CHAPTER I INTRODUCTION

INTRODUCTION
Assessment of Fund Base and Non Fund Base Loans in terms of its economic, social and financial viability is known as credit appraisal. Fund base includes Working Capital and Term Loan where as Non Fund Base includes Letter of Credit and Bank Guarantee. Credit appraisal is an exercise
whereby a lending financial institution makes an independent assessment of various aspects of an investment proposition to arrive at the financing decision. Appraisal exercises are basically aimed at determining the viability of the project and sometimes, also in reshaping the project so as to upgrade its viability. Here the financier takes a second look critically and carefully at a project as presented by the promoter to a person who is in no way related to the project and is as such able to take independent view of the project in its totality as also in respect of its various components. Since all activities involve risk in a smaller or larger measure, credit appraisal aims at sizing up the quality of projects and their long term profitability aims at minimizing the risk of lending by rectifying their weaknesses and improving their quality by incorporating into them the features/safeguards missed by the promoters either because of the lack of knowledge or information.

The factors generally considered by institutions while appraising a project include technical, financial, ecological and managerial aspects. This makes it necessary to identify the interrelationships among the various elements of a project. For instance, the size of the initial market and the estimates for demand build up would determine the plant capacity and production planning, which in turn would affect the profitability and this has a direct bearing on the means of financing. Above all, the management behind the project has a decisive influence on most of these aspects. These considerations imply that credit appraisal is viewed as a composite process as against the approach of viewing each aspect individually.

1.1 Meaning
The exercise of credit appraisal simply means the assessment of a project in terms of its economic, social and financial viability. This exercise is critical as it calls for a multi-dimensional analysis of the project that is, a complete scanning of the project. Financial institutions and banks make a critical assessment of projects which are submitted to them by the entrepreneurs for getting loans. They have traditionally been accepting the data given by the entrepreneur as valid while assessing the project. In fact, the emphasis has largely been on the cash flow and financial viability of the project in assessing their suitability for extending the loans.

1.2 Definition
Credit appraisal means an investigation/assessment done by the bank prior 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.

1.3 Scope of Appraisal

The appraisal of a project is under taken by the financial institutions with the twin objectives of determining the market potential and selecting an optimal strategy. The method of analysis varies from project to project. Nevertheless, certain common aspects of study from the angle of technology and engineering are mentioned below: Choice of technical process and/or appropriate technology Technical collaborations arrangements, if any
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Size and scale of operations Location aspects of the project and availability of infrastructural facilities Selection of plant, machinery, equipment together with background, competence and capability of machinery / equipment suppliers.

Plant layout and factory building Technical engineering services Project design and network analysis for the assessment of project implementation schedule Project cost and its comparison with other similar projects, based on technology, equipment, product mix and time spread

Determination of project cost estimates and profitability projections etc. Sensitivity analysis

It must be remembered that different aspects of a project are not independent entities but are highly inter-related and a meaningful interpretation of the project depends on the appreciation of this fact.

1.4 Objectives of the Study

The objectives of the research study are: To study the Credit Appraisal Methods. To Understand the credit appraisal process for working capital loan and term loan To learn about operating cycle To understand the commercial, financial & technical viability of the project proposed & its funding pattern.

To understand the pattern for primary & collateral security cover available for recovery of such funds.

1.5 Need for the study

Credit provided by commercial banks is an important driver of national economy. The modern economy is driven by technology, and the most important variables of the economy are consumption demands of the vast population as well as supply machineries to meet the demand. Today, the total requirements cannot be possibly met by traditional financiers alone. The role of modern commercial banks as providers of credit to the economy begins at this point. But the credit has to be given with proper analysis and reasoning based on the data. The quality of advance will definitely suffer if it is a wild goose chase. Small and medium enterprises play a vital role for the growth of the Indian economy by contributing 45% of the Industrial output, 40% of exports, 42 million in employment, create one million jobs every year and produces more than 8000 quality products for the Indian and International market. Credit is one of the critical inputs for the promotion of the Small and medium enterprises. An in-depth analysis is required to avoid the credit risk for the lending institutions. The present study finds that there is a need to undertake a comprehensive study on credit appraisal in SME segment. Hence an attempt is made on the present study with specific reference to State Bank of India.

1.6 Database of Study

The study is based on the primary data submitted by the promoter and secondary source of data. Primary data is collected from the interview with the directors of the company, data submitted by the company, discussions with the bank officials and the past financial statements of the sister concern. The secondary data are collected from the news papers, magazines, internet etc.

1.7 Limitations of the study

Credit appraisal system includes various types of detail studies for different areas of analysis, but due to time constraint, our analysis was of limited areas only. As the credit rating is one of the crucial areas for any bank, some of the technicalities are not revealed which may have cause destruction to the information and our exploration of the problem. As some of the information is not revealed, whatever suggestions generated, are based on certain assumptions.

1.8 Literature Review

The assessment of a project, from all the possible dimensions, is the most important aspect foe the financier / lender. In the wake of the global crisis, whose roots are tracked back mostly to the subprime-lending, the process of project evaluation and the accuracy with which the entire process is carried out assumes more significance than ever. In this context, it is imperative to identify those parameters which are instrumental in the success of a firm/project. Below are the excerpts from a few studies, which have carried out research on similar lines as this.

Volker Bruns and Margaret Fletcher in their work Banks risk assessment of Swedish SMEs taken from the journal Venture Capital, Vol.10, No.2, April 2008, pages 171-194, concentrates on a variety of items ranging from the problems the SMEs receiving external finance may be attributed to the fact that the vast majority is privately held and owner managed. As compared to such as issuing new public stock Bankers therefore emphasize on the information on the borrowers ability to repay the loan; alignment of risk preferences; and risk sharing affect their willingness to grant credit. Results suggest that features that reduce the risk to the bank and shift the risk to the borrower have the largest impact. Findings suggest that banks place the strongest emphasis on the tangible accounting figures SMEs present, and factors that shift the risk from the bank to the borrower. Moodys Investors Service report in its work Sharp Ramp-Up One-Year Default Rate for LowDSCR Loans from journal Mortgage banking, Aug2005, Vol. 65 Issue 11, p112-112, articulates the importance of Debt Service Coverage Ratio, the most important in any project financing decision. The work concluded that loans for non-core properties default far more frequently than the loans backed by core assets. The work quotes that in all classes of commercial ventures, the lower the debt-service coverage ratio (DSCR), the greater the risk of default. The depth of a cashflow delinquency, as measured by a lower DSCR, is critical to the likelihood of default. Moving down the coverage scale, the probability of a default progressively increases, according to this work. Thomas Ziwei and Tang in their work Delineating the predominant criteria for subcontractor appraisal and their latent relationships taken from the journal Construction Management & Economics Mar, 2008, Vol. 26 Issue 3, p249-259, have compiled a set of criteria that are helpful to assess the sub-contractors performance. Through factor analysis, the 15 most important
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subcontractor performance appraisal criteria and their underlying relationships are identified. A few of such criteria are: Workmanship, Progress, Resources control, Health and safety, Environmental protection, Organization, General obligations, Industry awareness, Attendance to emergency, Attitude to claims, Relationship, Communication. The results indicate that the three overarching factors for subcontractor performance appraisal are 'team interaction',

'accomplishment of project goals' and 'track record'. The identified appraisal criteria lay a solid foundation for the development of a centralized subcontractor performance appraisal system to facilitate performance reporting, data sharing and benchmarking. Ashish Kumar Rastogi, P.K.Jain, Surendra S. Yadav in their publication Debt financing of corporate enterprises in India: a study showing impact of industry, size and age factors taken from the journal Journal of Advances in Management Research, Year: 2006, Vol. 3, Issue: 2, p54-67 emphasizes on whether there are significant variations in the profile of debt-financing as a result of differences in industry, size and age group of the sample corporate enterprises in India. The study articulates that while industry and size have been observed to be a significant factor influencing composition and maturity structure of debt financing, the empirical evidence does not support the premise that the debt financing decisions vary significantly across age categories. Mile Terziovski in the study titled The relationship between networking practices and business excellence: a study of small to medium enterprises (SMEs) taken from the journal: Measuring Business Excellence, Year: 2003, Vol. 7, Issue: 2, p78-92, makes a mention of the relation between networking practices and business excellence. In this paper, the author quotes that the Networking practices regression (NPR) models were developed in order to test the strength of the relationship between key components of networking practice and several dimensions of business excellence such as success rate of new products, reduction in waste, increased market opportunities. He is of
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the opinion that groupings of network practices are required to explain business excellence. This means that a single networking practice is not sufficient to explain business excellence significantly. The most significant networking practices were found to be searching and incorporating diverse points of view, challenging the status quo, learning from failures, communicating with people outside the company, including experts, allocation of resources to support communication linkages. The main implication of the research results for SME managers is that a typical manufacturing SME is more likely to improve its chances of achieving business excellence with networking practices than without these practices. P.A.Thompson and J.D.Whitman in their publication Project Appraisal by Cost Model taken from the journal Management Decision, Year: 1973, Vol. 11, Issue: 5, p301-308, make a mention of the delay in commissioning the project and the risk associated with it. The risk of delay in commissioning the project is very instrumental, yet very rarely considered during feasibility studies for a capital project, and the results of such studies are rarely updated during the construction phase. Consequently project managers are deprived of reliable data relating to the project as a whole upon which they might base their decisions. Patricia R. Todd, Rajshekar G. Javalgi in their work Internationalization of SMEs in India: Fostering entrepreneurship by leveraging information technology taken from the journal International Journal of Emerging Markets, Year: 2007, Vol. 2, Issue: 2, p166-180, make a mention of the importance of information technology in the performance of a Small and Medium scale Enterprise. It is proposed that the primary method for fostering or promoting the growth of entrepreneurship is through the utilization of technology. Advancements in information technology and improvements in communication infrastructure have resulted in opportunities for SMEs to participate in global markets in both developing and developed countries. Since, governmental
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reforms in 1991, SMEs in India have been faced with new competitive intensity. Improvements in resource utilization, with special emphasis to information technology, make it possible to sell a variety of products and services from anywhere in the world, around the clock. S. Maguire, S. C. L. Koh, A. Magrys in their publication The Adoption of e-business and knowledge management in SMEs taken from journal Benchmarking: An International Journal, Mar2007, Vol. 14, Issue: 1, p37-58, emphasize the importance of information and communication technology in the performance of a SME. They show that the small and medium-sized enterprises (SMEs) using information and communications technology (ICT) to try and gain a competitive advantage over those which do not exploit the technology. This paper provides sound evidence that SMEs can gain competitive advantage through the use of Information and Communication Technology. More than 70 per cent of the entrepreneurs identified Information and Communication Technology as aiding their business in one or more of the accepted competitive areas. However, there is potential for SMEs to gain further advantages by using an integrated and strategic approach in their use of technology.

