fees of INR 6.51 Lakhs on entire credit limit.

Branch will get the opportunity to get other group company account and cross sale various liability
products.

Branch will also get opportunity to acquire new accounts with reference of the client as the client is well
known name in the industry.

5.

FINANCIAL ANALYSIS OF CLIENT


(INR in Lakhs)

Particulars

31-Mar-10 31-Mar-11
Audited

Audited

31-Mar-12

31-Mar-13

31-Mar-14

31-Mar-15

31-Mar-16

31-Mar-17

Audited

Provisional

Projections

Projections

Projections

Projections

Net Sales
COGS
COGS/Sales
EBITDA
EBITDA / Net
Sales
PAT
PAT/Net Sales
Cash Profit
Tangible Net
Worth (A)
Unsecured Loan
(B)
TNW+USL (A+B)

71

TOL/TNW
TOL/TNW (A+B)
Net Working
Capital
IBD/TNW
IBD/TNW (A+B)
Interest Servicing
Coverage
Debt Service
Coverage Ratio
Current Ratio
Inventory in days
Receivable in days
Payable in Days
Total Fixed AssetsNet
Machinery &
Equipment-Gross

i.
Historical
Turnover:
The Company has achieved the sales of INR Lakhs in FY 2011-12 as compared to INR Lakhs in FY 2010-11.
As per the provisional balance sheet of FY 2013, the company has achieved INR Lakhs of sales and it
projected to achieve INR in the current financial year. The month wise sales break from April 2011 to March
2012 is as follows:
Month
Sales
Apr-11
May-11
Jun-11
Jul-11
Aug-11
Sep-11
Oct-11
Nov-11
Dec-11
Jan-12
Feb-12
Mar-12
Total

72

Profitability:
Company has shown EBIDTA/ Net sales of 2.31% in FY 2011-12 compared to 2.93% in FY 2010-11. Whereas
the Net Profit is INR Lakhs in FY 2011-12 compared to INR Lakhs in FY 2010-11. Company achieves good
gross and net margins considering trading business. Also promoters have withdrawn profit in the form of
Directors Remuneration of INR 31.50 Lakhs which if added back the profitability will increase.
Net worth:
Tangible Net worth of the Company stands at INR Lakhs in the FY 2011-12 as compared to INR Lakhs in FY
2010-11. The increase in networth is due to retention of profits in the business.
USL:
USL from family members is INR Lakhs in FY 2011-12 and INR Lakhs in FY
2010-11. If this is considered as a part of the Net Worth, the owners funds in
the business would increase.
Leverage Ratio:
The IBD/TNW including USL was at 0.91 in the FY 2011-12 as compared to 1.59
in FY 2010-11.
The TOL/TNW including USL stands at 2.55 and 4.82 in FY 2011-12 and FY
2010-11 respectively.
Current ratio:
Current ratio in the FY 2011-12 was at 1.31 as compared to 1.19 in the FY 201011. There has been an increase in the current ratio compared to last FY.
Inventory Days:
Inventory days were at 22 days in FY 2011-12 as compared to 40 days in FY
2010-11.
Receivables period:
Receivables days stood at 48 days in FY 2011-12 as compared to 45 days in FY
2010-11. It varies from party to party and the company has long standing
relationship with all his customers. The working capital requirements are
dominated by companys inventory holdings and book-debts respectively.
Payable days:
Payable days were at 36 days in FY 2011-12 as compared to 47 days in FY 201011.
Future:
Turnover: As per the provisional balance sheet for FY 2013, the company has achieved a turnover of INR
5435.37 and is estimating a turnover of INR 5544.08 Lakhs in the FY 2013-14.
6. RISK APPRAISAL
i.
Business Risk and Future Outlook

The group is in this line of activity for the last 20 years and they have very good market reputation in
supplying yarn.

Business risk is at par with others and the Company is not exposed to any other specific risk.

Increasing and everlasting demand of textiles is favorable for the business of the Company. We dont
perceive any reduction in demand for the product of the Company.

