PROJECT REPORT ON

WORKING CAPITAL APPRAISAL AND TERM DEBT ASSESSMENT

PRACTICES FOLLOWED IN BANKS FOR MSME LENDING
BY
PRIYAL CHOWKHANI

GUIDE
Shri I.K AGARWAL
AT
ALLAHABAD BANK, RASH BEHARI AVENEUE,KOLKATA

SUMMER INTERNSHIP PROJECT REPORT SUBMITTED IN PARTIAL

FULFILLMENT OF THE REQUIREMENTS FOR THE AWARD OF
POST GRADUATE DIPLOMA in MANAGEMENT
(2013-2015)
AT
NATIONAL INSTITUTE OF BANK MANAGEMENT,PUNE

CERTIFICATE
TO WHOMSOEVER IT MAY CONCERN
This is to certify that MS PRIYAL CHOWKHANI, student of PGDM
(2013-15), National Institute of Bank Management has successfully
completed her Summer Internship Project on WORKING CAPITAL
APPRAISAL AND TERM DEBT ASSESSMENT PRACTICES FOLLOWED
IN BANKS FOR MSME LENDING from 30.04.2014 to 22.06.2014 for

the particular fulfillment of the requirements for the award of Post

Graduate Diploma in Management by National Institute of Bank
Management, Pune under my guidance. She had taken interest in the
project and worked sincerely during her stay here. This is her bonafide
work.
DATE:
(Shri I.K. AGARWAL)
Chief Manager
Rash Behari Branch
Allahabad Bank, kolkata

PREFACE
2

This Project Report has been prepared in partial fulfillment of the requirement for
the award of Post Graduate Diploma in Banking and Finance in the academic year
2013-15.
The rationale behind preparing this project report was to apply my theoretical
knowledge about Working capital assessment and term loan assessment into
practices and to know the steps followed by the bank to issue loans. The objective
of this project is to study the working of Allahabad Bank for providing loans to
MSE units and appraisal associated with it. MSE units add value to a countrys
economy by creating jobs, strengthening purchasing power, enhancing income,
lowering cost and adding business convenience.
This project report starts with the brief profile of the bank where I completed my
internship, introduction of Credit Appraisal Management followed by data analysis
of a MSE unit and the results.
The blend of learning and knowledge acquired during my practical studies at the
bank is presented in this project.
The information presented in this project report is obtained from different sources
like lectures attended by me in staff college, banks website, internet, books and
manuals provided by the bank etc.
DATE: 22.06.2014
PRIYAL CHOWKHANI
PGDM 2013-15

SL.No

CONTENTS

Pg. NO

PROFILE OF THE BANK

5-8

1.

INTRODUCTION

2.

OBJECTIVES

10

3.

DETAILED UNDERTANDING OF MSME

11-31

4.

LITERATURE REVIEW

32-46

5.

RESEARCH & METHODOLOGY

47

6.

ANALYSIS & INTERPRETATION

48-65

7.

CONCLUSION & RECOMMENDATION

66-68

8.

SUGGESTION FOR FUTURE RESEARCH

69

9.

EXECUTIVE SUMMARY

70

10.

BIBLIOGRAPHY

71

INDEX

VISION: To put the Bank on a higher growth path by building a Strong Customer-base through
Talent Management, induction of State-of-the-art Technology and through Structural Reorganization.
MISSION: To ensure anywhere and anytime banking for the customer with latest state-of-the-art
technology and by developing effective customer centric relationship and to emerge as a worldclass service provider through efficient utilization of Human Resources and product innovation.
Background of Allahabad bank
Allahabad Bank which began operations in 1865, has its head-quarters in Kolkata is the oldest
joint stock bank in India. The bank was founded in Allahabad in 1865 and as of 31 March 2012
now has over 2500 branches throughout India. The bank has a branch in Hong Kong and a
representative office in Shenzen
19th century: The Oldest Joint Stock Bank of the Country, Allahabad Bank was founded on April
24, 1865 by a group of Europeans at Allahabad. Thus, the History of the Bank spread over three
Centuries - Nineteenth, Twentieth and Twenty-First. By the end of 19th century it had branches
at Jhansi, Kanpur, Lucknow, Bareilly, Nainital, Calcutta, and Delhi.
20th century:

1920's

The Bank became a part of P & O Banking Corporation's group

with a bid price of Rs..436 per share,

1923

The Head Office of the Bank shifted to Calcutta on Business

considerations.

July 19, 1969

Nationalized along with 13 other banks, Branches - 151

Deposits - Rs.119 crores, Advances - Rs.82 crores.

October, 1989

United Industrial Bank Ltd. merged with Allahabad Bank.

1991

Instituted AllBank Finance Ltd., a wholly owned subsidiary for

Merchant Banking.

On 19 July 1969, the Government nationalised Allahabad Bank, together with 13 other banks.
In October 1989, Allahabad Bank acquired United Industrial Bank, a Calcutta-based bank that
had been established in 1940. Two years later, Allahabad Bank established AllBank Finance Ltd,
a wholly owned Merchant Banking subsidiary.
21st century
October, 2002

The Bank came out with Initial Public Offer (IPO), of 10 crores
share of face value Rs.10 each, reducing Government
shareholding to 71.16%.

April, 2005

Follow on Public Offer (FPO) of 10 crores equity shares of face

value Rs.10 each with a premium of Rs.72, reducing
Government shareholding to 55.23%.

June, 2006

The Bank Transcended beyond the National Boundary, opening

Representative Office at Shenzen, China.

Oct, 2006

Rolled out first Branch under CBS.

February, 2007

The Bank opened its first overseas branch at Hong Kong.

March 2007

Bank's business crossed Rs.1,00,000 crores

mark.

The government's ownership of Allahabad Bank shrank in October 2002 after the bank engaged
in an Initial Public Offering (IPO) of 100 million of shares, each with a face value Rs.10. The
IPO reduced the Government's shareholding to 71.16%. Then in April 2005 the bank conducted a
second public offering of 100 million of shares, each with a face value Rs.10 and selling at a
premium of Rs.72. This offering reduced the Government's ownership to 55.23%.
In June 2006 the bank opened its first office outside India when it opened a representative office
in Shenzen, China. In February 2007, Allahabad Bank opened its first overseas branch, in Hong
Kong. In March, the bank's business crossed Rs.1,000 billion mark.
ALLAHABAD BANK AND MSME LENDING
Allahabad Bank has signed a Memorandum of Understanding with the Chamber of Indian Micro,
Small and Medium Enterprises (CIMSME) to shore up its priority sector lending.
CIMSME represents the interests of companies in MSME sector, with banks, financial
institutions, concerned ministries and other organizations.
As per the terms of agreement, CIMSME would mobilize proposals from its members for
consideration of the bank. Once the loan is sanctioned, the organization would support the bank
in follow-up and recovery of dues and provide early warning signals, if any, said a press
statement issued by the bank.
The Bank has been awarded the long standing performer award for Priority Sector Lending by D
& B for implementing MSME Scheme.
Credit to corporate sector accounts for about 45 per cent of the bank's total outstanding, pegged
at about Rs 1,30,000 crore. The bank has advanced to the tune of Rs 42,000 crore to priority
sector comprising farm and small business houses.
PERFORMANCE HIGHLIGHTS
- Total Business of the Bank increased to Rs.3,31,748 Crore as against Rs.3,09,678 Crore in
previous year showing a YOY growth of 7.13 %.
- Operating Profit surged to Rs.4020 Crore as against Rs.3385 Crore last year showing a YOY
growth of 18.76%.
- Net Profit came down to Rs.1172 Crore during the Financial Year ending 31.03.2014 as
againstRs.1185 Crore last year showing a negative YOY Growth of 1.11 %.
- Net Interest Margin (NIM) decreased to 2.75 % during the Financial Year ending March, 2014
as against 2.81% last year.
- Deposits of the Bank went up to Rs.190843 Crore from Rs.178742 Crore last year. Year-onYear basis, Total Deposits grew by 6.77 %.
7

- Gross Credit surged to Rs.140905 Crore from Rs.130936 Crore last year. Year-on-Year basis,
the Gross Credit increased by 7.61 %.
- Credit Deposit Ratio stood at 74.26% as at March, 2014.
- Retail Credit grew to Rs.19308 Crore from Rs.17654 Crore last year, with an Y-O-Y growth of
9.37%.
- Non-Fund Non Interest Income during the Financial Year ending March, 2014 stood atRs.1085
Crore as againstRs.918 Crore last year.
- Capital Adequacy Ratio stood at 10.26 % as on 31.03.2014 under Basel-II norms and at 9.96%
under Basel-III norms.
- Gross NPA to Gross Advances and Net NPA to Net Advances Ratios stood at 5.73% and 4.15
% as on 31st March, 2014 respectively.
- Provision Coverage Ratio stood at 46.03%.

MSE SECTOR FINANCING

Credit to Micro and Small Enterprises (MSE) grew from Rs.16570 Crore as on March 2013 to
Rs.19520 Crore as on March 2014, registering an absolute YOY growth of Rs.2950 Crore
(17.80%).

1. INTRODUCTION
A developing country like India needs a lot of new project to satiate its need for basic
requirements, employment, sustained growth, balanced regional development & self dependency
amidst the global competitive environment. One sector which has potential to fulfill all these is
the MSME sector.
The Micro, small and Medium Enterprises (MSME) sector is a vital sector of our economy. It
contributes towards Indias Gross Domestic Product, exports and employment. Apart from being
smaller in their scale of operations, MSME offer flexibility towards adaption to changes, enable
low earning cost and are a source of dynamism in market-oriented economic set-up.
Bank have o finance them as fast as they can because market is willing to finance them. This is
also to keep them alive for their probable future transformation into MNCs. But a sole focus on
their speedy financing may lead to a big lot of NPAs for the bank, so prudence is to emphasize
upon a crude appraisal of the financing proposals coming from MSMEs, which will lead to a
good health of MSMEs and bank both.

2. OBJECTIVE
The main objective of the study I to conduct an evaluation and an in depth analysis of the credit
appraisal (working capital and term loan) methods used by Allahabad bank for MSMEs.
The other objectives are:
To have an overview of the MSME sector in India
To analyze the bottlenecks & hurdles in their financing.
To appropriate, study, evaluate and analyze the case of two-three borrowers.
To recommend changes if any with appropriate justifications to the existing systems
To study the progress made by Allahabad Bank in their financing to MSMEs.

10

3. DETAILED UNDERSTANDING OF MSME

DEFINITION OF MSME
In terms of MSMED ACT 2006, the MSME sector comprises of micro Enterprises, Small
Enterprises and Medium Enterprises in Manufacturing & Services Segments. Enterprise means
an industrial undertaking or a business concern or any other establishment, engaged in the
manufacture or production of goods, in any manner pertaining to any industry specified in the
First Schedule to the Industries (Development and Regulation) Act, 1951 or engaged in
providing or rendering of any services and whether proprietorship Hindu Undivided Family,
Association of persons, co-operative society, partnership firm, company or undertaking by
whatever name called. As per the provision of the Act, central government has classified micro
enterprises, small enterprises and medium enterprises as under:

SL.
No

Categories

Definition Of Micro, Small And Medium Enterprises

(MSME)

`1.1

MICRO ENTERPRISES
(MANUFACTURING)

Enterprises engaged in the manufacture/ production,

processing or preservation of goods and whose investment
in Plant and Machinery (Original cost excluding Land
and Building and the items specified by the Ministry
of Small Scale industries does not exceed Rs.25Lacs.