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CHAPTER II INTRODUCTION TO BANKING SECTOR AND SBI

INTRODUCTION TO BANKING SECTOR AND SBI

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2.1 A snapshot of the banking industry

The Reserve Bank of India (RBI), as the central bank of the country, closely monitors developments in the whole financial sector. The Reserve Bank of India was established on April 1, 1935 in accordance with the provisions of the Reserve Bank of India Act, 1934.The Central Office of the Reserve Bank was initially established in Calcutta but was permanently moved to Mumbai in 1937. The Central Office is where the Governor sits and where policies are formulated. Though originally privately owned, since nationalization in 1949, the Reserve Bank is fully owned by the Government of India. RBI data says that there are 171 different banks that operate in India, as on June 08. Together, these banks have 76,003 reporting offices across the country. Deposits have been growing the fastest in urban areas while credit has been growing the fastest in Metropolitan areas. Rural areas have seen slightly faster growth in deposits than in Credit, while i metropolitan areas, credit growth outpaced deposits growth by a large 7% margin. In semi - urban areas the two were more or less balanced with deposits getting a minor 0.6 % edge

as on June 08 All Scheduled Commercial Banks Regional Rural Banks Other scheduled commercial banks No. of Banks Non-Scheduled Commercial Banks Total 166 88 78 5 171

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Higher provisioning norms, tighter asset classification norms, dispensing with the concept of past due for recognition of NPAs, lowering of ceiling on exposure to a single borrower and group exposure etc., are among the measures in order to improve the banking sector. A minimum stipulated Capital Adequacy Ratio (CAR) was introduced to strengthen the ability of banks to absorb losses. The Reserve Bank of India (RBI) on day raised the minimum capital adequacy ratio (CAR) for deposit-taking non-banking financial companies (NBFCs) from 12 per cent to 15 per cent, effective from March 31, 2012. With a view to provide an institutional mechanism for sharing of information on borrowers / potential borrowers by banks and Financial Institutions, the Credit Information Bureau (India) Ltd. (CIBIL) was set up in August 2000. The Bureau provides a framework for collecting, processing and sharing credit information on borrowers of credit institutions. SBI and HDFC are the promoters of the CIBIL. The finance ministry spelt out structure of the government-sponsored ARC called the Asset Reconstruction Company India Limited (ARCIL), this pilot project of the ministry would pave way for smoother functioning of the credit market in the country.

2.2 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, regional rural banks and private sector banks (the old / new domestic and foreign).
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These banks have over 67,000 branches spread across the country. 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 Banks

Regional Rural Banks

Land Development Banks

Co-operative Banks

Public Sector Banks

Private Sector Banks

SBI Groups

Nationalized Banks

Indian Banks

Foreign Bank

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2.3 About SBI:

State Bank of India (SBI) is the largest Indian banking and financial services company (by turnover and total assets) with its headquarters in Mumbai, India. It is state-owned. The bank traces its ancestry to British India, through the Imperial Bank of India, to the founding in 1806 of the Bank of Calcutta, making it the oldest commercial bank in the Indian Subcontinent. Bank of Madras merged into the other two presidency banks, Bank of Calcutta and Bank of Bombay to form Imperial Bank of India, which in turn became State Bank of India. The government of India nationalized the Imperial Bank of India in 1955, with the Reserve Bank of India taking a 60% stake, and renamed it the State Bank of India. In 2008, the government took over the stake held by the Reserve Bank of India. SBI provides a range of banking products through its vast network of branches in India and overseas, including products aimed at non-resident Indians (NRIs). The State Bank Group, with over 16,000 branches, has the largest banking branch network in India. It also has around 130 branches overseas. With an asset base of $352 billion and $285 billion in deposits, it is a regional banking behemoth and is one of the largest financial institutions in the world. It has a market share among Indian commercial banks of about 20% in deposits and loans. The State Bank of India, the countrys oldest Bank and a premier in terms of balance sheet size, number of branches, market capitalization and profits is today going through a momentous phase of Change and Transformation the two hundred year old Public sector behemoth is today stirring
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out of its Public Sector legacy and moving with an ability to give the Private and Foreign Banks a run for their money. The State Bank of India is the 29th most reputed company in the world according to Forbes. Also SBI is the only bank featured in the coveted "top 10 brands of India" list in an annual survey conducted by Brand Finance and The Economic Times in 2010. The State Bank of India is the largest of the Big Four banks of India, along with ICICI Bank, Punjab National Bank and HDFC Bank are its main competitors.

2.3.1 International Presence

As of 31 December 2009, the bank had 151 overseas offices spread over 32 countries. SBI operates several foreign subsidiaries or affiliates.

2.3.2 Associate Banks

SBI has FIVE associate banks:

State Bank of Bikaner & Jaipur State Bank of Hyderabad State Bank of Mysore State Bank of Patiala State Bank of Travancore

Earlier SBI had only seven associate banks that constituted the State Bank Group. All use the same logo of a blue keyhole and all the associates use the "State Bank of" name, followed by the

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regional headquarters' name. Originally, the then seven banks that became the associate banks belonged to princely states until the government nationalized them between October 1959 and May 1960. In tune with the first Five Year Plan, emphasizing the development of rural India, the government integrated these banks into the State Bank of India system to expand its rural outreach. There has been a proposal to merge all the associate banks into SBI to create a "mega bank" and streamline operations.

2.3.3 Branches of SBI

State Bank of India has 131 foreign offices in 32 countries across the globe.

SBI has about 25,000 ATMs (25,000th ATM was inaugurated by the Chairman of State Bank Shri O.P.Bhatt on 31st March 2011, the day of his retirement) and SBI group (including associate banks) has about 45,000 ATMs

SBI has 26,500 branches, including branches that belong to its associate banks SBI includes 99345 offices in India

2.3.4 Symbol and slogan

The symbol of the State Bank of India is a circle and not key hole and a small man at the centre of the circle. A circle depicts perfection and the common man being the centre of the bank's business. Slogans of SBI include with you all the way, Pure banking nothing else, The Banker to every Indian, The Nation banks on us.

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2.3.5 Key areas of operation:

The business operations of SBI can be broadly classified into a) Corporate banking The Corporate banking of SBI include Working Capital Financing, Term loans, Deferred Payment Guarantees, Corporate Loans, Export Credit, Strategic Business b) National banking
This National Banking includes Personal Banking SBU, Small & Medium Enterprises, Agricultural

Units, Pricing.

Banking, and Government Banking c) International banking

As of 31 December 2009, the bank had 151 overseas offices spread over 32 countries.

d) Treasury
The bank manages an integrated treasury covering both domestic and foreign exchange markets. In recent years, the treasury operation of the bank has become more active amidst rising interest rate scenario, robust credit growth and liquidity constraints.

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CHAPTER III SME SECTOR

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SME SECTOR
3.1 Definition of SMEs
A small scale industrial unit is an undertaking in which investment in plant and machinery, does not exceed Rs.1 crore, except in respect of certain specified items under hosiery, hand tools, drugs and pharmaceuticals, stationery items and sports goods, where this investment limit has been enhanced to Rs 5 crore. Units with investment in plant and machinery in excess of SSI limit and up to Rs. 25 crore may be treated as Medium Enterprises (ME). The Government of India has enacted the Micro, Small and Medium Enterprises Development (MSMED) Act 2006 which was notified on October 2, 2006. Small and medium enterprises (SMEs), particularly in developing countries, are the backbone of the nation's economy. They constitute the bulk of the industrial base and also contribute significantly to their exports as well as to their Gross Domestic Product (GDP) or Gross National Product (GNP).India has nearly three million SMEs, which account for almost 50 percent of industrial output and 42 percent of Indias total exports.

Special roles for SMEs were earmarked in the Indian economy with the advent of planned economy from 1951 and the subsequent industrial policy followed by government. By and large, SMEs developed in a manner, which made it possible for them to achieve the following objectives:
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1. High contribution to domestic production 2. Significant export earnings 3. Low investment requirements 4. Operational flexibility 5. Low intensive imports 6. Capacity to develop appropriate indigenous technology 7. Import substitution 8. Technology-oriented industries 9. Competitiveness in domestic and export markets However, those SMEs who had a strong technological base, international business outlook, competitive spirit and willingness to restructure themselves withstood the current challenges and came out successful to make their own contribution to the Indian economy. It is the most important employment-generating sector and is an effective tool for promotion of balanced regional development. These account for 50 percent of private sector employment and 30 to 40 percent of value-addition in manufacturing. It produces a diverse range of products (about 8000 odd items), including consumer items, capital and intermediate goods. However, the SMEs in India, which constitute more than 80 percent of the total number of industrial enterprises and form the backbone of industrial development, are as yet, in technological backwaters vis--vis advances in science and technology. These suffer from problems of suboptimal scales of operations and technological obsolescence.

