Summer Internship Report

ON
CREDIT APPRAISAL AND CREDIT RISK
MANAGEMENT SYSTEM FOR SME IN AXIS
BANK

Submitted in partial fulfillment for the requirement of the

award of degree in Masters of commerce

Under the Guidance of:

Mr. Rajiv Kumar
(Deputy Manager)

PROJECT COORDINATOR : SUBMITTED BY :

Dr. Divya Sharma Ravneet kaur
(Faculty of Management Department ) Roll no - 45275
M.com – 2nd sem

DAV COLLEGE, SECTOR – 10, CHANDIGARH

1
 STUDENT DECLARATION

I, RAVNEET KAUR, a student of M.COM 2ND

SEMESTER, DAV college sector – 10, affiliated to
Panjab University hereby declare that all the information,
facts and findings furnished in this report are based on
my indigineous work and are original in nature. Any
literature, data, or work done by others and citied within
the dissertation has been given due acknowledgement.
This information is used purely for academic purposes.
Any resemblance to any other existing work is purely
coincidental.

DATE : NAME : RAVNEET KAUR

PLACE : CHANDIGARH ROLL NO : 45275

PROJECT COORDINATOR

2
 Acknowledgement

Gratitude is the hardest of emotion to express and often does

not find adequate ways to convey the entire one feels.

This formal piece of acknowledgment may not be sufficient to

express my feelings and deep respect that I had experienced
during my process of completion of this project of WORKING
CAPITAL MANAGEMNET WITH RESPECT TO AXIS BANK
Ltd. ( BRANCH – LANDRAN – KHARA ROAD,VILLAGE –
LANDRAN PUNJAB)). This endeavor would not have been
successful without the help and encouragement of lot of people
with whom I had good fortune of interacting during my course of
journey.

So, I take this opportunity to express a deep sense of gratitude

to my project supervisor MR. RAJIV KUMAR, Deputy Manager,
Axis Bank – Landran for his cordial support, valuable
information and guidance, which helped me in completing this
task through various stages.

I thank the H.O.D of commerce department Dr. SARIKA

MAHENDRU for providing me with such wonderful opportunity.

I take this opportunity to express my profound gratitude and

deep regard to my project coordinator Dr. DIVYA SHARMA, for
her exemplary guidance, monitoring and constant
encouragement throughout the course of this thesis.

I am obliged to staf f members of AXIS BANK, LANDRAN, for

the valuable information provided by them in the respective
fields. I am grateful for the cooperation during the period of my
report.
3
Lastly, I would also like to pay my sincere gratitude to my
family, friends and all other persons who encouraged and
guided me throughout the report.
PREFACE

There are always two sides of knowledge, practical as well as

theoretical. Practical is the path through which one can reach his

destination. But it is essential to have clear ideas to reach that

destination and that is what theoretical knowledge means. In short,

theoretical is the instruments which push back the practical one.

Experience makes man perfect. By facing practical situation, one can

get new ideas. Theoretical studies are something, which came by

practically. Management student can make use of whatever he or she

gets from his or her Academic background. Since, the commencement

of business and services importance hiked up day by day.

This project helped me to understand concept of credit appraisal and

how credit appraisal process is done in bank. I have tried to put my

best effort to complete this task on the basis of skill that I have

achieved during my study in the institute. I have tried to put my

maximum effort to get the accurate statistical data. However I would

appreciate if any mistakes are brought to me by the reader.

4
 EXECUTIVE SUMMARY

Banking can be defined as the network of institutions and law that

provide a great variety of financial services. At its most basic, banking

involves an institution holding money on behalf of customers that is

payable on demand, either by appearing at bank for withdrawal or by

issuing a check to the third party. The banking system also provides

loans to business and individuals. The banks also provide investment

and insurance services.

Axis Bank India, the first bank to begin operations as new private banks in 1994 after the
Government of India allowed new private banks to be established. Axis Bank was jointly
promoted by the Administrator of the specified undertaking of the
 Unit Trust of India (UTH)
 Life Insurance Corporation of India (LIC)
 General Insurance Corporation Ltd.
And other four PSU insurance companies, i.e. National Insurance Company Ltd., The New
India Assurance Company Ltd., The Oriental Insurance Company Ltd. and United India
Insurance Company Ltd. The Bank's Registered Office is at Ahmadabad and its Central
Office is located at Mumbai.

Growing percentage of Non Performing Assets is a big concern for

modern as well as traditional financial institutions. If credit appraisal

system is effective then certainly it will reflect positively on reducing

percentage of NPA’s.

5
Credit Appraisal is a process to ascertain the risks associated with the

extension of the credit facility. It is generally carried by the financial

institutions which are involved in providing financial funding to its

customers. Credit risk is a risk related to non repayment of the credit

obtained by the customer of a bank. Thus it is necessary to appraise

the credibility of the customer in order to mitigate the credit risk.

Proper evaluation of the customer is performed this measures the

financial condition and the ability of the customer to repay back the

loan in future. Generally the credit facilities are extended against the

security know as collateral. But even though the loans are backed by

the collateral, banks are normally interested in the actual loan amount

to be repaid along with the interest. Thus, the customer's cash flows

are ascertained to ensure the timely payment of principal and the

interest.

Project is about credit appraisal process and credit risk management

of SME (Small Medium Enterprise) sector of AXIS BANK.

The study related to the above project was constituted in ‘AXIS

BANK, LANDRAN’. The main objective of the study was to analyze

and interpret the credit appraisal and credit risk management system
6
of SME’s in Axis Bank, credit tools being used, and problems being

faced in accordance with the same.

CHAPTER-1

INTRODUCTION TO BANKING SECTOR IN INDIA

7
CHAPTERS TITLE PAGE NO.

CHAPTER1 INTODUCTION TO BANKING

SECTOR IN INDIA

CHAPTER 2 AXIS BANK PROFILE

● CURRENT SITUATION
● COMPETITOR ANALYSIS
● SWOT ANALYSIS OF AXIS BANK

CHAPTER 3 INTRODUCTION TO SME SECTOR

CHAPTER 4 CONCEPT OF CREDIT APPRAISAL

AND CREDIT RISK MANAGEMENT
● CONCEPT OF CREDIT
● CONCEPT OF LOAN
● CREDIT APPRAISAL PROCESS
● CONCEPT OF CREDIT
RISK MANAGEMENT
● TYPES OF RISKS
● DETERMINANATS OF
CREDIT RISK MANAGEMENT
● INTRODUCTION TO CREDIT
RATING TOOLS
● RATING TOOLS FOR SME’S
● MONITORING TOOL
● RATING SCALE

CHAPTER5 RESEARCH METHODOLOGY

● OBJECTIVES OF THE STUDY
● SCOPE OF THE STUDY
● RESEARCH DESIGN
SOURCES OF DATA COLLECTION
● DATA ANALYSIS AND
PRESENTATION TECHNIQUE
● LIMITATIONS

CHAPTER 6 ANALYSIS AND INTERPRETATION

OF DATA

CHAPTER 7 CASE STUDY

CHAPTER 8 FINDINGS AND RECOMMENDATIONS

 BIBLIOGRAPHY
 CONCLUSIONS

8
INDIAN BANKING SECTOR

Introduction

Without a sound and effective banking system in India it cannot have

a healthy economy. The banking system of India should not only be
hassle free but it should be able to meet new challenges posed by the
technology and any other external and internal factors.

For the past three decades India's banking system has several
outstanding achievements to its credit. The most striking is its
extensive reach. It is no longer confined to only metropolitans or
cosmopolitans in India. In fact, Indian banking system has reached
even to the remote corners of the country. This is one of the main
reasons of India's growth process.

Currently, India has 96 scheduled commercial banks(SCBs) - 27

public sector banks (that is with the Government of India holding a
stake), 31 private banks (these do not have government stake; they
may be publicly listed and traded on stock exchanges) and 38 foreign
banks. They have a combined network of over 53,000 branches and

9
49,000 ATMs. According to a report by ICRA (Investment
Information and Credit Rating Agency of India Limited) a rating
agency, the public sector banks hold over 75 percent of total assets of
the banking industry, with the private and foreign banks holding
18.2% and 6.5% respectively.

The first bank in India, though conservative, was established in 1786.

From 1786 till today, the journey of Indian Banking System can be
segregated into three distinct phases. They are as mentioned below:

Early phase from 1786 to 1969 of Indian Banks

Nationalization of Indian Banks and up to 1991 prior to Indian

banking sector Reforms.

