BFSM Case Analysis

By Ajay S D
B1851
 Loans for Fertilizer Distribution
The decision to approve or reject the loan is analyzed with the help of 5 C’s of Credit Assessment.
Under 5C’s of assessment the firm is analyzed on the following criterion.
 Character
 Capital
 Collateral
 Condition, and;
 Capacity

1. So, in case of Firm X.

Character: Limited or no information is provided on the past credit history of Firm X in the case
so it is difficult to come to a conclusion based on the information.
Capital: The firm has a net worth of 3,70,000 and it is said to be a partnership firm, since Limited
Liability Partnership is not specifically mentioned we can assume that it is unlimited liability so
the scope of repayment is more. But the applied amount of loan is about 60% of the total net worth
of the firm (60% of 3,70,000), which makes it a risky proposition, in terms of the bank. The details
of the other liabilities of the firm is also unavailable.
Collateral: In case of Firm X, the firm has agreed in terms of 25% margin on of 2,00,000 i.e. the
pledged stock and a hypothecation on the stock for the amount of 22,000. So, the collateral
amounts to 72,000 (which is 33% of the loan amount). It conforms to the scheme of distribution
of inputs which is 25% margin on stock.
Condition: The reason for the loan by firm X is to meet their working capital requirement which
in turn helps to expand their business. The firm expects to sell fertilizers worth 8 Lakhs. From past
data, it usually reaches a sale of 25,000 *12 = 3,00,000 per year. They require the loan to meet the
requirement of the extra 5,00,000.
Capacity:

area under cultivation average

baroda kaira N Dosage P dosage
rice 141207 193164 74 24
wheat 51441 149487 80 50
jowar 245823 78362 50 25
bajra 163354 474744 50 25
groundnut 349283 82464 18 38
cotton 715258 170334 75 38
 tobacco 1056419 156792 178 0
2722785 1305347 525 200
total area in acres 4028132
total area in hectres 1630127
Fertilizer requirement in KG 725
in Tonnes per hectre 0.725

total fertilizer requirement(in tonnes) 1181842

To find out Firms X’s share in total fertilizer requirement, we use its assumed revenue i.e Rs.
800,000.

assumed future revenue 800000

tonnes sold 846.5608
approx 847
cost 732655

Profit 67760
The assumption is that the selling Price of Fertilizer is 945 per tones and the cost price is 865 per
tones.
% share of firm x (future) 0.071668
i.e 847 tons out of 11, 81,842 tons
Remarks:
The application cannot be accepted due to the following reasons:
The firm is not in the capacity to repay the full amount of Rs. 2, 20,000 under the existing time
period, i.e. 6- 12 months after the fertilizer has been sold.
The loan amount is 60% of the total capital invested by the firm, and the detail about other
liabilities are also not provided.
There exist huge opportunities in the Fertilizer Market as the firm X which is appointed by
Fertilizer Corporation of India in Kaira and Baroda. But they are only having a share of 0.07% of
the total area under production. This leads us to the assumption that the consumption of the
fertilizer is much lesser than the area, so it requires awareness among farmers about the use of
fertilizers.
 2. Firm Y
Character: The firms has a book balance already in the bank, so it is in good relation with us. It
also has a healthy amount of accounts receivables and investments.
Capital: the firm Y is a Partnership Firm with unlimited liability (assumed) with a total asset of
Rs. 10,86,000, the loan application amount is Rs. 1,00,000, which is only 10% of the total asset.
The firm’s liquid cash balance is only Rs. 4,700.
Collateral: there is no mention about the collateral which they are ready to provide. But since it
is one of the mandatory stipulation of the bank a collateral must be agreed upon.
Condition: Firm X requires a Letter of Credit from the bank for intending fertilizer from Indian
Explosives Ltd. So the bank has to consider the possibility that in case of non-payment by firm
Y, it becomes the liability of the bank to pay on behalf of Y.
Capacity:

wholesale 705900
Semi Wholesale 217200
retail 162900
Sales 1086000

Amount of Tonnes Sold by Y Approx

wholesale 811.3793103 812
Semi Wholesale 244.0449438 245
retail 181 181
Total 1238

total Consumption 1942

% of sales of Y on total Consumption 64%
The firm is showing a healthy capacity to repay the loan as approximately 64% of the total
Production is in the hands of Firm Y. the overall consumption in both the staes are are showing a
rising trend. So the sales of the firm is also expected to rise.
Remarks:
The firm is eligible to be granted the loan of Rs 1,00,000. The amount is also small and the firm
is in a healthy position to earn the necessary profit and pay Indian Explosives Ltd. However the
stipulation on collateral is not met, it will be beneficial for the bank if the bank can negotiate
with the client and make the Firm agree to for some % of the collateral
Reference:
https://smeloan.sg/blog/business-loan-criteria-5cs-credit
http://www.allbankingsolutions.com/Banking-Tutor/Pledge-vs-Hypothecation-vs-Mortgage.html
http://blanker.org/letter-of-credit