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A Project Report

On
Working Capital Management
At

Company Guide

Faculty Guide

Mr. Slesh Chandra

Prof. Anand Rai

Personal Banker Authorizer

JRE Group of Institutions

Gomti Nagar

Greator Noida

Submitted By:
Vikas Kumar Singh
Roll No. 39
2014-16

Certificate

JRE Group of Institutions

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Acknowledgement
I would like to extend my heartfelt gratitude to Mr. Gaurav Rapal Zonal HR Manager of
HDFC Bank for providing me an opportunity to undergo my Summer Internship Project in their
esteemed organization. I am extremely grateful to my company guide Mr. Slesh Chandra,
Personal Banker Authorizer, Gomti Nagar-2 Branch, Lucknow for his guidance and
cooperative nature that helped me in completing this project report. I have learned many new
things about the working capital loans provided by bank to the customers and also its appraisal
part while working at HDFC bank.
I would also like to thank Mr. Manoj Srivastava, Senior Manager who permitted me to
work on my project in his branch and for his timely support and advice that helped me in
preparation of this report.
I express my sincere gratitude towards my faculty guide Prof. Anand Rai at JRE Group
of Institutions, Greater Noida for his time to time guidance and encouragement to take up this
interesting topic.
Last but not the least I would like to thank the Placement Cell at JRE Group of
Institutions for placing me at a prestigious organization like HDFC Bank for my Summer
Internship Project.

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Abstract
The project report is on the study of working capital management and the credit appraisal
process of HDFC Bank Ltd. The working capital management here refers to the working capital
loan provided by the bank to the customers and its appraisal.
Working capital is one of the most difficult financial concepts to understand. In fact, the term
means a lot of different things to a lot of different people. By definition, working capital is the
amount by which current assets exceed current liabilities. It involves the relationship between a
firms short term assets and its short term liabilities.
Funds needed for short term needs for the purpose like payment of wages, payment to suppliers
and other day to day expenses are known as working capital. The goal of working capital
management is to ensure that the firm is able to continue its operation and that it has sufficient
cash flow to satisfy both maturing short term debt and upcoming operational expenses. Such
funds which are needed by business are provided by banks. HDFC bank provide working capital
loan to its prospective customers.
The first part of the report is to analyze the market, who is the prospective customers of the bank
for working capital loan. To know who are the customers of the HDFC Bank Ltd. near Gomti
Nagar Branch-2, whether they need working capital loan (CC Limit) or not, all such data needs
to be collected.
The second part of the report is the credit appraisal of the working capital loan provided by the
bank. Credit appraisal is an important activity carried out by the credit department of the bank to
determine whether to accept or reject the proposal for finance.
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This report talks about bank lending. It starts with principles of lending then through role of RBI
and then types of lending i.e. Fund based lending and Non-fund based lending along with brief
explanations and examples as well.
In the following chapter Credit appraisal is briefly overviewed before talking about the credit
appraisal process in general and then the process undertaken by HDFC Bank Ltd. Credit report
and credit rating is discussed thereafter.
The last there is some of a few cases that I could fully cover during my tenure at the Gomti
Nagar-2 Branch of HDFC Bank Ltd. at Lucknow. This includes the appraisal procedure the bank
took for a working capital loan (CC Limit). In the end, I speak about my findings, conclusion and
recommendations.

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Table of Contents
SL. NO.
1.

PARTICULARS
Introduction

PAGE NO.
7

2.

Industry and Company Overview

10

3.

An Overview of Bank Lending

15

4.

Objectives

20

5.

Research Methodology

21

6.

Credit Appraisal Process

22

7.

Credit Appraisal at HDFC Bank Ltd.

24

9.

Data Analysis, Results and Interpretation

39

8.

Case Study

44

9.

Findings

46

10.

Conclusions

47

11.

Limitations of Study

48

12.

Recommendations

49

13.

References

50

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Introduction

Management is an art of anticipating and preparing for risks, uncertainties and overcoming
obstacles. An essential precondition for sound and consistent assets management is establishing
the sound and consistent assets management policies covering fixed as well as current assets. In
modern financial management, efficient allocation of funds has a great scope, in finance and
profit planning, for the most effective utilization of enterprise resources, the fixed and current
assets have to be combined in optimum proportions.
Working capital in simple terms means the amount of funds that a company requires for
financing its day-to-day operations. Finance manager should develop sound techniques of
managing current assets.
Working capital is one of the most difficult financial concepts to understand. In fact, the term
means a lot of different things to a lot of different people. By definition, working capital is the
amount by which current assets exceed current liabilities. It involves the relationship between a
firms short term assets and its short term liabilities.
Funds needed for short term needs for the purpose like payment of wages, payment to suppliers
and other day to day expenses are known as working capital. The goal of working capital
management is to ensure that the firm is able to continue its operation and that it has sufficient
cash flow to satisfy both maturing short term debt and upcoming operational expenses. Such
funds which are needed by business are provided by banks. HDFC bank provide working capital
loan to its prospective customers.

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Working capital loan is also called as CC Limit or OD Limit, which is provided by banks to the
firms for their day to day payments to the suppliers. Every firm needs funds to carry on its day to
day operations such funds are provided by HDFC bank at lower interest rate. Firms to whom the
CC limit is provided are like: Proprietorship, Partnership, Private Ltd., Public Ltd., and HUF.
Firms should be at least 2 years old to get the CC limit from bank; this is called as Vintage
Period. The firm whose turnover is less than 7.5 crore comes under EEG and a firm whose
turnover is more than 7.5 crore comes under BBG (Business banking Group). The bank usually
provides 30% of the turnover as working capital loan to the firms. The bank keeps the Stock and
Debtors as Primary Security and Property as a Secondary Security. Bank does not keep Plot as a
security for working capital loan.
There is also a CC Limit process called Take over Process. If a firm is already taking CC limit
from some other bank, then HDFC bank also provide them CC Limit by take over there already
running CC limit from their current bank at much lower rate than they are getting now and they
also enhance the limit value.
CC Limit is called as Cash Credit Limit and OD Limit is called as Overdraft Limit. In CC Limit
bank hypothecate the stock but in OD limit bank does not hypothecate the stock, this is the
difference between CC Limit and OD Limit. But CC Limit is mostly taken by the firms.
After taking the documents from the owner of the firm regarding working capital loan
(CC Limit) the documents are send to the concerned department for further process. Now the
appraisal of the loan has to be done by the credit manager. Credit manager analyze the
documents and see whether the person is eligible for the CC Limit or not.