New phase of Indian Banking System with the advent of Indian

Financial & Banking Sector Reforms after 1991.

Classification of Banks:

The Indian banking industry, which is governed by the Banking

Regulation Act of India
1949 can be broadly classified into two major categories, non-
scheduled banks and scheduled banks. Scheduled banks comprise
commercial banks and the co-operative banks. In Terms of
ownership, commercial banks can be further grouped into
nationalized banks, the State Bank of India and its group banks,
10
regional rural banks and private sector banks (the old / new
domestic and foreign). The Indian banking industry is a mix of
the public sector, private sector and foreign banks. The private
sector banks are again spilt into old banks and new banks.

Banking System in
India
Reserve bank of India (Controlling Authority)

Development Financial institutions Banks

IFCI IDBI ICICI NABARD NHB IRBI EXIM

Bank SIDBI

Commercial Regional Rural Land Development Cooperative

Banks Banks Banks Banks

Public Sector Banks Private Sector Banks

SBI Groups Nationalized Banks Indian Banks

Foreign Banks

Nationalized /Public sector banks

 Dominate the banking system in India.

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  Nationalization of banks in India took place in 1969 by Mrs.
Indira Gandhi.

Private Banks

 Made banking more efficient and customer friendly.

 Jolted public sector banks out of complacency and forced
them to become more competitive.

Foreign banks

 Have brought latest technology and latest banking practices

in India.
 Have helped made Indian banking system more competitive
and efficient.

12
 CHAPTER-2

AXIS BANK PROFILE

13
 AXIS BANK-AN INTRODUCTION.

Axis Bank was the first new generation private sector bank to be
established in India under the overall reform programme initiated by
the Government of India in 1991, under which nine new banking
licenses were granted.

The Bank was promoted by Unit Trust of India, the largest mutual
fund in India, holding 87% of the equity. Life Insurance Corporation
of India (LIC), General Insurance Corporation Ltd and its four
subsidiaries who were the co-promoters held the balance 13%. The
Bank started its operations in 1994.

Axis Bank’s first capital raising post inception was in 1998 through a
public offering of primary shares and in subsequent years through
equity allotment to a few other investors like CDC. Citicorp Banking
Corporation, Bahrain, Karur Vysya Bank and Chrys Capital leading to
a dilution in UTI’s shareholding in the Bank. Further dilution of
Promotors’ shareholding happened during Q4 ended of 2004, when
the Bank raised US$ 239.30 Million of Capital through a GDR issue.

The Bank today is capitalized to the extent of Rs. 358.56 crores with
the public holding (other than promoters) at 57.60%.

The Bank's Registered Office is at Ahmedabad and its Central Office

is located at Mumbai. Presently, the Bank has a very wide network of

14
more than 701 branch offices and Extension Counters. The Bank has a
network of over 2854 ATMs providing 24 hrs a day banking
convenience to its customers. This is one of the largest ATM networks
in the country.

The Bank has strengths in both retail and corporate banking and is
committed to adopting the best industry practices internationally in
order to achieve excellence.

Our Mission and Values

Our Mission
 Customer Service and Product Innovation tuned to diverse needs
of individual and corporate clientele.
 Continuous technology up gradation while maintaining human
values.
 Progressive globalization and achieving international standards.
 Efficiency and effectiveness built on ethical practices.

Core Values
 Customer Satisfaction through

 Providing quality service effectively and efficiently

 "Smile, it enhances your face value" is a service quality stressed

on

 Periodic Customer Service Audits

15
  Maximization of Stakeholder value
 Success through Teamwork, Integrity and Peoplle.

CURRENT SITUATION OF THE BANK

Today, more than a century after those tentative first steps,

AXIS BANK fairy tale is not only going strong but blazing
new standards, and that minuscule initial investment has
grown by leaps and bounds to crores of rupees in wealth for
AXIS BANK shareholders. The company’s offerings are
spread across the spectrum with service. Having
succeeded in garnering the trust of almost one-third of
India’s one billion populations and a strong management at
the helm means axis will continue to dream big on its path
of innovation. And millions of customer will savour the
results, happily ever after.

COMPETITOR ANALYSIS

Axis Bank stands apart from its private sector competitors —

ICICI Bank and HDFC Bank — in one crucial respect. While the
other two banks have envisaged retail banking as a key area of
strategic emphasis — with the share of the retail business (both
on the funding and asset sides) growing strongly year after year
— the share of retail business, particularly retail assets, has
actually come down quite sharply in the case of Axis Bank.

The numbers here are quite interesting. For ICICI Bank, retail
loans now (as of June 2014) account for as much as 70 per

16
cent of the bank’s total loan book of Rs 2,00,000 crore. For
HDFC Bank, retail assets are around 57 per cent (Rs 28,000
crore) of the total loans as of March 2014.

In the case of Axis Bank, retail loans have declined from 30 per
cent of the total loan book of Rs 25,800 crore in June 2013 to
around 23 per cent of loan book of Rs.41,280 crore (as of June
2014). Even over a longer period, while the overall asset
growth for Axis Bank has been quite high and has matched that
of the other banks, retail exposures grew at a slower pace.

If the sharp decline in the retail asset book in the past year in
the case of Axis Bank is part of a deliberate business strategy,
this could have significant implications (not necessarily
negative) for the overall future profitability of the business.

Despite the relatively slower growth of the retail book over a

period of time and the outright decline seen in the past year, the
bank’s fundamentals are quite resilient. With the high level of
mid-corporate and wholesale corporate lending the bank has
been doing, one would have expected the net interest margins
to have been under greater pressure. The bank, though,
appears to have insulated such pressures. Interest margins,
while they have declined from the 3.15 per cent seen in 2010-
11, are still hovering close to the 3 per cent mark. (The
comparable margins for ICICI Bank and HDFC Bank are
around 2.60 per cent and 4 per cent respectively. The margins
for ICICI Bank are lower despite its much larger share of the
higher margin retail business, since funding costs also are
higher).

Such strong emphasis and focus on lending also does not

appear to have had any deleterious impact on the overall asset
quality. The bank’s non-performing
loans are even now, after five years of extremely rapid asset
build-up, below 1 per cent of its total loans.

From a medium-term perspective, it appears that Axis Bank

could be charting out a niche for itself in the private bank
17
space. It appears to be following a business strategy quite
different from the high-volume and commodity-style approach
of ICICI Bank and HDFC Bank. That strategy also has its
pluses in terms of the relatively higher margins in some
segments of the retail business and the in-built credit risk
diversification (and mitigation) achieved through a widely
dispersed retail credit portfolio. But, as indicated above, Axis
Bank has been to able to maintain the quality of its loan
portfolio despite the concentrated nature of wholesale
corporate lending.

SWOT ANALYSIS OF THE BANK

The SWOT Analysis is a systematic identification of internal

strength and weakness of the business and environmental
opportunities and threats being faced by that business and
provides information that is helpful, in matching the resources
and capabilities to the competitive environment in which it
operates. It is necessary for to analyze its weakness that can
be removed by the undertaking the project and what
opportunities can be exploited and strengths can be strengthen
more. As such, it is instrumental in strategies and selection. It is
dynamic and useful framework for choosing a strategy. The
following aspects show how a SWOT analysis fits into an
environmental scan.

STRENGTHS:

 High quality service provide

 Strong and well management.
 Second largest private bank all over
India
 AXIS Bank has been able to maintain
the quality of its loan portfolio.

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WEAKNESSES:

 Strengthening of rupee hitting profits

 Ability to pass through price increases in various
markets .
 Intense competition.
 Manpower problem is big problem.

OPPORTUNITIES:

 Development of modern banking.

 Potential for growth through increased penetration.
 Opportunity to no:1 bank all over India
 Increasing popularity in overseas markets

THREATS/CHALLENGES:

 Environment with diverse players

 Rising competitors for private banking
 Change in fiscal benefits/laws
 People attraction & retention
 Management of country risk.

19
CHAPTER -3

INTRODUCTION TO SME

20
 INTRODUCTION TO SME

In the Indian context, the small and medium enterprises (SME) sector
is broadly a Term used for small scale industrial (SSI) units and
medium-scale industrial units. Any industrial unit with a total
investment in its fixed assets or leased assets or hire-purchase asset of
upto Rs 10 million, can be considered as an SSI unit and any
investment of upto Rs 100 million can be termed as a medium unit.
An SSI unit should neither be a subsidiary of any other industrial unit
nor be owned or controlled by any other industrial unit.

