UNIVERSITY OF MUMBAI

PROJECT REPORT ON CREDIT APPRAISAL

UNION BANK OF INDIA

SUBMITTED BY: Mr. SAGAR JADHAV ROLL NO: 33

MASTER OF MANAGEMENT STUDIES SEM III

LALA LAJPATRAI INSTUTUE OF MANGEMENT [2009-2011]

SR. NO 1 2 3 4 5 6 7 8 9 10 11

CONTENT

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ACKNOWLEDGMENT EXECUTIVE SUMMARY OBJECTIVES OF THE STUDY OVERVIEW OF THE BANKING INDUSTRY OVERVIEW OF UNION BANK OF INDIA INTRODUCTION TERMINOLOGIES INVOLVED TYPES OF CREDIT CASE STUDY CONCLUSION BIBLIOGRAPHY

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ACKNOWLEDGMENT
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I sincerely feel the credit of the project work could not be narrowed to only one individual. This work is an integrated effort of all those concerned with it, it would have been quite difficult without their direct & indirect co-operation. I wish to express my appreciation and gratitude to all the concerned people. First and the foremost my intellectual debt is to (Senior Lecturer Institute of Management Studies) and (General Manager Credit Department Union Bank of India, Thane) who have contributed significantly towards the completion of the project They have provided the guidelines on which this project was made. I am thankful to all the people who have given their precious time and provided me with requisite data without which this project would not have completed .I also thank them for giving their valuable suggestions during the entire period of research. However, I accept the sole responsibility for any errors of omission and commission.

SAGAR JADHAV.

EXECUTIVE SUMMARY

The project undertaken is credit appraisal of industrial finance for SMEs. The project emphasis on understanding the procedure and process used by union bank of India to assess the credit worthiness of the borrower. Small scale industry in India is booming and contributing to 17% of GDP in year 2009, many banks are focusing their attraction towards this sector. The credit appraisal process is the scientific way of giving the credit to corporate client by analyzing the credit worthiness of the company through different parameters. The first step in credit appraisal project is to understand the Indian banking industry and the performance of the few Indian banks in the previous financial years since project undertaken is in banking industry a glance on union bank of India and small scale industry in India is given and the steps taken by the banks to development and welfare of SSI. The credit appraisal for SME starts with Understanding the need of loan to the borrower i.e. for which purpose the loan is required. After this next step is to analyze the financial statement of the company to whom the loan is to be sanctioned. The main things which are taken into consideration while analyzing the financial statement are type of statement, nature of activity ,accounting policy, qualities of assets and liabilities , unit wise performance result of the company & directors report. After analyzing the financial statement the second step is to study the principle given by Basel committee on banking supervision which basically Indian banks have to be following as per the order By Reserve Bank of India. The third step is to analyze the key financial ratios of the company such as: Leverage ratio, liquidity ratio, profitability ratio, turnover ratio, inventory norms.

The next step is to understand the methodology used to determine the credit rating. Since the credit rating methodology differ from bank to bank in term of the weight age given to
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the parameters but the parameter used by the banks to assess credit worthiness are almost same to all company. The banks mainly provide two types of credit facility known as term loan and working capital loan. The working capital loan is given by three methods namelyTurn over method, FBF method and cash budget method. Term loan is the loan given by the company for a long term generally more than one year and less than 10 years to company. The term loan is assessed by the break even analysis, cost benefit ratio, payback period. While appraising the term loan technical, managerial, financial feasibility is checked. The debt service coverage ratio is used for assessing the company capacity to pay back installment of loan and interest on term loan.

OBJECTIVES OF THE STUDY

The objective of research is to study the Corporate Banking in Union Bank of India. The area of study in Corporate Banking in Union Bank of India would include:Working Capital Financing and Term loan financing :- To support extended both as Fund based and Non-Fund based facilities to Corporate, Partnership firms, Proprietary concerns. Working Capital finance extended to all segments of industries. The project research focuses on determining the various factors considered in analyzing the financial needs (working capital) of their clients and determining the limit of finance. The objective of the project is also to study the well-documented loan policy. The study would involve assessment of Advances.

PURPOSE OF THE STUDY FOR THE ORGANISATION:The Credit Appraisal process in union bank of India had the following: To understand the credit rating procedure. To analyze creditworthiness of the party which will include, 1. Analysis of balance sheets 2. Analysis of securities provided This study would involve working out and interpreting the financial ratios in case of working capital financing and term loans. The study also involves the study of procedural formalities included in sanctioning the finance to its clients.

Methodology:6

The methodology used in my case is exploratory study. Exploratory study is used to gather preliminary information. In this conclusion cannot be predicted. In my case it was not sure whether the concerned party would get the credit or not. The data used is secondary data. The basic source of data was as follows: balance sheets company profile data Previous ratings of the organization if any.

The indicators used were mainly the Ratios; the purpose of each ratio is as follows: 1) Current ratio to examine the liquidity aspects. 2) Debt equity ratio to examine term liability. 3) Debt service coverage ratio to examine the servicing capability of repayment obligations. For term loans financing DSCR plays an important role. While for loan relating to working capital financing Current ratio & DER are mainly considered.

LIMITATIONS OF THE STUDY:Every study or research is conducted under some limits and there are some restrictions which have some impact on the project. Limitations of this project are: Coverage: The study aims at covering the corporate banking of Union Bank of India only. The study aims at gaining the practical knowledge by taking help of bank personals. So there might have been tendencies among the personals to amplify or filter their responses due to time limitation.

OVERVIEW OF THE BANKING INDUSTRY

Banking in India originated in the first decade of 18th century with The General Bank of India coming into existence in 1786. This was followed by Bank of Hindustan. Both these banks are now defunct. The oldest bank in existence in India is the State Bank of India being established as "The Bank of Bengal" in Calcutta in June 1806.