1.2

MICRO ENTERPRISES

. Enterprises engaged in the providing / rendering of

11

(SERVICE)

services
and whose investment in Equipment
(Original cost excluding Land and building and
furniture, fittings and other not directly related to the
service rendered or as may be under the Micro, Small
and Medium Enterprises Development, Act 2006) does
not exceed Rs.10 Lacs.
ii. The Micro Enterprises (Service) shall include Small
Road & Water Transport Operator (SRWTO), Professional
and Self Employed (PSEP), Small Business, Retail Trade
(Upto loan limit of Rs.20.00 lac) and all other
service enterprises whose investment in equipment
does not exceed Rs.10Lacs.

2.1

SMALL ENTERPRISES
(MANUFACTURING)

Enterprises engaged in the manufacture/ production,

processing or preservation of goods and whose investment
in Plant and Machinery (Original cost excluding Land
and building and the items specified by the Ministry
of Small Scale Industries above Rs.25 Lacs to Rs.5Crore.

2.2

SMALL ENTERPRISES
(SERVICE)

i.Enterprises engaged in the providing / rendering of

services and whose investment in Equipment is above
Rs.10Lacs to Rs.2Crore.
ii. The Small Enterprises (Service) shall include Small
Road
&
Water Transport Operator (SRWTO),
Professional and Self Employed (PSEP), Small Business,
Retail Trade (Upto loan limit of Rs.20.00 lac) and all
other service enterprises, whose investment in equipment
is above Rs.10Lacs to Rs.2Crore.

3.1

3.2

MEDIUM
ENTERPRISES
(MANUFACTURING)

MEDIUM ENTERPRISE

Enterprises engaged in the manufacture/ production,

processing or preservation of goods and whose investment
in Plant and Machinery Original cost excluding Land and
building and the items specified by the Ministry of
Small Scale Industries is more than Rs.5Crore but does
not exceed Rs.10Crore.
i. Enterprises engaged in the providing/rendering of
12

(SERVICE)

services and whose investment in Equipment is more

than Rs.2 Crore but does not exceed Rs.5 Crore.
ii.The Medium Enterprises (Service) shall include
Small Road and Water Transport Operator (SRWTO),
Professional and Self Employed (PSEP), Business and
all other service enterprises, whose investment in
equipments above Rs.2Crore to Rs.5Crore.

HURDLES FACED BY BANKS IN MSME LENDING

Here are a number of issues in lending to the SME sector, which banks generally face. The key
issues among them are out-lined below:

Moral Hazard: Even when loans are made to SMEs , it may so happen that the owners
of these SMEs take higher risks than they otherwise would without lending support from
the banks. One reason for this situation is that the owner of the firm benefits fully from
any additional returns but does not suffer disproportionately if the firm is liquidated. This
is referred to as the moral hazard problem, which can be viewed as creating a situation of
over-investment. It may result in bad lending in a short period of time, which all banks
like to avoid

Switching Costs: SMEs may find it harder to switch banks, when counters with any
issue. It is known fact the smaller the business, the more significant the switching costs
are likely to be and, therefore, it is less likely that the benefits of switching out-weigh the
cost involved. This situation results in SME lending becoming a seller market which may
not be attractive to SME borrowers.

Information Asymmetry: Accurate information about the borrower is a critical input for
decision making by banks in the lending process. Where information asymmetry( a
situation where business owners or managers know more about the prospects for, and
13

risks facing their business than their lenders) exists, lenders may respond by increasing
lending margins to levels in excess of that which the inherent risks would require or
curtail lending. The implication of raising interest rates or curtailing lending is that banks
would not able to finance as many projects as otherwise would have been the case.

Granularity: This refers to a situation where the risk grading system at banks does not
have the requisite capability to discriminate between good and bad risks. The
consequence is tightening of credit terms< or an increase in prices, or both. This leads to
an outcome where the bank is over-pricing good risks and under-pricing bad risks.

Targets given by RBI for lending to Micro and Small enterprises (MSE)
sector by Domestic Commercial Banks operating in India as under:
1. In terms of the recommendations of the Prime Ministers Task Force on MSMEs, banks are
advised to achieve a 20 per cent yearonyear growth in credit to micro and small enterprises and
a 10 per cent annual growth in the number of micro enterprise accounts.
2. In order to ensure that sufficient credit is available to micro enterprises within the MSE sector,
banks should ensure that:
(a) 40 per cent of the total advances to MSE sector should go to micro(manufacturing)enterprises
having investment in plant and machinery up to Rs. 10 lakh and micro(service) enterprises
having investment in equipment up to Rs. 4 lakh;
(b) 20 per cent of the total advances to MSE sector should go to micro (manufacturing)
enterprises with investment in plant and machinery above Rs. 10 lakh and up to Rs. 25lakh, and
micro (service) enterprises with investment in equipment above Rs. 4 lakh and up to Rs. 10 lakh.
Thus, 60 per cent of MSE advances should go to the micro enterprises.
3. The target for lending to Micro Enterprises within the MSE sector (i.e. 60% of total lending to
MSE sector should go to Micro enterprises) will be computed with reference to the outstanding
credit to MSE sector as on preceding March 31st.
The provisions of MSMED Act-2006 , has clarified that the following categories
have been considered
under
Manufacturing or Service Sector :

14

A. Manufacturing Activities:

B. Service Activities:

i. Medical Equipment and Ayurvedic

Product

i. Sanitation Services (Hiring of Septic

Tank Cleaner)

ii. Composite unit of Bacon

Processing and Piggery Farm

ii. Clinical /Pathological Laboratories

and Scanning , MRI Tests

iii. Tobacco Processing

iii. Hospitals

iv. Beedi/Cigarette manufacturing

and other tobacco products

iv. Agri-Clinic and Agri-Business

v. Restaurants with Bar

v. Extraction of Agave Spirit from

Agave juice (imported medicinal plant vi. Canteens
) extraction of Agave
vii. Hotels
vi. Manufacture of Bio-Fertilizer
viii. Motel Industry

ix. Consultancy Services including

Management Services.
x. Composite Broker Services in Risk
and insurance Management.
xi. Third Party Administration (TPA)
Services for medical insurance Claims
of Policy Holders.
xii. Seed Grading Services.
xiii. Training-cum-incubator Centre.
xiv. Educational Institutions.
xv. Training Institutes.
xvi. Fair price shops.
xvii. Consumer cooperative stores.
xviii. Private Retail Trade (Loan upto
Rs.20 lac)
xix. Practice of Law, i.e. legal
services
xx. Trading in medical instruments

15

(brand new).
xxi. Placement and Management
Consultancy Services.
xxii. Advertising agency and Training
centres.
xxiii. Any other eligible activities.

C The following categories will not be classified under manufacturing or as Service Enterprises:
i. Piggery Farm without bacon processing as this is a farming activity.
2.

The activity of Bee-Keeping being farming allied activity.

COMMON GUIDELINES/INSTRUCTIONS FOR LENDING TO MSMEs

1

Loan

Applications

For loan beyond Rs.25Lacs, branches may obtain additional

information from the borrower, as deemed necessary, as
incorporated in the checklist enclosed to the loan application
form.
Before handing over the Application Forms to applicant, the
modification / addition as applicable under guidelines on Fair
Practice Code for Lenders Liabilities will be complied as under:

(a) An undertaking to be obtained from the prospective borrower

while accepting application that he has been briefed about and
convinced about the charges, bank will levy on pre/post sanction of
the loan.

Each branch will issue an acknowledgement for loan applications

submitted manually by the borrowers towards financing under
this sector. A running serial number should be recorded on the
application form as well as on the acknowledgement receipt.

16

Disposal of Applications:
In case of Loans up to Rs.25000/- : Within 2 weeks
In case of Loans above Rs.25000/- and upto Rs.5.00 lac : Within 4
Weeks
(Provided the loan applications are complete in all respect and
accompanied by a check list enclosed to the application form).

Register of Receipt/Sanction/Rejection of Applications:

(a) A register should be maintained at branch level containing

information on the date of receipt, sanction, disbursement, rejection
with reasons, should be recorded. The register should be made
available to facilitate verification by the Banks officials including
Zonal Heads during visit to the branch.
(b) Branch Manager may reject application (except in respect of
SC/ST). In the case of proposals of SC/ST, rejection should be done
at a level higher than Branch Manager.
(c) The reason for rejection will be communicated to the borrower in
line with the stipulation mentioned in the Fair Practices Code for
Lenders.

Photographs of Borrowers:

While there is no objection to take photographs of the borrowers, for

the purpose of identification, branches themselves should make
arrangements for the photographs and also bear the cost of
photographs of borrowers falling in the category of Weaker Sections.
It should also be ensured that the procedure does not involve any
delay in loan disbursement.
2

Nature/Type of

Credit Facilities

The Bank may provide all types of funded and non funded
facilities to the borrower under this sector viz, Term Loan, Cash
Credit, Letter of Credit, Bank Guarantee, etc.
A Composite Loan with maximum limit upto Rs.1.00 crore may
be considered by bank to enable the Micro and Small Enterprises
{both for manufacturing and service sector} to avail of their
working capital and Term loan requirement through Single
Window.

17

Margin

Funded Limit

Minimum Margin

(a) Up to Rs.25000.00

Nil

(b)Above Rs.25000.00

20%

Margin on Book debts

20%

Export Bills backed by LC/ confirmed by

First Class Bank

Nil

Non Funded Limit

(a) Letter of Credit(DP)

5% Cash Margin

(b) Letter of Credit(DA)

10% Cash Margin

(c) Bank Guarantee

20% Cash Margin

Margin in case of Non Funded facility can be reduced upto 5% by the

GM(PSC) at HO and below 5% by the Chairman and Managing
Director or Executive Director(in absence of C&MD).
4

Security

No collateral or third party guarantee for advances (both

manufacturing and service sector) up to Rs.10.00 Lacs
irrespective of coverage under CGTMSE.
No collateral or third party guarantee for advances upto Rs.10.00
lac to all units financed under the PMEGP.
In case of good track record of the borrower collaterals and/or
third party guarantee may be waived up to Rs.100.00Lac, where
guarantee cover is available from CGTMSE, in respect of term
loan and /or working capital facilities extended to new and
existing entrepreneur. However, for sanctioning collateral free
loans above Rs.25.00 lac, Branches should obtain prior approval
from their respective Zonal Offices. Regarding coverage and fee
etc, guidelines on CGTMSE Scheme would be applicable. The
subsequent changes from time to time if any will be applicable.
In case of Loan up to Rs.25000.00, minimum Asset Coverage
Ratio (Primary Security/ Loan amount) would be 1:1. However,
in case of schematic lending/specified scheme, the guidelines as
applicable will be complied with.
In case of Loan above Rs.25000/-, a minimum Asset Coverage
Ratio (Primary Security / Loan Amount) must be 1.1. excluding
18

Risk Rating

margin stipulated.
In case of loan accounts not covered under CGTMSE scheme i.e.
above Rs.100 lac, it may be explored as far as practicable that the
credit facilities/loans extended, are supported by collaterals in the
form of liquid securities or fixed assets, immovable properties,
based on the credit risks perception of the borrower. However,
availability of collateral security shall not be the mere criterion
for arriving at credit decision.
Collateral security shall not be insisted upon in those cases where
the RBI directives specifically advised the banks not to insist on
obtaining collateral security /third party guarantee. The other
guidelines as per Lending Policy of the Bank and subsequent
amendments, if any, should be closely observed.

All the MSME accounts (new/existing) are to be rated as per

rating modulus (In- House Module of Rating) prescribed under
Banks Credit Risk Management Policy.