An SME is known by different ways across the world. In India, a

standard definition surfaced only in October 2, 2006, when the
Ministry of Micro, Small and Medium Enterprises, Government of
India, imposed the Micro, Small and Medium enterprises
Development (MSMED) Act,2006.

History

Small and Medium Enterprises or SMEs are vital for the growth and
well being of the country. This sector was recognized and given
importance right from independence and is being encouraged ever
since then.

Though, it commenced on a small scale, it gradually gained

significance, because it employed a considerable number of people.

21
When it started gaining momentum, this sector was defined as an
enterprise with investment in plant and machinery of up to Rs 1 lakh
and situated in towns and villages with strength of less than 50,000
people. The policy statement put in place special legislation to
recognize and protect self employed people in cottage and home
industries. District industries canters (DICs) were set up and made the
focal point of SSI development, bypassing large cities and state
capitals. Also, the government started providing special services akin
to product standardization, quality control and marketing surveys in
order to assist the SSIs in enabling them to market their products in an
underdeveloped market.

Description of SME in the manufacturing sector

The Term enterprise in the manufacturing context stands for an

industrial undertaking or a business concern involved in the
production, processing or preservation of goods for the list of eligible
industries in the First Schedule to the Industries (Development and
Regulation Act), 1951.

For the Manufacturing Sector, the MSMED Act 2006 defines micro,
small and medium enterprises (MSMEs) as mentioned below:
 A micro enterprise is an enterprise where investment in plant
and machinery does not exceed Rs 25 lakh.
 The investment in plant and machinery in a small enterprise is
more than Rs 25 lakh, but does not exceed Rs 5 crore.

22
  A medium enterprise is one where the investment in plant and
machinery is more than Rs 5 crore, but does not exceed Rs 10
crore.

In all these, the cost excludes that of land, building and the items
specified by the Ministry of Small Scale Industries with its
notification No SO 1722 (E) dated October 5, 2006.

23
 CHAPTER -4

CONCEPT OF CREDIT APPRAISA AND CREDIT RISK

MANAGEMENT

24
  CONCEPT OF CREDIT APPRAISAL

Credit appraisal means an investigation/assessment done by the banks

before providing any Loans & advances/project finance & also checks
the commercial, financial & technical viability of the project
proposed, its funding pattern & further checks the primary &
collateral security cover available for recovery of such funds.

 Concept of Credit

Credit Appraisal is a process to ascertain the risks associated with the

extension of the credit facility. It is generally carried by the financial
institutions, which are involved in providing financial funding to its
customers. Credit risk is a risk related to non-repayment of the credit
obtained by the customer of a bank. Thus it is necessary to appraise
the credibility of the customer in order to mitigate the credit risk.
Proper evaluation of the customer is performed this measures the
financial condition and the ability of the customer to repay back the
Loan in future. Generally the credits facilities are extended against the
security know as collateral. But even though the Loans are backed by
the collateral, banks are normally interested in the actual Loan amount
to be repaid along with the interest. Thus, the customer's cash flows
are ascertained to ensure the timely payment of principal and the
interest.

25
It is the process of appraising the credit worthiness of a Loan
applicant. Factors like age, income, number of dependents, nature of
employment, continuity of employment, repayment capacity, previous
Loans, credit cards, etc. are taken into account while appraising the
credit worthiness of a person. Every bank or lending institution has its
own panel of officials for this purpose.

However the 3 ‘C’ of credit are crucial & relevant to all borrowers/
lending, which must be kept in mind, at all times.

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

Credit is the provision of resources (such as granting a Loan) by one

party to another party where that second party does not reimburse the
first party immediately, thereby generating a debt, and instead

26
arranges either to repay or return those resources (or material(s) of
equal value) at a later date. The first party is called a creditor, also
known as a lender, while the second party is called a debtor, also
known as a borrower.

Credit allows you to buy goods or commodities now, and pay for
them later. We use credit to buy things with an agreement to repay the
Loans over a period of time. The most common way to avail credit is
by the use of credit cards. Other credit plans include personal Loans,
home Loans, vehicle Loans, student Loans, small business Loans,
trade. A credit is a legal contract where one party receives resource or
wealth from another party and promises to repay him on a future date
along with interest. In simple Terms, a credit is an agreement of
postponed payments of goods bought or Loan. With the issuance of a
credit, a debt is formed.

 Concept of Loans

Loans can be of two types fund base & non-fund base:

A. Fund Base includes:

 Working Capital
 Term Loan

27
 B. Non-fund Base includes:
 Letter of Credit
 Bank Guarantee
 Bill Discounting

A. Fund Base:

 Working capital
Capital or funds required for an industry can therefore be bifurcated
as fixed capital & working capital. Working capital in this context is
the excess of current assets over current liabilities. The excess of
current assets over current liabilities is treated as net, for storing
finishing goods till they are sold out & for working capital or liquid
surplus & represents that portion of the working capital, which has
been provided from the long-Term source.

 Term Loan
A Term Loan is granted for a fixed Term of not less than 3 years
intended normally for financing fixed assets acquired with a
repayment schedule.

A Term Loan is a Loan granted for the purpose of capital assets, such
as purchase of land, construction of, buildings, purchase of
28
machinery, modernization, renovation or rationalization of plant, &
repayable from out of the future earning of the enterprise, in
installments, as per a prearranged schedule.
.
B. Non-fund Base:

 Letter of credit

Definition
A Letter of Credit (LC) is an arrangement whereby a bank (the issuing
bank) acting at the request & on the instructions of the customer (the
applicant) or on its own behalf,

o Is to make a payment to or to the order of a third party (the

beneficiary), or is to accept & pay bills of exchange (drafts
drawn by the beneficiary); or
o Authorizes another bank to effect such payment, or to accept &
pay such bills of exchanges (drafts); or
o Authorizes another bank to negotiate the Terms & conditions of
the credit are complied with. against stipulated document(s),
provided that

29
  Bank Guarantees:
A contract of guarantee is defined as ‘a contract to perform the
promise or discharge the liability of the third person in case of the
default’. The parties to the contract of guarantees are:
a) Applicant: The principal debtor – person at whose request the
guarantee is executed
b) Beneficiary: Person to whom the guarantee is given & who can
enforce it in case of default.
c) Guarantee: The person who undertakes to discharge the
obligations of the applicant in case of his default.
Thus, guarantee is a collateral contract, consequential to a main co
applicant & the beneficiary.

 Bill discounting:
 Definition:
As per Negotiable Instrument Act, “The bill of exchange is an
instrument in writing containing an unconditional order, signed
by the maker, directing a certain person to pay a certain sum of
money only to, or to the order of, a certain person, or to the
bearer of that instrument.”

Credit Appraisal Process

30
 Receipt of application from applicant

Receipt of documents
(Balance sheet, KYC papers, Different govt. registration no., MOA, AOA, and
properties documents

Pre-sanction visit by bank officers

Check for RBI defaulters list, willful defaulters list, CIBIL data, ECGC, Caution list
etc

Title clearance reports of the properties to be obtained from empanelled

Advocates

Valuation reports of the properties to be obtained from empanelled valuer/engineers

Preparation of financial data

Proposal preparation

Assessment of proposal

Sanction/approval of proposal by appropriate sanctioning authority

31
 Documentations, agreements, mortgages

Disbursement of Loan

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

 Introduction to Credit Risk Management

Definition

Of all different types of risks that a bank is subject to, credit risk can
be defined as the risk of failure on the part of the borrower to meet
obligations towards the bank in accordance with the Terms and
conditions that have been agreed upon. Inability and/or unwillingness
of the borrower to repay debts may be the cause of such default.

The bank aims at minimizing this risk that could arise from individual
borrowers or the entire portfolio. The former can be addressed by
having well-developed systems to appraise the borrowers; the latter,
on the other hand, can be minimized by avoiding concentration of
credit exposure with a few borrowers who have similar risk profiles.
Credit risk management becomes even more relevant in the light of
the changes that have been brought about in the economic

32
environment, including increasing competition and thinning spreads
on both the sides of Balance sheet.

CREDIT
The word ‘credit’ comes from the Latin word ‘credere’, meaning
‘trust’. When sellers transfer his wealth to a buyer who has agreed to
pay later, there is a clear implication of trust that the payment will be
made at the agreed date. The credit period and the amount of credit
depend upon the degree of trust.
Credit is an essential marketing tool. It bears a cost, the cost of the
seller having to borrow until the customers payment arrives. Ideally,
that cost is the price but, as most customers pay later than agreed, the
extra unplanned cost erodes the planned net profit.