Nationalization:By the 1960s, the Indian banking industry has become an important tool to facilitate the development of the Indian economy. At the same time, it has emerged as a large employer, and a debate has ensued about the possibility to nationalize the banking industry. Indira Gandhi, thethen Prime Minister of India expressed the intention of the GOI in the annual conference of the All India Congress Meeting in a paper entitled "Stray thoughts on Bank Nationalization." The paper was received with positive enthusiasm. Thereafter, her move was swift and sudden, and the GOI issued an ordinance and nationalized the 14 largest commercial banks with effect from the midnight of July 19, 1969.A second dose of nationalization of 6 more commercial banks followed in 1980. The stated reason for the nationalization was to give the government more control of credit delivery. With the second dose of nationalization, the GOI controlled around 91% of the banking business of India. Liberalization:In the early 1990s the thenMr.NarasimhaRao government embarked on a policy of liberalization and gave licenses to a small number of private banks, which came to be known as New Generation tech-savvy banks, which included banks such as UTI Bank (Now Axis), ICICI Bank and HDFC Bank. This move, along with the rapid growth in the economy of India, kick started the banking sector in India, which has seen rapid growth with strong contribution from all the three sectors of banks, namely, government banks, private banks and foreign banks. Current scenario:Currently, overall, banking in India is considered as fairly mature in terms of supply, product range, Even though reach in rural India still remains a challenge for the private sector and foreign banks. Most of the banks in this category are concentrated in the high-growth urban areas in metros (that account for approximately 70% of the total banking business). Even in terms of
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quality of assets and capital adequacy, Indian banks are considered to have clean, strong and transparent balance sheets-as compared to other banks in comparable economies in its region. The Reserve Bank of India is an autonomous body, with minimal pressure from the government. The stated policy of the Bank on the Indian Rupee is to manage volatility-without any stated exchange rate-and this has mostly been true. The banking industry in India seems to be unaffected from the global financial crises which started from U.S in the last quarter of 2008. Despite the fallout and nationalization of banks across developed economies, banks in India seems to be on the strong fundamental base and seems to be well insulated from the financial turbulence emerging from the western economies. The Indian banking industry is well placed as compare to their banking industries western counterparts which are depending upon government bailout and stimulus packages. The strong economic growth in the past, low defaulter ratio, absence of complex financial products, regular intervention by central bank, proactive adjustment of monetary policy and so called close banking culture has favored the banking industry in India in recent global financial turmoil. Although there will no impact on the Indian banking system similar to that in west but the banks in India will adopt for more of defensive approach in credit disbursal in coming period. In order to safe guard their interest, banks will follow stringent norms for credit disbursal. There will be more focus on analyzing borrower financial health rather than capability. Indian banks are now quoting al higher valuation when compared to banks in other Asian countries (viz. Hong Kong, Singapore, Philippines etc.) that have major problems linked to huge Non Performing Assets (NPAs) and payment defaults. Indian nationalized banks (banks owned by the government) continue to be the major lenders in the economy due to their sheer size and penetrative networks which assures them high deposit mobilization.

OVERVIEW OF UNION BANK OF INDIA

Union Bank of India was inaugurated by the father of the nation Mohandas Karamchand Gandhi. It commenced operations in the year 1920. Union Bank has offered vast and varied services to its entire valuable clientele taking care of their needs. Today, with its efficient customer service, consistent profitability & growth, adoption of new technologies and value added services, Union Bank truly lives up to the image of, Good People to bank with. Anticipative banking is an integral ingredient of value-based services. This ability to gauge the customer's needs long before he realizes, best reduces the gap between expectance and deliverance Manpower is the key factor for the success of any organization. Union Bank has a dedicated family of about 26,000 qualified / skilled employees who will and always will be delighted to extend their services to the customers with heartfelt efforts The Bank is a Public Sector Unit with 55.43% Share Capital held by the Government of India. The Bank came out with its Initial Public Offer (IPO) in August 20, 2002 and Follow on Public Offer in February 2006. Presently 44.57 % of Share Capital is presently held by Institutions, Individuals and Others. The Bank has over the years earned the reputation of being a techno-savvy Bank and is one of the front runners amongst public sector bank in the field of technology. It is one of the pioneer public sector banks, which launched Core Banking Solution in 2002. As of September 2005, more than 719 branches/extension counters of Bank are networked under Core Banking Solution, powered with the centralized technology platform; the Bank has launched multiple Electronic Delivery Channels and has installed nearly 469 networked ATMs. Online Tele banking facility is available to all its Core Banking customers. The multi facility versatile Internet Banking Solution provides extensive information in addition to the on line transaction facility to both individuals and corporate banking with the Core Banking branches of the Bank. In addition to regular banking facilities, today customer can also avail variety of value added services like cash

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management service, insurance, mutual funds, Demat from the bank. Today there are more than 26,000 employees in Union Bank of India. UBI has been ranked at 5th position among the nationalized bank in India.

Corporate Mission: A logical extension of the Vision Statement is the Mission of the Bank, which is

to gain market recognition in the chosen areas. market. To facilitate a process of restructuring of branches to support a greater efficiency in the retail banking field. To sustain the mission objective through harnessing technology driven banking and delivery channels. To promote confidence and commitment among the staff members, to address the expectations of the customers efficiently and handle technology banking with ease. To build a sizeable market share in each of the chosen areas of business through

effective strategies in terms of pricing, product packaging and promoting the product in the

ABOUT UNION BANK OF INDIA We should have the ability to carry on a big bank, to manage efficiently Crores of rupees in the course of our national activities. Though we have not many banks amongst us, it does not follow that we are not capable of efficiently managing Crores and tens of Crores of rupees."

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MAHATMA.GANDHI

INTRODUCTION

Credit appraisal is the process in which lender appraises the creditworthiness of the borrower. In other words we can say that Credit Appraisal is a process to ascertain the risks associated with the extension of the credit facility. Offering credit is an operation involving risk. Before offering credit to an organization, its financial health must be analyzed. Credit should be disbursed only after ascertaining satisfactory financial performance. Based on the financial health of an organization, banks assign credit ratings. These credit ratings are used to fix the interest rate and quantum of installment. This study aims to analyze the financial health of organizations that approach Union Bank of India (UBI) for credit facilities. After analyzing credit health, the credit rating is determined. On the basis of credit rating, the interest rate guidelines circular is consulted to fix a price for the credit facilities i.e. determine the interest rate. The significance of this project is that every organization needs credit for some or the other purposes but financial institution cannot just give credit to anybody as there is risk involved in that. So before coming to the decision of lending credit appraisal is carried out. I always wanted to know the procedure behind lending process and summer project in that was best opportunity for me to know the same. In this I have taken a case study of UBI client to explain the same.

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TERMINOLOGIES INVOLVED

Prime Securities- Primary security is the asset created out of the credit facility extended to the borrower and / or which are directly associated with the business / project of the borrower for which the credit facility has been extended. Collateral Securities- In lending agreements, collateral is a borrower's asset that is forfeited to the lender if the borrower is insolvent --- that is, unable to pay back the principal and interest on the loan. When insolvent, the borrower is said to default on the loan, in which case the lender becomes the owner of the collateral. It is the additional security given while applying for the loan. Credit rating- It is the rating which determines the creditworthiness of the concerned party. Union Bank of India follows a finely defined Credit Rating Model for assessing the creditworthiness of the applicant. The credit rating model asses various aspects of the projects and assigns scores against them thereby determining the risk level involved with the project It is divided in Four Sections:

1. Rating of the Borrower Financial Risk Management Risk Market Condition/ Demand Situation
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2. Rating of the Facility 3. Risk mitigators 4. Business Consideration