Future outlook is bright considering the everlasting demand of textiles and strong presence of M/s ABC

Risk of technical obsolescence is less.


ii.

Management Risk
The entire business is managed by Mr. M and by Mr. G(Father of Mr. M), both are actively involved in
the business

73

Day to day activity is handled by him and he is also having staff strength of more than 6 people.
Due to the huge experience of Mr. M in the same line of industry the company is having good presence in
the market.

iii.

Structure Risk
Low structure risk as it is plain working capital lending with no complicated structures
Documentation will be done in Mumbai and BB Ops will be looking after the documentation. Hence
documentation risk is low.

iv.

Regulatory Risk
Company has obtained all the necessary government approvals. This industry is highly regulated by
Government and company has all the necessary approvals on record.
Banks Reputation Risk - Customer is highly regarded in society and business community hence there
is no risk on banks reputation.

v.

Transaction Risk
Documentation Risk: Documentation will be done as per IVBL procedures. Moreover facility will be
released only after CAPU permission. Hence documentation risk is low.
Interest rate risk: Interest rate is linked to IVBR. Hence interest rate risk is considered at lower side

7.

TAKE OUT

Primary Takeout Servicing of interest will be done from the cash generated from operating activity of
the company. The present and expected cash inflows of the company are sufficient to service the interest.
The estimated financials that are based on the actual give an indication that the company will have no
problem in servicing the facilities.
Secondary Takeout In case for any reason the cash accruals shrink or stop, IVBL can fall back on
securities for recovery of loan.

8.

SWOT

Strength:

Client is in this line of activity for the last 20 years and has rich experience.

Client has strong networking in market

Customer does not stock material hence no stock related risk

Customer is financially sound

Weakness:
No Major Weakness envisaged.

Opportunity:
The present marketing strength of the company is quite diversified and well spread.
The company is targeting expansion of its business with existing and new clients.

Threats:
There are other companies also in the same line of business and there is a possibility of competitive
marketing. But since the client has long dealings, good associations and expertise in this market so there
is negligible risk.

9.

POLICY DEVIATION: One

10.

HIGHLIGHTS OF CREDIT INVESTIGATION CONDUCTED :


Satisfactory
11. COMPLIANCE WITH STATUTORY REQUIREMENTS
All the statuary dues have been paid and there are no overdues.
12.

SUMMARY OF THE CONDUCT OF ACCOUNT

74

Company is currently availing cash credit limit of Rs.500.00 lakhs from PQR.
There are credits of INR Lakhs in the last six months in account.
All the business related transactions are found in the account.
There are Nil Inward cheque returns and few outward cheque returns in past six months.
Snapshot of credit in all account is as follows:

PQR BANK
Credit
%
Summatio
Churnin
n
g

Outwar
d
Return

Inward
Utilizatio
Utilizatio
Months
Return
Sales
n
n %age
Limit
Oct-12
Nov-12
Dec-12
Jan-13
Feb-13
Mar-13
Total
The churning in the account is high due to the agency business model. Overall account conduct is satisfactory.
1.

DP Calculation:
The DP calculation for the last 7 months is as follows:
Month
Mar-13
Feb-13
Jan-13
Dec-12
Nov-12
Oct-12
Sep-12

Stock

Creditors

Receivables

DP

13. COVER / COLLATERALS AND COVENANTS


i) Primary:

Hypothecation on entire current assets (excluding assets hypothecated to other banks) both present and
future (including book debts).
ii) Collateral: (INR in lakhs)
Address of the Property

Owner of the Property

75

Valuation As per

Approx.
Valuation

ADDRESS 1.

Mr. M

Market Value

135.00

ADDRESS 2.
ADDRESS 3.
ADDRESS 4.
TOTAL

Mr. M and Mrs.F


Mrs. F
M/s ABC

Market Value
Market Value
Market Value

135.00
70.00
155.00
495.00

14. NW of Guarantors - Personal / Corporate guarantees:


(INR in Lakhs)
Particulars
Net Worth as on 31/03/2012
Mr. M
*
Mr. G
*
Mr. N
*
Mrs F
*
Total
*

i.