RISK
Risk is defined as uncertain resulting in adverse out come, adverse in
relation to planned objective or expectation. It is very difficult 0 find a
risk free investment. An important input to risk management is risk
assessment. Many public bodies such as advisory committees
concerned with risk management. There are mainly three types of risk
they are following:

1. Market risk
2. Credit Risk
3. Operational risk

33
Risk analysis and allocation is central to the design of any project
finance, risk management is of paramount concern. Thus quantifying
risk along with profit projections is usually the first step in gauging
the feasibility of the project. Once risk have been identified they can
be allocated to participants and appropriate mechanisms put in place.
TYPES OF FINANCIAL RISKS

MARKET RISK

FINANCIAL RISK
CREDIT RISK

OPERATIONAL
RISK

1.MARKET RISK:
Market risk IS the risk of adverse devration ol the mark to market
value of the trading portfolio due to market movement, during the
period required to liquidate the transactions.

34
2.OPERTIONAL RISK:
Operational risk is one area of risk that is faced by all organization s.
More complex the organization more exposed it would be operational
risk. This risk arises due to deviation from normal and planned
functioning of the system procedures technology and human failure of
omission and commission. Result of deviation from normal
functioning is reflected in the revenue of the organization. Either by
the way of additional expenses or by way of loss of opportunity.

3.CREDIT RISK:
Credit risk is defined as the potential that a bank borrower or
counterparty will fail to meet its obligations in accordance with
agreed terms or in other words it is defined as the risk that a firm‘s
customer and the parties to which it has lent money will fail to make
promised payments is known as credit risk. The exposure to the credit
risks large in case of financial institutions, such commercial banks
when firms borrow money they in turn expose lenders to credit risk,
the risk that the firm will default on its promised payments. As a
consequence, borrowing exposes the firm owners to the risk that firm
will be unable to pay its debt and thus be forced to bankruptcy.
 CONTRIBUTORS OF CREDIT RISK:
1. Corporate assets
2. Retail assets
3. Non-SLR portfolio
4. May result from trading and banking book

35
 5. Inter bank transactions
6. Derivatives
7. Settlement, etc

 KEY ELEMENTS OF CREDIT RISK MANAGEMENT:

1. Establishing appropriate credit risk environment
2. Operating under sound credit granting process
3. Maintaining an appropriate credit administration, measurement
& Monitoring
4. Ensuring adequate control over credit risk
5. Banks should have a credit risk strategy which in our case is
communicated throughout the organization through credit policy.

36
  STEPS TO FOLLOW TO MINIMIZE RISKS

STANDARDISED

INTERNAL RATING
CREDIT RISK

CREDIT RISK
MODELS

CREDIT MITIGATION

TRADING BOOK
RISKS
MARKET RISK
BANKING BOOK

OPERATIONAL

OPERATIONAL
RISK
OTHERS

Determinants of Credit Risk

Factors determining credit risk of a bank’s portfolio can be divided

into external and internal factors. The banks do not have control on

37
external factors. These include factors across a wide spectrum ranging
from the state of the economy to the correlation among different
segments of industry. The risk arising out of external factors can be
mitigated via diversification of the credit portfolio across industries
especially in light of any expectations of adverse developments in the
existing portfolio.

Given that the banks have very little control over such external
factors, the bank can minimize the credit risk that it faces mainly by
managing the internal factors.
These include the internal policies and processes of the bank like
Loan policies, appraisal processes, monitoring systems etc. These
internal factors can be taken care of, partly, via effective rating and
monitoring systems, entry level criteria etc. These processes would
enable improvement in the quality of credit decisions.
This would effectively improve the quality (and hence profitability) of
the portfolio. While monitoring systems are useful tool at post-
sanction stage, rating systems act as important aid at the pre-sanction
stage.

38
Introduction to Credit Tools

The Bank has developed tools for better credit risk management.
These focus on the areas of rating of corporate (pre-sanctioning of
Loans) and monitoring of Loans (post-sanctioning). The focus of this
manual is to familiarize the user with the credit rating tool.

 Credit Rating: Definition

Credit rating is the process of assigning a letter rating to borrowers
indicating the creditworthiness of the borrower. Rating is assigned
based on the ability of the borrower (company) to repay the debt and
his willingness to do so. The higher the rating of a company, the lower
the probability of its default. The companies assigned with the same
credit rating have similar probability of default.

 Use in decision-making
Credit rating helps the bank in making several key decisions
regarding credit including:
• Whether to lend to a particular borrower or not; What price to
charge
• What are the products to be offered to the borrower and for what
tenor
• At what level should sanctioning be done
• What should be the frequency of renewal and monitoring

39
It should, however, be noted that credit rating is one of the inputs used
in taking credit decisions. There are various other factors that need to
be considered in taking the decision (e.g., adequacy of borrower’s
cash flow, collateral provided, relationship with the borrower). The
rating allows the bank to ascertain a probability of the borrower’s
default based on past data.

 Main features of the rating tool:

i) Comprehensive coverage of parameters.
ii) Extensive data requirement.
iii) Mix of subjective and objective parameters.
iv) Includes trend analysis.
v) 13 parameters are benchmarked against other players in the
segment. The tool contains the latest available audited data/ratios of
other players in the segment. The data is updated at intervals.
vi) Captures industry outlook.
vii) Eight grade ratings broadly mapped with external credit rating
agency’s ratings prevalent in India.

Rating Tool for Small and Medium Enterprises (SME)

The SME rating tool has been developed for the purpose of assigning
a credit rating to the SME borrower of the Bank. The aim of the tool
is to provide a standardised system for the bank to evaluate the credit

40
risk of different borrowers. It should, however, be noted that this tool
is not the standalone exercise for the purpose of sanctioning of Loan
to a SME borrower. It should be supplemented with other inputs
important in the sanctioning process.

The following broad areas have been considered for determining the
rating of
Borrowers’ in the SME category:
 Financial performance
 Business performance
 Industry outlook
 Quality of management
 Conduct of account (after roll out of the Monitoring tool)

Within each of these broad areas, various parameters have been used
for obtaining an overall rating of the borrower. In the following
sections, we shall discuss in greater detail the structure of the tool and
the methodology of using it.

Parameters:

 Financial performance
The tool in its current form uses various parameters for rating a
borrower on its financial strength. These various sub-parameters

41
 give us an idea of the different sources of risk being faced by a
company in different areas.

 Operating performance of business

Operational efficiency of a borrower is important in
deTermining the generation of cash for repayment of its debt
obligations. The parameters in this category assess the
borrower’s competence in its primary activities.

 Quality of management
Quality of the management of a borrowal unit has a direct
impact on the performance of the unit. Also, it would have a
direct impact on the integrity of the borrower especially in
Terms of its willingness to repay its debt.

 Industry
In order to undertake the credit rating of any borrower, it is
important to assess the riskiness of the industry to which that
borrower belongs. Borrowers, which are similarly ranked in
Terms of financial performance, operating performance of
business and quality of management may have different credit
ratings due to the risks inherent in their industry. The risk
assessment in industry sectors is done at the Central Office level
and appropriate score for each industry has been allocated in the

42
 tool. On selection of the relevant industry sector, the tool will
automatically reckon the allocated score.

 Three types under SME tool

i) Manufacturing
ii) Services and
iii) Trading
Various parameters under each of the above stated parameters for
these three types of SME tool are as under:

Monitoring Tool

Introduction
The web based credit rating model consists of the following two tools:
1) Credit rating tool
2) Monitoring tool

The model has been provided with the following two options:
1) Scenario I
2) Scenario II

At the time of sanctioning of a fresh advance, the concerned client

should be rated in the credit rating model under the Scenario I option.

43
This would activate the Credit rating tool provided in the rating
model and based on the data entered, the tool would compute a credit
rating for the client.

After the sanction and disbursement of the advance, rating of the

borrower should be reviewed at a frequency indicated by the rating
wise schedule (as indicated in the Credit Policy of the Bank). This
rating exercise should be done in the model under the Scenario II
option. This would activate both the Credit rating tool and the
Monitoring tool in the model. The model would re-compute the
overall rating after reckoning the data both from rating tool and the
monitoring tool. Once an account has been re-rated using the
Scenario-II option, further modifications / re-ratings pertaining to
that account will compulsorily have to be done using Scenario-II
option only
Rating Scales
The rating tool for SME has an 8-point rating scale, which ranges
from SME 1 to SME 8.