1) Rating of the Borrower: This part of credit rating model deals with assessing the financial and managerial ability of the borrower. The financial ability of the firm is derived by calculating ratios that determine the short term and long term financial position of the firm Short term ratios include Current Ratio, determines the liquidity position of the company over a period of one year. The current ratio is an indication of a firm's market liquidity and ability to meet creditor's demands. It is excess of current assets over current liability. If current liabilities exceed current assets (the current ratio is below 1), then the company may have problems meeting its short-term obligations. If the current ratio is too high, then the company may not be efficiently using its current assets. According to the guidelines given to UBI the ideal level is at 1.33:1 however the acceptable level is at 1.17:1. However at times current ratio may not be a true indicator, the current ratio for road projects is very high but this does not indicate that the company is not using its assets well but the ratio is high because the activity involves more in dealing with current assets. Hence it is important for the evaluator to understand the nature of the industry. Long term ratio include Debt Equity Ratio is a financial ratio indicating the relative proportion of equity and debt used to finance a company's assets. This ratio is also known as Risk, Gearing or Leverage. A high debt equity ratio is not preferable by an investor as the company already has acquired high amount of funds from market thereby reducing the investor share over the securities available, increasing the risk. It is also important for the lender bank to assess the firms debt paying capacity over a period. Such capacity is derived by calculating ratio like Debt Service Coverage Ratio minimum acceptable level is 1.50.
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It also necessary for the lender to determine the ability of the firm to achieve the projected growth by evaluating the projected sales with actuals. However such parameter remains non applicable if the business is new.

Financial risk evaluation is only one of the parameter and not the only parameter for determining the risk level. It is important to evaluate the Management Risk also while evaluating the risk relating to borrower. It is the management of the company that acts as guiding force for the firm. The key managerial personnel should bear the capacity to bail out the company from crisis situation. In order to remain competitive it is essential to take initiatives. Such skills are developed over years of experience, thus for better performance it is required to have a team of well qualified and experienced personnel.

Market potential / Demand Situation A Company does not operate in isolation there are various market forces that acts in either favorable or unfavorable manner towards its performance. Thus the rating would not give true picture if does take market or demand situation in consideration. The demand supply situation / market Potential plays an important role in determining the growth level of the company like i) Level of competition: monopoly, favorable, unfavorable ii)Seasonality in demand: affected by short term seasonality, long term seasonality or may not be affected by seasonality in demand. iii)Raw Material Availability: iv) Location Issueslike proximity to market, inputs, infrastructure: Favorable, neutral, unfavorable.

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v) Technology i.e., proven Technology- not to be changed in immediate future, technology undergo change, outdated technology. vi)Capacity utilization

2) Rating of the Facility: The company can start functioning only after completing statutory obligations laid down by the governing authority. Such statutory obligation involves obtaining licenses, permits for ensuring smooth operations. Preparation and Submission of Financial Statements, Stock statements in the standard format within the given time schedule.

3)Risk mitigators: It involves the securities, guarantees given by the concerned party to the bank.

4) Business Consideration: The length of relationship with the bank enables the lender to assess the previous performance of the account holder. A good track record acts in the favor of the applicant, however a under performance make the lender more vigilant. The income value to the bank also given due consideration. Thus Credit Rating of the Business takes into consideration various aspects that directly or indirectly is related the performance of the business.

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Credit rating

The diagrammatic representation is shown as below:-

Rating of Borrower

Rating of Facility

Risk Mitigator

Business Aspects

Financial Risk

Management Risk

Evaluation of market/industry

After evaluating the risk level involved the lender bank decided on lending Interest Rate. In UBI they are categorized in 9 segments

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1. lowest Risk CR-1 2. Low Risk CR-2 3. Medium Risk CR- 3 4. Moderate/ Satisfactory Risk CR- 4 5. Fair Risk CR- 5 6. High Risk CR- 6 7. Higher Risk CR- 7 8. highest risk CR- 8 9. NPA CR- 9

In UBI, a business receiving Credit Rating above level 6 are not considered good from point of investment and thus are avoided.

Working Capital GapWorking Capital Gap (WCG) is the difference between Current assets and Other Current Liabilities (OCL) [excluding Bank Borrowings] of a unit. This has to be financed from the NWC and BB only. Working Capital Gap = Current Assets - Current Liabilities other than Bank Borrowings

Margin Margins are imposed with a view to have adequate stake of the promoters in the business both to ensure his adequate interest in the business and to act as a bulwark against any shocks that the business may sustain. The margins stipulated will depend on various factors like salability, whether the material is imported or indigenous, quality, durability, price fluctuations in the
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market for the commodity etc. Sundry creditors and advance payments received will not be reckoned towards margins. Margin on different items of stocks viz. raw material, stock in process, finished goods may be kept same or different. Margins on receivables are usually higher than stocks as receivables include profits. The logic is that raw materials, by definition, should have alternative uses and hence, salability of raw materials should be easier than finished goods and of course, stock in process. Receivables attract the highest margin as bankers are skeptical about the accuracy, reliability of dues and even the very existence of the receivables, as checking on them could be a cumbersome task.

DETERMINATION OF INTEREST RATEThe interest rate is determined from the interest rate guidelines circular. This circular is regularly updated to reflect the banks latest credit policies. The rupee credit is based on BPLR and the foreign exchange loans are based on LIBOR. Credit disbursement at Union Bank of India This project was undertaken at the Industrial Finance Branch of Union Bank of India, at the Credit Department. 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:1. 2. 3. Working capital finance Term loan for mega projects Non fund based Limits like Letter of Guarantee, Letter of Credit

Companies present audited balance sheets of the current and previous years. These are used to determine the financial health, turnover trends and rise and fall of profitability. Then credit rating is done. The financial health and credit rating are theoretical methods for determining the right interest rate. However, in practice, banks consider other factors such as history with client, market reputation and future benefits with clients. Thus, a difference exists between theory and practice.

ASSESSMENT OF WORKING CAPITAL REQUIREMENT:19

The working capital Assessment depends upon the level of business, segment of the borrower, prevailing guidelines of RBI, trade and industry practice prevailing and other objective factors. The assessment shall be based on a total study of borrowers operations, the processing and production cycle of the Industry, Financial and Managerial capability of the borrowers and other parameters relating to the unit and the Industry. The Assessment of the working capital of the borrower can be done under anyone of following four methods:

1) Turnover Method:Under this method, the working capital limit shall be computed at 20% of the projected sales turnover accepted by the Bank. In the case of MSE borrowers seeking/enjoying fund based working capital facilities uptoRs 500 Lacs , the limits shall be assessed on the basis of turnover method. The turnover method shall be applied for sanction of fund based working capital limits to the non MSE borrowers requiring working capital facilities up to Rs. 100 Lacs from the banking system. This system shall be made applicable to traders, merchants, exporters who are not having a predetermined manufacturing/ trading cycle. Under the Turn over method, branches/ offices shall ensure maintenance of a minimum margin on the projected annual sales turnover. In other words, 25% of the estimated sales turnover value shall be computed as working capital requirement , of which at least 4/5th (20%) shall be provided by the bank and the balance 1/5th (5%) shall be by way of promoters contribution towards margin money. However, if the available NWC is more, the same shall be reckoned for assessing the extent of bank finance and lower limits are to be considered.