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While most of the large companies, even in developing countries, have financial as well as technical capacity to identify technological sources and evaluate alternate technologies that would suit their requirements, unfortunately this capacity is missing in most SMEs.

3.2 Growth of SME Sector in India: An Analysis

SME is the abbreviation for Small and Medium Enterprises. These enterprises can be rightly called as the backbone of the GDP of India. The SME sector in India is growing at an exceptionally fast rate due to which it is proving to be beneficial to the Indian Economy. However, there are some important points that need to be considered for further development of the SME sector. The current figures related to the SME sector in India are as follows:
The contribution of the SME sector Currently,

to the entire output of the country is 40 %.

there are over 11 million SME units in India that produces more than 8000

products.
90 % of the Industrial Units in India belong to the SME sector. These SME units contribute 35 % to the Indian Industrial Export.

The below mentioned are the factors that have contributed to the growth of the SME sector in India.

SME units in India are being funded by foreign and local fund providers. The advancement in technology has also contributed highly to the SME sector. There are numerous business directories and trade portals available online that contains a rich database of manufacturers, sellers and buyers
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To start and maintain these units, minimal investment is required. These SME units are now being funded by many government and private banks. The SME sector is one of the greatest contributors of domestic production as well as the export earnings. Many major mergers have taken place recently.

Though the sector is flourishing and expected to grow further in the near future, there are however certain challenges that the SME sector will have to face. Though the SME industries are spread all over the urban areas, proper infrastructure needs to be developed in the rural areas to establish these industries there. The SME units are functioning efficiently and effectively, but even now there is lack of information regarding the inputs of these industries, like the raw materials, skills, machinery and equipment. There is need of high level research and development required to develop these sectors in both the urban and rural areas. The SME sector is almost at the initial stage of its growth. With further advancements in technology, this sector is likely to grow further and contribute greatly to the economy of India. Some Figures of Interest

The Indian SME market is worth $5 billion There are over 11 million SME units in India that produce more than 8,000 products Nearly 90 percent of the Indian industrial units belong to the sector of small and medium enterprises

The SMEs contribute 40 percent to the overall industrial output of the country
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These enterprises contribute almost 35 percent to the Indian industrial export Finally, these enterprises are estimated to grow at the rate of 20 percent per year for upcoming years

3.3 Main Reasons for SME Growth

Foreign and local fund providers are taking huge interest in the small and medium enterprises of India

Banking sector has also shown a keen interest in lending credit to these enterprises Many recent mergers have taken place in the sector The sector has significantly contributed towards the domestic production as well as the export earnings

Low investment is required to start and maintain these enterprises The sector has contributed impressively towards job creation and increase in individual incomes

Technological growth is also a factor for growth of SME's in India as there are several trade portals and business directories available online with huge database of buyers, sellers, manufacturers who are basically back bone of SME's

Banks may initiate necessary steps to rationalize the cost of loans to SME sector by adopting a transparent rating system with cost of credit being linked to the credit rating of enterprise SIDBI has developed a Credit Appraisal & Rating Tool (CART) as well as a Risk Assessment Model (RAM) and a comprehensive rating model for risk assessment of proposals for SMEs. The
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banks may consider taking advantage of these models as appropriate and reduce their transaction costs. In order to increase the outreach of formal credit to the SME sector, all banks, including Regional Rural Banks may make concerted efforts to provide credit cover on an average to at least 5 new small/medium enterprises at each of their semi urban/urban branches per year. A debt restructuring mechanism for nursing of sick units in SME sector and a One Time Settlement (OTS) Scheme for small scale NPA accounts in the books of the banks as on March 31, 2004 are being introduced.

3.4 Challenges faced by SME:

The challenges being faced by the small and medium sector may be briefly set out as followsa) Small and Medium Enterprises (SME), particularly the tiny segment of the small enterprises have inadequate access to finance due to lack of financial information and non-formal business practices. SMEs also lack access to private equity and venture capital and have a very limited access to secondary market instruments. b) SMEs face fragmented markets in respect of their inputs as well as products and are vulnerable to market fluctuations. c) SMEs lack easy access to inter-state and international markets. d) The access of SMEs to technology and product innovations is also limited. There is lack of awareness of global best practices. e) SMEs face considerable delays in the settlement of dues/payment of bills by the large scale buyers. With the deregulation of the financial sector, the ability of the banks to service the credit
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requirements of the SME sector depends on the underlying transaction costs, efficient recovery processes and available security. There is an immediate need for the banking sector to focus on credit and SMEs.

CHAPTER IV CREDIT APPRAISAL PROCESS AND BRIEF ABOUT LOANS

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4. CREDIT APPRAISAL PROCESS AND BRIEF ABOUT LOANS

4.1 Credit Appraisal Process
Credit appraisal can be defined as the promoter taking a second look critically and carefully at a project as presented by the promoter to a person who is in no way involved in or connected with its preparation and who is as such able to take an independent, dispassionate and objective view of the project in its totality as also in respect of its various components. 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 Indian banks and small scale industry in India 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

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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, and 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 weightage given to 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 namely- projected balance sheet method, MFBF 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. The sensitivity analysis is used to check the company ability to pay back the loan by changing the independent variables and consequently monitoring the effect on dependent variables. The last step is to understand the classifications of nonperforming asset and the provision to recovery of NPA. The research report contains the whole procedure & process which is used by the bank to give credit to SMEs.
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4.2 Brief overview of loans

Loans can be of two types fund base & non-fund base: FUND BASE includes: Working Capital Term Loan

NON-FUND BASE includes: Letter of Credit Bank Guarantee

4.2.1 FUND BASE

Working Capital
The objective of running any industry is earning profits. An industry will require funds to acquire fixed assets like land, building, plant, machinery, equipments, vehicles, tools etc., & also to run the business i.e. its day to day operations. Funds required for day to-day working will be to finance production & sales. For production, funds are needed for purchase of raw materials/ stores/ fuel, for employment of labor, for power charges etc., for storing finishing goods till they are sold out & for financing the sales by way of sundry debtors/ receivables. Capital or funds required for an industry can therefore be bifurcated as fixed
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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 working capital or liquid surplus & represents that portion of the working capital, which has been provided from the long-term source. 1. Definition Working capital is defined as the funds required carrying the required levels of current assets to enable the unit to carry on its operations at the expected levels uninterruptedly. Thus Working Capital required is dependent on (a) The volume of activity (viz. level of operations i.e. Production & sales)
(b) The activity carried on viz. mfg process, product, production programme, the materials &

marketing.
2. Method Application

SEGMENT SSI SBF C&I Trade Services

LIMITS Upto Rs 5 cr Above Rs 5 cr All loans & Upto Rs 1 cr

METHOD Traditional Method & Nayak Committee method Projected Balance Sheet Method Traditional / Turnover Method Traditional Method for Trade & Projected Turnover Method Projected Balance Sheet Method & Projected Turnover Method Projected Balance Sheet Method Traditional Method Projected Balance Sheet Method & Projected Turnover Method Projected Balance Sheet Method 30

C&I Units

Above Rs 1 cr & upto Rs 5 cr Above Rs 5 cr Industrial Below Rs 25 lacs Rs 25 lacs & Over but upto Rs 5 cr Above Rs 5 cr

3. Operating cycle method

Any manufacturing activity is characterized by a cycle of operations consisting of purchase of purchase of raw materials for cash, converting these into finished goods & realizing cash by sale of these finished goods. Diagrammatically, the OPERATING CYCLE is represented as under The time that lapses between cash outlay & cash realization by sale of finished goods & realization of sundry debtors is known as the length of the operating cycle. That is, the operating cycle consists of:

Time taken to acquire raw materials & average period for which they are in store. Conversion process time

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Average period for which finished goods are in store & Average collection period of receivables (Sundry Debtors)

Operating cycle is also called the cash-to-cash cycle & indicates how cash is converted into raw materials, stocks in process, finished goods, bills (receivables) & finally back to cash. Working capital is the total cash that is circulating in this cycle. Therefore, working capital can be turned over or redeployed after completing the cycle. The length of the operating cycle is different from industry to industry and from one firm to another within the same industry. For instance, the operating cycle of a pharmaceutical unit would be quite different from one engaged in the manufacture of machine tools. The operating cycle concept enables us to assess the working capital need of each enterprise keeping in view the peculiarities of the industry it is engaged in and its scale of operations. Operating cycle is an important management tool in decision-making. 4. Traditional Method of Assessment of Working Capital Requirement The operating cycle concept serves to identify the areas requiring improvement for the purpose of control and performance review. But, as bankers, we require a more detailed analysis to assess the various components of working capital requirement viz., finance for stocks, bills etc. Bankers provide working capital finance for holding an acceptable level of current assets, viz. raw materials, stocks-in-process, finished goods and sundry debtors for achieving a predetermined level of production and sales. Quantification of these funds required to be blocked in each of these items of current assets at any time will, therefore provide a measure of the working capital requirement (WCR) of an industry.
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5. Projected Annual Turnover Method for SSI units (Nayak Committee) For SSI units which enjoy fund based working capital limits up to Rs.5 cr, the minimum working capital limit should be fixed on the basis of projected annual turnover. 25% of the output or annual turnover value should be computed as the quantum of working capital required by such unit .The unit should be required to bring in 5% of their annual turnover as margin money and the Bank shall provide 20% of the turnover as working capital finance. Nayak committee Guidelines correspond to working capital limits as per the Operating Cycle method where the average production / processing cycle is taken to be 3 months (i.e. working capital would be turned over 4 times in a year). 6. Projected Annual Turnover Method for C & I industrial units (limits upto Rs 5 cr) Bank has decided to extend Nayak Committee approach for assessment of limits to C&I industrial units requiring credit limits upto Rs.5 cr. That is, credit requirement up to Rs.5 crores of C&I borrowers (industrial units) may be assessed at a minimum of 20% of projected annual turnover. In other words, the working capital requirement will be assessed at 25% of projected annual turnover, of which 5% should be brought by entrepreneur as margin and 20% would be allowed as Bank Drawings. While accepting projected annual sales turnover, a cap of 25% over actual annual sales turnover in the immediately preceding year should be set, except where production capacity has been substantially increased.