Borrower Rating Range of Scores Risk Level

SME 1 Above 85 Lowest risk
SME 2 76-85 Lower risk
SME 3 66-75 Low risk
SME 4 56-65 Moderate risk
SME 5 46-55 High risk
SME 6 36-45 High risk
SME 7 26-35 Higher risk
SME 8 Below 26 Highest risk

44
Difficulty in measuring credit risk:-

Measuring credit risk on a portfolio basis is difficult. Banks and

financial institutions traditionally measure credit exposures by obligor

and industry- They have only recently attempted to define risk

quantitatively in a portfolio context e.g. a value-at-risk (VaR)

Framework. Although banks and financial institutions have begun to

develop internally, or purchase. systems that measure Vary for credit.

bank managements do not yet have confidence in the risk measures

the systems produce- In particular, measured risk levels depend

heavily on underlying assumptions and risk managers often do not

have great confidence in those parameters- Since credit derivatives

exist principally to allow for the effective transfer of credit risk, the

difficulty in measuring credit risk and the absence of confidence in

the result of risk measurement have appropriately made banks

cautious.

45
 CHAPTER - 5

RESEARCH METHODOLOGY

46
RESEARCH METHODOLOGY

Research is a systematic investigation carried out for the

purpose of finding solutions to a problem and deriving general
principles.
Research methodology is a science of studying how research is
done scientifically. It is a way to systematically solve the
research problem by logically adopting various steps.
Methodology helps to understand not only the products of
scientific inquiry but the process itself. It aims to describe and
analyze methods, throw light on their limitations and resources,
clarify their presuppositions and consequences.

 OBJECTIVES:

● To study the Credit Appraisal and Credit Risk Management

system of SME in Axis Bank.
● To understand the commercial, financial & technical viability
of the project proposed & it’s funding pattern.
● To gain insight into the credit risk management activities of
Axis Bank.
● To know the different methods available for credit rating.

SCOPE OF THE STUDY

The project helps in understanding the clear meaning of credit Risk

Management In Axis Bank . It explains about the credit risk scoring

and Rating of the Bank. And also Study the credit appraisal and

47
credit risk management system for SME in Axis bank. Each and

every study has its own scope This study helps to identify the

areas that could be improved and excelled in future.

RESEARCH DESIGN

Research design is a conceptual structure within which

research is conducted. It constituted the blue print for
collection, measurement and analyses of data. Research
design stands for advance planning of the methods to be
adopted. For collection of relevant data and techniques to be
used in their analysis keeping in view of the objective of the
research and the availability of the staff, time and money.

THREE BROAD CLASSES OF RESEARCH DESIGN ARE

IDENTIFIED AS :

1. Research design in case of exploratory research design.

2. Research design in case of descriptive research design.
3. Research design in case of hypothesis testing research
studies.

Exploratory study is used when the major emphasis is on

discovery of ideas, insights and relevant decision variables. As
such the research design appropriate for such studies must be
flexible enough to provide opportunity for considering different
aspects of problem under study.

Descriptive study has the name because they describe

phenomena without establishing association between the
factors. The data may be the behavioral variable of the people
48
(or other subjects) are under study and the situational variables
that existed or are forthcoming.

Hypothesis testing research studies are adopted to discover

and determine cause and effect relationships.

Keeping in view the relevant research design is followed in the

training report.

 So as a part of the training report “Exploratory study” was

done for understanding the variable involved and to gain
insights of the problem and “Descriptive study” was done
to know in detail the status quo in the areas in which the
research is being carried out.

 SAMPLING DESIGN :

a. POPULATION

From all the COOPERATIVE SOCIETIES, AXIS BANK,

LANDRAN is selected.

b. SAMPLING UNIT

It includes the:
 “AXIS BANK, LANDRAN”, KHASRA NO-462-438-1 TO
2423-264-2(1-5),HADBAST NO-3 Landran-Kharar Road,
Village Landran Punjab.
 “AXIS BANK, CHANDIGARH”,S.C.O-343-344,CHD,
SECTOR-35B, CHD.

49
  “AXIS BANK,CHANDIGARH”, S.C.O-61, SECTOR-32C,
CHD.
 “AXIS BANK, PANCHKULA”, S.C.O-11, SECTOR-10,
PANCHKULA.
 “AXIS BANK, MOHALI”, S.C.F-113-114, PHASE-7 S.A.S
NAGAR,MOHALI.

c. SAMPLING METHOD

“Statistical technique” is used for calculation of credit risk

management.

d. SAMPLING SIZE OR PERIOD OF THE STUDY

The present study deals with the data collection from

Annual Reports and other Relevant Documents for the
2013-2014 and 2014-2015.

 Case study

SOURCES OF DATA COLLECTION

The data required for a research can be primary or secondary

in nature.

SOURCES OF DATA COLLECTION

PRIMARY SECONDARY
DATA DATA

50
PRIMARY DATA – The data that has been collected first hand
or contains information that has been collected specifically for
the purpose of investigation at hand. Primary data can be
collected with the help of observation method like
questionnaires etc. this is collected afresh.

SECONDARY DATA – Secondary data is the information that

has been gathered not for the immediate study but for some
other purpose. It is collected by people or agencies in response
to some other problem rather than the problem at hand.
Secondary data can be collected from previous research or
findings.

 This project is based on PRIMARY AND SECONDARY

DATA .It consists of valuable cooperation and continued
support of associates, head of department and staff
members.

 PRIMARY DATA SOURCES

It will be collected through filling of questionnaire and Informal
interviews with Branch Managers and other staff members at AXIS
BANK.

 SECONDARY DATA SOURCES

It will be collected from Business Newspapers, books, and websites.
Case Study: To understand how credit appraisal is done, I will be taking
cases study of Dynamic Products. Ltd. which is in manufacturing of Food
color product.

51
  DATA ANALYSIS AND PRESENTATION TECHNIQUES

The study has used the following data analysis techniques

 Tables

 Bar Graphs

 Rating Scale

 LIMITATIONS OF STUDY

● As the credit rating is one of the crucial areas for any bank,
some of the technicalities may not reveal which might cause
destruction to the information and exploration of the problem.
● As some of the information is not revealed, whatever
suggestions generated, will be based on certain assumptions.
● Finding of the study will be based on the assumptions that
respondents have given correct information.
● Information provided by respondents may be biased.
● The study is academic in nature.

It can be said that limitations like Limited area, Limited data and Limited period
were encountered overall while preparing the report.

52
 CHAPTER 6

DATA ANALYSIS AND INTERPRETATION

53
Analysis and interpretation of credit risk management system of axis bank as a

whole, on the basis of data collected from answers received from five managers

of five branches of Axis Bank in different cities

 QUESTIONNAIRE

Q1.

Rate the importance of risk High Medium Low

management in banking industry

A. Credit Risk 5

B. Market Risk 1

C. Operational Risk 3

D. Liquidity Risk 4

HIGH MEDIUM LOW

Rating scale being:

5 4 3 2 1

54
 HIGH
5

4
MEDIUM
3

2
LOW
1

A B C D

INTERPRETATION

From the above chart, it is clear that credit risk management is considered as most important
risk management in banking industry as it has been ranked number 5 on rating scale followed
by liquidity risk management at second place with ranking of number 4, by most of the Axis
Bank branch managers, indicating these two risks of being high importance for Axis Bank as
compared to all other risks.

Q2. Which of the following according to you are the most important
potential benefits of Credit Risk Management Strategy?
Please tick ( ) for correct answer.
A. Improved pricing of the product.
B. Real time exposure updates.
C. Credit grading models.
D. Reduction in losses
E. Improved selection of clients according to risk profile.

55
Total Number of Number of Number of Number of Number of
number of respondents respondents respondents respondents respondents
respondents who marked who marked who marked who marked who marked
. A B C D E

5 1 0 1 2 1

A B C D E

INTERPRETATION

From the above chart, it is clear that according to 2 out of 5 branch managers of Axis Bank
the most important potential benefit of a Credit Risk Management Strategy is option C, that
is, reduction in losses. Therefore it is clear that Credit Risk Management Strategies if planned
carefully results in reduction of losses of bank.

Q3.