2)FLEXIBLE BANK FINANCE:Flexible bank finance method is an extension of permissible bank finance method with customer friendly approach in as much as the scope of current assets is made broad based and for evaluating projected liquidity, acceptable level of current ratio is taken at 1.17: 1 against benchmark level of 1.33: 1 . FBF method is applicable for account with credit limits of Rs 1 crore and above for other advances and above Rs 5 Crores for MSE advances.

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Under the FBF system, an uniform classification for current assets and current liabilities shall be adopted on the terms given in CMA data format.

The assessment of credit requirement of a party shall be made based on the projected study of the borrowers business operations vis--vis the production/processing cycle of the industry. The projected level of inventory and receivable shall be examined in relation to the past trend, market developments and industry trend.

TYPES OF CREDIT FACILITY THAT BANK PROVIDES:-

A) FUNDED CREDIT FACILITIES: 1. Working capital 2. Term loans B) NON- FUNDED CREDIT FACILITIES: a. Guarantee b. LC.

FUNDED CREDIT FACILITIES: Funded credit facilities mainly consist of:

1. Working capital :-

Working capital is a financial metric which represents the amount of day-by-day operating liquidity available to a business. Also known as operating capital, it is calculated as current assets

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minus current liabilities. A company can be endowed with assets and profitability, but short of liquidity, if these assets cannot readily be converted into cash. Current assets and current liabilities include three accounts which are of special importance. These accounts represent the areas of the business where managers have the most direct impact:

Accounts receivable (current asset) Inventory (current assets), and Accounts payable (current liability)

In addition, the current (payable within 12 months) portion of debt is critical, because it represents a short-term claim to current assets. Common types of short-term debt are bank loans and lines of credit. A positive change in working capital indicates that the business has either increased current assets (that is received cash, or other current assets) or has decreased current liabilities, for example has paid off some short-term creditors. The working capital includes the following : a. Cash credit hypothecation of stocks b. EPC-sublimit of CC c. Cash credit hypothecation of book debts d. FBP/FBD/ODF OBC(foreign bill payment, foreign bill negotiation) FBN-DP/DA 90 days.

2. Term loans:A term loan is a secured commercial loan made to business concerns for a specific period (normally three to ten years).It is repaid with interest, usually with regular periodical payments.

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Term Loan usually are granted for the purchase of longer-term fixed assets (land, buildings and equipment etc.). Other purposes may include business expansion investments and company acquisitions. The repayment term of an individual loan will vary depending on the useful life of the asset being financed and the lending policy of the financial institution (e.g. 3 years for a computer, 10 years for machinery etc.). Generally, the interest rate on a term loan will be higher than the rate on an operating loan to reflect the risk associated with the longer term.

NON- FUNDED CREDIT FACILITIES: Besides meeting the credit requirements of the borrowing enterprises by way of fund-based credit facilities, banks also cater to the non-fund based requirements of their clients. The fund-based facilities provided by the banks require immediate outlay of funds which must be provided beforehand. On the other hand, the non-fund based facilities are essentially in the nature of promises made by banks in favor of a third party to provide monetary compensation on behalf of their clients if certain situations emerge or certain conditions are fulfilled. These non-fund based facilities may be in the nature of Bank Guarantees or Letters of Credit issued by the bank. These facilities may also be in the nature of co-acceptance of bills accepted by their borrower clientele. In the wake of globalization of economy, the non-fund based facilities are playing a far more important role, where banks act as intermediaries between the buyers and sellers, the providers and recipients of services or the contractors and the contra tees situated across the globe. The borrowing clients of banks prefer to avail of the non-fund based facilities on account of two factors. First, the facility does not require immediate outlay of funds and therefore the cost of such facilities tend to be lower than the cost of fund based facilities charged by the bank. Secondly, a bank guarantee or a letter of credit issued by a bank on behalf of the client is an offbalance sheet item in the books of the client, which enables the latter to prepare a more appealing balance sheet for the lending banks the cost of providing non-fund based facilities is significantly
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lower than the cost of providing fund-based facilities especially if the probability of default by the client is low. Banks earn fee-based income in course of providing non-fund based facilities. This is the second most important source of income for the banks, next only to interest income on funds lent Bank Guarantee: A guarantee from a lending institution ensuring that the liabilities of a debtor will be met. In other words, if the debtor fails to settle a debt, the bank will cover it. A bank guarantee might be used when a buyer obtains goods from a seller then runs into cash flow difficulties and can't pay the seller. The bank guarantee would pay an agreed-upon sum to the seller. Similarly, if the supplier was unable to provide the goods, the bank would then pay the purchaser the agreed-upon sum. Essentially, the bank guarantee acts as a safety measure for the opposing party in the transaction. Letter of Credit:A Letter of credit also known as documentary credit is the most commonly accepted instrument of settling international trade payments. A letter of credit is an arrangement whereby a bank, acting at the request of a customer, undertakes to pay a third party by a given date, on documents being presented in compliance with the conditions laid down.

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CASE STUDY
ABC Pvt. Ltd. VashiTurbhe, R.O (NORTH) Thane It was incorporated on 10.04.1994. They are into the business of ship Repairing, management of ONGCs offshore vessels & suppliers of Ship spares to ONGC. Importers of Diesel engines spares & machinery. The Directors of the Company are : Mr.AdityaChiplunkar. Mr.SagarJadhav.

The company is managed by the Directors who are experienced Marine Engineers having experience in ship repairing. They are running this company for last 16 years.

COMPANY PROFILE:

BRIEF HISTORY:
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The Company ABC Pvt.Ltd.was originally incorporated in 1994 as partnership concern for providing quality marine service with educated, technically qualified, experienced & trained staff. The firm looking to the business opportunities and necessities was converted to a private limited company in 1996.

In 1997 ABC has ventured into ship management and has been successfully managing offshore supply Vessels and Crew Boats for ONGC.

The core activities of the company includes Ship management, ship repairs, Trading in spares and stores related to and used in ships repairs, operation and maintenance of ship and chartering of ship. The companys philosophy is to provides a competent and accountable service and to ensures constantly improved and updated its systems and working methodology.

ABC has been approved as ship repair unit by the Directorate General of shipping, by virtue of which, imports of machinery spares required for repairs can be done duty free. ABC also has a License for steel Hull Repairs in Mumbai Dry Docks issued by the Mumbai Port Trust.

The company has two crew Boats RAAVI , CHENAB and they are provided on charter Hire to oil & ONGC which supplements their Mumbai offshore logistics requirements.

ABC is also registered with Naval Dockyard LTD. Mazagon Cocks Ltd and Mumbai Port Trust for major repair and overhauling jobs.