As stipulated by CGTMSE all proposals of sanction of Guarantee

approvals for credit facilities above Rs.50.00 Lacs and up to Rs.
100.00 Lacs will have to be rated internally by Member Lending
Institutions(MLIs) and should be of investment grade.
Accordingly, all proposals above Rs. 50 Lacs are to be rated on
Credit Risk Grading as per applicable internal rating modules as
above prescribed under Banks Credit Risk Management Policy
and proposals rated as AB-1 to AB-7 would only be considered as
investment grade subject to other stipulated norms in relevant
policies/ guidelines.
Rating from Outside Rating Agencies:

Bank has entered into MOU with CRISIL, ONICRA, SMERA,

ICRA, BRICK WORKS and CARE for rating of MSME borrowers
and the same will be taken into consideration for appropriate lending
decision apart from internal .To promote more external rating which
provides the broader comparability of rating at all levels, the Bank
may allow incentive in rate of interest of 0.50% below the applicable
rate in case of Highest and High rated accounts, for rating done by
outside rating Agencies.
Zonal Heads may allow such incentive on the interest rate. Zonal
Heads while reviewing the existing loan accounts and considering

19

sanction of new connection may exercise the authority.

6

Pricing/ Rate of
Interest

The rate of interest to the borrower classified under Micro, Small and
Medium Enterprises will be guided by banks policy on interest rate
issued from time to time.
Concessions on Rate of Interest :
Concession of 0.50% below the applicable rate subject to minimum
of Base Rate in case of Highest and High rated accounts, for rating
done by outside rating Agencies.
Concession of 0.50% below the applicable rate subject to minimum
of Base Rate in case of loan allowed to Women beneficiaries. Any
other concession in interest rate may be allowed as per interest rate
policy of the bank issued from time to time.

Repayment /

Moratorium

Repayment schedule should be fixed taking into account the

sustenance requirements, surplus generating capacity, the breakeven point, the life of the asset, etc., and not in an ad hoc
manner.
Moratorium period depending on requirement of the project will
be considered.
Moratorium period may be extended by further six months
where project implementation has been delayed for reasons
whatsoever beyond control of theborrower.
Interest accrued during moratorium period may be capitalized
and accordingly loan installment may be fixed.

Mode of
Disbursement of
Loan

The disbursement of the loan will be made in phases depending on

the progress on implementation of the project and payment towards
cost of Plant and Machinery, Equipment and other fixed assets will be
made in favour of the supplier through Demand Draft/Banker
Cheque. Branches will continue to ensure the end use verification on
monthly/quarterly basis.

Methodology for
Calculation of
Bank Finance

working Capital :
i) Working capital credit limits to Micro, Small and Medium
Enterprises in individual cases up to Rs.5.00 Crore (Manufacturing
sector) and upto Rs.2.00 Crore (Service sector) will be computed as
per existing guidelines on the basis of minimum 20% of projected
annual turnover (turnover method). However, in case of borrower
applying for working capital limit higher or lower than the working
20

capital computed on the basis of turnover method shall be assessed as

per actual requirement.
ii) For assessment of the working capital requirement for borrowers
falling within the band of above Rs.5.00 crores and below
Rs.10.00Crore (Manufacturing Sector) and above Rs.2.00 Crore and
below Rs.10.00 Crore (Service Sector) the traditional method of
computing MPBF as per second method of lending will continue. If
any of the borrower falling in this band intends to shift to cash budget
system, the same may be accepted.
iii) For borrowers having working capital limit of Rs.10.00 crores
and above, Cash Budget System will be applicable. However, if a
borrower is desirous to continue with the existing MPBF system the
Bank may accept the request. If any of the borrowers falling in this
band intends to shift to cash budget system, the same may be
accepted.
iv) The Book Debts upto 90 days may be treated as Current Asset, for
the purpose of computation of permissible bank finance and drawing
power calculation. All Book Debts more than 90 days are to be
treated as Non-Current Assets.
v) In regard to age of the book debts, a certificate preferably from
Auditors/ Chartered Accountant to be obtained.
. Term Loan and Other Facilities :
i) The technical feasibility and economic/ financial/ commercial
viability, managerial competence, environment viability and bankability of the proposal with reference to risk and legal aspect will be
assessed.
5.10.03 All the benchmark financial ratios, tenure etc. will be in line
with the Banks Domestic Lending Policy.
10

Financing under
Cluster Based
Approach

The cluster based approach should be given thrust for financing

as the cluster financing approach reduces the cost of transaction
to the Entrepreneurs.
The Zonal Offices/ Branches will give due importance for
financing of MSME sector through Specialised SME Financing
Branches and the identified Thrust branches and Branches
situated near to clusters.
21

11

Discretionary
Authority

Discretionary authority for sanction of credit facilities as well as

sanction of adhoc credit facilities will be as per Discretionary
Authority circularized by the Bank.

12

Review of
Portfolio

At the Zonal Office level, Chief Manager (Credit)/ Senior Manager

identified as nodal officers will act as coordinating officer to monitor
the functioning, review and the progress in SME financing and to
coordinate with other banks/financial institutions and the State
Government in removing bottlenecks, if any, to ensure smooth flow
of credit to the sector.

13

Debt
Restructuring/O
TS

14

Banking Codes
and Standard
Board of
India(BCSBI)

The Banks Policy of Debt Re-structuring will be applicable.

The Banks Policy of One Time Settlement will be applicable.

The Banking Codes and Standard Board of India (BCSBI)

formulated a Code of Bank's Commitment to Micro and Small
Enterprises and have been adopted by the Bank for MSMEs. The
printed booklet of the Code in English/Hindi/Other vernacular
languages has been provided to Zonal Offices, to make available
for use of new/existing customers at all the Branches.
This is a Voluntary Code, which sets minimum standards of
banking practices for banks to follow when they are dealing with
Micro and Small Enterprises (MSEs) as defined in the MSMED
Act, 2006. It provides protection to MSE and explains how banks
are expected to deal with MSE for their day to-day operations and
in times of financial difficulty.
The Code does not replace or supersede regulatory or supervisory
instructions issued by the Reserve Bank of India (RBI) and will
comply with such instructions / directions issued by the RBI from
time to time.
Objectives Of The Code:
(a) Give a positive thrust to the MSE sector by providing easy access
to efficient banking services.
(b) Promote good and fair banking practices by setting minimum
standards in dealing with MSE.
(c) Increase transparency so that a better understanding of what can
reasonably expected of the services.
(d) Improve our understanding of business through effective
22

communication.
(e) Encourage market forces, through competition, to achieve higher
operating standards.
(f) Promote a fair and cordial relationship between MSE and banks
and also to ensure timely and quick response to banking needs.
(g) Foster confidence in the banking system.

COMPHREHENSIVE GUIDELINE ON CREDIT RISK GRADING

1) Risk Grading of any account reflects upon the borrowers strength and soundness based on
the study of past results and future projections. A good Credit-risk Rating Framework (CRF)
should be act as a single point indicator to identify good or a bad category. It can be
aggregated through various external and internal risk faced by the Borrower.
1.1 External Risk: (Activity Risk Or Industry Risk) (Assessment is usually based on: DemandSupply Position, Govt policy for the sector, Extent of Competition, Input Related Risk
,variability of operating margin/income for sector as a whole etc)
1.2 Internal Risk with respect to counter party:
a) Business Risk : Assessment is usually based on: brand equity, consistency in quality, product
range, distribution set up, diversity of market, financial ability to withstand competition, after
sales service , availability of raw material, capacity utilization, employee cost, energy cost,
selling cost, cost effective technology etc. Its input related risk. Raw materials supply should be
ensured so that there is no problem in the production and so that the cash cycle is not hampered.
So the better the arrangement for raw material the lesser is the risk for the firm and thus the bank.
Stocking too much stock in advance can be risky.
Past performance of sales achievement or the growth rate: past performance of the bank is
calculated by the bank and also the growth rate is seen.

23

Marketability or the market share of the firm's product is very important aspect. If the market is
broad based and diversified, there are more chances of the company doing well. IF there would
be more competition, ore would be the risk.
b) Financial Risk (Assessment is usually based on Financial Ratios in balance sheet/profit &
loss statement). Financial statements for at least 2 years are mandatory. Since it is available with
the bank they can calculate various ratios to check the financial health of the SME.

Interest coverage, Return on capital employed, operating margins, operating income, current
ratio, DSCR, total outside liabilities/total networth.

c) Management Risk (Assessment is usually based on: experience of promoters/management,

business &financial policy, track record etc)
d) Stabilization Risk (Assessment is usually based on type of performance test to be done after
stabilization of project)
e) Construction Risk: (Assessment of expected balance project duration & time over-run if any)
f) Other risk parameters: Assessment of Clearances & financial closures, Operational Aspects
etc. covered

INTERNAL GRADING
The two types of Credit Risk Frameworks developed by the bank are:
1. Software based Risk Assessment Module(RAM)- It has been developed with assistance
from CRISIL. The RAM module is used for grading of large borrower accounts under
various industrial sector whose credit score is finalized with assistance from CRISIL. The
cut off credit limit under this module is Rs, 5 crore or above.
2. The In-House CRG Module are developed by the bank to cover all the borrower
accounts/branches which are not covered under Risk Assessment Module of Crisil. This
module is applicable as below:
CRG

APPLICATIONS

MODULES
CRG-01

RISK GRADING OF:

Advances Against Liquid Security & Advances to Staff, irrespective of
24

Credit Limit
Clean Advances & Non Performing Assets , irrespective of Credit Limit
Advances Under Retail Credit Scheme of the bank if sanctioned for
personal use(not for business activity) irrespective of Credit Limit.
Other Advances with credit limit (Funded & Non Funded) below Rs 10
Lakh
CRG-02

Risk Grading of Borrower accounts (with existing units/project) having

Aggregate Credit Limit of Rs.10.00 Lac to Rs.200.00Lac.

CRG-03

Risk Grading of Borrower accounts (with existing units/project) having

Aggregate Credit Limit above Rs.200.00Lac.

CRG-04

Risk Grading of Borrower accounts (with New units/ project) having

Aggregate Credit Limit of Rs.10.00 Lac and above but excluding SSI & SME
with Rs 1.00 crore or more limit/service sector/ FIs etc which are covered in
CRG5 to CRG 7 Modules.

CRG-05

Risk Grading of Borrower Accounts with 10 Lakh & above aggregate credit
limit falling under following categories:
Service Sectors (Railway, Air Way, State Road Transport Corp, Transport
Business, Nursing Home, Amusement Park Hospital etc)
Municipality Or Corporation/Development Authority

CRG-06

Risk Grading of Borrower Accounts with 10 Lakh & above aggregate credit
limit falling under following categories:
NBFC / Financial Institution
Intermediaries engaged in lending activities (like lending for Project,
Infrastructural Development, and Housing.)
Financial Corporation like IRFC

CRG-7A

For Risk Grading of borrowers under SSI/SME category (existing accounts)

with credit limit of Rs 1.00 crore & above

CRG-7B

For Risk Grading of borrowers under SSI/SME category (new connection)

with credit limit of Rs 1.00 crore & above

25

CRG- 7(C):

For advances under MSME segment upto Rs.10.00 lacs including transport
operators under All Bank-Commercial Vehicle Scheme.

CRG-7(D)

For advances above Rs.10.00 lacs (borrowers with first time projects)
including transport operators under All Bank-Commercial Vehicle Scheme.

In case of any loan facility under All Bank Property & All Bank Rent, if extended to the
company/firm, the risk rating of the said proposals will based on the latest audited financials &
activity of the company/firm for exposure of Rs.10.00 lacs & above and will not be done as per
CRG-1.However, schematic lending like PMRY, SGSY etc. will continue to be covered
under thumb rule guidelines of CRG-01.