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7. Projected Annual Turnover Method for Business Enterprises in Trade & Services

Sector For working Capital limits up to Rs. 5 cr to C&I (Trade) sector, the assessment of credit limit is to be based upon annual turnover. Thus across the board credit limit equal to 15% of projected annual turnover be offered to business enterprises in the T&S sector. It would be available for utilization generally as a cash credit limit. However, where needed an LC limit (as a sub-limit of total), may also be allowed. The credit limit would be secured by hypothecation charge on the current assets of the enterprise. Periodical stock statements are to be obtained and margin of 25% be retained. Credit limits under this assessment method may be offered to established (at least 3 years old) profit making business enterprises, eligible for credit rating of SB-4 and above. Mortgage of property valued at least at 33% of the limit is to be prescribed. Further, an interest rebate of 0.50% p.a. may be given to borrowers who offer mortgage of property valued at over 75% of the credit limit. While accepting projected annual sales turnover, a cap of 25% over actual annual sales turnover in the immediately preceding year should be set. When circumstances warrant its breach, reasons therefore should be recorded. Where borrowers indicate need for credit limits which are higher than the amount indicated above, assessment under the traditional PBS method may be resorted to.

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8. Projected Balance Sheet Method (PBS) The PBS method of assessment will be applicable to all C&I borrowers who are engaged in manufacturing, services, and trading activities, including merchant exports and who require fund based working capital finance of Rs. 25 lacs and above. In the case of SSI borrowers, who require working capital credit limit up to Rs.5 cr, the limit shall be computed on the basis of Nayak Committee formula as well as that based on production and operating cycle of the unit and the higher of the two may be sanctioned. Fund based working capital credit limits beyond Rs 5 cr for SSI units shall be computed in the same way as for C&I units. For business enterprises in Trade and Services Sector, where the projected turnover method is not applicable, PBS method shall be followed. In the Projected Balance Sheet (PBS) method, the borrowers total business operations, financial position, management capabilities etc. are analyzed in detail to assess the working capital finance required and to evaluate the overall risk of the exposure.

Term Loan
1. 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 normally not exceeding 8 years. 2. A term loan is a loan granted for the purpose of capital assets, such as purchase of land, construction of, buildings, purchase of machinery, modernization, renovation or rationalization of plant, & repayable from out of the future earning of the enterprise, in installments, as per a prearranged schedule.

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From the above definition, the following differences between a term loan & the working capital credit afforded by the Bank are apparent

The purpose of the term loan is for acquisition of capital assets The term loan is an advance not repayable on demand but only in installments ranging over a period of years

The repayment of term loan is not out of sale proceeds of the goods & commodities per se, whether given as security or not. The repayment should come out of the future cash accruals from the activity of the unit

The security is not the readily saleable goods & commodities but the fixed assets of the units

3. It may thus be observed that the scope & operation of the term loans are entirely different from those of the conventional working capital advances. The Banks commitment is for a long period & the risk involved is greater. An element of risk is inherent in any type of loan because of the uncertainty of the repayment. Longer the duration of the credit, greater is the attendant uncertainty of repayment & consequently the risk involved also becomes greater. 4. However, it may be observed that term loans are not so lacking in liquidity as they appear to be. These loans are subject to a definite repayment programme unlike short term loans for working capital (especially the cash credits) which are being renewed year after year. Term loans would be repaid in a regular way from the anticipated income of the industry/ trade. 5. These distinctive characteristics of term loans distinguish them from the short term credit granted by the banks & it becomes necessary therefore, to adopt a different approach in examining the applications of borrowers for such credit & for appraising such proposals.
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6. The repayment of a term loan depends on the future income of the borrowing unit. Hence, the primary task of the bank before granting term loans is to assure itself that the anticipated income from the unit would provide the necessary amount for the repayment of the loan. This will involve a detailed scrutiny of the scheme, its financial aspects, economic aspects, technical aspects, a projection of future trends of outputs & sales & estimates of cost, returns, flow of funds & profits. 7. Appraisal of Term Loans Appraisal of term loan for, say, an industrial unit is a process comprising several steps. There are four broad aspects of appraisal, namely

Technical Feasibility - To determine the suitability of the technology selected & the adequacy of the technical investigation & design

Economic Feasibility - To ascertain the extent of profitability of the project & its sufficiency in relation to the repayment obligations pertaining to term assistance

Financial Feasibility - To determine the accuracy of cost estimates, suitability of the envisaged pattern of financing & general soundness of the capital structure

Managerial Competency To ascertain that competent men are behind the project to ensure its successful implementation & efficient management after commencement of commercial production.

Technical Feasibility

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The examination of this item consists of an assessment of the various requirement of the actual production process. It is in short a study of the availability, costs, quality & accessibility of all the goods & services needed. location of the project Size of the plant Type of technology Labor Technical Report

Economic Feasibility An economic feasibility appraisal has reference to the earning capacity of the project. Since earnings depend on the volume of sales, it is necessary to determine how much output or the additional production from an established unit the market is likely to absorb at given prices. i) A thorough market analysis is one of the most essential parts of project investigation. This involves getting answers to three questions. a) How big is the market? b) How much it is likely to grow? c) How much of it can the project capture? ii) Future iii) Intermediate product Financial Feasibility
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The basis data required for the financial feasibility appraisal can be broadly grouped under the following heads i) Cost of the project including working capital ii) Cost of production & estimates of profitability iii) Cash flow estimates & sources of finance. The cash flow estimates will help to decide the disbursal of the term loan. The estimate of profitability & the breakeven point will enable the banker to draw up the repayment programme, start-up time etc. The profitability estimates will also give the estimate of the Debt Service Coverage which is the most important single factor in all the term credit analysis. A study of the projected balance sheet of the concern is essential as it is necessary for the appraisal of a term loan to ensure that the implementation of the proposed scheme. Break-even point: In a manufacturing unit, if at a particular level of production, the total manufacturing cost equals the sales revenue, this point of no profit/ no loss is known as the break-even point. Break-even point is expressed as a percentage of full capacity. A good project will have reasonably low breakeven point which not be encountered in the projections of future profitability of the unit.

Debt/ Service Coverage:

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The debt service coverage ratio serves as a guide to determining the period of repayment of a loan. This is calculated by dividing cash accruals in a year by amount of annual obligations towards term debt. The cash accruals for this purpose should comprise net profit after taxes with interest, depreciation provision & other non cash expenses added back to it. Debt Service Coverage Ratio = Cash accruals Maturing annual obligations

This ratio is valuable, in that it serves as a measure of the repayment capacity of the project/ unit & is, therefore, appropriately included in the cash flow statements. The ratio may vary from industry to industry but one has to view it with circumspection when it is lower than the benchmark of 1.75. The repayment programme should be so stipulated that the ratio is comfortable. Managerial Competency In a dynamic environment, the capacity of an enterprise to forge ahead of its competitors depends to a large extent, on the relative strength of its management. Hence, an appraisal of management is the touchstone of term credit analysis. If there is a change in the administration & managerial set up, the success of the project may be put to test. The integrity & credit worthiness of the personnel in charge of the management of the industry as well as their experience in management of industrial concerns should be examined. In high cost schemes, an idea of the units key personnel may also be necessary.

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4.2.2NON-FUND BASE
Letter of Credit The expectation of the seller of any goods or services is that he should get the payment immediately on delivery of the same. This may not materialize if the seller & the buyer are at different places (either within the same country or in different countries). The seller desires to have an assurance for payment by the purchaser. At the same time the purchaser desires that the amount should be paid only when the goods are actually received. Here arises the need of Letter of Credit (LCs). The objective of LC is to provide a means of payment to the seller & the delivery of goods & services to the buyer at the same time. 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, i. 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 ii. authorizes another bank to effect such payment, or to accept & pay such bills of exchanges (drafts); or iii. Authorizes another bank to negotiate against stipulated document(s), provided that the terms & conditions of the credit are complied with.

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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 contract between the applicant & the beneficiary.

4.3 Nonperforming Asset

A debt obligation where the borrower has not paid any previously agreed upon interest and principal repayments to the designated lender for an extended period of time. The nonperforming asset is therefore not yielding any income to the lender in the form of principal and interest payments. It can also be defined as an asset is classified as Non-performing Asset (NPA) if due in the form of principal and interest are not paid by the borrower for a period of 180 days. However with effect from March 2004, default status would be given to a borrower if dues are not paid for 90 days. If any advance or credit facilities granted by banks to a borrower become non-performing, then the bank will have to treat all the advances/credit facilities granted to that borrower as non-performing without having any regard to the fact that there may still exist certain advances / credit facilities having performing status. Though the term NPA connotes a financial asset of a commercial bank, which has stopped earning an expected reasonable return, it is also a reflection of the productivity of the unit, firm, concern, industry and nation where that

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asset is idling. Viewed with this perspective, the NPA is a result of an environment that prevents it from performing up to expected levels.