In 2002-03 OSV Sindhu -11 a vessel which was submerged for nearly 50 days under water was revamped and handed over to ONGC witin a short span of 12 months

(B) MANAGEMENT AND TECHINICAL ASPECTS:-

Management structure ABC is a professionally managed company headed by a strong technical team of highly qualified and experienced marine engineers ,ably assisted by a team of experienced and skilled personnel
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MrAditya.Chipulnkar Director of the company had Distinction class in Engineering with 13 years experience in Merchant Navy and 8 Years in ONGC . MrSagarJadhav is an Engineer with 15 years Experience in Merchant navy and 5 years with WartsilaDiesel .MrPratik Palkar is a an Engineer with 10 Years experience in merchant Navi and 5 years with WartsilaDiesal. Company is in business for last 15 Year. The company has sufficient manpower and infrastructure facility so as to provide the value added Service. The company has efficient staff of ship of ship captain. Chief engineer, second engineer, chief Officer, radio officer, cook, seaman, filter person etc. The company has easy availability of engine stores And spares.

SERVICE DIVISION: The company has an ISO 9001:2000 certified workshop, headed by highly qualified and experienced engineers and technical workforce extending service and maintenance services to off shore supply vessels owned by, among others, ONGC, Essar shipping , shipping corporation of India (SCI) , South India Corporation (A) ltd. (SICAL), Great eastern shipping , SAMSON Maritime Ltd.

The company also undertakes Propeller Blade repairs in association with their Principle, M/S Van VoordenReparatie RV, Netherlands, who specialize in hub and propeller blade repairs and also make new propellers that may be required for new ship building. They repair approx. 10000 propeller blades per year.

c) COMPANYS DIVERSIFICATION, EXPANSION, MODERNIZATION PROGRAMME:

The company is getting the chartering on confirmed basis from ONGC ltd. The chances of getting more contracts from ONGC are on higher sides. Due to good business potential for chartering of ships to ONGC, the company is now concentrating on chartering of ships. The company has decided to expand its operating and have acquired Two Crew Boats costing around Rs 1400 lacs. The said crew Boats are equipped with all the required technology and amenities.

d) DETAILED INDUSTRIAL SCENARIO

The total Indian fleet, which was hovering around 7.0 million GT for a long time, registered a sudden surge over the last two years and reached a historic high when it crossed the 8.0
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million GT mark. This corresponds, for the the last two years, to nearly 14 % growth for the last two years. Today Indian shipping companies collectively owns about 704 vessels with 8.3 million gross tonnage (GT) or around 13.75 million deadweight tonnages. This recent surges is attributable to the remarkable upswing in the shipping markets globally coupled with the supportive measures initiated by the Indian government and easing of procedure for acquiring second-hand vessels. Indian shipping industry contributes approximately 0.3% to the countrys GDP.

The offshore industry comprises of support services to the exploration and production (E&P) Activity of oil & gas in offshore areas. The industry includes a wide array of activities ranging from drilling rigs, marine construction, port support services to development of oil field & production of support facilities.

Contrary to global scenario, offshore industry in India has started of late in the 1970s with finding of oil in Bombay high region. In the initial years the offshore industry in India was supported by support vessels owned and operated by foreign offshore service providers. However from mid 1960s Indian shipping companies started participating in the industry with long-term chartering of various tugs by OIL and Natural gas Corporation (ONGC) of India. Presently a handful number of Indian Offshore service providers like Shipping Corporation of India. Great Eastern Shipping, Essar shipping are involved in the offshore business, serving to domestic industry. The sector demanded by ONGC which is largest owner of offshore fleet in India as well as biggest client to other service providers.

With regards to the increasing demand for crude oil, Government is giving more emphasis on exploration and production activities in deepwater blocks. The recent awarding of 25 out of 48 oil blocks by the union government of India through the New Exploration and Licensing Policy (NELP) has boosted the prospects of the Indian offshore sector and would give rise to significant number of new opportunities in the near future.

Thus prospects of the industry demand are very bright considering the requirement of oil in our country and consequent productions of the same by the ONGC. The company is getting the chartering operation and management contracts on confirmed basis by ONGC and there are chances of getting more contracts from ONGC are on high side ,Due to good business potential for chartering of ships to ONGC The company has concerted on chartering of ships.

(F)COMPANY S CONTRACT WITH ONGC

28

ONGC, tops the list of six Indian companies figured in the Business Week list of Asia s 50 best firms. Other Indian companies appear on the list along with ONGC are Tata Steel ,Reliance Industries ,Tata motors, Larsen &Turbo and Infosys Technologies.

ONGC as an E&P company ,is venturing out into new areas of Deep water frilling ,exploration of marginal fields ,optimization of production from offshores fields and associated engineering ,construction and allied activities .Increased activities require increased effort and resources in the form of marine spreads like offshore supply vessels ,production supply vessels ,Anchor Handling Tug-cum-supply Vessels Multipurpose support Vessels ,crew boats Survey Vessels Stimulation Vessels besides other type of vessels required for the allied jobs .

Oil and Natural Gas Corporation Limited (ONGC) is India s Most valuable company having a market share of above 80% in India Crude Oil and Natural Gas Exploration and Production .ONGC also produce Value added products (VAP) like C2-C3 ; LPG ; Naphtha and SKO.

(G) SWOT ANALYSIS:

Strengths The Promotes are well experienced and financially sound . They are qualified marine engineers and engaged in the business of ship management ,ship repairs ,import of spares and offshore supply vessels and chartering of ships since last 15 years.

The performance of the associate concern M/s Arc Marine Pvt Ltd. Has been quite satisfactory and the account of the associate concern has been classified as standard assets

The company is having confirmed contract with ONGC for three years extendable by one year in hand .

Weaknesses The availability of the spare for vessels sometimes may take longer time.

29

Opportunities Apart from ONGC there is good business potential for chartering of vessels to Shipping Corporation of India, Mazagaon Dock Ltd, Naval Dockyard ,Mumbai Port Trust ,etc. further private companies like Reliance ,Shell ,ESSAR, etc. have also entered Oil & Gas exploration.

Threat Rough weather at sea may lead to damage to the vessels. It is a normal operational risk and insurance cover is already taken for the same. The group has been dealing with ONGC since 1995 and due to its satisfactory performance new contract have been awarded to the group by ONGC.