The three stage process in case of RAM & CRG-2 to CRG-7 modules are as under:
(a) Rating Modules helps isolate risk elements using a top-down approach. The user is required
to score the company on risk factors only (which are automatically built up stage by stage into
the final grading).
Stage I

The user scores each risk factor.Various Risk Factors/Parameters within

various Risk Category (i.eIndustry/Activity Risk, Business Risk, Financial
Risk, Management Risk,Operational Aspects etc) will be scored on six
point scales (6 being the highest score and 1 is the lowest score, However,
different scoring system has also been incorporated in some parameters
under various CRG modules.Scale gradation will vary depending on the
borrowers profile

Stage II

The risk factors are aggregated to arrive at the grading for each
parameter.Scores under various Risk Factors of each parameter will be
aggregated to arrive at the grading/scores of each Risk category.

Stage III

The scores for risk parameters are further aggregated to arrive at a grading
for a risk category. Finally the overall grading is a result of the aggregation
of the different risk category scores.The final aggregated scores vis-a-vis
Risk Grade (which is on eight point scale) is given in point no 5.While
aggregating the scores of various Risk Categories, a weightage as below
will be assigned to arrive at the final score in various modules to be used
for grading:

26

CRISILS

Industry/

Business

Financial

Management Operational

RAM*

Activity

CRG 2

15%

30%

40%

50%

nil

CRG3

20%

25%

35%

35%

nil

CRG4

20%

20%

35%

45%

nil

CRG5

20%

30%

30%

20%

nil

CRG6

15%

25%

40%

20%

Nil

CRG 7A

10%

10%

40%

20%

20%

CRG 7B

20%

15%

30%

35%

NIL

Aspects

6 Scoring Norms for overall Risk Gradation & the Grade Definitions:
6.1 All Standard Assets will be graded between AB1 to AB7 depending upon scores obtained
whereas all NPAs will be graded as AB8. Various categories of NPAs, VIZ- SST, DT & Loss will
further be subcategorized as AB8A, AB8B & AB8C respectively.
6.2 The Aggregate Score for all Risk Categories vis a vis Grades to be assigned as per existing
Norms for CRISILS RAM & CRG2 to CRG 7 Modules is give:

Grade

Risk Nature

Scores under
Scores under
CRISILS
CRG-2 to 5 &
RAM(Out of 6) CRG7A/7B(Out of
100)

Scores
UnderCRG-6
(Out of 100)

AB-1

Very Low

5.10-6.00

Above 90

Above 90

AB-2

Low

Below 5.10 &

up to 4.40

Above 80 & Up Above 80 & Up

to 90
to 90

AB-3

Moderately

Below 4.40 &

Above 70 &

Above 70 &

Low

up to 3.80

Up to 80

Up to 80
27

AB-4

AB-5

AB-6

AB-7

AB-8

Fair

Moderate

High

Very High

Default

Below 3.80 &

Above 60 &

Above 60 &

up to 3.40

Up to 70

Up to 70

Below 3.40 &

Above 50 &

Above 55 &

up to 3.00

Up to 60

Up to 60

Below 3.00 &

Above 40 &

Above 50 &

up to 2.50

Up to 50

Up to 55

Below 2.50 &

Above 35 &

Above 45 &

up to 1.75

Up to 40

Up to 50

Below1.75

35 or Below

45 or Below

Risk Grade Definition:

Overall Weighted
Risk

Risk Grade Description

Grade

Score Range
5.10 - 6.00

AB 1

The fundamentally strong debt servicing capacity of such

companies is more unlikely to be adversely affected by
changes in circumstances.

4.40 - 5.10

AB 2

Adverse business conditions are unlikely to affect

debtservicing capacity. Such companies differ in safety from
those in Grade 1 only marginally.

3.80 - 4.40

AB 3

Changes in circumstances are more likely to affect debt

servicing capacity than for higher grades.

3.40 - 3.80

AB 4

While such companies are less susceptible to default than those

in lower grades, uncertainties faced by them could adversely
affect debt servicing capacity.

3.00 - 3.40

AB 5

Uncertainties faced by issuer could lead to inadequatecapacity

to make timely debt repayments.

28

2.50 - 3.00

AB 6

Adverse business or economic conditions are likely to lead to

lack of ability or willingness to service debtobligations

1.75 - 2.50

AB 7

Timely payment of debt would continue only if favourable

circumstances continue

1.00 - 1.75

AB 8

Debt servicing capacity is in default and returns from this may

be realised only on reorganisation or liquidation.

29

CMA DATA
In order to assess the requirements of working capital on the basis of production needs, it is
necessary to get the data from the borrowers regarding their past/projected sales, cost of
production, cost of sales, operating profit, etc. In order to ascertain the financial position of the
borrowers and the amoun of working capital needs to be financed by banks, it is necessary to call
for the data from the borrowers regarding their networth, long term liabilities, fixed assets,
current assets etc. A separate of forms has been designed for traders and merchant exporters.
The CMA data are used for collecting various information/data from the borrowers cover
following six forms;FORM-1(Particular of the existing/proposed limits from the banking system)
Particular of the existing credit from the entire banking system as also the term loan facilities
availed from the term lending institutions/banks is furnished in this form. Maximum and
minimum utilization of the limits during the last 12 months and outstanding balances as on a
recent date are used for comparison with the limits now registered for.
FORM II (operating statement)
The data relating to gross sales, net sales, cost of raw materials, power and fuel, direct labour,
depreciation, selling, general and administrative expenses, interest etc are furnished in this form.
It also covers information on operating profit and net profit after deducting total expenditure
from total sale proceeds.
FORM-III(Analysis of Balance sheet)
A complete analysis of various items of last two years balance sheet, current years estimates
and following years projection are given in the form. The details of current liabilities, term
liabilities, net worth, current assets, fixed assets and other non-current assets etc are given in this
form as per the classification accepted by the banks
FORM-IV( Comparative statement of current assets and current liabilities)
This form gives the details of various items of current assets and current liabilities as per the
classification accepted by the banks. The figures given in this form should tally with the figures
given in the form II. In caseof inventory (raw materials, consumable spares, stock-in-process and
finished goods) receivables and sundry creditors, the holding/ levels are given not only in
absolute amounts but also in terms of months so that a comparative study may be done with the
prescribed norms/past trends.

30

FORM- V(Computation of Maximum Permissible Bank Finance)

On the basis of the details of the current assets and current liabilities given in the FORM-IV,
MPBF is calculated in this form to find out the credit limits to be allowed to the borrowers.

FORM-VI( Funds flow statement)

In this form, funds flow of long term sources and users is given to indicate whether long term
funds are sufficient for meeting the long term requirements. In addition to long term sources and
uses, increase/decrease in current assets is also indicated in this form.

31

4.LITERATURE REVIEW
Credit Appraisal is a holistic exercise which starts from the time a prospective borrower walks
into the branch and culminates in credit delivery and monitoring with the objective of ensuring
and maintaining the quality of lending and managing credit risk within acceptable limits.
There are two types of proposals that are received by the Bank for funds. The first types of
proposals are for starting a new project for setting up a new company, also known as project
financing and other proposals are for additional funds requirements (working capital). Financial
requirements for Project Finance and Working Capital purposes are taken care of at the Credit
Department. Companies that intend to seek credit facilities approach the bank primarily; credit is
required for following purposes:
Working Capital finance
Term loan
Non fund based limits like letter of Guarantee, letter of credit.
Prior to nationalization the bank had a security centric approach for sanctioning the proposals i.e
the bank sanctioned the proposal for credit facility to the company when it had security against
the amount given. There are two types of securities primary and collateral. The primary security
is the asset created out of the Bank's Finance. Collateral security refers to other assets owned by
the company or its directors. Previously there were no regulatory issues or capital adequacy
issues. But it was observed that during boom period many people who did not even had the
knowledge about a particular industry jumped in and were interested for finance. Eventually such
companies resulted to be failures. RBI norms for non-performing asset (NPA) are very strict.
Thus to avoid many of the accounts becoming NPA the banks changed its security centric
approach.
The process of credit appraisal begin with the selection of the proponent. It would involve
appraising the background of the proponent/management, commercial, technical and financial
appraisal. Appraisal of credit facilities would comprise two distinct segments
a) Appraising the acceptability of the customer.
b) Assessment of the customer's credit needs.

32

The various aspects are:

1. Background of the proponent/management
The identification of the borrower is done properly through scrutiny of his antecedents,
experience, competence, integrity etc. This may be done by obtaining status reports from
previous bankers or meaningful assessment of his dealings with the bank, if banking with it.In
case of corporate, the management structure, the background of top management, needs to be
scrutined

2. Economic and Financial Appraisal

The aspects needs to b analyzed under this head should include cost of the project and
means of financing, cost of production, break even analysis, balance sheet and profitability
projections, and fund flow statements.
i)

Cost of project
It includes land and building, plant and machinery, preliminary expenses, pre-operative
expenses(salary, insurance, etc), capital issue expenses, etc.

ii)

Means of finance
The cost of project can be financed through the following means-capital from
promoters and shareholders, unsecured long term loans and deposits raised from, term loans
from bank, deferred term credits by suppliers of plant and machinery, subsidies and development
loans ,etc.
iii) Profitability projection
The profitability projections should be prepared based on assumptions which are realisticneither optimistic nor pessimistic. Projections are worked out for a period covering the
repayment of loans. The appraisal of the projections should cover scrutiny of various items of
revenue and cost to ensure that these are achievable. While preparing profitability projections,
the past trends of performance in industry and other environmental factors influencing the cost
and revenue items should also be considered objectively.

iv) Break even Analysis

Analysis of breakeven point of a business enterprise would help in knowing the level of ouput or
sales at which would break-even, I.e there is neither profit nor loss. The break-even analysis can
help in making vital decisions relating to fixation of selling price, make or buy decision,
maximising production of the item giving higher contribution etc.
33

v) Fund- flow statement

A fund-flow statement is often described as a working capital flow statement.It is derived by
comparing the balance sheets on two specified dates and finding out the net changes in the vrious
items appearing in the balance sheets.
A critical analysis of the statement shows the various changes in sources and applications of
funds and to ultimately provide the position of net funds available with the business for
repayment of the loans.

vi) Balance Sheet projection

Study of projected balance sheet statement provides the position of assets and liabilities of a unit
at a particular time. An appraisal of the projected balance sheet data would reveal whether the
concern is healthy, growing and has a promising future or is stagnating.

vii) Financial Ratios:

While analysing the financial aspects of project,the financial ratios should be analysed over a
period of time as it would tell us a lot about a unit's liquidity position, management's stake in the
business capacity to service the debts etc. the financial ratios which are considered important
may include debt-service coverage ratio, debt-equity ratio, current ratio,net profit to sales
ratio,etc.

Where higher limits are considered, detailed analysis of the financial health would be made and
the following ratios computed
I) Current ratio
This ratio indicates the solvency of the company to meet the liabilities, which are due for
payment within the next 12 months from out of the current assets. The benchmark is
1.33:1

II) Debt-equity ratio

This ratio reflects the financial soundness and the solvency of the company. Lower the
ratio indicates the high degree of solvency and higher the ratio indicates the
over extended financial position of the company. The benchmark is 3:1.
34

III) Funded debt ratio

This ratio is calculated by dividing the long term loans with the tangible net worth of the
company. This ratio reflects the financial soundness and the solvency of the company.
IV) Debt Service Coverage Ratio
This ratio is calculated by dividing the cash accruals with the term loan obligation, which
falls due during the accounting period. This ratio will enable the term lending institutions
to evaluate the viability of the proposals and determine the period of the term loan and
also to fix up a suitable repayment schedule depending on the cash accruals during the
tenor of the term loan. Normally, the minimum average DSCR of 1.5:1 is considered
desirable while considering the term loan to any corporate.