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Overview of Credit Appraisal:


Credit Appraisal is a process to ascertain the risks associated with the extension of the credit
facility. It is generally carried by the financial institutions, which are involved in providing
financial funding to its customers. Credit risk is a risk related to non-repayment of the credit
obtained by the customer of a bank. Thus it is necessary to appraise the credibility of the
customer in order to mitigate the credit risk. Proper evaluation of the customer is performed this
measures the financial condition and the ability of the customer to repay back the Loan in future.
Generally the credits facilities are extended against the security know as collateral. But even
though the Loans are backed by the collateral, banks are normally interested in the actual Loan
amount to be repaid along with the interest. Thus, the customer's cash flows are ascertained to
ensure the timely payment of principal and the interest.
It is the process of appraising the credit worthiness of a Loan applicant. Factors like age, income,
number of dependents, nature of employment, continuity of employment, repayment capacity,
previous Loans, credit cards, etc. are taken into account while appraising the credit worthiness of
a person. Every bank or lending institution has its own panel of officials for this purpose.
However the 3 C of credit are crucial & relevant to all borrowers/ lending, which must be kept
in mind, at all times.
-

Character
Capacity
Collateral

If any one of these is missing in the equation then the lending officer must question the viability
of credit. There is no guarantee to ensure a Loan does not run into problems; however if proper
credit evaluation techniques and monitoring are implemented then naturally the Loan loss
probability / problems will be minimized, which should be the objective of every lending officer.

Industry/Company Overview
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The HDFC Bank was incorporated on August 1994 by the name of HDFC Bank Limited, with its
registered office in Mumbai, India. HDFC Bank commenced operations as a Scheduled
Commercial Bank in January1995. The Housing Development Finance Corporation (HDFC) was
amongst the first to receive an 'in principle' approval from the Reserve Bank of India (RBI) to set
up a bank in the private sector, as part of the RBI's liberalization of the Indian Banking Industry
in 1994.
HDFC Bank is headquartered in Mumbai. The Bank at present has an enviable network of over
4014 branches spread over 2464 cities across India. All branches are linked on an online real
time basis. Customer is also serviced through Telephone Banking. The Bank also has a network
of about over 11,766 networked ATMs across these cities.
The promoter of the company HDFC was incepted in 1977 is India's premier housing finance
company and enjoys an impeccable track record in India as well as in international markets.
HDFC has developed significant expertise in retail mortgage loans to different market segments
and also has a large corporate client base for its housing related credit facilities. With its
experience in the financial markets, a strong market reputation, large shareholder base and
unique consumer franchise, HDFC was ideally positioned to promote a bank in the Indian
environment.
Business:
HDFC Bank offers a wide range of commercial and transactional banking services and treasury
products to wholesale and retail customers. The bank has three key business segments:

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Wholesale Banking Services The Bank's target market ranges from large, bluechip
manufacturing companies in the Indian corporate to small & midsized corporate and agri based
businesses.
Retail Banking Services The objective of the Retail Bank is to provide its target market
customers a full range of financial products and banking services, giving the customer a one
stop window for all his/her banking requirements.
Treasury Within this business, the bank has three main product areas Foreign Exchange and
Derivatives, Local Currency Money Market & Debt Securities, and Equities. The Treasury
business is responsible for managing the returns and market risk on this investment portfolio.

Awards and Achievements:


2015
AIMA Managing India Awards

Business Leader of the Year

2015

Aditya Puri

Barron's

World's 30 Best CEOs


Mr Aditya Puri

Finance Asia poll on Asia's Best

Best Managed Public Company India'

Companies 2015

Best Corporate Governance Rank 3


Best Investor Relations Rank 3
Best CEO Aditya Puri

J. P Morgan Quality

Best in class straight through processing

recognition Award

rate

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SWOT Analysis:

Strength

Weakness

1. One of the leading new age private sector 1. Rural penetration is low.
banks.
2. Lesser no. of branches when compared
2. HDFC Bank has over 4014 branches and with its competitors.
over 11,766 ATMs, in 2464 cities in India.
3. Existing CBS across its branches.
4. Huge Employee base i.e. more than 51000
employees.
5. Large collaborations with corporate for
employee salary accounts.

Opportunities

Threats

1. Mobile banking, internet banking


1.Competitors
2. Venturing into rural areas.
2.New banking licenses
3. Providing more complex products to the 3. Foreign banks that offer complex
ever increasing demands of the industry.
products.

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Organization Structure:

MD
Adiyta Puri

Chief Financial Officer


Shashidhar Jagdishan

Treasurer
Ashish Parthasarthy

Director
Partho Datta

Branch Banking Head


Navin Puri

Head, Wholesale Credit


& Market Risk
Kaizad Bharucha

Director
Shyamala Gopinath

Chief Information Officer


Anil Jaggia

Chief Risk Officer


Jimmy Tata

Executive Vice President


Legal & Secretary
Sanjay Dongre

Head, Business,
Commodities & Rural
Banking
Anil Nath

Renu Karnad

Director
Keki Mistry

Director
Pandit Palande

Director
Bobby Parikh

Director
Anami Roy

Head, Credit and Market


Risk and HR
Paresh Sukhthankar

Head, Government &


Microfinance
Rajendra Sehgal

Head, Equities, Private


Banking
Abhay Aima
Head, Retail Liabilities,
Marketing & Direct
Banking Channels
Rahul Bhagat

Head, Wholesale Banking,


Executive Director
Harish Engineer
Operations & Cash
Management
Bhavesh Zaveri
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Departmental Structure:

Regional Head

Circle Head

Direct Report (DR) Cluster Head

Cluster Head

Direct Report
(DR) - Branch

Branch Head

Personal Banker
Authorizer (PBA)
Teller Authorizer

RM/ Imperia Relationship


Manager
Personal Banker

Assistant Branch Manager


(ABM)
Teller

Personal Banker Welcome


Desk (PB WD)
Branch Sales Officer
(BSO)

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An Overview of Bank Lending


A developed country like U.S.A. sees its major lending activities done by Capital & Money
market, where banks provide services for merger & acquisition and other merchant banking
activities. In India lending is predominantly done by Banks. Capital Market & Money Market are
not as strong and dependable entities as yet as banks in a developing country as India and Indian
Economy. Banks have different ways of extending credit to different types of borrowers for a
wide variety of purposes.
Principles of Lending and Loan Policy:
Principles of Lending:
Banks lend from the funds mobilized as deposits from public. A bank acts in the
capacity of a custodian of these funds and is responsible for its safety, security but at
the same time is also required to deliver justified and assured returns over these
borrowings. A bank looks into following aspects before lending:
Safety: the first rule of lending is to ascertain the safety of the advances made. This
means assessment of the repaying capacity of the borrower and purpose of borrowing.
It also includes assessment of contingencies and a fallback plan for the same. This is
ensured by taking adequate security (readily marketable and free of encumbrances)
by way of guarantee, collateral, charges on property, etc.
Liquidity: The second rule of lending is to ascertain how and when the repayment of
the advances made would happen and that the repayment is timely. This is to ascertain
availability of funds in future and make sure that the funds are not locked up for a
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long period. This helps in maintaining balance between deposits and advances and to
meet depositors obligation.
Profitability: The third rule of lending is to lend at higher rate of interest than
borrowing rate. This is called as interest spread / margin. One has to strike a balance
between profitability and safety of funds. Interest rates must be charged competitively
but at the same time spread should be adequate.
Risk diversion: An old saying says never put all your eggs in one basket. A
lender must lend to a diversified customer base. Diversification must be made in
terms of geographical locations, borrowers, industry, sector etc. It is done so as to
mitigate adverse financial effects of a business cycle, catastrophe, chain effect etc.
Loan Policy: Banks are basically a lending institution. Its major chunk of revenue is
earned from interest on advances. Each bank has its own credit policy, based on the
principles of lending, which outlines lending guidelines and establishes operating
procedures in all aspects of credit management. The policy is drafted by the Credit Policy
Committee and is approved by the banks board of directors.
The credit policy sets standards for presentation of credit proposals, financial covenants,
rating standards and benchmarks, delegation of credit approving powers, prudential limits
on large credit exposures, asset concentrations, portfolio management, loan review
mechanism, risk monitoring and evaluation, pricing of loans, provisioning for bad debts,
regulatory/ legal compliance etc. The lending guidelines reflect the specific bank's
lending strategy (both at the macro level and individual borrower level) and have to be in
conformity with RBI guidelines. The loan policy typically lays down lending guidelines
in the following areas:

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Credit-deposit ratio: Banks are under an obligation to maintain certain statutory


reserves like cash reserve ratio (CRR to be kept as cash or cash equivalents), statutory
liquidity ratio (SLR to be kept in cash or cash equivalents and prescribed securities),
etc. These reserves are maintained for asset liability management (ALM) and are
calculated on the basis of demand and time liabilities (DTL). Banks may further invest in
non prescribed securities for the matter of risk diversion. Funds left after providing for
these reserves are available for lending. The CPC decides upon the quantum of credit that
can be granted by the bank as a percentage of deposits.
Targeted portfolio mix: CPC has to strike balance between risk and return. It sets the
guiding principles in choosing preferred areas of lending and sectors to avoid. It also
takes into account government policies of lending to preferred / avoidable sectors. The
bank assesses sectors for future growth and profitability and accordingly decides its
exposure limits.
Loan pricing: Risk-return trade-off is a fundamental aspect of risk management.
Borrowers with weak financial position and, hence, placed in higher risk category are
provided credit facilities at a higher price (that is, at higher interest). The higher the credit
risk of a borrower the higher would be his cost of borrowing. To price credit risks, bank
devises appropriate systems, which usually allow flexibility for revising the price (risk
premium) due to changes in rating. In other words, if the risk rating of a borrower
deteriorates, his cost of borrowing should rise and vice versa.
At the macro level, loan pricing for a bank is dependent upon a number of its cost factors
such as cost of raising resources, cost of administration and overheads, cost of reserve
assets like CRR and SLR, cost of maintaining capital, percentage of bad debt, etc. Loan
pricing is also dependent upon competition
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Collateral security: As part of a prudent lending policy, bank usually advances loans
against some security. The loan policy provides guidelines for this. In the case of term
loans and working capital assets, bank takes as 'primary security' the property or goods
against which loans are granted. In addition to this, banks often ask for additional security
or 'collateral security' in the form of both physical and financial assets to further bind the
borrower. This reduces the risk for the bank. Sometimes, loans are extended as 'clean
loans' for which only personal guarantee of the borrower is taken.

Types of Lending:
Lending can be for long term tenure or short term tenure. Lending is broadly classified into two
broad categories: fund based lending and non-fund based lending.