COLLATERAL SECURITY

The concerned party has given the collateral security of value Rs 495.71(lacs) which includes personal owned flats, office building, and some deposits

Analysis
Projected Balance Sheet Rs. in Crores

30

As at 31st March CURRENT ASSETS Cash and bank balance Margin money on LC/Bank Deposits Book Debts Inventory Taxes paid in advance Advance to suppliers TOTAL CURRENT ASSETS

2008 AUDITED 14.45 699.91 530.61 25.57 54.82 0.52 1439.90

2009 ESTIMATED 1.16 547.56 525.01 88.64 0.00 55.95 1218.32

2010 Projected 7.18 74.32 886.79 62.14 11.33 84.22 1125.98

CURRENT LIABILITIES Bank Borrowings (short term) c/c Bank Borrowings (short term)- SOD Sundry Creditors Expenses Other Provisions Sundry creditors Other current liabilities Advance from customers TOTAL CURRENT LIABILITIES 431.40 7.54 41.44 454.86 78.31 186.59 1200.14 76.05 309.33 129.30 915.98 66.03 335.27 65.82 93.26 532.71 97.26 789.38

FIXED ASSETS Land Building Plant and Machinery Other Fixed Assets 19.54 45.56 1.58 37.42
31

19.54 43.28 1.36 14.80

19.54 41.11 1.27 17.66

Furniture and Fixtures Crew Boats Property TOTAL FIXED ASSETS

2.70 165.08 11.00 263.34

2.30 132.06 54.50 267.84

1.88 105.65 59.65 246.76

LONG TERM LIABILITIES Deferred Tax Liability Redeemable Pref Shares Loan from Ass.Concern 8.24 8.24 8.24

Term Loan-Other Term Loan UNION BANK Other Term Liabilities(security deposits) Unsecured loan from FRIENDS & RELATIVES TOTAL LONG TERM LIABILITIES 8.24 20.00 0.00 28.24 20.00 291.54 319.78

MISCALLENOUS ASSETS Deferred Tax Assets Bals/Dep with p.Trust/customs Other loans and advances Unquoted investments Other miscellaneous assets Book debts older than 6 months Security and other deposits Total miscellaneous assets 17.71 2.29 3.88 300.00 0.00 2.12 326.00
32

0.00 417.11 5.88 0.00 0.00 0.00 422.99

0.00 550.45 5.88 0.00 184.96 0.00 741.29

Net worth Paid up capital General reserves & surplus Other reserves-revaluation reserve Balance of profit Total net worth 50.00 14.00 9.58 747.28 820.86 50.00 14.00 9.58 891.35 964.93 50.00 14.00 9.58 931.29 1004.87

Total assets Total liabilities Tangible net worth Current ratio Der Tol/tnw Net working capital Sales Purchases Profit Depreciation PAT

2029.24 2029.24 820.86 1.20 .01 1.47 239.76 1539.19 1227.05 80.31 50.22 80.31

1909.15 1909.15 964.93 1.33 .03 .98 302.34 2098.99 1649.91 175.48 39.96 175.48

2114.03 2114.03 1004.87 1.43 .32 1.10 336.60 1468.24 921.94 151.35 32.79 101.35

1.

TOTAL INDEBTEDNESS

(Rs. in crores)

33

1.

TOTAL INDEBTEDNESS

(Rs. in crores)

FUND BASED FINANCIAL INDICATORS Existing Proposed

NON-FUND BASED Existing Proposed

TOTAL Existing Proposed

our Bank CC SOD LG/LC 80.00 154.4 200 400.00 280.00 80.00 154.40 400.00 200.00 280.00

Term Loan Sub-Total

234.40 -

-200.00 -

400.00 -

280.00 -

634.00 -

480.00 -

Other Banks Fin. Institutions TOTAL 234.40 200.00 400.00 280.00 634.00 480.00
(Rs. in crores)

34

Year Ending Paid up Capital Reserves & Surplus. Intangible Assets Tangible Net Worth (excl. revaluation reserve) Long Term Liabilities Capital Employed Net Block Investments Non Current Assets Net Working Capital Current Assets Current Liabilities Current Ratio Debt Equity Ratio (LTL/TNW) TOL/TNW (with unsecured loan as quasi capital/Equity) Net Sales Other Income Net Profit Before tax Net Profit After Tax Depreciation Cash Accruals

31.3.2008 (Aud.) 50.00 770.86 0.00 820.86

31.3.2009 (Est.) 50.00 914.93 0.00 964.93

31.3.10 (Proj) 50.00 954.87 0.00 1004.87

8.24 263.34 263.34 3.88 322.12 239.76 1439.90 1200.14 1.20 0.01 1.47

28.24 267.84 267.84 5.88 417.11 302.34 1218.32 915.98 1.33 0.03 0.98

319.78 246.76 246.76 5.88 735.41 336.60 1125.98 789.38 1.43 0.32 1.10

61.90 61.90 80.31 80.31 50.22 130.53

69.56 69.56 175.48 144.06 39.96 184.02

28.01 28.01 151.35 101.35 32.79 72.73

3. COMMENTS ON FINANCIAL INDICATORS:

35

1. Sales of the company has reduced from Rs. 2089.99 Lacs in 2008-09 to Rs. 1468.24 Lacs in 2009-10. It was due to cancellation of contracts with HUL Offshore pvt.Ltd. An amt of Rs. 184.96 Lacs is reflected in their Balance Sheet as on 31.03.2010. as a book debt older than 6 months for this party. 2. Corresponding to the reduction in the Sales. Profit Before Tax reduced from Rs. 175.48 Lacs to 151.35 Lacs. However, net Profit After Tax has reduced sizably from Rs. 144.06 Lacs to 39.94 Lacs. The main reason was Provision for Tax of Rs.50 Lacs and adjustments by way of short provision of Rs. 61.42 Lacs pertaining to taxation of earlier year (PY Rs. 31.41 Lacs) 3. Total Net Worth of the company has improved from Rs. 964.93 Lacs to Rs. 1004.87 Lacs as on 31.03.2010. 4. NWC has also improved from Rs. 302.34 Lacs to Rs. 336.60 as on 31.03.2010. 5. Due to substantial increase in LTL from Rs. 28.24 Lacs to Rs. 319.78 Lacs, DER increased from 0.03:1 to 0.32 :1 and TOL/TNW from 0.98: 1 to 1.10:1. Term Liability include unsecured loans of Rs. 291.54 Lacs from friends and relatives

Assesment of working capitalAs the propose limit is above 1 crore FBF method should be followed. 2008 A) B) C) D) E) F) TOTAL CURRENT ASSETS CURRENT LIABILITIES ( EXCLUDING BANK BORROWINGS) WORKING CAPITAL GAP NET WORKING CAPITAL (ACTUAL) 25% OF THE CURRENT ASSETS (MINIMUM STIPULATED NWC) ITEM NO (C D)
36

2009 1218.32 849.95 703.64 302.34 304.58 401.3

1439.90 768.74 671.16 239.76 359.96 431.4

G) H)

ITEM NO (C E) MAXIMUM FBF (ITEM F OR G WHICHEVER IS LOWER)

311.2 311.2

399.06 399.06

FBF has worked out to be 399.06 for the financial year 08-09 on the sales of 2098.99 it has been recommended the CC limit to be increased to 200lacs which can be accepted

4. EVALUATION OF INDUSTRY Shipping with respect to Offshore Exploration is a different kind of industry. This business has very limited players and requires high investment. The industry mainly consist of oil rigs for drilling and platform for pumping the crude oil. Crew boats, security boats, Security boats and helicopters support this. At the base they are supported by Marine Logistics division and by Marine Workshops for repairs.