Relationship to Borrower
Director
Director
Director
Property Owner

Specific covenants if any:


Net worth Statement i.e. Assets & Liability Statement for all the PG providers to be submitted in the
Banks format i.e. Form 479.
Interest on unsecured loan should be subordinated to the bank finance.
Company should use the funds for working capital purpose only and not use it for any speculation
purposes.

15. RISK RATING/RISK-REWARD/PROFITABILITY


a. Risk Rating
As per ABS 31/03/2012
Risk rating
CRR: 4
Rewards / Profitability

Previous rating
NA

The group is in this line of activity for the last 20 years and the group is having good market reputation in
the market.
Branch will get the opportunity to get other group company account and cross sale various liability
products.
Branch will also get opportunity to acquire new accounts with reference of the client. As the client is well
known name in the industry.

16. CONCLUSION/RECOMMENDATION
Considering good vintage of the group and good business:
Name of Author/ Signature

Date:

Proposer (Relationship Manager/ Branch Manager)

Sub-Regional Head of BU

76

Sub-Regional Credit Officer (SRCO)

Regional Credit Officer (RCO)

Group Details
a.

Group Performance Highlights (Amt in Rs. Lacs)

Particulars
Name of the
company/company/
Constitution
Name of proprietor
Activity
Established in
Presently banking with
Credit facilities
Conduct of account
Overdues if any

Company (1)

Company (2)

NA

NA

77

Sales
PAT
Capital + reserves
USL
b. Limits enjoyed by Associate Company with ING Bank
Branch

Name
of
borrower

Sanction
no. & dt.

Nature of
facility

Limit

O/s as
of

Overdues/
Default

Exclusive
collaterals given
to IVBL

NA
c.

Limits enjoyed by Associate Companys with other Banks

Bank/
branch
NA

Name of borrower

Sanction
no. & dt.

Nature
facility

of

Limit

O/s as of
31/10/2011

Overdues/
Default

17. Deviations
a.

Deviations in Credit Policy Financial Parameters:

Parameters
Minimum EBITDA / Net Sales

Median
0.03

Threshold
0.03

A 2011-12
0.02

Minimum Interest Coverage Ratio (EBITDA /


Interest & other finance charges)
Minimum Current Ratio (Current Assets / Current
Liabilities)
Maximum Debt Equity (total Interest bearing
debt / TNW)
Operating Cash Flow

1.88

1.50

1.58

Remarks
Not
Complied
Complied

1.81

1.00

1.31

Complied

0.52

2.00

0.91

Complied

Complied

Positive at least 2 years in


immediate past 3 years
1.25

Minimum DSCR (EBITDA / interest plus current


1.58
Complied
maturities in long term debt)
Minimum EBITDA / Net Sales: Company achieves good gross and net margins considering trading business.
Also promoters have withdrawn profit in the form of Directors Remuneration of INR 31.50 Lakhs which if
added back the profitability will increase.
b. Deviation in other Credit Policy parameters
List Name

Complied
(Yes/ No)

Exposure Norms- Unit


Exposure Norms- Industry/ Sector
Tenor norms for exposure & rating
Regulatory restrictions
Takeover norms
Product Norms
FEMA/ FERA requirements
Sec 19(2) of Company act

Y
Y
Y
Y
Y
NA
NA
NA

If not complied, reason


for non-compliance

78

Time lines within which


compliance
will
be
reached

c.

Verification of Defaulters List

List Name

Dated

RBI Defaulters list


Willful defaulters list
ECGC Special Approval list
Other caution lists
CIBIL Database