Normally current ratio and debt equity ratio are relied for the working capital assessment and
the funded debt ratio and debt service coverage ratio are relied for the project appraisals.

V) Capacity utilization to installed capacity ratio

This ratio will indicate the following:
Extend of the capacity utilization.
Whether the growth in sales is on account of increase in the production or increase in the
selling price per unit of production or increase in the production and decrease in the selling price
per unit of production and vice versa.
Future capacity expansion can always be subjected to a closer scrutiny in the event of any
increase in fixed assets being reflected in the CMA.

VI) Closing stock of raw materials to raw materials consumed ratio:This ratio will compare the extent of raw materials holding as closing stock with
reference to the raw materials consumed during the accounting year. This ratio will
indicate how many times the raw materials have been turned over during the accounting
period.

35

VII) Total Assets to net worth ratio:

This ratio will indicate the extent to which the owned funds are invested in building up
the assets of the corporate. A low ratio indicates the lesser dependence on the outside
borrowings and plough back of cash accruals into the system and the vice versa

VIII) Cost of production to net sales ratio:

This ratio will indicate the operating efficiency of the corporate and the increasing ratio
will indicate the inability of the corporate to pass on the rising cost of inputs to the end
users of the product. This will indicate the falling/rising profit margin of a corporate,
which will put the lenders on guard while making further financial commitments to the
corporate.
IX) Interest to total borrowings
This ratio will indicate the average cost of the funds borrowed by the company to run its
business.
X) Net sales to total current assets ratio
This will indicate the number of times the company has been able to turn over the total
working capital employed by the company if the ratio goes beyond 8, there is possibility of
corporate indulging in over trading.
XI) Interest coverage ratio(pbt/interest)
This ratio will indicate the ability of the corporate to service the interest on the loan taken
from the lenders. If the ratio is increasing, it gives an indication that corporate is
generating sufficient profit to service the interest on loans borrowed. It will increase the
comfort level of the lenders in taking higher exposure to the corporate.
XII)Net sales to bank borrowing ratio:
This ratio will indicate whether the increase in the bank borrowings is proportionate to the
increase in the sales.

36

XIII) Net profit margin (pbt/net sales)

This ratio will indicate the profitability of the corporate in relation to the volume of the
sales achieved. Even though the profit of the corporate in absolute terms may be
increasing but in terms of percentage to sales it may be shrinking.

3. Appraisal of market demand and potentiality

The market demand and potential need to be examined for each product item after taking
into account the demand/supply position, availability of substitutes, selling price,
discount structure, arrangement for after sales service etc. the main aspects to be critically
analysed under this head may include the following:
-size of the market based on present/expected demand and supply position.
-position of competitors.
-buy back arrangement.
4. Appraisal of technical aspects
The appraisal of technical aspects of a project should cover the technology to be used and
how far it s successful. The important aspects requiring examination should cover the
following:
-products or the services
-location of unit indicating advantages and disadvantages, availability of infrastructural
facilities, concessions available from the govt.
-Size of land and building
-availability of technology and process of manufacture
-Capacity of the plant/machinery, price, market report on the suppliers' credentials and
the performance of the machines.
-Specification of raw material needed, sources of supply, avail position,transporation
costs.

37

5. Appraisal of management and organization project.

The identification of the borrower is done properly through scrutiny of his antecedents,
experience, competence, integrity etc. This may be done by obtaining status reports from
previous bankers or meaningful assessment of his dealings with the bank, if banking with
it.In case of corporate, the management structure, the background of top management,
needs to be scrutined .
6. Post-sanction supervision and follow-up
Post sanction supervision and follow-up of loan accounts in banks has assumed a lot of
Significance as it helps in keeping a close watch on their performance and for initiating
timely correction action. Main objective of the post-sanction supervision is to ensure that
the project financed is successfully implemented. Some of the important goals of
Monitoring is as under:
1. Periodical monitoring of the actual performance of assisted constituents vis-s-vis
projections accepted at the time of appraisal of credit facilities viz. Sales, operating
profits, inventory and debtor levels, cash flow etc.
2. Identifying and evaluating temporary aberrations coming in the way of smooth
functioning of the assisted company for timely restructuring.
3. Interacting regularly with the borrowers and guarantors through timely inspection in
order to ascertain- borrowers' stake and interest in the day to day operations, the
production level, inventory level, etc.
Understand the financial problems of the assisted companies without delay and to assist
on regular or ad-hoc basis after evaluating the same on merits; If banks funds are put to
productive use.
The system adopted by the bank for follow-up of the loan accounts having working capital
limits of Rs.50 lakhs and above is as advised by the RBI. The system is popularly known as
quarterly information system(QIS) which the following three formats have been prescribed for
collecting information.
Form-1(quarterly): projected level of sales, production,current assets and current liabilities
Form-2 (quarterly): comparison of projection of the previous quarter with the actual figures in
respect of production, sales and position of current assets and current liabilities.

38

Form-3(half yearly):operational and financial information in respect of sales,cost of goods sold,

profit/loss,position with regard to inflow and outflow of funds

MEANS OF FINANCE:

Assessment of working capital

working capital is required to sustain day to day functioning of any industrial unit. Various
inflows & outflows of cash constitute the working capital cycle(as depicted below) of the
company. Banks finance for this requirement of working capital ensuring a minimum margin that
is to be arranged by borrower himself. Banks with their various products ensure that the working
capital cycle of the company goes smoothly and a potentially good unit should not face any
problem just because of absorption of cash in the working capital cycle as inventories or
receivables.

A unit needs working capital funds mainly to carry current assets requires for its
operations.Inadequate levels of working capital may result in under-utilisation of capacity and
serious financial difficulties. Reserve bank has decided in April, 1997 to withdraw the
prescription in regard to assessment of working capital need based on the concepts of MPBF
enunciated by Tandon Study Group. Banks are also advised to lay down through their boards,
transparent policy and guidelines for credit dispensation in respect of each broad category of
economic activity.

The three methods are a) Turnover method

b )MPBF method based on inventory and receivables holding levels
c) Cash budget method

39

A) Turnover method:

This is applicable to all borrowers enjoying fund-based working capital credit limits up to and
inclusive of Rs. 5 Crore with the banking system. Under this method, the working capital
requirements of the borrower will be computed at 25% of the projected annual turnover of which
atleast four-fifth I.e. 20% of the projected annual turnover should be provided by the bank as
working capital finance and balance 5% of the projected annual turnover should be contributed
by the borrower, as his margin towards working capital. It is followed when the
business/production cycle is shorter and actual drawing power should be allowed on the basis of
drawing power after excluding unpaid stocks.

Checklist of Mandatory Information

1. Working capital facilities of less than Rs. 10.00lacs-

Audited/unaudited financial statements for last 3 years. In their absence, data on

performance during past 3 years like sales, gross profit, net profit etc may be accepted.
Copies of sales tax, returns/declaration/assessment orders, wherever applicable, in
support of performance data.
Projections of sales gross profit and net profit for the current year.
2. Working Capital Facilities upto Rs.5.00 cr(SME)
audited financial Statements
sales projection
CMA data to be taken only
3. Working capital facilities of Rs.5 crore and above\
audited financial Statements
full set of CMA data forms
40

 cash flow statements

Borrowers having working capital limits (fund based) above Rs.5.00 crores from the banking
system may be given the option to choose between(a) the existing system of lending based on
holding level of inventory/receivables and (b) the Cash Budget System of lending. The decision
to allow the borrower to switch over to Cash Budget Systems of assessment would rest with the
bank.

B) MPBF Method

A directed credit approach was adopted by the Reserve Bank of ensuring the flow of credit to the
priority sector for fulfillment of the growth objectives laid down by the planners. Various
committee such as the Tandon committee and the Chore committee were constituted and studied
the problem at length. Norms were fixed regarding the quantum of various current assets for
different industries(as multiples of the average daily output) and the Maximum Permissible Bank
Finance(MPBF) was capped at certain percentage of working capital requirement thus arrived at.

Working Capital assessment formula prescribed by the Tandon Committee is as under:

Working Capital Requirement (WCR)= Current Assets(CA)- Current Liabilities(CL)

Permissible Bank Financing (PBF)=WCR- Promoter's Margin Money i.e PMM(to be brought in
by borrower/promoter).

As per MPBF 1:PMM= 25%of WCR and thereby PBF=75% og WCR

As per MPBF 2:PMM= 25%of CA and thereby PBF=75% of (CA)-CL.

The MPBF limit under fund based is fixed on an annual basis. However, since such limits is
provided to meet specific requirements, utilizing the limits is subjected to the DP(drawing
power),which is decided on a monthly/quarterly basis.
41

The effective bank financing is to the extent of lower of:

I) Bank Financing Limit: Determined on an annual basis based on an assessment of the

current year's projections and the actual figures for the previous years.
II) Drawing power : it is linked to the quantum of current assets(and current liabilities)
owned by the business with appropriate margins. Fixed on a monthly/quarterly basis
depending on the monthly/quarterly information system returns indicating the position of
the stock statement, receivables, work-in progress, payables, etc.
COMPUTATION OF DRAWING POWER:
The following shall be the methodology for computing the drawing limit in respect of
finance against:
i)

Inventories

Total inventory(excluding non usable, non moving, slow moving stocks

(period to be specified)
Less: Unpaid stock(on account of sundry creditors for purchases, advance
payment guarantees/ suppliers credit etc,) and stock hypothecated to any
other facilities
Value of paid stock (A-B)
Less: Stipulated margin on stocks as per sanction
DP/DL on stocks (C-D)

A
B

C
D
E

ii) Book debts

Total amount of inland credit sales(debtors) not exceeding the period
permitted by the sanctioning authority
Less: Value of Bills discounted by the bank /factors duly adding back the
margin (on the date of stock statement) & advance received against supplies
Net bills receivables/ debtors unfinanced by the Bank/ factors (F-G)
Less: Stipulated margin on book debts as per sanction
DP/ DL on Book Debts(H-I) or stipulated sub limit under book debt
whichever is lower

F
G
H
I
J

42

The total drawing power/drawing limit against stocks and book debts shall be E+J or sanctioned
limit whichever is lower:

TREATMENT OF UNPAID STOCKS

Normally drawing limit shall be computed as above wherein the entire creditors on account of
goods/raw materials are deducted from stock value to determine drawing limit. In exceptional
cases, based on the merits thereof, drawing limit may be determined without excluding sundry
creditors for goods as stater here under:
i)sundry creditors for goods up-to the levels projected/accepted while arriving at
MPBF need not be deducted from stock value to determine drawing limit.
ii) if the sundry creditors for goods are over and above the accepted level, then to the
extent of such difference in the amount, may be deducted from stockvalue to
determine drawing limit.
CASH BUDGET SYSTEM
Customers enjoying working capital limits in excess of Rs 10 crores will be given option to
adopt cash budgeting method at the dicretion of the bank. In case such borrower choose the cash
budget system of lending, they have to satisfy the bank that they have necessary infrastructure in
place to submit the required information periodoically in time. The scope of internal MIS should
be satisfactory and commensurate with the level of operations. The borrower mus have a finance
professional and computerized environment
1. Under this method the peak level cash deficit will be the level of total working capital
finance to be extended to the borrower by the banking system. The peak level cash
deficit will be ascertained from the projected cash budget statement submitted by the
borrower. The cash budget statement would be comprised of projected receipts and
payments for the next 12 months on account ofBusiness operations
A. Non-business operations
B. Cash flow frm capital accounts
C. Sundry items
D. Checklist of mandatory information:
i)