56
Please tick ( ) for correct answer. Yes No

A. Is credit policy part of the company-wide capital

management strategy?
B. Does the bank has adequate system in place to

identify and monitor risk on an ongoing basis?

C. Are adequate capital reserves maintained on off-

balance sheet risks?

D. Does the bank disclose off-balance sheet trading

to public.

NO

YES

A B C D

INTERORETATION

From the above chart, it is clear that credit policy of the bank is part of its company-wide
capital management strategy, also the bank has adequate system to identify and monitor risk
on an ongoing basis. Bank also maintains adequate capital reserve on off-balance sheet risks.
Therefore it is evident from above that Axis Bank has an adequate Credit Risk Management
Strategy.

57
Q4. Which of the following best describes the way risk management is
reported within the organization?
(Please select the answer most closely corresponds to situation in your
bank).
A. Risk reporting takes place on regular, formal basis.
B. There is continuous management reporting which includes
risk.
C. Risk issues are reported on an ad hoc basis.
D. Risk issues are not reported at all.

Total Number of Number of Number of Number of

number of respondents respondents respondents respondents
respondents who marked who marked who marked who marked
A B C D

5 3 2 0 0
5

A B C D

INTERPRETATION

It is clear from above chart that risk management reporting takes place on regular, formal and
continuous basis in Axis Bank, as most of the branch managers marked regular, formal and

58
continuous basis as the way of risk management reporting in there Axis Bank branches.
Therefore it can be said that Axis Bank has regular reporting of risk management so that it
can deal with risk related matters on time to prevent losses.

Q5.

How important according to you each of the High Medium Low

following would be in the implementation of
a successful Credit Risk Management
culture within your bank.
A. Having an enterprise risk data 4
infrastructure in place.

B. Policy is supported at board of 5

dierectors or executive level.
C. Adequate employee training. 2
D. Hiring qualified staff. 3
E. Ability of organization to adapt to 3
changes in business environment.

HIGH MEDIUM LOW

Rating scale being:

5 4 3 2 5

HIGH
5

4
MEDIUM
3
59
 2
LOW
1

A B C D

INTERPRETATION

It is clear from the above chart, that having policy support at executive level and enterprise
risk data infrastructure in place are most important for the implementation of a successful
Credit Risk Management culture within the Axis Bank as these two are marked at rate of 5
and 4 on the rating scale respectively, indicating it to be of high importance, followed by
employee training, qualified staff, and ability of the bank to adapt to changes at medium level
with marking of 2,3,and 3 on rating scale respectively.

Q6. How best do you think your bank responds to unforeseen risk or credit
crunches?
A. Reduce employment B. Stringent lending policy
C. Increase in capital reserve ratio D. Others (please specify)

Total Number of Number of Number of Number of

number of respondents respondents respondents respondents
respondents who marked who marked who marked who marked
A B C D

5 0 3 2 0
60
 5

A B C D

INTERPRETATION
It is clear from the above chart, as most of the branch managers are of view that in case of
unforeseen risks or credit crunches, Axis Bank follows either stringent lending policy or
increases its capital reserve ratio to respond in situation of such unforeseen risks in its best
possible way, so as to reduce losses created by such risks.

Q7. Major difficulties faced in successful implementation of Credit Risk

Management policies?
Please tick ( ) for correct answer.
A. Difficulty in quantifying risk.
B. Timeliness and quality of information.
C. Business priorities are often conflicting.
D. Calculation of parameters.
E. Lack of necessary knowledge and skill within the organization.

61
Total Number of Number of Number of Number of Number of
number of respondents respondents respondents respondents respondents
respondents who marked who marked who marked who marked who marked
. A B C D E

5 0 1 0 2 2

A B C D E

INTERPRETATION

From the above chart, it is clear that major difficulties faced by Axis Bank in successful
implementation of Credit Risk Management policies are, calculation of parameters, lack of
necessary skill and knowledge within the organization and timeliness and quality of
information, as these are the options mostly marked by branch managers of Axis Bank.

Q8.
Please rate your opinion on HIGH MEDIUM LOW
following points.

62
 A. How would you rate risk 3
tolerance behavior of your
bank
B. Introduction of credit bureau 4
will help banks to manage
credit risk efficiently.

HIGH MEDIUM LOW

Rating scale being:

5 4 3 2 1

HIGH
5

4
MEDIUM
3

2
LOW
1

63
 A B

Interpretation
From the above chart, it is clear that risk tolerance behavior of Axis Bank is moderate in
nature as it has been marked number 3 on rating scale, and also most of the managers of Axis
Bank are of the view that introduction of credit bureau will help banks to manage credit risk
efficiently, it is evident from its rating be at number 5 on rating scale.

Q9. Provide your assessment of the risk, profitable and cost of the SME
financing relative to other loans of your bank?

SME loans are SME loans are SME loans are

less___ than equally___ than more___ than
others. others. others.
A. Profitable

B. Risky

C. Costly

Total number of Number of Number of Number of

respondents respondents respondents who respondents who
who marked marked marked
A B C
5 2 3 0

5
64
 4

A B C

INTERPRETATION

From the above chart, it is clear that SME financing is comparatively more risky as well as
more profitable and less costly for Axis Bank as compared to other loans provided by Axis
Bank.

Q10. Who are the main players in SME financing?

Please tick ( ) for correct answer.
A. Small banks. B. Large banks.
C. Public banks. D. Niche banks (region /sector specific).
E. Other financial intermediaries outside the banking system.

Total Number of Number of Number of Number of Number of

number of respondents respondents respondents respondents respondents
respondents who marked who marked who marked who marked who marked
. A B C D E

5 1 0 1 2 1

5
65
 4

A B C D E

Interpretation

From the above chart, it is clear that main players in SME financing are niche banks

(region/sector specific), followed by small banks and public banks. Also other financial

intermediaries outside the banking system are major players in SME financing. It is evident

from above that large banks lack behind in SME financing reasons of this may be the

formalities involved in taking credit from large banks or can be the increased rate of interest

as compared to other bank.

CASE STUDY

Details of case study

Name M/s Dynemic Products Limited (DPL)
Constitution Public Limited Company
Office Address B- 301, Satyamev Complex-1, Opp. New Gujarat High Court,
S.G.Highway, Sola, Ahmedabad-380 060, Gujarat, India.
Line of activity Manufacturing of Food Colour Products
Sector Chemical and Chemical Products
Dealing with us New Connection
Incorporation 14th June 1990

Group Not a recognized group

66
Rating
Associate Concern
Share holding pattern
Share Price movement
External: Not done.
Internal: SME 3 (ABS 31.03.2009)
Dynemic Overseas (India) Private Limited
Dynemic USA Inc.
As mentioned below
Listed on the BSE
Current Market Price – Rs.22.35/- (27.11.2009)
52 week high/low – Rs. 15.15 ( 22 Apr' 09) / Rs. 27.35 ( 16 Jan' 09)

Brief Background:
The Company was incorporated on 14th June, 1990 as Private Limited Company. The Name
was subsequently changed to Dynemic Products Limited on 31/12/1992. The Company was
promoted with the objective of carrying on the business of manufacturing S.P.C.P, the raw
material for Food Color, reactive & Raazole Dyes.

In the Year 2000 the company acquired the running business of M/s Safforn Dye Stuff
Industries and started manufacturing wide range of food colors at the premises 3709/6, GIDC
Estate, Ankleshwar having plot area of admeasuring 3700 Sq.Mtr.

As the company aims to provide entire range qualitative and quantitative service to food
industry, as its Unit I. The company commenced manufacturing of food colors namely
Tratrazine in the year 2000-01. Both the units at Ankleshwar are Ultra modern and have eco
friendly plants with in house testing facilities to control quality at every level of
manufacturing. The Company gained goodwill in the short span of time due to its quality
product. The company has well equipped state of art in house laboratory which conduct test
of every parameter of food color & Dye intermediates laid down under national and
international authorities. The Company exports its product to around 41 countries worldwide.
All these have led the company to acquire and retain a status of largest manufacturer and
supplier of food colors and dye intermediates in India.