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GeBCTLa r f eaorut nr esap a meud n i r dt ri a at e n l t e e
Fund Based Lending:
This is a direct form of lending in which a loan with an actual cash outflow is given to the
borrower by the Bank. In most cases, such a loan is backed by primary and/or collateral security.
The loan can be to provide for financing capital goods and/or working capital requirements.
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Loan: -In this case, the entire amount of assistance is disbursed at one time only, either in
cash or by transfer to the companys account. It is a single advance. The loan may be
repaid in installments, the interests will be charged on outstanding balance.
Overdraft: - In this case, the company is allowed to withdraw in excess of the balance
standing in its Bank account. However, a fixed limit is stipulated by the Bank beyond
which the company will not be able to overdraw the account. Legally, overdraft is a
demand assistance given by the bank i.e. bank can ask for the repayment at any point of
time. However in practice, it is in the form of continuous types of assistance due to
annual renewal of the limit. Interest is payable on the actual amount drawn and is
calculated on daily product basis.
Cash Credit: - In practice, the operations in cash credit facility are similar to those of
overdraft facility except the fact that the company need not have a formal current
account. Here also a fixed limit is stipulated beyond which the company is not able to
withdraw the amount. Legally, cash credit is a demand facility, but in practice, it is on
continuous basis. The interests is payable on actual amount drawn and is calculated on
daily product basis. Concept of margin also plays a vital role unlike overdraft.
Working Capital Term Loans: - To meet the working capital needs of the company,
banks may grant the working capital term loans for a period of 3 to 7 years, payable in
yearly or half yearly installments.

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Objectives
-

To know who are the prospective customers of the bank for working capital loan.

To study the credit appraisal methods.


To understand the internal steps taken by the bank for scrutinizing the customers

details and credentials.


To understand the commercial, financial & technical viability of the proposal
proposed and its finding pattern.

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Research Methodology
Introduction:
Credit appraisal means investigation/assessment done by the bank before providing any
loans and advances/project finance and also checks the commercial, financial & industrial
viability of the project proposed its funding pattern and further checks the primary &
collateral security cover available for recovery of such funds.
Problem statement:
-

To know whether the interest rate is dependent upon the type of business or not
To know whether the interest rate is dependent upon the turnover or not
To study the credit appraisal system in HDFC Bank Ltd.

Data collection:
i.
ii.

Primary data:
Informal interview with manager at HDFC Bank Ltd.
Collecting information from the customers regarding working capital loans
Secondary data:
Books, Websites, Customer files at HDFC Bank, Circulars of HDFC Bank

Tools Used for the Analysis:


i.
ii.

One Way ANOVA (SPSS)


Post Hoc Test

Credit Appraisal Process


Receipt of application from applicant
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of documents
Title clearance reports ofReceipt
the properties
to be obtained from empanelled
Valuation
of the properties
Assessment
Proposal
to defaulters
be of
obtained
preparation
of
financial
proposal
from
data
empanelled
valuer/engineers
Check
for reports
RBI defaulters
list,Preparation
willful
list,
CIBIL
data, ECGC,
Caution list
visit
by
bank
officers
(Balance sheet, KYC Pre-sanction
papers, Different
govt.
registration
no.,
MOA,
AOA
etc.
etc
Advocates

Sanction/approval of proposal by appropriate sanctioning authority

Documentations, agreements, mortgages

Disbursement of Loan

Post sanction activities such as receiving stock statements, review of accounts, renew
of accounts, etc
(On regular basis)

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Credit Appraisal at HDFC Bank Ltd.


Credit Appraisal Initial due Diligence & Financial Analysis:
The process of credit appraisal would begin with the selection of the borrower. The process
would broadly cover:

I.
II.

Appraising the borrower/business


Appraising/assessing the credit requirement and structuring the credit delivery, security,
etc. Appraisal of the borrower would include background check and assessment of
managerial and financial capability/strength, project execution/management ability,
success in joint venture for technology/ market, retention of professional talent at various
levels, management control, promoters shareholding etc.

Both the above aspects need to be appraised/ examined at the time of the initial entry of a
customer to the Bank as also at the time of subsequent periodic reviews. Naturally, the appraisal
would be different in respect of:
-

Retail segment like personal loans for consumer durables, house etc

Small business like loans to business enterprises

Farming sector/agriculturists

MSME sector

Corporate in manufacturing, infrastructure, services, wholesale trade and other


sectors.

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Background of the Borrower/Management:


Background of the borrower needs to be done through scrutiny of antecedents, experience in the
line of business, managerial, marketing, technical competence, organizational strength, integrity
etc. Track record with us, status report from the other banks, reports in the sector from our
borrowers

in

similar

business,

RBI/CIBIL

reports

on

defaulters/willful

defaulters,

Corporate action taken by SEBI/NSE/BSE, reports from their vendors/dealers who may be our
customers, actual performance vs estimates, frequent overdrawing, history of restructuring etc.

In case of adverse report in any of the above areas, there could be justifications/mitigations
which should be looked into. If need be the appraising officer may personally visit the other bank
for personal discussions. The gist of such oral discussion may be recorded in the file of the
borrower and brought out in the proposal. KYC guidelines as framed by RBI and adopted by
Bank are to be followed by the branches.

Financial appraisal: Analysis of financial parameters/ratios should be done. Aspects like


i.

Balance sheet strength

ii.

Growth in TNW, sales, PAT etc

iii.

Borrowers ability to service the principal and interest, meet the cash flow requirement in

respect of payments, absorb additional burden due to escalation of raw material cost etc
iv.

Position of receivables/inventory etc should be looked into.

The following parameters ratios should be computed:

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i.

TNW with reconciliation of change in TNW

ii.

Current Ratio

iii.

Total outside liabilities/equity (DER)

iv.

Profit before interest, depreciation, taxes, appropriation (PBIDTA/EBIDTA)

v.

Profit After Tax/Net sales

vi.

Inventory + receivables/Sales ratio


vii.

viii.
ix.

PAT/Capital employed

Investments
Segmental Revenue if applicable

Check Points for Due Diligence/Assessment in Credit Proposal:

1. Articles of Incorporation - A corporate registration is the cornerstone and basis for


legitimacy, as it requires the business to rely upon its corporate name, image and
reputation.
2. Status Reports - This is useful to show that the company continues to exist and operate
as a legal entity, and has not been dissolved and/or reincorporated under another name.
Most companies that actively engage in business with serious clients will have one that is
relatively recent. Whenever new proposals are put up for approval, status reports of the
company / group needs to be obtained from their existing bankers. Obtaining status
reports is an essential step in due diligence process, in all advance accounts.
3. Market Enquiries - This serves as an important tool. Verification of the antecedents of
the borrower through discrete market enquiries could amply reveal inherent deficiencies.