Projected Cash Budget Statement(annual)

ii)

Projected cash flow for next quarter(at least a week in advance)

43

iii)

Quarterly summary of cash book pertaining to previous quarter(actual)

certified by a Chartered accountant within 2 weeks of the close of the
quarter

iv)

Monthly selected operational data

Actual quarterly cash flow statement duly certified by a Chartered accountant should be
compared with the projected cash flow statement for the relevant quarter submitted by the
borrower earlier. The borrower should properly explain any inconsistencies between the
projected and actual cash flow. Where it is found that actual cash deficit is lower than the
borrower has not used the advance for approved purpose. Such cases should be handled with
circumspection.
Term loan Assessment
a. In case of term loan, Debt Equity Ratio(DER) should not normally be above 3:1. However, in
case of capital intensive industries, the same may be considered 5.00:1.
b. In case of Term Loan , minimum average DSCR of 1.30:1 will be considered as reasonable
requirement for any New Connection, relaxation may however be considered on merit of the
case by the sanctioning authority not below the rank of Zonal Head.
c. Apart from calculating Debt Service Coverage Ratio(DSCR), it is suggested to observe the
expected cash surplus i.e. the cushion available as detailed in the format. The projected closing
cash balance at the end of each year must be at least 50% of the proposed repayment of the
installment of the term liabilities for the respective year.
d.Moratorium period depending on requirement of the project/ proposal will be considered.
e. The existing moratorium period may be extended further six months in respect of loans availed
by MSMEs where project implementation has been delayed in the current scenario.

NON-FUNDED BASED CREDIT FROM BANKS AND FIS

Credit facilities, which do not involve actual deployment of funds by banks but help the
obligations to obtain certain facilities from third parties, are termed as non-fund based facilities.
These facilities include issuance of letter of credit, issuance of guarantees, which can be
performance guarantee/financial guarantee.
For its export financing purposes as well as for supplying and erection of transmission it mainly
uses non fund based working capital i.e
44

Letter of credit
A letter of credit, often abbreviated as an LOC or LC, and also referred to as a documentary
credit, is a document issued by a financial institution or any bank which essentially acts as an
irrevocable guarantee of payment to a beneficiary. This means, that once the beneficiary has
presented to the issuing or negotiating bank documents complying with the LC terms, the bank is
obliged to pay irrespective of any instructions of the applicant to the contrary. In other words, the
obligation to pay is shifted from the applicant to the LC issuing bank. The LC can also be the
source of payment for a transaction, meaning that an exporter will get paid by redeeming the
letter of credit. Letters of credit are used now-a days almost exclusively in international trade
transactions of significant value, for deals between a supplier in one country and a wholesale
customer in another.
The parties to a letter of credit are usually a beneficiary who is to receive the money(seller), the
issuing bank of whom the applicant is a client, and the advising bank of whom the beneficiary is
a client. Since now-a-days almost all letters of credit are irrevocable, the applicant is not a party
to the letter of credit.
Bank Guarantee
A bank guarantee means the guarantee from a lending institution ensuring that the liabilities of a
debtor will be met. A letter of credit is a written promise issued by the bank to compensate(pay a
sum of money) to the beneficiary(third party, local or foreign) in the event that the
obligor(customer) falls to honor its obligations in accordance with the term and conditions of the
guarantee/agreement/ contract. In other words, if the debtor falls to settle a debt, the bank will
cover it.
Elements of guarantee:
There are no standard international regulations for Guarantees, so guarantees may be
worded freely, depending on individual requirements. However, Guarantees should at
least contain the following clauses:
i)An introduction referring to the key elements of the underlying transactions.
ii)An abstract undertaking according to which Guaranteeing Bank promises to pay the
Guarantee amount upon receipt of the first written demand from the beneficiary
iii)A clause specifying the expiry date by which any claim amount must have been
received by the bank indicating specific calendar date or a statement that the validity of
the Guarantee is unlimited.

45

VARIOUS TYPES OF WORKING CAPITAL FACILITIES

Working capital finance is extended in different forms based on the requirements as
follows:

I)

Fund Based
a) Open cash Credit
b) Over draft
c) Book Debts
d) Bills purchased/discounted
e) Working capital demand loan

II)

Non- fund based

a) Letter of credit
b) Letter of comfort
c) Bank guarantee

46

5.RESEARCH AND METHODOLOGY

a) Primary data
i) Discussions with the personnel of credit department of the branch.
ii) Borrowers file
b) Secondary data
i) Various published sources like banks policy.
ii) Allahabad Bank and RBI website
iii)Ministry of MSME website
DATA PROCESSING
Required data has been collected from different sources, processing and analysis of the same has
been done to reach at the conclusions and to suggest certain recommendation for future
prospects.
SAMPLE OF BORROWERS FILES USED IN STUDY:
For the purpose of study a sample borrower file of Dekeem Engineering of MSME sector were
selected for the study of credit appraisal, Working capital assessment and a file of M/s Sardaye
Spice Mill for term loan assessment

47

5.ANALYSIS AND RESULTS & INTERPRETATION

1.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 ranges of services. The leading
industries with their respective shares are depicted as below:

It is well known that the MSME Sector provide the maximum opportunities for both selfemployed and jobs after agriculture.

48

2) The number of enterprise in MSME sector is depicted as below:

2. The number of employment in MSME sector is depicted below:

49

3. The fixed investment in MSME sector is depicted as below:

4. The gross output in MSME sector is depicted a below:

50

ANALYSIS OF THE CASE:

1. Case study : CREDIT APPRAISAL OF DEKEM ENGINEERING PVT. LTD
BACKGROUND:
Dekem Engineering Pvt. Ltd. started business under the promoter Mr. D.K. Mukherjee in the
year 2005 manufacturing battery chargers. Initially the company started operating as an ancillary
unit of Caldyne Automatics Ltd.(a subsidiary of Exide Industries Ltd.) and now the company has
embarked upon a massive expansion business and started venturing into new areas like
Distribution Transformers.
The company has been chosen as global vendor by ABB limited and they have placed order on
us for their projects in Vietnam, Thailand, Nepal & Bangladesh. They are also approved vendor
by SAIL, Bokaro for one of their turnkey project for construction of battery & Charger room,
Electrification and supply of Battery & Chargers. The value of the project is around Rs. 1.5
crores.
SHAREHOLDING PATTERN
Dipti Kumar Mukherjee- 5000.00 shares
Others- 5000.00 shares
DIRECTORS PROFILE
1

Shri Udayan Mukherjee (age 57 years)

Science graduate and Cost Accountant and having 35 years experience in this segment. For about
28 years used to look after Production, Marketing and Finance operation of Caldyne Automatics
Ltd. A group company of Exide Industries Limited. Resigned from the post of Director and
C.E.O in the year 2007 and started up Dekem Engineering Pvt. Ltd.
2

SMT. Monami Mukherjee (age 38 years)

Graduate Electronics & Telecommunication Engineer and having 20 years experience in this
segment. Was employed with Caldyne Automatic Limited, a group company of Exide industries
Limited and used to look after Design and Marketing. Resigned from Caldyne from the post of
Chief designer in the year 2007 and started her own business Dekem Engineering Pvt. Ltd.
Presently looking after the Design, production and marketing activity of the organization.
Monami Mukherjee is the holder for 1st prize from Federation for Small Industries Corporation
as Lady Entrepreneur, in the year 2012. She is having the thorough knowledge of the products
Dekem Engineering is dealing with.

51

Dipti Kumar Mukherjee( age 68 years)

Having about 45 years experience in business field. Used to run his own business in
various field successfully last 45 years. Mr. Mukherjee is looking after day to day
administration and guiding us for smooth operation of the business.
PRODUCTS & SERVICES
Battery, Charger, Transformer, LT control Panel, AVR etc.
INDUSTRY SCENARIO
Presently, the Govt. of India has given thrust on power projects, infrastructure
development and supply of drinking water. Since our core area of business is Power
Sector, Metal Industries, Cement plants and Public Health Engineering Departments,
there are chances of considerable growth in the organization in coming years.
BORROWER PROFILE, FACILITY & SECURITY COVER:
1.1
1.2

Name of the
Account
Address:
Factory(s)

1.3

Administrative
office
Name of Directors

1.4

Constitution

1.5

Business Activity

1.6
1.7
1.8

Established on
Advance since
Risk Grading
(CRG-02)
Risk Weightage
Asset classification
Group
Any default in RBI

1.9
1.1
1.11
1.1

Dekem Engineering
Pvt. Ltd.
14, Sonapur Road.
Kolkata -700088
14, Sonapur Road.
Kolkata -700088
1. Shri Udayan
Mukherjee
2.
SMT. Monami
Mukherjee 3. Dipti
Kumar Mukherjee
Private Limited
Company
Manufacture of
n=battery chargers,
transformers,etc.
23/11/2005
2005
AB-4
100%
Standard
NA
no
52

list
1.13
Consortium/ Multiple
banking arranagemnet
1.14
CC limit
1.15
ROI
PRESENT PROPOSITION:

solely with Allahabad bank

Rs. 50 lacs
BR+4.05%

Present proposal is for financial review and enhancement of existing cash credit limit from
Rs 85.00 lacs
DETAILS OF SECURITIES:
Particulars

Nature of charge

Date of
valuation

Value in(Rs
lac)

1. Primary
Hypothecation of fully paid up stock
and book debts upto 90 days

Hypothecation

31/03/2014

159.74

NA

NA

NA

2. Collateral
Under CGTMSE

III.

Balance Sheet

Year ended 31st March

2012

2013

2014

(Audited)

(Audited)

(Audited)

(` /lakh)
2015
2016
(Estimated
(Projected)
)
53

1.
1.1
1.1.
1
1.1.
2
1.2
1.3
1.4
1.5
2.
2.1
2.2
2.3
2.5
2.6
3.
3.1
3.2
3.3
3.4
3.5
4.
5.
6.
6.1
6.2
6.3
7.
7.1
7.2
7.3
7.4
7.5
7.6
7.7

II.

FIXED ASSETS
Gross Block
P&M
Others
Depreciation
Net Block
Capital work in progress
NET FIXED ASSETS
CURRENT ASSETS
Cash & Bank balance
Sundry Debtors
Misc. Current Assets
Inventory
TOTAL
CURRENT LIABILITIES
Loans & advances
Sundry Creditors
I) Provision for Taxation
II) Provision for Dividend
Misc. Current Liabilities
TOTAL
Net Current Assets
CURRENT RATIO
Investment & Non-C.As.
TOTAL
FINANCED BY :LONG TERM LOANS
Secured Loans
Unsecured Loans
SUB-TOTAL
SHARE HOLDER'S FUND
Equity Share Capital
Pref. Share Capital
Share Application Money
Reserve & Surplus
SUB-TOTAL
Intangible Assets
Tangible Net Worth
D/E Ratio
TOL/TNW

23.41

21.65

19.75

21.75

24.60

4.34

3.54

3.80

4.2

4.2

19.07

18.10

15.95

17.55

22.40

1.76
21.65
21.65

2.70
19.75
19.75

2.25
17.50
17.50

2.00
19.75
19.75

2.00
22.60
22.60

0.01
107.67
26.31
35.42
169.41

0.55
83.91
27.60
54.66
166.92

2.14
120.00
56.29
38.74
217.82

2.80
131.53
45.20
48.00
227.53

2.00
210.00
51.25
55.00
318.25

48.27
74.31
1.80
-

62.49
57.05
1.31
-

83.97
64.35
2.05
-

85.00
85.00
5.90

105.00
95.00
20.92

126.34
43.07
1.34:1
-

124.72
42.20
1.34:1
-

155.14
62.68
1.40:1
-

181.10
46.43
1.26

227.11
91.14
1.40

2.98
23.08
26.06

2.84
18.42
21.26

3.18
2.92
6.10

3.51
3.51

4.28
4.28

1.00
23.60
14.06
38.66

1.00
23.60
15.49
40.09

24.60
Nil
20.08
74.28

24.60
Nil
33.27
62.87

24.60
Nil
80.06
109.66

38.66
1.92
3.94

40.09
2.09
3.64

74.28
1.21
2.17

62.87
1.41
2.94

109.66
1.00
2.11

Profitability
(` /lacs)
2012

2013

2014

2015

2016

54

Year ended 31st March

1.
2.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
*
i.
ii
iii
iv.
v.
vi.