Marketing Strategy/Marketing arrangement

Strong and experience people are leading company’s marketing department. Company’s total
turnover is divided into:
 Exports Sales
 Local Sales

67
 Operational & Financial Analysis
(Rs. in lacs)
Particulars 31.03.09 31.03.10 31.03.11 31.03.12 31.03.13
(Actuals) (Actuals) (Actuals) (Projected) (Projected)
Gross Sales 3231.12 3657.70 4911.20 6500.00 7500.00
Net Sales 3231.12 3657.70 4911.20 6500.00 7500.00
Net Sales Growth Rate % 12.79% 13.20% 34.27% 32.35% 15.38%
Operating Profit 227.49 313.80 261.62 621.29 729.97
Other Income 141.52 (5.36) 56.07 55.00 65.00
PBDIT 322.88 412.89 503.87 881.74 1018.09
Depreciation 47.94 50.62 96.12 110.94 107.00
Interest 47.45 48.47 146.12 149.50 181.12
PBT 369.01 308.44 317.69 676.29 794.97
PAT 266.95 184.99 190.03 446.42 524.76
Cash Profit 182.35 103.07 153.62 424.83 499.22
Operating Profit Margin % 7.04% 8.58% 5.33% 9.56% 9.73%
PBDIT Margin % 9.99% 11.29% 10.26% 13.57% 13.57%
PAT Margin % 8.26% 5.06% 3.87% 6.87% 7.00%
Paid up Capital - Equity 1132.84 1132.84 1132.84 1132.84 1132.84
Unadjusted TNW 2649.73 2707.33 2764.96 3078.84 3471.06
Unadjusted TOL 1109.42 1589.26 2331.73 2890.12 3094.44
Unadjusted TOL/ TNW 0.42 0.59 0.84 0.94 0.89
Adjusted TNW 2710.84 2725.68 2828.34 3237.48 3629.70
Adjusted TOL 1048.31 1570.91 2268.35 2731.48 2935.80
Adjusted TOL/ TNW 0.39 0.58 0.80 0.84 0.81
Interest Coverage 9.82 8.44 3.84 6.27 5.98
Current Ratio 1.76 1.34 0.94 1.13 1.24
DSCR 7.67 1.83 1.21 2.35 2.20
NOCF 105.69 230.12 654.38 (269.99) 149.24
Net Profit / NOCF 2.53 0.80 0.29 (1.65) 3.52
NOCF / Interest 2.23 4.75 4.48 (1.81) 0.82
NOCF / Financing Payments 0.08 0.13 0.29 (0.08) 0.04
Total Debt / NOCF (No. of 1.17 0.78 0.60 (0.45) (0.00)
years)

Rating

The rating of the company as per SME Rating Tool comes to SME - 3 (ABS 31.03.2011). The
segment wise scoring is as under:

Particulars Rating
Overall Scoring SME-3

68
 Financial scoring SME-4
Business scoring SME-3
Management scoring SME-3
Industry scoring SME-3

Analysis

a) The promoters of the company are having rich experience of more than 19 years in
various Industries.
b) The proposed expansion of the company is having huge market potentials.
c) The Company is the leader in Manufacturing and export of food colours.
d) The overall credit rating of company is SME –3.
e) The business is 19 years old.
f) The sale of the company has been showing an increasing trend throughout the years
under consideration. The sale of the company was increased from Rs. 3231.12 lacs in
FY08-09 (Aud) to Rs. 3657.70 lacs (Aud) in FY09-10 and further to Rs. 4911.20 lacs
in FY10-11 (Aud).
g) Since the company is into Manufacturing of Food Colours, the net margin normally
remains between 5.00% - 9.00%. The net profit of the company was decreased from
Rs. 266.95 lacs in FY08-09 (Aud) showing margin of 8.26% to Rs. 184.99 lacs in
FY09-10 (Aud) showing margin of 5.06%. However, the same was maintained at Rs.
190.03 lacs in FY10-11 (Aud) showing margin of 3.87% due to decrease in margins in
the chemical industry on account of raw material price fluctuations worldwide. The
same was an aberration. But, now the industry is on revival and boom path.
Considering the same, the company has estimated the profit of Rs. 446.42 lacs for
FY11-12 @ margin of 6.87%, which may be accepted.
h) The TOL/TNW of the company increased from 0.42 in FY08-09 (Aud) to 0.59 in
FY09-10 (Aud) and to 0.84 in FY10-11 (Aud). The company has estimated
TOL/TNW at 0.94 and 0.89 for FY11-12 and FY12-13 respectively on account of
increased bank borrowings, which may be considered comfortable.
i) The current ratio of the company was 1.76 in FY08-09 (Aud) which decreased to 1.34
in FY09-10 (Aud) and which further plummeted to 0.94 in FY10-11 (Aud), on
account of capex expansion which will be completed in the current fiscal. The

69
 company has estimated its current ratio at 1.13 and 1.24 for FY11-12 and FY12-13,
which is reasonably acceptable as regards to the liquidity position of the company.
j) The NOCF is positive during FY 2010-11 (Aud) by Rs. 654.38 lacs. NOCF is
estimated negative in FY 2011 –12 at Rs. 269.99 lacs, as per projected financials
submitted by the company on account of increase in stock and receivables which is
keeping in line with the increase in turnover and the holding levels are as per the
industry practice.
k) The overall conduct of the account, repayment status etc. at Citi Bank and HDFC is
satisfactory.
l) The main director is dynamic and has rich experience of more than 20 years in his line
of activity.
m) The company is a registered SSI unit.
n) Market reference of the company is satisfactory
o) The overall projected performance and financial of the unit are satisfactory.

Analysis

a) The market reputation of promoter is satisfactory.

b) Firm has achieved sales of Rs. 204.49 lacs in FY. 2009- 10 and Rs. 431.02 lacs in FY.
2010-11, this is more than double of the last year. Firm has submitted estimated sales
of Rs. 568.57 lacs for FY 2011-12, against which firm has achieved sales turnover of
Rs. 235.70 lacs till 31st October 2011, which is 41.45 % of estimated sales.

c) Profitability of the firm is also showing increasing trend y-o-y bases. Firm has
achieved PBT of Rs. 3.71 lacs in FY 2009-10 & Rs. 8.55 lacs in FY 2010-11.
Profitability has also rose in line with increase in sales of previous financial year.
PBDIT of the firm is also on increasing trend, which can be considered as satisfctory.

d) Net worth of the firm is increasing y-o-y bases, with plough back of the profit in the
business. Unadjusted gearing of the firm is on higher side for FY 2010-11 mainly due
to higher side of creditors at particular point in March 2010. In March 2011,
proprietor submitted that purchase of raw material was at better price & the suppliers
also allowed credit period. Hence, the creditor base was on higher side.

70
e) Debtor’s level of the firm is average 60 days for all the past 3 years. Proprietor has
submitted that average payment duration is 60 days maintained in the business.
Debtors maintain regularity in payment, which can be considered as acceptable.

f) The Current Ratio of the firm has been on higher side, above the benchmark level of
1.33 for all the past 3 years. Current ratio for FY 2009-10 was 1.44 & for FY 2010-11
was at 1.77. Estimated ratio is 1.66 for FY 2011-12. Although, it has been maintained
above the benchmark level, which can be considered as acceptable.

71
CHAPTER - 9

FINDINGS
 Credit appraisal is done to check the commercial, financial & technical viability of the
project proposed its funding pattern & further checks the primary or collateral security
cover available for the recovery of such funds
 Credit is the core activity of the banks & important source of their earnings which go
to pay interest to depositors, salaries to employees & dividend to shareholders
 Credit & risk go hand in hand
 In the business world risk arises out of:-
 Deficiencies / lapses on the part of the management
 Uncertainties in the business environment
 Uncertainties in the industrial environment
 Weakness in the financial position
 Bank’s main function is to lend funds/ provide finance but it appears that norms are
taken as guidelines not as a decision making
 A banker’s task is to indentify/assess the risk factors/parameters & manage/mitigate
them on continuous basis
 The Credit Appraisal process adopted by the bank take into account all possible
factors which go into appraising the risk associated with a loan
 These have been categorized broadly into financial, business, industrial, management
risks & are rated separately
 The assessment of financial risk involves appraisal of the financial strength of the
borrower based on performance & financial indicators
 The norms of the bank for providing loans are not stringent, i.e. even if a particular
client is not having the favorable estimated and financial performance, based on its
past record and future growth perspective, the loan is provided.

72
  By providing various schemes of loans, Axis bank tries to cater to the financial
requirements of almost all the types of SME units.

CHAPTER - 10

CONCLUSION

 Finance management is the backbone of any organizations and hence yields a number
of job options ranging from strategic financial planning to sales.