Causes for Non Performing Assets A strong banking sector is important for a flourishing economy. The failure of the banking sector may have an adverse impact on other sectors. The Indian banking system, which was operating in a closed economy, now faces the challenges of an open economy. On one hand a protected environment ensured that banks never needed to develop sophisticated treasury operations and Asset Liability Management skills. On the other hand a combination of directed lending and social banking relegated profitability and competitiveness to the background. The net result was unsustainable NPAs and consequently a higher effective cost of banking services. One of the main causes of NPAs into banking sector is the directed loans system under which commercial banks are required a prescribed percentage of their credit (40%) to priority sectors. As of today nearly 7 percent of Gross NPAs are locked up in 'hard-core' doubtful and loss assets, accumulated over the years. The problem India Faces is not lack of strict prudential norms but

i. The legal impediments and time consuming nature of asset disposal proposal ii. Postponement of problem in order to show higher earnings iii. Manipulation of debtors using political influence

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In the present scenario there is a gradual growth of npas in commercial banks. More importantly the number increased too many times. Though this is predicted but some of the banks crossed the estimated npas. In this present condition it might not be possible for the banks to provide or sanction loans without NPAs. Previously the newly established private banks somehow managed without having bad debts. On progress these banks are also suffering with the growth of NPAs. According to conditions NPAs may increase or decrease. Growth rate of different sectors, interest on loans, inflation and other financial factors will influence the NPAs. The Non Performing Asset of SBI is increased from 10,870(march2010) crores to 12,346(march 2011) crores. There is an increase of 13.57% of NPAs. So in this present financial year the SBI bank is trying to decrease NPAs at maximum possible level.

Steps taken by SBI to decrease the NPAs The bank is taking a serious action on the one who is having a financial stability and unwilling to pay debts Previously the sanction process of loans is liberal but now the bank is following the tight set of rules and restrictions for the sectors of those with higher NPAs SBI bank is giving the details of debtors to Credit Information Bureau of India Limited (CIBIL) so that they can take necessary measures of not issuing or proving new loans The issue of Non-Performing Assets (NPAs) in the financial sector has been an area of concern for all economies and reduction in NPAs has become synonymous with functional efficiency of financial intermediaries. Although NPAs are a balance sheet issue of individual banks and financial institutions, it has wider macroeconomic implications. So therefore banks have to move with strategic operations to decrease NPAs in order to increase the growth of the Indian economy.

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CHAPTER V CREDIT APPRAISAL STANDARDS AND CRA

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5. CREDIT APPRAISAL STANDARDS AND CRA

Credit appraisal means an investigation/assessment done by the bank prior 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.

5.1 State Bank of Indias Loan Policy

State Bank of Indias (SBI) Loan Policy is aimed at accomplishing its mission of retaining the banks position as a Premier Financial Services Group, with World class standards & significant global business, committed to excellence in customer, shareholder & employee satisfaction & to play a leading role in the expanding & diversifying financial services sector, while continuing emphasis on its Development Banking role. The Loan Policy of the any bank has successfully withstood the test of time and with inbuilt flexibilities, has been able to meet the challenges in the market place. The policy exits & operates at both formal & informal levels. The formal policy is well documented in the form of circular instructions, periodic guidelines & codified instructions, apart from the Book of Instructions, where procedural aspects are highlighted. The policy, at the holistic level, is an embodiment of the Banks approach to sanctioning, managing & monitoring credit risk & aims at making the systems & controls effective.

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The Loan Policy also aims at striking a balance between underwriting assets of high quality, and customer oriented selling. The objective is to maintain Banks undisputed leadership in the Indian Banking scene. The Policy aims at continued growth of assets while endeavoring to ensure that these remain performing & standard. To this end, as a matter of policy the Bank does not take over any NonPerforming Asset (NPA) from other banks. The Central Board of the Bank is the apex authority in formulating all matters of policy in the bank. The Board has permitted setting up of the Credit Policy & Procedures Committee (CPPC) at the Corporate Centre of the Bank of which the Top Management are members, to deal with issues relating to credit policy & procedures on a Bank-wide basis. The CPPC sets broad policies for managing credit risk including industrial rehabilitation, sets parameters for credit portfolio in terms of exposure limits, reviews credit appraisal systems, approves policies for compromises, write offs, etc. & general management of NPAs besides dealing with the issues relating to Delegation of Powers. Exposure Levels Individuals as borrowers Maximum aggregate credit facilities of Rs. 20 crores ( Fund based & non-fund based ) Maximum aggregate credit facilities of Rs. 80 crores ( Fund based & non-fund based ) Maximum aggregate credit facilities as per prudential norms of RBI on exposure

Non-corporates ( e.g. Partnerships, JHF, Associations ) Corporates

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5.2 Credit Appraisal Standards

Qualitative: At the outset, the proposition is examined from the angle of viability & also from the Banks prudential levels of exposure to the borrower, Group & Industry. Thereafter, a view is taken about our past experience with the promoters, if there is a track record to go by. Where it is a new connection for the bank but the entrepreneurs are already in business, opinion reports from existing bankers & published data if available are carefully pursued. In case of a maiden venture, in addition to the drill mentioned heretofore, an element of subjectively has to be perforce introduced as scant historical data weightage to be placed on impressions gained out of the serious dialogues with the promoter & his business contacts. Quantitative: a) Working capital Quantitative Parameters
Sector/ Parameters Liquidity Current Ratio (min.) Financial Soundness TOL/TNW (max.) DSCR Net (min.) Gros (min.) Gearing D/E (max.) Promoters contribution (min.) Mfg 1.33 Others 1.20 (For FBWC limits above Rs. 5 cr.) 1.00 (For FBWC limits upto Rs. 5 cr.)) 5.00 2:1 1.75:1

3.00 2:1 1.75:1

2:1 2:1 30% of equity 20% of equity 48

(i) Liquidity Current Ratio (CR) of 1.33 will generally be considered as a benchmark level of liquidity. However the approach has to be flexible. CR of 1.33 is only indicative & may not be deemed mandatory. In cases where the CR is projected at a lower than the benchmark or a slippage in the CR is proposed, it alone will not be a reason for rejection for the loan proposal or for the sanction of the loan at a lower level. In such cases, the reason for low CR or slippage should be carefully examined & in deserving cases the CR as projected may be accepted. In cases where projected CR is found acceptable, working capital finance as requested may be sanctioned. In specific cases where warranted, such sanction can be with the condition that the borrower should bring in additional long-term funds to a specific extent by a given future date. Where it is felt that the projected CR is not acceptable but the borrower deserves assistance subject to certain conditions, suitable written commitment should be obtained from the borrower to the effect that he would be bringing in required amounts within a mutually agreed time frame. (ii) Net Working Capital Although this is a corollary of current ratio, the movements in Net Working Capital are watched to ascertain whether there is a mismatch of long term sources vis--vis long term uses for purposes which may not be readily acceptable to the Bank so that corrective measures can be suggested. (iii)Financial Soundness This will be dependent upon the owners stake or the leverage. Here again the benchmark will be different for manufacturing, trading, hire-purchase & leasing concerns. For industrial ventures a

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Total Outside Liability/ Tangible Net worth ratio of 3.0 is reasonable but deviations in selective cases for understandable reasons may be accepted by the sanctioning authority. (iv) Turn-Over The trend in turnover is carefully gone into both in terms of quantity & valve as also market share wherever such data are available. What is more important to establish a steady output if not a rising trend in quantitative terms because sales realization may be varying on account of price fluctuations. (v) Profits While net profit is ultimate yardstick, cash accruals, i.e., profit before depreciation & taxation conveys the more comparable picture in view of changes in rate of depreciation & taxation, which have taken place in the intervening years. However, for the sake of proper assessment, the nonoperating income is excluded, as these are usually one time or extraordinary income. Companies incurring net losses consistently over 2 or more years will be given special attention, their accounts closely monitored, and if necessary, exit options explored. (vi)Credit Rating: Wherever the company has been rated by a Credit Rating Agency for any instrument such as CP / FD this will be taken into account while arriving at the final decision. However as the credit rating involves additional expenditure, we would not normally insist on this and only use this tool if such an agency had already looked into the company finances.

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(b) Term Loan (i) In case of term loan & deferred payment guarantees, the project report is obtained from the customer, (ii) This may be compiled either in-house or by a firm of consultants/ merchant bankers. The technical feasibility & economic viability is vetted by the bank & wherever it is felt necessary, the Credit Officer would seek the benefit of a second opinion either from the Banks Technical Consultancy cell or from the consultants of the Bank/ SBI Capital Markets Ltd. (iii)Promoters contribution of at least 20% in the total equity is what we normally expect. But promoters contribution may vary largely in mega projects. Therefore there cannot be a definite benchmark. The sanctioning authority will have the necessary discretion to permit deviations. (iv)The other basic parameter would be the net debt service coverage ratio i.e. exclusive of interest payable, which should normally not go below 2. On a gross basis DSCR should not be below 1.75. These ratios are indicative & the sanctioning authority may permit deviations selectively. (v) As regards margin on security, this will depend on Debt: Equity gearing for the project, which should preferably be near about 1.5: 1 & should not in any case be above 2:1, i.e., Debt should not be more than 2 times the Equity contribution. The sanctioning authority in exceptional cases may permit deviations from the norm very selectively. (vi)Other parameters governing working capital facilities would also govern Term Credit facilities to the extent applicable.

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Lending to Non-Banking Financial Companies (NBFCs) Financing of infrastructure projects Lease Finance Letter of Credit, Guarantees & bills discounting Fair Practices for lenders

5.3 CREDIT RISK ASSESSMENT

Risk: definition with reference to bank Risk is inability or unwillingness of borrower-customer or counter-party to meet their repayment obligations/ honor their commitments, as per the stipulated terms. In the business world, Risk arises out of Deficiencies / lapses on the part of the management (Internal factor) Uncertainties in the business environment (External factor) Uncertainties in the industrial environment (External factor) Weakness in the financial position (Internal factor)

To put in another way, success factors behind a business are Managerial ability Favorable business environment Favorable industrial environment Adequate financial strength
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. Lending despite risks So, risk should not deter a Banker from lending. A bankers task is to identify/ assess the risk factors/ parameters & manage / mitigate them on a continuous basis. But its always prudent to have some idea about the degree of risk associated with any credit proposal. The banker has to take a calculated risk, based on risk-absorption/ risk-hedging capacity & risk-mitigation techniques of the Bank.