Gross sales
Growth
Net sales
Gross Profit
Gross Profit/Net sales (%)
Operating, Administrative,
Selling & General Expenses
Interest
Operating Profit
Non-operating surplus/Deficit
(+/-)*
Pre-Tax Profit/Loss
Provision for Taxation/Deferred
Taxation
Net Profit/Loss
Profit distributed through :
a) Equity Dividend
b) Preference Dividend
Retained Profit
Depreciation
Cash Generation
NON-OPERATING
SURPLUS/DEFICIT
Profit on sale of assets/
investments
Investments and Dividend
Forex gains
Non-op. income from
subsidiaries
Tax Refund
Other Non Operating Income
Total other income

(Audited
)
310.22
35.48%
310.22
54.11
17.44%

(Audited
)
222.29
(-)28.34%
222.29
40.34
18.15%

297.15

(Audited
)
414.45
46.36%
414.45
50.87
12.27%

212.36

(Estimate
d)
709.02
41.54%
709.02
73.84
10.41%

(Projected
)
1000.00
41.00%
1000.00
175.22
17.52%

677.72

907.04

399.36

7.93
5.14

7.19
2.74

8.44
6.64

12.19
19.09

25.25
67.71

5.14

3.11

6.41

17.10

1.80

1.31

2.05

5.90

20.92

3.34

1.43

4.59

13.19

46.79

1.76

2.70

2.25

2.00

2.00

16.22

16.29

21.32

31.05

35.00

ANALYSIS:
55

A)
Current
Ratio
Net Working
Capital

2012
1.34

2013
1.34

2014
1.40

2015
1.26

2016
1.40

43.07

42.20

62.68

46.43

91.14

Till 2014 the current ratio is above the mark i.e 1.33 but for the current(estimates)year
slightly less but for the projected year, it is satisfactory. So, an undertaking is taken by
the borrower that he will rectify the current year ratio.

Since in 2015(estimated year) the NWC is decreasing, thus, the company will be able
to meet its working capital requirement more from external capital. Hence it has
proposed to enhance its working capital limit.

B)
2012
48.27

Bank
Finance
Total
169.41
Current
Assets
Bank
finance/Total
Current
Assets
28.49%

2013
62.49

2014
83.97

2015
85.00

2016
105.00

166.92

217.82

227.53

318.25

37.44%

38.55%

37.36%

32.99%

The ratio signifies the amount of bank borrowing needed to fund its current assets. However, its
little high but comfortable and stable over the years.
C)
Inventory:
Total Current
Liabilities
Inventory/Tota

2012
35.42
126.34

2013
54.66
124.72

2014
38.74
155.14

2015
48.00
181.10

2016
55.00
227.11

28.04%

43.83%

24.97%

26.50%

24.22%
56

l Current
Liabilities
The amount of current liability needed to fund its inventory is decreasing after 2013 as the
finished tock decreased. However it again increases by 2015 as finished good will increase
leading to increase in longer operating cycle.
D)
Gross Profit
%

2012
17.44%

2013
18.15%

2014
12.27%

2015
10.41%

2016
17.52%

Gross Profit %
20.00%
15.00%
Gross Profit %
10.00%
5.00%
0.00%
2012

2013

2014

2015

2016

The gross profit over net sales has been estimated to be at its lowest in last four years due
to increase in cost of production. The borrower is asked to keep this parameter under control.

E)
Net Profit /
Loss

2012
3.34

2013
1.43

2014
4.59

2015
13.19

2016
46.79

57

Net Profit / Loss

50
45
40
35
30
25
20
15
10
5
0
2012

Net Profit / Loss

2013

2014

2015

2016

The net profit has increased over the years due to increase in sales. This is a positive sign on part
of the borrowing company.

DEKEM ENGINEERING PVT LTD

First Method of Lending
Year
1.
2.

Total Current Assets

Other Current Liabilities

Lacs

2012

2013

2014

2015

2016

169.41

166.92

217.82

227.53

318.25
58

3.
4.

5.
6.
7.
8.

9.

(other than
bank borrowings
Working Capital Gap
(WCG) (1-2)
Min. stipulated net working
capital:
(25% of WCG excluding
export receivables)
Actual / Projected net
working capital
Item-3 minus Item-4
Item-3 minus Item-5
Max. permissible bank
finance
(item-6 or 7, whichever is
lower)
Excess borrowings
representing
shortfall in NWC (4 - 5)

76.83

58.36

66.4

90.9

115.92

92.58

108.56

151.42

136.63

202.33

23.145

27.14

37.855

34.1575

50.5825

43.07

42.2

62.68

46.43

91.14

69.435
49.51

81.42
66.36

113.55
88.74

102.45
90.2

151.75
111.19

49.51

66.36

88.74

90.2

111.19

169.41

166.92

217.82

227.53

318.25

76.83

58.36

66.4

90.9

115.92

92.58

108.56

151.42

136.63

202.33

42.3525

41.73

54.455

56.8825

79.5625

42.2

62.68

46.43

91.14

Second Method of Lending

1.
2.
3.
4.

Total Current Assets

Other Current Liabilities
(other than
bank borrowings
Working Capital Gap
(WCG) (1-2)
Min. stipulated net working
capital:
(25% of total Current
Assets excluding
export receivables)

Actual / Projected net

working capital
5.

43.07

59

6.
7.

Item-3 minus Item-4

Item-3 minus Item-5
Max. permissible bank
finance
(item-6 or 7, whichever is
lower)
Excess borrowings
representing
shortfall in NWC (4 - 5)

8.

9.

50.2275
49.51

66.83
66.36

96.965
88.74

79.7475
90.2

122.76
111.19

49.51

66.36

88.74

79.7475

111.19

10.4525

2012

2013

2014

2015

2016

Holding period of Raw Materials (days)

Holding period of Consumable Stores &
Spares (days)

50

50

50

50

50

50

50

50

50

50

Holding period of Finished Goods (days)

Credit Period for Raw Materials &
Stores (days)

120

110

110

110

110

80

70

70

70

70

60

50

50

40

40

Credit Period for Expenses (days)

Sundry Debtors Holding Period

90
90
90
90
The holding period of raw materials is stable through out while holding period for finished goods
has decreased. But also the creditor period has decreased and this calls for more of working
capital.
COMPUTATION OF RISK GRADE(Based on audited balance sheet as on 31/3/2014
Sl.no Risk Category

A.
B.
C.
D.
E.

Financial Risk
Business Risk
Management Risk
Industry Risk
Total Marks

Maxm.
score

36
26
36
10
108

Eligible
score(x)

Score
obtained(y)

Risk
weight(%)
(z)

36
26
30
10

18
13
29
8

35
20
35
10
100

Risk
Adjusted
Score(y/x*z
)
17.50
10.00
33.83
8.00
69.33

Rating Awarded: AB-4 and Risk Nature :Fair

Department Views, Comments & Recommendations:
1

The company is promoted by technocrats as entrepreneurs and it has grown steadily with
the banks support.
60

90

The company is having credit facilities since 8 years with Allahabad Bank. The conduct
of the account is satisfactory till date.

The advance of the company falls under MSME- Industrial Sector and risk grading of the
account is AB-4.

The company is expecting the vendor approval from Tata Steel,Larsen & Tourbo Ltd,
Siemens limited so the expected turnover of Rs 709 lacs is acceptable.

It is recommended that the cash credit limit can be enhanced.

FINAL SANCTION & TERMS AND CONDITIONS:

Sl.no
1.
2.
3.
4.

Cash Credit
Limit
Interest
Margin
Primary Security

5.
6.

Collateral
Guarantor

Particulars
Rs. 85 lacs
BR+ 4.05%
25% on stocks and debtors upto 3 months
Hypothecation of stocks, debtors and other current assets
of the company, both future & current.
NA(covered under CGTSME
Sri. Udyan Mukherjee
Sri. Dipti Mukherjee
Smt Monami Mukherjee

Other terms and condition:

1. The documentation should be completed and legal audit will be obtained
2. The borrower should bring its contribution.
3. The stock statement should be submitted monthly.
4. The company should put a board of the bank near its premise
5.The company should maintain its current ratio of 1.33:1 and should give a declaration
of it.

2. CASE STUDY ON TERM LOAN SANCTION- M/S Ma Saradamayee Spice Mill

BACKGROUND:
61

Ms .Ma Saradmayee Spice Mill, a micro/ small scale industrial limit, registered with the
Department of Cottage and Small Scale Industries, having its registered office at P-42, Raipur
,Kolkata-84, West Bengal. The firm is a proprietorship concerned owned by Shri tushar Kanti
Sikdar, who had inherited the firm from his father Late Tarakeshwar Sikhdar.
The firm is engaged in the field of manufacturing, processing and packing of superior quality
spices in the form of grounded, whole and blended. The product range is marketed under the
brand nameMs Sarada.
The unique selling proposition of its grounded spice is that the brand Ms Sarada is certified by
Govt. of India and by the Govt. of West Bengal b the covet AGMARK which is the hallmark
of purity.
The firm was established 50 years ago by Late Tarakeshwar Sikdar, a highly knowledgeable and
respected person in the Spices Industry.
The firm had exported substantial quantity of its products to various countrt through Govt. of
India. It is enlisted and a regular supplier of its products in huge quantity to:
West Bengal Essential Supply and Corporation Ltd.
Wholesale Consumers Co-operative societies(samabaikas)
Government Hospitals, Hotels, Restaurants, etc.
The firm now plans to expand its business by making the products available to the mass by
distributing its products range through setting up Distribution network in every city and town of
west Bengal. The firm is confident in making the business expansion a success.
Business expansion would require an additional finance. Moreover, the price of whole spices
increased more than double during last two years. The firm present its expansion plan and
requirements of fund through this project report and makes its presentation to the financial
institution for sanction of Working Capital Loan under the CGTMSE for Small Industries.