73
 From the study of Credit appraisal of SME, it can be concluded that credit appraisal
should therefore be based on the following factors, the same are applied at Axis Bank:
 Financial performance
 Business performance
 Industry outlook
 Quality of management
 Conduct of account

 Axis Bank loan policy contains various norms for sanction of different types of loans.
These all norms do not apply to each & every case. Axis Bank norms for providing
loans are flexible & it may differ from case to case.

 Usually, it is seen that credit appraisal is basically done on the basis of fundamental
soundness. But, after different types of case studies, our conclusion was such that
credit appraisal system is not only looking for financial wealth. Other strong
parameters also play an important role in analyzing credit worthiness of the
firm/company.

 In all, the viability of the project from every aspect is analyzed, as well as type of
business, industry, promoters, past records, experience, projected data and estimates,
goals, long term plans also plays crucial role in increasing chances of getting project
approved for loan.

74
CHAPTER - 11
BIBLIOGRAPHY

Web Sites
www.rbi.org.in
www.Axis Bank.com
www.indianbankassociation.com
www.bankersindia.com
www.wikipedia.com
Books:
“Credit and banking” By: K. C. Nanda

0 State Bank Of India is granting credit in all sectors in an Equated Monthly

Installments so that any body can borrow money easily

0 Project findings reveal that State Bank Of India is lending more credit or
sanctioning more loans as compared to other Banks.

0 State bank Of India is expanding its Credit in the following focus areas:

l. 831 Term Deposits

2. 831 Recurring Deposits
3. 831 Housing Loan
4. 831 Car Loan
5. 881 Educational Loan
6. 881 Personal Loan ...etc
BABASAB PATIL 4

State Bank of India

Credit Risk Management in State Bank Of India

0 In case of indirect agriculture advances, $31 is granting 3.1% of Net Banks

75
Credit, which is less as compared to Canara Bank. Syndicate Bank and
Corporation Bank. 881 has to entertain indirect sectors of agriculture so that it
can have more number of borrowers for the Bank.

0 881’s direct agriculture advances as compared to other banks is 10.5% of the Net
Bank’s Credit, which shows that Bank has not lent enough credit to direct
agriculture sector.

0 Credit risk management process of 581 used is very effective as compared with
other banks.

RECOMMENDATIONS:

0 The Bank should keep on revising its Credit Policy which will help Bank's effort
to correct the course of the policies

0 The Chairman and Managing DirectorlExecutive Director should make

modifications to the procedural guidelines required for implementation of the
Credit Policy as they may become necessary from time to time on account of
organizational needs.

0 Banks has to grant the loans for the establishment of business at a moderate rate
of interest. Because of this, the people can repay the loan amount to bank
regularly and promptly.

0 Bank should not issue entire amount of loan to agriculture sector at a time, it
should release the loan in installments. If the climatic conditions are good then
they have to release remaining amount.

0 881 has to reduce the Interest Rate.

0 8131 has to entertain indirect sectors of agriculture so that it can have more number
of borrowers for the Bank.

76
BABASAB PATIL 5

CONCLUSION:
The project undertaken has helped a lot in gaining knowledge of the “Credit Policy and
Credit Risk Management” in Nationalized Bank with special reference to State Bank Of
India. Credit Policy and Credit Risk Policy of the Bank has become very vital in the
smooth operation of the banking activities. Credit Policy of the Bank provides the
framework to determine (a) whether or not to extend credit to a customer and (b) how
much credit to extend. The Project work has certainly enriched the knowledge about the
effective management of “Credit Policy" and “Credit Risk Management” in banking
sector.

0 “Credit Policy” and “Credit Risk Management” is a vast subject and it is very
difficult to cover all the aspects within a short period. However, every effort has
been made to cover most of the important aspects, which have a direct bearing
on improving the financial performance of Banking Industry

0 To sum up, it would not be out of way to mention here that the State Bank Of
India has given special inputs on “Credit Policy" and “Credit Risk
Management”. In pursuance of the instructions and guidelines issued by the
Reserve Bank of India, the State bank Of India is granting and expanding credit
to all sectors.

0 The concerted efforts put in by the Management and Staff of State Bank Of
India has helped the Bank in achieving remarkable progress in almost all the
important parameters. The Bank is marching ahead in the direction of achieving
the Number-l position in the Banking Indus

mm;
State Bank at India
Credit Risk Management in State Bank Oflndia

77
Credit Risk Management in State Bank Ol‘lndia
The success of credit risk management models depends on sound design,
intelligent implementation. and responsible application of the model. While there
has been significant progress in credit risk management models. the industry must
continue to advance the state of the art. So far the most successful models have
been custom designed to solve the specific problems of particular institutions.
A credit risk management model tells the credit risk manager how to allocate scarce
credit risk capital to various businesses so as to optimize the risk and retum
characteristics of the firm. It is important or understand that optimize does not mean
minimize risk otherwise every firm would simply invest its capital in risk less
assets. A credit risk management model works by comparing the risk and return
characteristics between individual assets or businesses. One function is to quantify
the diversification of risks. Being well-diversified means that the firms has no
concentrations of risk to say, one geographical location or one counterparty.
Steps to follow to minimize different fine of risks:-
Standardized

Internal Ratings
Credit Risk
Credit Risk Models
Credit Mitigation
Trading Book
Risks ) u
arket Risk
Banking Book
Operational

Other Risks
Other
BABASAB PATIL 43

State Bank ol India

Credit Risk Management in State Bank Oflndia
78
El Status of deterioration in value of primary security or stock X
deletion
Status of deterioration in value of collateral securit
Status of deterioration in ‘rsonal net worth and TNW
Ade uae of insurance for the rimarri'collateral securit
Labor situation."industrial relations
Delay or default in payments ofsalaries and statutory dues
Non co-operation by the borrower
Intended end-use of financing
F5 Any other adverse featurei'snon financial including corporate X
governance issues suchasadverse publicity, strictures from
regulators, pitical risk and adverse trade environment not covered
Difficultv of measuring credit risk:-

Measuring credit risk on a portfolio basis is difficult. Banks and financial institutions
traditionally measure credit exposures by obligor and industry- They have only recently
attempted to define risk quantitatively in a portfolio context e.g.. a value-at-risk (VaR)
framework. Although banks and financial institutions have begun to develop internally,
or purchase. systems that measure VaR for credit. bank managements do not yet have
confidence in the risk measures the systems produce- In particular, measured risk levels
depend heavily on underlying assumptions and risk managers often do not have great
confidence in those parameters- Since credit derivatives exist principally to allow for the
effective transfer of credit risk, the difficulty in measuring credit risk and the absence of
confidence in the result of risk measurement have appropriately made banks cautious

BABASAB PATIL 51

Credit Risk Management in State Bank Of India

Bank’s investments in accounts receivable depends on: (a) the volume of credit
sales, and (b) the collection period. There is one way in which the financial manager can
affect the volume of credit sales and collection period and consequently, investment in
79
accounts receivables. That is through the changes in credit policy. The term credit policy
is used to refer to the combination of three decision variables: (I) credit standards, (2)
credit terms, and (3) collection efforts, on which the financial manager has influence.
(1) Credit Standards:

Credit Standards are criteria to decide the types of customers to whom goods could
be sold on credit. If a firm has more slow-paying customers, its investment in accounts
receivable will increase. The firm will also be exposed to higher risk of default.

(2) Credit Terms:

Credit Terms specify duration of credit and terms of payment by customers.

Investment in accounts receivables will be high if customers are allowed extended time
period for making payments.

(3) Collection Efforts:

Collection efforts determine the actual collection period. The lower the collection
period, the lower the investment in accounts receivable and higher the collection period,
the higher the investment in accounts receivable.

GOALS OF CREDIT POLICY

State Bank at India

Credit Risk Management in State Bank Of India
RE C OMMENDA TIONS

0 The Bank should keep on revising its Credit Policy which will help Bank's effort
to correct the course of the policies

0 The Chairman and Managing DirectorfExecutive Director should make

modifications to the procedural guidelines required for implementation of the
80
Credit Policy as they may become necessary from time to time on account of
organizational needs.

0 Banks has to grant the loans for the establishment of business at a moderate rate
of interest. Because of this, the people can repay the loan amount to bank
regularly and promptly.

0 Bank should not issue entire amount of loan to agriculture sector at a time, it
should release the loan in installments. If the climatic conditions are good then
they have to release remaining amount.

0 8131 has to reduce the Interest Rate.

0 881 has to entertain indirect sectors of agriculture so that it can have more number
of borrowers for the Bank.

BABASAB PATIL 98

81