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Cross verification with our existing customers in the line and other players in the line,
would serve as first hand information.
4. Licenses / Certifications - Ask for a copy of licenses, permits, registrations or
certifications if they are directly related to and required for the specific work the
company must perform. If copies are not available, request the number and issuing
authority of each document.
5. Web Site Addresses - All Companies have their websites. Companies that say they do
not have a website or do not need one have to be treated with caution. Good companies
always make efforts to allow clients or partners to keep in touch with them, receive notice
of changes of office address, e-mail addresses or phone numbers, reminders of services
offered or updates on new services.
6. Corporate Brochure or Company Overview - Every company should have a
professional and well-developed presentation of their business concept or services. This
evidences the level of preparation of the company, and demonstrates whether they have
sufficiently developed their capabilities. Project Reports / Information Memoranda, are
not to be taken for face value. They need to be critically examined vis--vis other sources
like similar businesses.
7. Each proposal should bear reference related to RBI/CIBIL/ECGC/ List of Defaulters /
willful Defaulter List, etc. As per existing guidelines, Branch / Zonal Office must bring
out this aspect in the proposal.
8. Pre-Sanction Inspection Branches should note to conduct pre-sanction inspections
before submitting new proposals. Inspection reports should be prepared strictly as per the
format. Findings of the inspection should be brought out in the proposal.

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9. It should invariably include the place of work of the entity in addition to visiting the
corporate office, meeting promoters & employees etc.
10. Critical information as envisaged in Credit policies / Circulars, are to be obtained and
scrutinized.
11. Scrutiny of statements of accounts with previous / existing bankers, to be done, to
ascertain their conduct. This is more so necessary while takeover of the facilities is
involved.
12. Risk Mitigation - Proper coverage of risk and mitigation in the proposal reflects good
understanding of the business. As per existing guidelines, Branch / Zonal Office must
bring out these aspects in the proposal.
13. Status of Litigation If the company is involved in any litigation/disputes/ arbitration,
Zone / Branch should give details in the proposal.
14. Assessment of Limits Financial parameters like DER, Current Ratio for W/C & DSCR,
DER, FACR, BEP, IRR, sensitivity analysis for Term Loan are to be properly captured in
the proposals. Proposals should not be considered without these parameters being
adequately brought out.
15. Risk Rating - Risk Rating Exercise for Credit Rating & Pricing has to be done as per
different Risk Scoring Modules.
16. The security which is obtained by the Bank (either as principal or as collateral) shall be
verified as to its title clearance as well as value by independent Panel Advocates/ Valuers
and periodical Encumbrance Certificate shall be obtained. In this regard, extant
guidelines, is enumerated in Branch Circular from time to time are to be meticulously
observed.

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Check points for Pre and Post Monitoring Norms:

Pre Disbursement:
Suitable monitoring of various acts by the customer/Branch officials/out-side agencies should be
done at the pre-disbursement stage. Depending upon the terms of sanction in each case, the
following actions/steps, wherever applicable, may be taken prior to disbursement:

Obtention of satisfactory credit reports from existing lenders and other service providers
such as D&B, CIBIL etc. if stipulated. Branch staff, which is processing the applications
for credit requests of new customers, should personally call on the Bank/FI with whom
the incumbent is presently enjoying facilities and discreetly enquire about the conduct
and general aspects of the account. This is in addition to obtaining status reports.
The personal visit to the operating staff of that Bank/FI may reveal more about the
proposed borrower which may not have been incorporated in the report. Wherever it is
not desirable to obtain Status Report for the fear of putting our competitor on guard,
decision may be taken on the basis of scrutiny of proponents statement of account for the
last one year with the existing Banker and the fact that the Sanctioning Authority has
satisfied itself about the credit worthiness of the proponents on the strength of statement
of account for the last one year and that status report is not being obtained for the fear of
putting the existing banker on guard should be recorded in the proposal.

However, in case Branch desires not to obtain Status Report from other Bankers/Service
providers prior to disbursement then specific approval of the higher authority viz GM NBG
and/or GM Head Office should be obtained

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In such cases the Branch should obtain status report subsequently and the staff should visit the
Bank/FI immediately after disbursement to discreetly enquire about the conduct and general
aspects of the account.

Adhering to Head Office guidelines for Credit Rating exercise pertaining to entry level
for new accounts.

Post-sanction inspection of the unit prior to disbursement. Needless to add, pre-sanction


inspection report cannot substitute the need of pre-disbursement inspection

Issuance of sanction letter and acceptance of terms, conditions and stipulations of


sanctions by the borrowers.

Execution of all relevant documents, including creation of collateral security / mortgage


etc. as per terms of sanction

Furnishing of Letters of guarantee by guarantors.

Disbursement of amounts by other participating financial agencies / Banks / Financial


Institutions etc.

Clarity in regard to draw down of amounts such as first date of disbursal and last date of
disbursal, the stages in which the monies are required to be drawn, its acceptance and
evaluation at Branch level (If these are already included in the credit proposal, the same
must be adhered to).

Vetting of documents

Credit Process Audit compliance

Post Sanction Pre Disbursement approval wherever branch level sanction

Keeping the duly completed/signed check list on record along with other security
documents

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During Disbursement:
Credit delivery in loan accounts is distinct from running accounts such as Cash Credit. All
disbursements whether in loan account or in running accounts, will be related to actual /
acceptable performance of the business unit and should never lose sight of basic objective of
safety of Bank's exposure in the credit assets. The disbursements should commensurate with the
progress of the project / business activity, also taking into account the extent of margin brought
in by the promoters up to the given point of time.
The sanction of the limit is not a commitment in isolation to extend funds to the borrower under
all circumstances. It is only a financial contract to make available funds for due performance of
various business objectives and goals set out in his proposal. Bank's disbursements depend upon
due performance compliance of borrower's own commitments. Therefore, the credit delivery has
to be used as an effective monitoring tool to ensure that there are only normal and acceptable
credit risks.
The following aspects wherever applicable, may be considered for monitoring:

(a) Loan Accounts :

Actual Implementation vis-a-vis Project schedule.