Spice Market:
Spices play an important role in enhancing the flavor and taste of the processed foods. They are
also used in the medicines because of their carminative, simulative and digestive properties.
India produces almost all the known spices and is the largest exporter of this commodity. Ground
spices are extensively used in all types of curried dishes in India and abroad

Market Potential:

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India is one of the leading exporters of spices. The export earnings from spices can be increased
quite considerably if the export of spices is encouraged in processed form, which will bring more
value addition to the unit price, of whole spices. Further as it is a mass consumption item mostly
used in culinary preparations or seasoning of food products, its domestic demand is increasing
quite steadily due to improvement in purchasing power of people.
Process of Manufacture:
The process of manufacture involves cleaning, drying, pulverizing, sieving and packing of spices
such as chilli, pepper,turmeric,coriander etc. either individually or in combination with other
spices. There are various formulations for curry powder, but the ingredients like red chilli, black
pepper, cloves, coriander seed, cumin seed, fenugreek seed, ginger and turmeric are typically
common. The proportion and the inclusion of spices in a particular mix depends upon individual
manufacturers
Objective of the organization:
After 50 years of steady success in satisfying the consumers through quality product mainly to
the customers of the institutions, the promoter of the firm plans to expand its market of its
product through distributors network in the State of West Bengal at the intial stage and gradually
expand the marketing operation to the other state of Eastern region such as Assam,Jharkhand,
Orissa, etc.
Team of Professionals and background of the promoter:
The firm has designed a detail plan for this expanded operation and the unique part of this plan is
that it has engaged experienced and qualified professionals to head the following departments:
A. Production and Purchase Department
B. Sales and Marketing Department
C. Finance and Accounts Department
Mr. Tushar kanti Sikdar who had been assisting his father in this Business immediately after his
graduation, which is over 34 years has not only gained a practical hand on experience in
purchase and processing of spices but also a major theoretical knowledge from his father Late
Tarakeshwar Sikdar, who was considered then an Authority in spices.

PROPOSITION
The loan proposal was for loan limit as per details given below under MSME scheme:
1. C.C : Rs.12 lacs

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2;Term loan limit: Rs 3 .92lacs

RISK GRADING
Under CRG-02 module, the A/c is awarded as AB-4, i.e Fair Risk Nature
Assessment Of Term Loan Requirement
The company has made a request for sanction of termloan of Rs. 3 lac .to buy the
machines like pulvaisor, chakkin seaparator.
1. Cost of the project & means of finance:
The cost of project i.e plant and machionery is Rs. 4,90,000
The means of finance is term loan of Rs. 3,92,000 and margin(borrower contribution)
is Rs.1,02,000.
2. Status: the brand Ms Sarada is certified by Govt. of India and by the Govt. of West
Bengal b the covet AGMARK which is the hallmark of purity.
3. Projected financials
RS. IN LACS
Description
Profit After Tax
Add: Depriciation
Net Cash Accruals
Interest on term loan
Repayment of term loan
D.S.C.R(gross)

1st year
10.73
.54
11.27
0.39
1.30
6.89

2nd Year
15.03
.54
15.57
.25
1.30
10.20

3rd year
15.78
.54
16.32
.10
1.32
11.56

4th year
17.35
.54
17.89
-

5th year
20.92
.54
21.46
-

Average= 9.55
Comments:
The debt service coverage ratio(DSCR), also known as debt service coverage ratio,(DCR) is
the ratio of cash available for debt servicing to interest, principal and lease payments. It is a
popular benchmark used in the measurement of an entitys(person or corporation) ability to
produce enough cas to cover its debt(including lease) payments. The higher this ratio is , the
easier it is to obtain a loan.
Typically, most commercial banks require the ratio of 1.15-1.35 times (net operating income or
NOI/annual debt service) to ensure cash flow sufficient to cover loan payments is available on
ongoing basis. The company has its average DSCR much above the desired level from a banks
perspective to grant the term loan.

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4. Security: No security for term loan as covered under CGTSME

5. Department Comment and Views
The borrower is a well established firm which has exported its products through
Government of india and also did business through government supported institution
Sanction of fresh term loan of Rs. 3 .92 lacs for purchase of machinery with interest
BR+3.25% with total tenure of 3 years has been done on the following terms and
conditions
1. Principal should be paid in 36 equal monthly statement of rs .10 lac each commencing
from the following month of first disbursement. Interest to be served as and when debited
to the account.
2, The following are the documents to be submitted:
a) Copy of registration certificate with DIV/Shop & Establishment Act/VAT
b) Copy
of
latest
IT
returns
with
copies
of
PAN
card
of
firm/company/society/partner/director/guarantor/proprietor.
c) Audited balance sheet of the firm for last three years
d) Up to date financial performance supported by VAT Return.
e) Estimate of current year and projection of two years financial statements along with
CMA data.
f) The firm must confine its entire dealings with the bank only and will not make any
financial arrangement with any other Bank without the prior consent of the bank.
g) Nameplate of the Bank will be displayed in prominent places at the business site of
the borrowers.

7.CONCLUSIONS & RECOMMENDATION:

The following are some of the practical recommendations that may be appropriate for
adoption as they deemed fit.
A. STRATEGIES FOR EXPANSION OR DIVERSIFICATION OF APPROPRIATE
FINANCING FOR SME.
1. Improve outsearch of credit guarantee mechanism
In many of the countries with successful financing programmes (such as Japan, China,
Gerrnany), credit guarantee mechanism are a strong feature of the development
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framework. These guarantee schemes are usually well supported by government or

industry funds. In India, the Credit Guarantee Trust for Micro & Small Enterprises is
present which shoyld ensure wide availability of finance to those SME units lacking to
provide collaterals as security to the banks for getting finance. However, the benefit of
such schemes are not available to the SME sectors due to following reasons:
a)Lack of knowledge of the scheme on part of the borrower.
b)Lack of interest to finance the unit under CGTSME schemes by the borrower,
c) Not all banks are member of this trust.
Hence , Governments should look into improving the scope and outreach of their credit
guarantee schemes by increasing the exposure ceiling to be covered under the scheme
and to popularize the scheme by massive advertisement/campaign. Further, the credit
guarantee schemes could be made available to all institutions involved in SME financing.
One important element is that successful credit guarantee schemes require appropriate
risk sharing.
2. Develop alternative market for SME financing
The equity markets in India are well developed and provide depth & liquidity to its
play. However there is a need to develop the equity markets as alternative source of
fund for SME. The existing listing requirements of equity exchanges catering to
smaller companies are hardly SME-friendly.
Debt markets in India is not much that develop, hence also not available to SME as a
source of financing. Hence, governments should concentrate the efforts to sufficiently
develop these market and make these markets accessable to SME by offering liberal
norms.

B. STRATEGIES FOR INSTITUTIONAL STRENGHTENING OF FINANCIAL

INSTITUTIONS
1. Improve credit evaluation skill of bank officials
Although the feedback of most bank respondents is that bank credit officers have
understanding of SME and do not lack the requisite skills to evaluate SME, but
my discussion with the bank officials suggest that many credit officers do not
have required skills to evaluate the SME proposals,. Moreover, banks are more
stringent with SME on documentation requirements. For a start, there needs to be
a paradigm shift in the mindset SME have unique characteristic that
differentiates them from large established corporations.
2. Establish SME units in banks

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To encourage lending to the sector, banks(that are not specialized in SME

lending) could consider setting up an SME division/ department/ cell to,provide
specialized services to SME. Specially trained credit officers could staff uch a
unit.
3. Apply appropriate evaluation technique
Credit scoring can reduce default risk but if this will improve financing to SME
sector is debatable. Lack of information and weak financial capacities would still
inhibit SME from gaining access regardless of the technique used by
banks.Hence, my recommendation is for financial institutions to apply evaluation
techniques that are appropriate to their circumstances. In this regard, relationship
banking would seem to be more appropriate.
C. STRATEGIES FOR CHANGES TO THE LEGAL AND REGULATORY
ENVIRONMENT TO IMPROVE SME FINANCING
1. Consistent and legalized Classification of SME.
In India though the definitions of SME is consistent and well drafted in
MSMED Act 2006, however the classification of units, which are part of SME
is quite confusing because of frequent updation/deletion of activity under the
segment, which affect the improvement & effectiveness of developing &
financing programmes. If classification of the units under SME standardized
and legalized, this would facilitate better planning and targeting of sectors by
financial institution.
2. Provide incentives for banks to lend to SME
To provide greater SME lending, the regulatory authorities could consider
granting certain incentives to financial institutions that actively promote SME
financing and have achieved a sizeable SME loan book. To maintain
prudential banking standards, such incentives could be for a certain period of
time and in non-financial form, e.g. branching privileges, tax deductions, on
credit expenses etc.
D. SME INITIATIVES:
1. Quality of information: SMEs are required to provide accurate and
qualitative information to the banks for them to undertake a reliable risk
assessment. Accurate risk asseements rely upon good information
regarding the SME and its prospects. Hence it is suggested that banks
should make efforts to encourage SMEs to improve the quality of
information provided.

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2. Proper maintenance of Books of Accounts: SMEs should maintain the

proper books of accounts especially the tiny & micro units. This will
enable SME to provide the desired information to the bank.

8. SUGGESTION FOR FUTURE RESEARCH

Competition from other nationalized and private bank and FTs can be recognized by
collecting data and research can be done to analyze the competitive edge of the bank over
its peers(other public sector banks, private sector banks and other Financial institutional
for extending the credit facilities to SME borrowers/ firms)to enhance its business.
There is further scope of doing research as regard to the methodology( interviews of the
client, questionnaires etc) to be adopted by the research in order to understand the
hurdles, grievances, financial and technical feasibility from the borrowers perspective
and accordingly products can be designed in future for better growth of the sector.

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 Industry analysis by the credit rating agencies like ICRA, FITCH, CRISIL etc can be
done to look deeper into the industry perspective for better understanding of the industry,
financial outlook and product design.
The researcher can also look into the various aspects of SME performance and analysis,
the data in future as per next census, since most of present data is related to the census
pertain to year 2006-07, to find the improved condition of SME sector and status of the
credit flow to this sector at the point of time.

9. EXECUTIVE SUMMARY

It gave an opportunity to work on a project report on Working Capital Appraisal& Term Dept
Assessment practices followed in bank for MSME lending at the head office kolkata. The project
was carried out under the guidance of Mr. I.K Agarwal (Chief Manager) from 30 April,2013 to
22 june 2015.

India is home 26 million small enterprises that count for about 20% of the countrys GDP, While
small enterprises drive economic growth with their ability to innovate and employ in large
numbers, the biggest challenge faced by them is to access the finance. Despite the efforts of
ministry of small and medium enterprises, SIDBI and support of RBI by inclusion under priority
sector, there continues to be the huge demand-supply mismatch in small enterprises financing.
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My analysis consist of two cases: Working Capital assessment and Term loan Assessment, their
evaluation, analysis and sanction procedure.
The procedure of working capital assessment includes analyzing the promoters background,
scrutinizing the financials, industry scenario, risk grading and adopting one of the methods for
cash credit limits- here I have adopted the MPBF method in my case. The entire working capital
limit is comprised of Cash Credit.
Similarly the term loan assessment includes assessing the promoters background, industry
perspectives, analyzing the financial performances, risk grading and finally sanctioning of the
term loan.
I have also looked into the Credit Risk Grading Framework of the Bank-Internal Risk Grading
(CRG) and External Risk Grading by Rating institutes. The In-house developed Credit Risk
Grading (CRG) module of the bank mainly looks into four kinds of risks

Financial Risk
Business Risk
Management Risk
Industry Risk

There are 10 different sub-modules for different category of disbursement where CRG-7A,
CRG-7B, CRG-7C and different weights are given to each of four kinds of risks to come to the
grading of final proposal

10.BIBLIOGRAPHYBooks1. MANAGEMENT OF BANK LENDING 1 BY DR. V. S. KAVERI

2. HANDBOOK ON LENDING TO MICRO, SMALL & MEDIUM ENTERPRISES BY
D. P. SARDA
WEBSITES
1.
2.
3.
4.
5.
6.
7.

www.rbi.org.in
www.sbi.co.in
www.indianbankassociation.com
www.bankersindia.com
www.wikipedia.com
www.iibf.co.in
www.msme.gov.in
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