Mar 12
Mar 12

N
N

NA
NA
Consumer CIBIL for the
Director and Property
Holder

A. Client covered in BIR


Registered Address
ADDRESS 1

Key Contacts / Position


Mr. M

A. Client covered in BIR


Registered Address
ADDRESS 1

Key Contacts / Position


Mr. M

B. Ownership And Management


Held by
%age as on
31/03/2013
Mr. M
25%

Mr. N

25%

YVJewels Limited
AB Pvt Ltd
NB Pvt Ltd
Total

25%
12.50%
12.50%
100%

C. Capital Market Indicators


Last 12 month High
Last 12 month Low
Price as on
Market

(P) resent/ (N)ot present

NA

Presence
related to

Phone Number

Phone Number

Board of Directors, Age,


Experience, Qualification
Director, Graduate, having
experience of 20 years

Relationship

Position

Promoter/Director

Director

Director,
MBA,
experience of 3 years

Son of Mr. M

Director

Shareholder
Shareholder
Shareholder

Shareholder
Shareholder
Shareholder

having

D. External Rating Indicators


Agency
Debt Program
Rating
Outlook

E. Debt Financing arrangement of borrower with other Banks/FIs


Ban
Branch
Limit
O/s as of
Sanction no. Nature
k/
of
(INR in Lakhs)
31/03/2013
& dt. (if
Insti
facility
(INR in Lakhs)
available)
tutio
n
PQR
Term
6.17
3.27
Loan
(Car)
KM
Auto
14.52
13.45
N
Loan

79

Overdues/
Default if
any

Collateral Value
Exclusive

Total

16.72

Debt Paper (Debentures, CPs etc)


No Issue Detail
NA

Type

Size

Period

O/s

Comments

TOTAL

F. Operations as on 31/03/2012
Products
Production Facilities

The company is engaged in the trading of all types of


cotton yarns, bamboo natural blends yarn, mlange, lycra,
dyed
NA yarn etc.

Raw materials, services, utilities and Major Suppliers

Major Suppliers are as follows:

80

Raw material, services and utilities procurement terms

The company get a credit period of 5 days from its


suppliers

Major buyers of Firms products and services

Major buyers are as follows:


Sr No.
Name of Debtor
1 O
2 R
3 V
4 H

Selling terms

5 M
Company generally offers credit period for 45-60 days.

Distribution network

No specific distribution channel

Peer Group / competition

There are n numbers of players in this market.


Further the Company is into this business for 20 years.

Human Resource Availability

Adequate staff strength apart from the promoters who see


the business on a daily basis. There are around 6 employees
3 in finance/accounts department and 3 in marketing
department.

MPBF Calculation:
(INR in
Lakhs)
Particulars

31-Mar-10

31-Mar-11

31-Mar-12

Sales
Sr.
No.

TOTAL CURRENT ASSETS

Stock in trade

Trade debtors

Cash in hand

Other current assets

81

31-Mar-13

31-Mar-14 31-Mar-15

31-Mar-16

31-Mar-17

TOTAL CURRENT ASSETS


TOTAL CURRENT
LIABILITIES

Other Bank Credit

Our bank credit

Creditors

Other current liabilities

10

TOTAL CURRENT
LIABILITIES

11

Working Capital Gap (WCG) =510+7

12

25% of Total Current Assets

13

Net Working Capital = 5-10

MPBF Calculation : Lower of Two.


Working Capital Gap - 25% of
14
Total Current Assets
Working Capital Gap - Net
15
Working Capital

16

MPBF lower of the two

Calculation of DSCR
Sales
PBDIT
Depreciation
Interest
Tax
Non Operating Income
Profit after Tax
Int. on Term Loans
Depreciation

DSCR Calculation:
2012-12
2012-13
2013-14

82

2014-15

2015-16

2015-17

Total (A)
Int. on Term Loans
Term Loans Repayment
Total (B)
Debt Service Coverage Ratio
Avg. DSCR

Sensitivity Analysis
Calculation of DSCR
Sales
PBDIT
Depreciation
Interest
Tax
Non Operating Income
Profit after Tax
Int. on Term Loans
Depreciation
Total (A)

2012-12

Increase in Raw Material Cost by 10%


2012-13
2013-14
2014-15
2015-16

2015-17

Int. on Term Loans


Term Loans Repayment
Total (B)
Debt Service Coverage Ratio
Avg. DSCR

Decrease in Sales Price by 10%


Calculation of DSCR
Sales
PBDIT
Depreciation
Interest
Tax
Non Operating Income
Profit after Tax
Int. on Term Loans
Depreciation
Total (A)