5. EVALUATION OF BUSINESS RISK : There is not much competition visible in this field as it requires a highly specialized area requiring expertise in Marine Engineering Practices, Marine repairs, Liason with the Ministry Of surface Transport, etc.

Rating Model- III

Revised Rating Model for Large Borrowers With Credit Limits between Rs. 1 Croreto Rs. 10 Crores (Fund Based & Non-Fund Based)

Name of Branch

VashiTurbhe Region _R O THANE_______

Name of Borrower

ABC PVT LTD

37

Credit Facilities Nature of limit _________________________ _________ _________________________ _________________________ _________________________ _________________________ _____________ _____________ _____________ _____________ Amount of limit ___280.00

Rating Assigned Date of Rating Rating assigned based on audited/provisional financials as of

Rating Model -III Applicable for sanctions between Rs. 1 Crore to Rs. 10 Crore (Fund Based and Non-Fund Based)

INVESTMENT GRADE CREDIT QUALITY Lowest risk Minimal risk Moderate risk Satisfactory risk Acceptable risk RATING NUMERI C CR 1 CR 2 CR 3 CR 4 CR 5 AGGREGATE SCORE >90 81-90 71-80 66-70 61-65
38

NON INVESTMENT GRADE CREDIT QUALITY Risk Prone High Risk Sub-Standard Doubtful Loss RATING NUMERIC CR 7 CR 8 CR 9 CR 10 CR 11 AGGREGATE SCORE 51-55 50 & below Default NPA -

Watch List

CR 6

56-60

I. RATING OF THE BORROWER

No .

Parameter/Criterion

Parameter/Criterion

Score Max

A. FINANCIAL RISK [ as per last audited financial statement ] (static) I DEBT EQUITY RATIO [Term Liability to Tangible Net Worth] 1.50 and below 2.00 and below 2.50 and below Above 2.50 3 2 1 0 *

II

Ratio of Total Outside Liability to Tangible Net Worth

3.00 & below Above 3.00-4.00 Above 4.00-5.00 Above 5.00

3 2 1 0

III. CURRENT RATIO Liquidity Ratio Current Assets Current Liabilities

1.33 and above 1.25 and above 1.17 and above 1.10 and above 1.00 and above Less than one

5 4 3 2 1 0

IV

Return on Capital Employed Net Profit after Taxes

15% and above 12% and above

39

4 3

Capital Employed Capital Employed means = TNW + Long Term Liabilities

10% and above 7% and above Less than 7%

2 1 0

NET SALES Actual vis--vis Projections Indicates achievement level

100% and above > 80% < 100% > 60% < 80% Below 50%

3 2 1 0 *

VI

Interest Service Coverage Ratio Measures firms ability to pay interest Profit before Interest, Depreciation, tax Interest

More than 2.5 2.00 to 2.5 1.99 to 1.50 Less than 1.50

3 2 1 0

VI I

Debt Service Coverage Ratio Measures firms ability to pay interest &installment Net Profit +Interest on TL + Depreciation Installment + Interest on TL

>2 > 1.50 TO 2.00 > 1.10 TO 1.50 < 1.10

3 2 1 0 NA

VII I

Growth in net sales As compared to previous year

> 20% > 15% < 20% > 10% < 15% Less than 10%

3 2 1 0

40

IX. Growth in Net profit As compared to previous year

In excess of 20% In excess of 15% < 20 % In excess of 10% < 15 % Less than 10%

3 2 1 0 30

SUB-TOTAL B. MANAGEMENT RISK I Hands on experience of the management personnel in the industry The management/proprietor understands of the business environment the borrower operates in. (If an experienced management of wellmanaged company/firm undertakes a new industry/business sector, they may be given the marks for managerial competence, as per rating of the existing account provided the industry/business sector they propose to start is related to their existing one.) Very High >5 years High (2 to 5 yrs) Moderate (<2 years) Absent (0 yrs)

3 2 1

II

Management Initiatives The initiatives of the management to stay ahead of the competitors are a clear indication of management quality. The pointers are quality certification, collaborations and marketing alliances, awards etc.

High Moderate Low

2 1 0

III

Honoring financial commitments (to our bank and other banks & Financial Institutions and Govt. and other creditors). Consider the following to judge the payment of practices:

Honored on time Honored but delayed within acceptable period (say 10 to 15 days)

3 2

41

Payment of interest/installment Retirement of bills Govt. dues like sales tax/income tax (whether attachment orders received from sales tax/income tax, etc. Return of cheques A/c within limits Creditors velocity ratio in line with the projections/acceptable level

Honored but delayed beyond acceptable period (beyond 15 days business) Not honored

IV

Concentration of Management

Team of qualified professional Business managed by family members/concentrated in few hands Business dependent on 1 or 2 individuals

2 1

Labour Management in the past.

Very Good

In case of the borrower employing substantial labour force the parameter should be rated. If there has been no history of labour problems max. score.

Cordial Inadequate

1 0

VI

Affiliate concerns performance

Absent Present

2 0

42

In case there are affiliates of the same management of the borrower then this criteria to be applied, as to whether these concerns are classified as NPAs by banks/FIs. VI I Market reputation of the promoters / Excellent image management. (In case of adverse report on the promoters /directors, proposal will not No adverse factors be entertained) 2 1 *

VI II

Ability of the promoters / management to bail out the company in case of crisis

Yes No

1 0

IX

Succession planning in key business areas

Yes No

1 0

Balance Sheet Practices Consider those qualification having adverse impact on Net Profit & TNW

Unqualified Report for the past 3 years Unqualified Report for the past 2 years Other cases

2 1 0

XI

Statutory Compliance

Complied with

43

Compliance with the following (a) Pollution Board (b) Environmental clearance (c) Sales Tax Income Tax No. (d) Export/Import code (e) (list only illustrative) Sub-Total

Not complied with

22

C. MARKET- INDUSTRY RISK I. Market potential/Demand situation Consider the following : Assessment of the market/demand for the product being or proposed to be sold by the borrower in the area of operation. Compare demand / supply scenario. Say supply is short of demand can be classified as a good scenario. If supply more or less matches demand, it can be classified as neutral scenario. Good Neutral Unfavorable 2 1 0 *

II

Diversification among different consumer High segments/geographical spread Moderate Consider the following Low

2 1 0

44

Diversification among consumers and geographical spread of the products sold. Say whether highly diverse set of customers or products or fairly diverse set of customers / products

III

Competitive Situation Every business unit is exposed to competitive pressures, except in monopoly. With the available information, an approximate assessment of the competitive situation should be arrived at after considering the following aspects : a) Number of Competitors b) Presence of big competitors with inherent strength c) Existence of parallel Markets d) Competitive advantages enjoyed by the borrower such as cost efficiencies, superior technology, brand loyalty, etc. e) Market share of key products f) Impact of WTO liberalization