5.3.1 CREDIT RISK ASSESSMENT (CRA): Credit is a core activity of banks & an important source of their earnings, which go to pay interest to depositors, salaries to employees & dividend to shareholders. In credit, it is not enough that we have sizable growth in quantity/ volume, it is also necessary to ensure that we have only good quality growth. To ensure asset quality, proper risk assessment right at the beginning, that is, at the time of taking an exposure, is extremely important. Moreover, with the implementation of Basle-II accord4, capital has to be allocated for loan assets depending on the risk perception/ rating of respective assets. It is, therefore, extremely important for every bank to have a clear assessment of risks of the loan assets it creates, to become Basle-II compliant. That is why Credit Risk Assessment (CRA) system is an essential ingredient of the Credit Appraisal exercise.
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Bank has introduced New Rating Scales for borrower for giving loans. Rating is given on the basis of scores out of 100. Bank gives loans to the borrower as per their rating like SBI gives loans to the borrower up to SB8 rating as it has average risk till SB8 rating. From SB9 rating the risk increases. So banks do not give loans after SB8 rating.
1. The risk parameters as mentioned above are individually scored to arrive at an aggregate

score of 100 (subject to qualitative factors negative parameters). The overall score thus obtained (out of a max. of 100) is rated on an 8 point scale from SB1/SBTL1 to SB 8 /SBTL8. CRA model also stipulates a minimum score under financial, business, industry and management risk parameters for a proposal to be considered acceptable in a given form. 5.3.2 Salient features of CRA models: (a) Type of Models S. No. (i) (ii) Exposure Level (FB + NFB Non Trading Sector Limits ) (C&I , SSI , AGL) Over Rs. 5.00 crore Regular Model Rs 0.25 crore to Rs. 5.00 crore Simplified Model Trading Sector ( Trade & Services) Regular Model Simplified Model

(b) Type of Ratings S. No. (i) (ii) Model Regular Model Simplified Model Type of Rating (i) Borrower Rating (ii) Facility Rating Borrower Rating

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(c) New Rating Scales - Borrower Rating: 16 Rating Grades

S. No. 1 2 3 4 5 6 7 8 9 10

Borrower Rating SB1 SB2 SB3 SB4 SB5 SB6 SB7 SB8 SB9 SB10

Range of Scores 94-100 90-93 86-89 81-85 76-80 70-75 64-69 57-63 50-56 45-49

Risk Level

Comfort Level

Virtually Zero risk Virtually Absolute safety Lowest Risk Highest safety Lower Risk Higher safety Low Risk High safety Moderate Risk with Adequate Adequate safety Cushion Moderate Risk Moderate Safety Average Risk Acceptable Risk (Risk Tolerance Threshold) Above Safety Threshold Safety Threshold

11 12 13 14 15
16

SB11 SB12 SB13 SB14 SB15

SB16

40-44 35-39 30-34 25-29 <24

-

Borderline risk High Risk Higher Risk Substantial risk Pre-Default Risk (extremely vulnerable to default)
Default Grade

Inadequate safety Low safety Lower safety Lowest safety Nil

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(d) New Rating Scales - Facility Rating (Separate for each Fund Based / Non- Fund Based Facility): 16 Rating Grades

S FACILITY NO GRADES 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 FR1 FR2 FR3 FR4 FR5 FR6 FR7 FR8 FR9 FR10 FR11 FR12 FR13 FR14 FR15 94-100 87-93 80-86 73-79 66-72 59-65 52-58 45-51 38-44 31-37 24-30 17-23 11-16 5-10 1-4

LGD LEVEL (Recovery Level) Virtually Zero LGD Lowest LGD (Highest Recovery) Lower LGD (Higher Recovery) Very Low LGD (High Recovery) Low LGD (Adequate Recovery) Moderate LGD (Moderate recovery) Average LGD (Average Recovery) LGD Tolerance Threshold (Recovery Tolerance Threshold) High LGD (Low recovery) Higher LGD (Lower Recovery) Substantial LGD (Small recovery) Highest LGD (Minimal/zero recovery

RISK COMFORT LE LEVEL VE L Virtually Zero Virtually Risk Absolute Safety Lowest Risk Highest Safety Lower Risk Low Risk Moderate Risk with Adequate Cushion Moderate Risk Average Risk Higher Safety High Safety Adequate Safety

Moderate Safety Above Safety Threshold Acceptable Safety Risk Threshold (Risk Tolerance Threshold) High Risk Low Safety Higher Risk Substantial Risk Highest Risk NIL Lower Safety Lowest Safety

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(e) Qualitative Parameter (External Rating) Solicited Rating by a recognized External Credit Rating Agency (ECRA) translates to additional Score. Following ECRAs recognised by RBI are considered for this purpose: External Credit Rating Agencies S. 1 Type Domestic (d) ECRA Credit Analysis & Research Limited CRISIL Limited FITCH India ICRA Limited

International

(a)

FITCH Moodys Standard & Poors

RBI has clarified that Cash Credit Exposures tend to be generally rolled over and also tend to be drawn on an average for a major portion of the sanctioned limits. Hence even though a cash credit exposure may be sanctioned for a period of one year or less, these exposures should be reckoned as Long Term Exposures and accordingly, the Long Term Ratings accorded by the chosen Credit Rating Agencies will be relevant.

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CHAPTER VI A case study on credit appraisal: case on Manufacturing Industry

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6. A case study on credit appraisal: case on Manufacturing Industry

Company: - Paark Turbo Profiles Private Limited Firm:-partnership Industry: - Manufacturing Activity: Manufacturing of Moving Blades, Nozzles, Welded Diaphragms, Nozzles Segments, Guide Wheel Carriers, Grid Valves, Riorar Assembly, Base Plate, Exhaust Casings, Pump set, Derater Heater, Storage Tank, Gas Tank, Columns, Separator Body and Heat Exchanger. Segment:-C&I Date of incorporation: - 15-01-1991 Banking arrangement: - Sole Banking Regd Office: - Plot No. 12 of A3 and A4, Industrial Estate, Patancheru, Medak District.

Brief Background of the company

Paark Turbo Profiles Private Limited (PTPPL) was incorporated in Feb 1991 with an objective to carry on the business of manufacturing of Moving Blades, Nozzles, , Welded Diaphragms, Nozzles Segments, Guide Wheel Carriers, Grid Valves, Riorar Assembly, Base Plate, Exhaust Castings, pump set, derater Heater, Storage Tank, Gas Tank, Columns, Separator Body and Heat Exchanger. Shri Eechampati Siddhartha is the Managing Director of PTPPL.
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PTPPL is an Engineering company and it is primarily catering to the needs of BHEL R.C Puram, BHEL Varanasi, Bhopal and trichi, etc., The company supplies Base Plates, Exhaust casting, Pumpset, Derater Heater, Storage tank Gas tank, Columns, Separator body & Heat Exchanger (which are turbine parts) in the existing unit. The unit has acquired an open industrial land admeasuring 10030.07 Sq Yards in the open auction conducted by ARCIL on 18 th January 2007 and the unit is now planning for constructing shed and buildings and erecting heavy machinery for taking up additional turbine parts like Moving Blades, Nozzles, Welded Diaphragms, Nozzle segments, Guide wheels Carrier, Grid valves and Rotor Assembly. The total project cost of the proposed expansion is at Rs 907 lac. The promoters have requested for a Term Loan of Rs.464 lacs while the balance Rs 443 lacs will be brought in, in the form of promoters contribution and internal accruals, giving debt equity of 1.28:1. The company is also requesting to enhancement of Working Capital from the existing Rs 50 lac to Rs 100 lac to take care of increased order booking in the existing portfolio and take also to take care of fabrication works for outer shells of turbines. Promoters E.Siddhartha, Sanata Srikanth and Sri Vani are the Board of Directors of the company. The Management of the company is controlled by Sri E.Siddhartha. E.Siddhartha is having experience of running the business for the last nineteen years. He is having a good exposure in Engineering Industry. Sanata Srikanth is also having experience of running the business for the last ten years. He is having a good exposure in the area of Engineering & Steel Industry. Mr.E.Siddhartha Managing Director of the company and his team are instrumental in successfully running the unit.
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Shareholding pattern
SERIAL NO 1. 2 3 NAME OF HOLDER THE SHARE % SHARE HOLDING 55 30 15 100

Shri E.Siddhartha Shri Sanata Srikanth Smt Sri Vani Total

Industry Scenario
The major end-user industries for heavy engineering goods are power, infrastructure, steel, cement, petrochemicals, oil & gas, refineries, fertilizers, mining, railways, automobiles, textiles, etc. Light engineering goods are essentially used as inputs by the heavy engineering industry. Key Growth Drivers of Indian Engineering Sector The engineering sector in India has been growing on the back of growth in the user industries and several new projects been undertaken in various core industries such as railways, power, infrastructure, etc. Capacity creation in sectors such as infrastructure, oil & gas, power, mining, automobiles, auto components, steel, refinery, consumer durables, etc, is driving growth of the engineering industry.

Growth of the key user industries

Governments thrust on the power and construction industries

61

 India being preferred by global companies as an outsourcing destination as it enjoys lower labour cost and better designing capabilities

Heavy Engineering Sector The heavy engineering sector can be classified into two broad segments capital goods/machinery (which is further classified as electrical machinery/equipment and non-electrical machinery/equipment), and equipment segments. Electrical machinery includes the following: power generation, transmission and distribution equipments such as generators and motors, transformers and switchgears. Non-electrical machinery includes machines/equipments used in various sectors such as material handling equipments (earth moving machinery, excavators, cranes, etc), boilers, etc

Heavy Electrical Industry The fortunes of the heavy electrical industry have been closely linked to the development of the power sector in India. The heavy electrical industry has under its preview power generation, transmission, distribution and utilization equipments. These include turbo generators, boilers, turbines, transformers, switchgears and other allied items. These electrical equipments (transformers, switchgears, etc) are used by almost all the sectors. Some of the major areas where these are used include power generation projects, petrochemical complexes, chemical plants, integrated steel plants, non-ferrous metal units, etc. The existing installed capacity of India heavy electrical industry is 4,500 MW of thermal, 1,345 mw of hydro and about 250 MW of gas-based power generation equipment per annum. The industry has the capability to manufacture transmission and distribution equipment up to 400KV AC and high voltage DC.