Possibility of time or cost overrun.

Adequacy of arrangements to meet cost overruns.

Impact of time overrun on timely cash generations of the project.

Verification of end-use of funds with reference to verifiable records such as invoices,


account books, registers, records, inspection of the unit etc.

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Certificate from Companys Statutory Auditors on the extent of cost incurred on the
project at any given point of time, implementation progress certificate from approved
architect/contractor etc., wherever applicable.

Disbursements to be made, to the extent possible, directly to the suppliers / service


providers and the element of cash withdrawals to be kept minimum.

Status report on the suppliers of machinery as per the guidelines which ensures
genuineness of supplier/transaction must be obtained.

(b) Cash Credit Accounts:

Compliance of sanction terms / stipulations (any exception requires approval of


appropriate authority)

Verification of completion of the implementation of the project/business activity and


readiness to commence commercial production.

Disbursements to be made, to the extent possible, directly to the suppliers/service


providers and the element of cash withdrawals to be kept minimum.

Even while making direct payments, whenever doubt arises about the genuine nature of
the transaction, due care is to be exercised.

Stock inspection data regarding regular movement of goods, actual sales keeping pace
with projections, not having unacceptable quality rejections in sales, not accumulating
slow/ obsolete inventory, elongation of debtors beyond acceptable levels, change in credit
periods from suppliers etc.

Meaningful on site/off site verification of Stock/Book Debt statements to ensure


adequacy of Drawing Power/Drawing Limit

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Post Disbursement:

Monitoring of the actual performance of the borrowers on monthly basis by calling for
MSOD statements and comparing the same with the projected performance figures
appearing in the customers own CMA data submitted to Bank, sanctioned proposal / QIS
returns etc. Any substantial deviation will have to be probed into, not waiting for
submission of audited financials.

Obtention of Stock/Book debts statements as per stipulation and scrutiny thereof.

Periodical inspections by our staff.

Stock Audit by approved C.As as per extant policy.

Timely obtention and analysis of Audited statements of Accounts.

Timely review of account

Timely identification of accounts showing symptoms of strain and, wherever considered


fit, resort to prompt restructuring of the account, so that the rehabilitation process is
meaningful.

Monitoring of an account is not confined to any single office (Branches including Large
Corporate/Mid Corporate branches/Zonal Office /NBG office/Divisional Office/Head Office)
and concerted efforts will have to be made at all levels with whatever information available at
each level, to prevent any deterioration in asset quality. Under-lending or delay in lending can be
equally painful to the wellbeing/viability of the borrowers unit and this itself can lead to asset
becoming non-performing.

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Credit Report and Credit Rating:Credit Report:


The credit report is an important determinant of an individual's financial credibility. They are
used by lenders to judge a person's creditworthiness. They also help the person concerned to
narrow down on the financial problem areas.
Credit report is a document, which comprises detailed information about the credit payment
history of an applicant. It is mostly used by the lenders to determine the credit worthiness of an
applicant. The business credit reports provide information on the background of a company. This
assists one to take crucial business related decisions. People can also assess the amount of
business risk associated with a company and then decide whether they would be comfortable in
providing them with credit facilities. The degree of interest that would be shown by investors in
their company can also be gauged from the business credit reports as they can get an idea of the
conception of their customers regarding themselves. Since these records are updated at regular
intervals of time they enable people to identify the risk levels associated with a business as well
as its future. These reports also allow businesses to get detailed information about the financial
status of business partners and suppliers.

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Credit Rating:
Ratings can be assigned to short-term and long-term debt obligations as well as securities, loans,
preferred stock and insurance companies. Long-term credit ratings tend to be more indicative of
a company's investment surroundings and a company's ability to honor its debt responsibilities. .
The ratings therefore assess an entity's ability to pay debts. There are various organizations that
perform credit rating for various business organizations.
HDFC Bank Ltd. follows a finely defined Credit Rating Model for assessing the creditworthiness
of the applicant. The credit rating model of HDFC Bank Ltd. assesses various aspects of the
projects and assigns scores against them thereby determining the risk level involved with the
project.
It is divided in five sections:
1. Rating of the borrower
-

Financial risk
Management risk

2. Market condition/ Demand situation


3. Rating of the facility
4. Business consideration
5. Cash flow related parameters

1) Rating of the borrower: This part of credit rating model deals with assessing the financial
and managerial ability of the borrower. The financial ability of the firm is derived by calculating
ratios that determine the short term and long term financial position of the firm.
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Short term ratios include Current Ratio, determines the liquidity position of the company over a
period of one year. The current ratio is an indication of a firm's market liquidity and ability to
meet creditor's demands. It is excess of current assets over current liability. If current liabilities
exceed current assets (the current ratio is below 1), then the company may have problems
meeting its short-term obligations. If the current ratio is too high, then the company may not be
efficiently using its current assets.
According to the guidelines given to HDFC Bank Ltd. the ideal level is at 1.33:1 however the
acceptable level is at 1.17:1.
However at times current ratio may not be a true indicator, the current ratio for road projects is
very high but this does not indicate that the company is not using its assets well but the ratio is
high because the activity involves more in dealing with current assets. Hence it is important for
the evaluator to understand the nature of the industry.
Long term ratio include Debt Equity Ratio is a financial ratio indicating the relative proportion
of equity and debt used to finance a company's assets. This ratio is also known as Risk, Gearing
or Leverage. A high debt equity ratio is not preferable by an investor as the company already has
acquired high amount of funds from market thereby reducing the investor share over the
securities available, increasing the risk.
It is also important for the lender bank to assess the firms debt paying capacity over a period.
Such capacity is derived by calculating ratio like Debt Service Coverage Ratio minimum
acceptable level is 1.50.
It is also necessary for the lender to determine the ability of the firm to achieve the projected
growth by evaluating the projected sales with actual. However such parameter remains non
applicable if the business is new.
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Financial risk evaluation is only one of the parameter and not the only parameter for determining
the risk level. It is important to evaluate the Management Risk also while evaluating the risk
relating to borrower.
It is the management of the company that acts as guiding force for the firm. The key managerial
personnel should bear the capacity to bail out the company from crisis situation. In order to
remain competitive it is essential to take initiatives. Such skills are developed over years of
experience, thus for better performance it is required to have a team of well qualified and
experienced personnel.
2) Market potential / Demand Situation: A Company does not operate in isolation there are
various market forces that acts in either favorable or unfavorable manner towards its
performance. Thus the rating would not give true picture if does take market or demand situation
in consideration.
The demand supply situation / market Potential plays an important role in determining the
growth level of the company like
1. Level of competition: Monopoly, Favorable, Unfavorable
2. Seasonality in demand: affected by short term seasonality, long term seasonality or may
not be affected by seasonality in demand.
3. Raw material availability
4. Location issues like proximity to market,