Monopoly situation Favorable Neutral Unfavorable

3 2 1 0 *

IV

Inputs/Raw materials availability

High Moderate Low

2 1 0

45

The availability, quality of key inputs/raw materials is having bearing on the quality and price of the final product/services Consider the following : a) b) c) Continuous availability of quality inputs/raw materials Availability of substitutes for inputs/raw materials Affordability of quality inputs/raw materials

Locational issues

Favorable Neutral

2 1 0

Locational advantage might provide a borrower with a competitive advantage vis--vis competitors like availability of infrastructure, favorable government policies, nearness to raw materials/markets, etc. a) Infrastructure facilities b) Proximity to Inputs c) Proximity to markets
d) Presence in a state with favorable

Un Favorable

policies

VI

Technology (T.O. findings) Consider the following factors :

Superior Adequate

2 1 *

46

Availability of R&D facilities Proven Technology,(i.e. not subjected to changes in the immediate future) Technology likely to undergo changes (i.e. Company capable of surviving the changes.) Outdated technology

Low

VII

Manufacturing efficiency/capacity utilization. Consider the following : -

Good Satisfactory Average

3 2 1 0 *

More than 90% Between 75% to 90% Between 50% to 75% Below 50% -

Good

Below Average

- Satisfactory Average Below Average

Provided unit is working above the break even point, otherwise score of 0 to be given

VII I

Cyclicality/Seasonality

Not affected by cyclical fluctuations

47

Favourable industry cycle with long term prospects Susecpetible to unfavourable changes in the markets/ Industry cycle Sub- total 18

1 0

SUMMARY

Borrower Rating

Marks A B C Financial Aspects Management aspects Market/Industry aspects TOTAL 10 10 8 28 30 22 18 70

II. RATING OF THE FACILITY

A. Compliance of Sanction Terms I Compliance of Sanction terms All sanction terms complied with and 2 legally enforceable documentation held on records *

48

Only 2nd Charge not registered EM not completed

1 0

II

Submission of Stock Statements/QPR

Timely Submission Submitted within 30 days from due date Belated Submission beyond 30 days

2 1 0

III

Submission of Audited Balance Sheet & Profit & Loss A/c & Financial Data in CMA forms

Submitted within 5 months from the closure of the account Submitted within a period of > 5 months < 8 months from the closure of the account Delay > 8 months

2 1

IV. Repayment schedule for Term Loans only

Upto5 years > 5 years

2 1

V.

Operations in the account

- Turnover Commensurate with sales - Turnover > 70% to < 90% - Turnover > 60% to < 70% - Turnover < 60%

3 2 1 0

VI. Operations in the account

Top Class No occasion of excess and return of cheques

49

Satisfactory Rare occasions of excess and returns of cheques Average Occasional excesses and return of cheques Below Average Frequent excess and return of cheques

VI I

Commitments under DPGL/Term Loan and payment of interest on cash credit/overdraft, etc.

Timely payment Irregular/overdue unto one month from due date Irregular/overdue beyond one month unto 2 months Delayed beyond 2 months

4 3 2 0

VII I

Margin given on Term Loan

> 40% Margin 25% to < 40% 20% < 25% < 20%

3 2 1 0 21

TOTAL

III. RISK MITIGATORS Availability of Collateral Security and quality of collaterals. More than75% to 100% of the total Exposure 3

50

Note : Marks to be allotted only if the formalities of documentation / creations of securities are completed in all respects.

Between 50% to 75% of the exposure. Less than 50% of the exposure No Collateral Security

1 0 2 0 *

Availability of Guarantee Promoter Directors Guarantee / Third Party Guarantee Means of the Guarantor = Total Exposure (FB + NFB) TAKEN Sub- total

Guarantee available Guarantee not available

IV. BUSINESS CONSIDERATION:I Length of Relationship Under length of relationship, it is now clarified that marks can be allotted if any group/ associate concern dealing with the bank is floating a new venture, the relationship value of the group/ associate concern can be taken in to account. Having satisfactory relationship with the Bank for > 5 years Having satisfactory relationship with the Bank between 1 5 years Having satisfactory relationship with the Bank for < 1 year 2 *

II

Income Value to the Bank (Interest, commission, exchange, etc.) from the

> 10% > 8% - 10%

2 1

51

account as percentage to total fund based limits

< 8%

SUB-TOTAL

SUMMARY

Marks I II III IV Rating of the Borrower Rating of the facility Risk Mitigator Business Aspects Total 70 21 5 4 100(78)

Note:

1. The total score under the model is 100. Where one or more parameters are not applicable, the score obtained under the applicable parameters should be converted into % terms and appropriate grade / rating is assigned

2.

Presently, the entire facility rating is treated as not applicable for new borrower. However, marks may be allotted for proposed margin and repayment schedule for term loans as margin and repayment schedule are among other things, main preconditions for sanction of the facility

52

CREDIT RATING:-

Year Total score obtained Grade CR-4

Previous yr.

Current yr.

CR-3

The company has scored 78/97 points i.e. 80% and is rated as CR-3. The interest rate applicable for CR- 3 rating is BPLR + 0.5.

53

DISBURSEMENT:

After submission Proposal to Designated/ Sanctioning Authority for sanctioning the Term Loan. The authorities may raise quarries, if any relating to projects and thereby convey it to the processing officer the processing officer in turn addresses them to the borrower for necessary step to be taken; such quarries are required to be solved to the earliest by the applicant for further processing of the proposal. If the authorities are satisfied and have no further quarries with respect to proposal, the Loan gets sanctioned and the disbursement would be released in as per the terms decided.

54

CONCLUSION
Credit Appraisal is a process of appraising the credit worthiness of loan applicants. The funds of depositors i.e. general public are mobilized by means of such advance / investment. Thus it extremely important for the lender bank to assess the risk associated with credit; thereby ensure the security for the funds deposited by the depositors. In UBI the credit appraisal is done by thorough study of the project which involves Following: 1)Evaluation of Management: A detailed study about the promoters is carried out in order to ensure promoters are experienced in the line of business and are capable to implement and run the project 2) Technical Feasibility: A detailed study about the technical aspects is done to determine the technical soundness of the project 3) Financial Viability: A detailed study relating to financial viability of the project is done; thereby ensuring that project will generate sufficient surplus to repay the installment and interest 4)Risk analysis: it determines the risk associated with the project this is done by performing a Sensitivity analysis and Credit Rating. With Sensitivity Analysis the projects capacity to service debts under worsened conditions is determined. Credit rating, provides rating for various parameters like management, financial, market and so, thereby determine the credit worthiness of the borrower 5) It is on the basis of the credit risk level, collateral securities to be given by the borrower are determined. This shows Union Bank of India has sound system for credit appraisal.

55

BIBLIOGRAPHY
Websites:

www.marketresearch.com www.Investopedia.com www.cmia.com www.unionbankofindia.com www.google.com www.rbi.org.in

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