62

Indebtedness / Exposure & Capital Charge: Company Indebtedness Existing Proposed Group Existing Proposed

(Rs. in lacs) Proposed exposure Credit Risk conversio weight n factor 100 50% 100% 100%

Fund based Non fund based TOTAL (Indebtedness) Investment Leasing TOTAL (Exposure)

50.00 (10.00) 50.00 --50.00

564.00 100.00 664.00 --664.00

50.00 (10.00) 50.00 --50.00

564.00 100.00 664.00 --664.00

---

---

Capital charge for Total exposure : Present proposal

a. Proposal: Sanction for i. a ii . b ii i. c

Rs 67.54 lac

Renewal of Cash Credit facility with enhancement from existing Rs 50 lac to Rs 100 lac. Term Loan of Rs 464 lac for expansion

Bank Guarantee of Rs 100 lacs.

This proposal falls within the powers of Net Working Credit Committee: Rs in lacs (i) FB/NFB/Total indebtedness is Rs. 564/100/664 respectively for a corporate entity

63

Credit Limits (Existing and Proposed)

(Rs. in lacs)

Existing
Limits SBI % Total Cons/ MBA. SBI

Proposed
% Total Cons/ MBA. 100.00 100% --

Change
SBI Total Cons / MBA. +50 --

FBWC

50.00

100% --

Total FBWC TLs Total FB LC BG Total NFB Total FB+NFB

50.00 0.00 50.00 -(10.00) -50.00

100% -100% -100% -100% -100% ----

100.00 464.00 564.00 -100.00 100.00 664.00

100% -100% -100% -100% -100% -100% -100% --

+50 +464 +514 -100 100 +614

--------

100% --

Sharing pattern
Financial Arrangement: Sole Banking

FB SBI Ass.Bks. SBI Group 100% -100%

NFB 100% -100%

Total 100% -100%

64

Other Banks Total

-100%

-100%

-100%

6.1 PERFORMANCE AND FINANCIAL INDICATORS

As on 31st March

YR.BEFORE LAST AUDITED

LAST YEAR AUDITED

CURRENT YEAR ESTIMATED

FOLLOWING YEAR PROJECTED

2009 Net Sales [Value] 5.57 [] [Export Sales] [] [] Operating Profits 0.48 [] Profit Before Tax [PBT] 0.22 [] PBT / Net Sales [%] 3.95 [] Profit After Tax [PAT] 0.17 [] Cash Accruals 0.43 [] PBDITA 0.74 [] Paid up Capital [PUC] 0.30 [] Tangible Net Worth [TNW] 1.48 [] 65

2010 4.81 [] [] [] 0.36 [] 0.25 [] 5.20 [] 0.18 [] 0.44 [] 0.62 [] 0.39 [] 1.65 []

2011 6.45

2012 8.86

[]

[]

1.28

2.25

0.91

1.51

14.11

17.04

0.64

1.06

0.90

1.70

1.54

2.89

2.84

4.00

4.74

6.96

Adjusted TNW

0.68 []

0.85 [] 2.76 [] 5.36 [] 1.98 [] 0.44 [] -2.53 []

4.74

6.96

TOL / TNW

3.07 []

0.92

1.17

TOL / Adjusted TNW

6.68 []

0.92

1.17

Total Current Assets

1.69 []

3.27

6.86

Current Ratio

0.44 []

1.51

2.11

Net Working Capital

-2.12 []

1.10

3.61

Sales
The company could achieve 82.57% of the estimated turnover in FY10. and Rs 4.81 crores in FY 10. The company was hitherto executing orders of BHEL Hyderabad on job work basis. Hence the performance of the unit heavily depended on the work orders allotted by BHEL Hyderabad. BHEL Hyderabad could not place orders for the quarter of FY10 due to disturbances in the state

Profitability
The company has been recording profits continuously. The profitability parameters are not as per the estimated lines in FY 09 due to the factors impacting turnover. However the estimated and projected profit is justified in view of the change over from job works to regular commercial sales where in the profit margin is more than that of the job work orders. The company has posted PBT of Rs 0.43crore at the end of Dec10. (As per the provisional balance sheet date 31.12.10). The estimated PBT for FY11 is Rs 0.64 crores. 66

TNW & TOL/TNW:

The TNW of the unit is increasing and is estimated to increase further with infusion of additional capital of Rs 3.6 crores. The company has already brought in Rs 2.44 crores which was invested in fixed assets. Balance of Rs 116 lac will be brought by the end of Apl11. The gearing ratio is expected to improve comfortably with infusion of capital in FY11 & FY 12 and retaining of profit margins. The estimated increase in the gearing ratio in FY12 over FY11 is on account of expansion and increase in term liabilities. However the ratio is expected to be well below the bench mark.

Current Ratio & NWC:

The current ratio is not on estimated lines and far below the bench mark level in Fy09 & 10. However it is estimated to improve and will be above the bench mark level in FY11 with improvement in NWC. The company is bringing in capital of Rs 50 lac in FY 12 and the ratio is expected to improve further. The company has never defaulted in payment of its liabilities.

Movement in TNW (Past three years)

Year Opening TNW Add PAT Add. Increase in equity / premium Add./Subtract change in intangible assets Adjust prior year expenses Deduct Dividend Payment Closing TNW 1.18 1.48 2008 0.94 0.24 2009 1.18 0.17 0.14

(Rs in crs)
2010 1.43 0.18 0.04

1.65

67

Synopsis of Balance Sheet (Rs in crs)

Sources of funds Previous Year 2009 Share Capital Reserves and Surplus 0.30 1.18 Last Year 2010 0.39 1.26

Secured Loans : Short Term : Long Term Unsecured Loans Deferred Tax Liability Other Liabilities Total Application of Funds Fixed Assets [Gross Block] Less Depreciation Net Block CAPEX in Progress / Adv.to CAPEX Investments Inventories Sundry Debtors Cash & bank balances Loans & advances to subsdiaries & group companies Loans & advances to others Total Current Assets

0.16 0.68 0.05 0.00 0.00 2.37

0.60 0.00 0.05 0.00 0.00 2.30

5.19 1.66 3.53 0.00 0.00 0.04 1.26 0.19 0.80 0.20 2.49

5.37 1.94 3.43 0.00 0.00 0.01 1.69 0.16 0.80 0.12 2.78

68

[Less : Current Liabilities] [Less : Current Provisions] Total Current Liabilities Net Current Assets Misc. Expenditure [To the extent not written off or adjusted] Total ASSETS LIABILITIES

3.60 0.05 3.65 -1.16 0.00 2.37 6.02 6.02

3.84 0.07 3.91 -1.13 0.00 2.30 6.21 6.21

Current liabilities are more than current assets in FY09 & FY10 due to mounting of creditors which includes creditors for capex. However the company has improved its liquidity position and the current ratio is expected to be well above the bench mark with increased NWC and infusion of capital of Rs 50 lac for funding of current assets.

Risk Assessment
Credit Rating
Borrower rating
WC 31.03.10 ABS

Facility rating TL (31.03.10) ABS

Facilities Existing Proposed

CC(hyp)

---

FR5 (70/100)

CRA

SB7

65/100

SB7

69/100

TL

--

FR6 (67/100)

@ECRA

--

--

--

--

--

BG

--

FR5 (66/100)

-Others --

---

---

---

---

---

---

---

69

Risks and mitigating factors

Risk Competition in the industry

Mitigation The company has been in existence for more than 18 years and has established good reputation in the market.

Proposed Pricing ITEM CC (Hyp) TL Processing fee Commit charges Upfront fee BG Existing Rate Card rate Proposed rate 6.5% above SBBR 7.25% above SBBR Rs 400/- per lac

0.75% above SBAR 6.5% above SBBR ie., 13.25% PA -Rs 400/- per lac -----As applicable 7.25% above SBBR Rs 400/- per lac -1.5% of amount the

loan 1.5% of amount

the

loan

As applicable

As applicable

Deviations in Loan Policy:

Parameters Indicative Min / Max level as per loan policy Company's level as on 31.03.10 (ABS)

1. 2. 3. 4. 5.

Liquidity TOL/TNW Average gross DSCR (TL) Debt / equity Promoters contribution

Min. 1.33 Max. 3.00 Min. 1.75 Max. 2:1 Min. 30% 70

0.44* 2.76 NA NA NA

Environmental and sustainability implications The Company is engaged in engineering activity and is located in industrial area. They have already obtained necessary clearances. Statutory dues / other contingent liabilities: 31.03.10

Dues Statutory dues Contingent liabilities

Level (Rs in lac) Nil Nil

Impact on financial position NA NA

Justification for the proposal:

The promoters of the company have good experience in area of engineering

industry. The outlook of the industry is bright with a growing increase in demand for

turbine blades and other turbine components. The company has backing of BHEL R.C. Puram and also bagging orders from

BHEl Varanasi, Bhopal, Trichi, With increase in capacity the cost per unit of the product would reduce and

company would be benefited from economics of large scale. The company is an existing customer of bank and the operations in the account

are satisfactory.

71

 The company presently manufacturing some components of turbines with its expansion it is able to manufacture majority of components of power generation turbines.