2012-12

2012-13

2013-14

2014-15

2015-16

2015-17

Int. on Term Loans


Term Loans Repayment
Total (B)
Debt Service Coverage Ratio
Avg. DSCR

Decrease in Selling price and Increase in Raw Material price by 10% each

83

Calculation of DSCR
Sales
PBDIT
Depreciation
Interest
Tax
Non Operating Income
Profit after Tax
Int. on Term Loans
Depreciation
Total (A)

2012-12

2012-13

2013-14

2014-15

Int. on Term Loans


Term Loans Repayment
Total (B)
Debt Service Coverage Ratio
Avg. DSCR

PCL/PCFC/PSL Assessment:
Assessment of PCL/PSL for FY 2013-14

(INR in Lakhs)

PCL request

200.00

Sales for 2013-14

5544.08

Export sales estimated (20 % of Total Sales)

1108.82

Period required from procurement, convert the RM


into FG

90 days

Number of export cycles in a year

4 cycles

Margin stipulated

Eligible PCL

Limit recommended

25%
207.90

84

200.00 (As a sub-limit to Cash


Credit)

2015-16

2015-17

STRENGTH, WEAKNESS, OPPORTUNITY & THREAT


(SWOT) OF TEXTILE INDUSTRY
STRENGTH :

Indian Textile Industry is an independent & self-reliant industry.

Abundant raw material availability that helps industry to control costs and reduces the
lead-time across the operation.

Availability of low cost and skilled manpower provides competitive advantage to


industry.

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Availability of large varieties of cotton fiber and has a fast growing synthetic fiber
industry.

India has great advantage in Spinning Sector and has a presence in all process of
operation and value chain.

Directors/promoters of the Company are experienced in the line of activity.

Companies are well established and producing quality products which have market
demands.

India is one of the largest exporters of Yarn in international market.

The Apparel Industry is one of largest foreign revenue contributor.

Industry has large and diversified segments that provide wide variety of products.

Growing Economy and Potential Domestic and International Market.

Industry has Manufacturing Flexibility that helps to increase the productivity.

Weaknesses:

Indian Textile Industry is highly Fragmented Industry.

Industry is highly dependent on Cotton.

Lower Productivity in various segments.

Stiff competition in market leading to squeezing of margins.

There is Declining in Mill Segment.

Lack of Technological Development that affect the productivity and other activities in
whole value chain.

Infrastructural bottlenecks and efficiency such as, transaction time at ports and
transportation time.

Unfavorable labor laws.

Lack of Trade Membership, which restrict to tap other potential market.

Lacking to generate Economies of Scale.

Higher Indirect Taxes, Power and Interest Rates.

Opportunities:

Growth rate of Domestic Textile Industry is 12-15% per annum.

Large and potential domestic as well as international market.


86

Product development and diversification to cater global needs.

Market is gradually shifting towards branded readymade garment.

Increased disposable income and purchasing power of Indian customer open new
market development.

Emerging Retail Industry and malls provide huge opportunities for the apparel,
handicraft and other segments of the industry.

Greater investment and FDI opportunities are available.

Threats:

Competition from other developing countries, especially China.

Continuous quality improvement is need of the hour as there are different demand
patterns all over the world.

Threat for traditional market for powerloom and handloom products and forcing them
for product diversification.

International labor and Environmental Laws.

Any drastic changes in government policies may have adverse impact over the textile
industry in general

To balance the demand and supply.

MARKET SCOPE OF SMEs


INTRODUCTION
Micro, small, medium enterprises are a ray of hope for the economy at large. The
development and growth of such enterprises generates derived demand for funds and
resources. A squeeze on interest margins, a nudge from the central bank and an opportunity to

87

expand their credit portfolio towards a new and relatively unexplored direction, and led banks
to take a focus on the small and medium enterprise (SME) sector.
With so much to work with, bank now have special cells in place to target this sector. In
addition to providing the usual loans and working capital assistance, bank is now going the
extra mile to empower their SME clients.
Understandably, risk management for this sector is a huge issue with banks. CRISIL has
stepped in to provide a rating service for the SME sector. According to this rating
programme, SMEs would be rated on a scale of one to eight, with scale one indicating the
highest credit quality and the scale eight, hinting at default possibilities. The ratings assigned
to SMEs would also function as a self-improvement tool for them.
The rating agency, Small and Medium Enterprises Rating Agency (SMERA), will rate the
companys overall strength; unlike most rating agencies whose core business are to rate debt
instruments.
With planning, government encouragement and dedicated rating services, banks can tap the
potential of this sector in the coming time.