inputs, infrastructure: Favorable, neutral,

unfavorable
5. Technology i.e. proven technology: Not to be changed in immediate future, technology
undergoes change, outdated technology.
3) Rating of the Facility: The Company can start functioning only after completing statutory
obligations laid down by the governing authority. Such statutory obligation involves obtaining

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licenses, permits for ensuring smooth operations. Preparation and Submission of Financial
Statements, Stock statements in the standard format within the given time schedule.
4) Business Consideration: The length of relationship with the bank enables the lender to assess
the previous performance of the account holder. A good track record acts in the favor of the
applicant, however an under-performance make the lender more vigilant. The income value to
the bank is also given due consideration. Thus Credit Rating of the Business takes into
consideration various aspects that have direct or indirect effect on the performance of the
business.
After evaluating the risk level involved the lender bank decides on lending interest rate.
In HDFC Bank Ltd. they are categorized in 9 segments:
1. Lowest Risk CR-1
2. Low Risk CR-2
3. Medium Risk CR- 3
4. Moderate/ Satisfactory Risk CR- 4
5. Fair Risk CR- 5
6. High Risk CR- 6
7. Higher Risk CR- 7
8. Highest risk CR- 8
9. NPA CR- 9
In HDFC Bank Ltd., a business receiving Credit Rating above level 6 are not considered good
from point of investment and thus are avoided.

Data Analysis, Results and Interpretation


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Questionnaire:
Q.1 You are doing banking or funding your business from which bank?
o
o
o
o
o
o
o
o

HDFC Bank
ICICI Bank
AXIS Bank
SBI
PNB
Bank of Baroda
Union Bank
Others, ______________

Q.2 Are you satisfied with services provided by your bank?


o
o

Yes
No

Q.3 If No, what are the problems you are facing?


Q.4 Are you taking any CC Limit or OD Limit?
o
o

Yes
No

Q.5 If Yes then how much and at which rate?


Q.6 If No, then are you interested in taking any CC limit or OD Limit?
o
o

Yes
No

Q.7 Your firm is of which type:


o
o
o

Proprietorship
Partnership
Private Ltd.

Q.8 How much is your turnover?


o
o
o

Less than 1 Cr
1 to 5 Cr
More than 5 Cr

Hypothesis Testing:
To know whether the interest rate is dependent upon the type of business or not.
Ho: Means of interest rate for Proprietorship, Partnership and Private Ltd. are same
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H1: Means of interest rate for Proprietorship, Partnership and Private Ltd. are not same
Result:
Descriptive
95% Confidence Interval for
Mean
N Mean Std. Deviation Std. Error Lower Bound Upper Bound Minimum Maximum
Proprietorship 24 12.45

.491

.100

12.25

12.66

11

13

Partnership

7 12.04

.721

.272

11.38

12.71

11

13

Private Ltd.

4 12.16

.533

.266

11.31

13.01

12

13

35 12.34

.557

.094

12.15

12.53

11

13

Total

ANOVA
Sum of
Squares

df

Mean Square

Between Groups

1.057

.528

Within Groups

9.509

32

.297

10.565

34

Total

Sig.
1.778

.185

Post Hoc Tests

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Multiple Comparisons
Tukey HSD
(I) Your firm (J) Your firm
is of which
is of which
Mean
type?
type?
Difference (I-J)

95% Confidence Interval


Std.
Error

Sig.

Lower Bound Upper Bound

Proprietorship Partnership

.411

.234

.200

-.16

.99

Private Ltd.

.292

.294

.588

-.43

1.02

Proprietorship

-.411

.234

.200

-.99

.16

Private Ltd.

-.120

.342

.935

-.96

.72

Proprietorship

-.292

.294

.588

-1.02

.43

.120

.342

.935

-.72

.96

Partnership

Private Ltd.

Partnership

Interpretation:
Since, P Value = 0.185 which is more than significance value i.e., P>0.05
Therefore, HO is accepted
Hence we can say that, rate of interest for proprietorship; partnership and private ltd. are
same i.e. around 12%.

To know whether the interest rate is dependent upon the turnover of the business or
not.
Ho: Means of interest rate for turnover Less than 1 cr., 1-5 cr., More than 5 cr., are same

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H1: Means of interest rate for turnover Less than 1 cr., 1-5 cr., More than 5 cr. are not
same.
Result:

Descriptive
95% Confidence Interval for Mean
Std.
Std.
N Mean Deviation Error

Lower Bound

Upper Bound

Minimum Maximum

Less Than 1 crore 11 12.87

.202

.061

12.73

13.00

13

13

1-5 crore

15 12.39

.309

.080

12.22

12.56

12

13

9 11.61

.343

.114

11.35

11.87

11

12

35 12.34

.557

.094

12.15

12.53

11

13

5 crore & Above


Total

ANOVA
Sum of Squares

df

Mean Square

Between Groups

7.883

3.941

Within Groups

2.683

32

.084

10.565

34

Total

F
47.016

Sig.
.000

Post Hoc Tests

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Multiple Comparisons

Tukey HSD
95% Confidence Interval
(I) How much is your
turnover?

(J) How much is Mean Difference Std.


your turnover?
(I-J)
Error

Less Than 1 crore

1-5 crore

1-5 crore

5 crore & Above

Sig. Lower Bound Upper Bound

.482*

.115

.001

.20

.76

5 crore & Above

1.257*

.130

.000

.94

1.58

Less Than 1 crore

-.482*

.115

.001

-.76

-.20

5 crore & Above

.776*

.122

.000

.48

1.08

-1.257*

.130

.000

-1.58

-.94

-.776*

.122

.000

-1.08

-.48

Less Than 1 crore


1-5 crore

*. The mean difference is significant at the 0.05 level.

Interpretation:
Since, P Value = 0.000 which is less than significance value i.e., P<0.05
Therefore, HO is rejected and H1 is accepted.
Hence we can say that, rate of interest is different for different turnovers.
The business whose turnover is more than 5 cr. from them bank charges lower rate of
interest than others i.e. around 11%.

Case Study

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Mr. XYZ is a customer of the bank who holds a current account with the branch. He owns a
cement store nearby and approached the bank for a Working Capital loan (CC Limit) of
Rs. 40, 00, 000 as he wanted to expand his business.
PRE-SANCTION ACTIVITIES:
1.
2.
3.
4.

KYC formalities
Scrutiny of bank accounts
Family background, social reputation, duration in the business
Checking RBIs willful defaulters list, Special Approval List (SAL) of ECGC, CIBIL

report.
5. The acceptability of the product, its market demand/supply position, market competition,
market arrangement etc. has to be checked
6. Techno-economic appraisal of the unit to be carried out as per the guidelines by Technical
Appraisal Department (TAD) of HDFC
7. Visit to the store and residence of the applicant
8. Checking store rent agreement, residence proof etc.
9. Checking of documents

ASSESSMENTS:
1. Working capital assessment:
As this units WC requirement is below Rs.5 crores, the bank adopts Turnover
method for assessment. Under this method the WC is arrived @ 20% of the
projected turnover based on the assumption of a three month operating cycle.
2. Financial ratios:
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Debt equity ratio: Mr. XYZ business D/E ratio stood at 1.7:1 which was considered

as a very strong one by the bank.


Current ratio: His current ratio was 1.5:1 as he does business on a credit basis more

often and received the money once in a month from the customer.
Debt Service Coverage Ratio: He had a fair DSCR ratio of 1.65:1 which implied
that he generated enough Net operating income to pay off his debts.

As all factors were satisfactory, Mr. XYZ application was passed.


POST-SANCTION ACTIVITIES:
1.
2.
3.
4.
5.
6.

Monitoring the accounts on a regular basis


Visit to the store for checking of stock
Acquire monthly stock statement as well as receivables account
Balance sheet evaluation
Collection of repayment should be maintained
Prevent account form being sub-standard

Ensure utilization of funds for genuine purpose

Findings
-

By using SPSS and applying tools like One Way ANOVA and Post Hoc Test, it is clear
that bank charges lower interest rate from the businesses whose turnover is high as they

take CC limit more than others whose turnover are less.


Interest rate is not dependent upon the type of business i.e. Proprietorship, Partnership

and Private Ltd.


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

Credit is core activity of the banks and important source of their earnings which go to pay
interest to depositors, salaries to employees and dividend to shareholders.

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Credit and risk go hand in hand.

In the business world risk arises out of:-

Deficiencies /lapses on the part of the management


Uncertainties in the business environment
Uncertainties in the industrial environment
Weakness in the financial position
The loan policy of HDFC Bank Ltd. contains various norms for sanction of different

types of loans.
For each type of loan, there are different norms as per the guidelines of RBI.

The assessment of financial risk involves appraisal of the financial strength of the
borrower based on performance & financial indicators.

Conclusions
-

The requirement of credit is ever increasing.


In most of the cases, hypothecation and/or mortgage are used to create securities for the

banks.
Every bank has its own internal credit rating procedure to rate the clients (Borrowers).
After doing the assessment of the financial indicators it is up to the judgment of the top
management of the bank to sanction such loan. The very decision could be against the

assessment result.
If the company is with bank from inception stage then they are given preference, as
credible and loyal party over their financial indicators.

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Limitations of the Study


-

As the credit appraisal is one of the most crucial areas for any bank, some of the

technicalities are not revealed.


Credit appraisal system includes various types of detail studies for different areas of

analysis, but due to time constraint, analysis was of limited areas only.
The study was only on desk jobs related to credit. I was not exposed to the field
survey and valuation part.

Actual balance sheets, ratios, financial statements of the customers were not shared with me for
my records and thus my study lacks certain details.

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Recommendations
-

Closely monitoring and inspecting the activities and stocks of the borrowers from time to
time can avoid the misuse of advances.

The bank must further secure itself by holding a second charge on all the fixed assets of

the borrower.
The time period taken by the banks to sanction the limits should be significantly reduced
to allow the borrowers to make use of the credit when the need is most felt.

There should be a standard rating process to remove the subjectivity and different
perceptions of the rater (person who does credit rating process for a borrower company).
It will remove the human biasness in the process.

Personal guarantee does not give any physical asset to the bank. It is for the moral
binding on the part of the borrower. Hence, bank should prefer to use this type of
guarantee as this will reduce the default rate on the part of borrower.

Faster dispersion of credit is of paramount importance. A proposal has to pass through


different channels which lead to delay in the dispersal of credit. There is a need of drastic
reduction in these channels for faster decision making. This will curtail avoidable delays,
improved efficiency besides reducing appraisal time as well as cost.

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References
-

www.hdfcbank.com
www.rbi.org.in
www.wikipedia.com
www.investopedia.com
www.theofficialboard.com

Books Referred:
-

I.M Pandey Financial Management Vikas publishing House Pvt. Ltd.


Credit & Banking K.C Nanda

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