ROLE OF RELATIONSHIP MANAGER IN


MARKET SCOPING
88

The relationship manager plays a very crucial role in market scoping of various SMEs in
Mumbai. They are the people who source various markets and bring to light the untapped
world SME finance. There are various ways through which sourcing of clients is undertaken
by the relationship manager at IVBL.
a) Cold Calling:
Cold Calling is the art of approaching someone, professionally, openly and meaningfully,
with a sensible proposition. Cold calling typically refers to the first telephone call made to a
prospective customer. Also a popular method used by many RMs. An authentic data base is
made and calls are made to prospective clients. Another method of cold calling includes
sourcing clients on fields. A RM would visit a company and ask for working capital
requirement arbitrarily to source clients. This is an indirect method of sourcing clients.
b) Existing Client References:
Each Relationship Manager (RM) is given their own territory wherein they have to tap the
SMEs. Once they are well established in their sector they start to form a chain of client in
the same industry with reference of an existing client. This method of sourcing clients is
called Referencing. The RM networks through the existing client to get information about
new clients. The positive aspect of this method is that the RM gets primary information
about the new client and he is well informed about the credibility of the client due to the
intense network. The negative aspect of this method is that the client base of the RM gets
restricted to a particular sector. Any macro impact on the sector therefore affects the overall
client base of the RM.
c) Consultants:
Another popular method used by the RMs are through Consultants. There are various
consultants in the market mostly known as Direct Selling Agents who help the clients who
are in need of working capital financing get in touch with the Relation Manager. These
Direct Selling Agents are mostly reputed Chartered Accountants who offer consultancy
services to the clients and help the bank generate new business. These consultants are aware
of the market conditions and help in the smooth process of SME financing.
d) Branch Networks:
Every RM is tagged to a few branches. The RM is based out of these branches. The RM
interacts with the branch staff (Branch Manager, Sales Manager, Trade and Forex RM,
Business Development staff) and explains to them the various business banking products.
The best way to source customers is to tap the existing relationships of the branch i.e
customers who already hold savings or current accounts with the bank or is taking any other
banking services. Cross Selling techniques are used under this method. These customers
could also be all together a new client who approaches the banks for the needs of working
capital or walk in customers.

CONCLUSION
MSMEs will continue to play a very important and vital role in our economy where the twin
problems of unemployment and poverty constitute a major developmental challenge. MSMEs
89

are the best vehicle for inclusive growth, to create local demand and consumption. The
MSMEs of yesterday are the large corporates of today and could be MNCs of tomorrow.
Thus, the banks and other agencies should take pride while servicing the MSMEs as they are
playing an instrumental role in the formation of MNCs of tomorrow. MSMEs themselves
have to be on their toes, in this rapidly changing business environment, and keep evolving to
stay clear of all the potential pitfalls that confront them in their progress from small
enterprises to large corporations.

SME sector is the back bone of the economy especially in a developing country.
Banks need to broaden their horizon and venture further into better funding patterns
for SMEs.
Banks have to view lending to the SMEs as a profitable avenue rather than an avenue
for forced lending.
The paradigm shift in the lending operations of the Bank to SME sector is to be
discerned and managed pragmatically.
Banks must take advantage of the ever growing SME sector and capitalize on this
vibrant segment.

BIBLIOGRAPHY
1) www.rbi.gov.in
2) www.smera.in
90

3) www.ingvysya.com
4) www.msme.gov.in
5) www.smeworld.org
6) Internal circulation of ING Vysya Bank

91

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