6.2 Appraisal Memorandum for term loan:

Circle Branch Company Hyderabad Saifabad Branch, Hyderabad Paark Turbo Profiles Private Limited

TERM LOAN / DPG:

a) Proposal : Sanction for Term Loan of Rs.464 lac

b) Project / Purpose To meet part cost of construction of Shed and Building and for purchase of Machinery for its expansion project of manufacturing facility of Heavy Fabrication works. c) Cost of Project & Means of finance Project Cost Land Civil Construction Plant & Machinery Preliminary and Preoperative Expenses Contingencies at 2% of P&M amount 144.00 238.00 445.00 15.00 15.00

72

Margin for Working Capital To Total

50.00 907.00

d) Means of Finance
Term Loan Equity Internal Accruals Total 464.00 360.00 83.00 907.00

e)

Remarks on Cost of the project & Means of finance: The Total Project cost of the proposed expansion is Rs.907 lac and the company requires a

Term Loan of Rs. 464 lac with Promoters contribution of Rs. 443 lac which resulted in to a Debt Equity Ratio as 1:1.28. The company has already increased its Authorized Capital to Rs 400 lac. They have already brought in funds to the extent of Rs 244 lac (Rs 144 lac- Land purchase & Rs 100 lac for civil constructions). Balance Capital of Rs 116 lac will be brought by Sri Eechampati Siddhartha Managing Director -Rs 70 lac and Rs 46 lac by other directors by the end of Apl11.

The detail of each item of project cost is given below. Details of Project Cost:

73

Land: The company proposes the intended project in plot no. 23-c(part), part of Sy. No. 359 & 409 phase-I IDA Patancheru, Medak dt. Admeasuring 10030.07 sy yards. The company has purchased from ARCIL in the auction by paying consideration of Rs 136 lac In 2007. The value of the land including stamp duty is Rs 144 lac. Legal opinion from panel advocate indicates that the company holds absolute clear and marketable title over the property.

Civil Works Civil works consists of land development, civil constructions and fabrication of pre-engineered structure required to construct the primary and secondary framing etc., the cost of civil work is estimated at Rs. 238 lac The Company is constructing shed and Building of area 36133.35 sq. ft of covered area. Cost of civil works has been vetted by panel engineer. The cost of construction works out to be Rs 659 per sq.ft which is considered reasonable. The company has already invested Rs 100 lacs for civil works. The same has been certified by the Chartered Accountant. Plant & Machinery The cost of plant and machinery is estimated at Rs. 445 lac including taxes and erection charges.The suppliers are standard suppliers of engineering machinery. The machinery includes import of second Horizontal Boring Machine & Vertical Turrent Lathe Machine from Walter kames Germany. The life and condition of the Machine will be certified by Chartered Engineer along with invoice which is required for customs clearance. Opinion report on Walter kames Germany is being obtained from Dun & Bradstreet. Preliminary & Preoperative Expenses Preliminary Expenses is estimated at Rs. 15 lac and includes interest during construction and other establishment expenses. Contingencies 74

The contingency is estimated at 2% of the plant and machinery and civil construction i.e. Rs. 15 lacs. Margin for Working Capital: The company has estimated 25% margin on Inventory and receivables to Rs.50 lacs.

Project Financing
Item Land Cost 144 Margin% 100 45.38 25 100 100 100 Contribution from Bank finance company 144 108 111 15 15 50 443 -130 334 ---464

Civil Construction 238 Machinery Equipments Preliminary Expenses Contingencies WC Margin Total & 445 15 15 50 907

The promoters margin includes Equity of Rs 360 lac and Rs 83 lac internal accruals. The company has already started the project work to stick on to the schedule and the amount expended by the unit will be treated as their margin. Production factors: The proposed facility has been coming up at the companys newly acquired industrial land in Medak Dist. where all the necessary infrastructural facilities are already available. Raw material

75

X22 CRMOV 1 and X 20 CR (Steel alloy bars) which are to be imported from Germany and they are available at STAR WIRE Ltd. Gujarat and SNO3,5 & 6 and IS 2062 which are procured from Sail and Gindal. In addition to above Steel Bars and sheets are needs which are available from local market. Power The company is installing 11 KV substation which is included in project cost and is also arranging standby power supply with 500 KV Generator. Water Sufficient Ground water through bore wells available. Labour Labour contractors are available locally for unskilled work. Skilled staff: The activity requires ITI and Mechanical Engineers/Diploma Holders and the

company has already been in the process of employing the required employees for the new unit. Marketing: The company receives orders from various units of BHEL, Triveni Engineering works ltd Bangalore

Commercial Viability
2012 2013 2014

[` in crores] 2015 2016 2017

Capacity utilization Sales Net Profit Depreciation+Ammortise d Exp. Interest on Term Loan [s] Less: Accruals used as Margin

80% 8.86 1.06 0.64 0.63 0.00

85% 12.83 1.61 0.50 0.54 0.00

85% 15.15 1.95 0.40 0.42 0.00

85% 16.18 2.08 0.38 0.30 0.00

85% 17.21 2.22 0.34 0.17 0.00

85% 18.36 2.40 0.28 0.06 0.00

76

TOTAL TL / DPG Repayments Interest on Term Loan [s] TOTAL Gross DSCR Average Gross DSCR Average Net DSCR

2.33 0.44 0.63 1.07 2.18 2.36 2.99

2.65 0.88 0.54 1.42 1.87

2.77 0.88 0.42 1.30 2.13

2.76 0.88 0.30 1.18 2.34

2.73 0.88 0.17 1.05 2.60

2.74 0.68 0.06 0.74 3.70

The average gross DSCR is 2.36 and the cash generation in the project is comfortable to service the debt and interest.

Security Margin Particulars WDV of fixed assets Agg. TL / DPG outstanding Security Margin available % of Margin 2011 5.54 4.64 0.9 16.25 2012 7.97 4.2 3.77 47.30 2013 6.77 3.32 3.45 50.96 2014 5.75 2.44 3.31 57.57 2015 4.89 1.56 3.33 68.10 2016 4.16 0.68 3.48 2017 3.54 0.00 3.54

83.65 100.00

Security margins are adequate. It is initially high in 2010-11 as the company is debt free (long term) and the estimated disbursement in 2011 is only Rs130 lac. Subsequently margin slips down to 47.30% in 2012 (as the disbursement of the entire term loan will be completed). However the margin is comfortable and

gradually increases in subsequent years. Break Even Analysis

(Rs in crores) Ist full year of Year of highest production capacity utilization 2013 77

BREAK EVEN ANALYSIS

Capacity utilization [as % of IC] [A] Production Value in Sales [B] Variable Expenses [C] Contribution [D] Fixed & Semi Variable Expenses Operating Profit Break Even Point [Sales] Break Even Point [Installed Capacity] [%] Break Even Point [Cash] [%]

85% 12.88 8.01 4.87 2.58 2.29 6.82 45.03% 36.30%

Break even Analysis carried out for FY 2013 and the break even sales are at Rs 6.82 crores in value and the margin of safety is 45.03%. As the margin of safety is below 50% it is considered acceptable for engineering industry. Cash break even at an installed capacity is 36.30% which is below 50% and is quite acceptable.

Sensitivity Analysis
PAARK TURBO PROFILES PRIVATE LIMITED

SENSITIVITY ANALYSIS [` in crores] 2014 5% 5% decrease volume sales 14.39 14.63 9.18 5.45 2.96 in of 5% decrease in selling price 14.39 14.63 9.66 4.97 2.96

Increase in variable cost. Sales Prod.Value of Sales Less: Variable Cost Contribution Less Fixed Cost 15.15 15.40 9.66 5.74 2.96 15.15 15.40 10.14 5.26 2.96

78

Operating Profit

2.78 2014

2.30 10%

2.49 10% decrease volume sales 13.64 13.86 8.69 5.17 2.96 2.21 15% decrease volume sales 12.88 13.09 8.21 4.88 2.96 1.92 in of in of

2.01 10% decrease in selling price 13.64 13.86 9.66 4.20 2.96 1.24 15% decrease in selling price 12.88 13.09 9.66 3.43 2.96 0.47

Increase in variable cost. Sales Prod.Value of Sales Less: Variable Cost Contribution Less Fixed Cost Operating Profit 15.15 15.40 9.66 5.74 2.96 2.78 2014 15.15 15.40 10.63 4.77 2.96 1.81 15%

Increase in variable cost. Sales Prod.Value of Sales Less: Variable Cost Contribution Less Fixed Cost Operating Profit Effect on : 2014 Increase in Variable Cost : Break Even Sales Gross DSCR 7.94 2.13 5% 8.67 1.76 15.15 15.40 9.66 5.74 2.96 2.78 15.15 15.40 11.11 4.29 2.96 1.33

10% 9.56 1.38

15% 10.63 1.02

Decrease in Volume of Sales : Break Even Sales Gross DSCR Decrease in Selling Price : 7.94 2.13

5% 7.95 1.91 5%

10% 7.94 1.69 10%

15% 7.94 1.47 15%

79

Break Even Sales Gross DSCR

7.94 2.13

8.71 1.54

9.77 0.95

11.30 0.35

Sensitivity analysis indicates that the project can sustain adverse impact of decrease in volume of sales upto 15% and increase in variable cost and decrease in selling price up to 15%

Inventory & Receivable levels :

6.3 ASSESSMENT OF WC FACILITIES

Inventory / Payments
YR.BEFORE LAST AUDITED LAST YEAR ESTIMATED AUDITED CURRENT YEAR ESTIMATED

[` in crores] FOLLOWING YEAR PROJECTED

2009 Raw Material Imported [Months] Domestic [Months] Semi Finished Goods [Amount] [Months] Finished Goods [Months] Receivables Export [Months] Domestic [Months] Sundry Creditors Import / Domestic [Months] [Amount] 3.23 [Amount] [Amount] 1.26 2.71 [Amount] [Amount] [Amount] 0.04 0.11

2010

2011

2012

0.01 0.03

1.00 3.49 0.85 2.22 -

1.30 4.31 1.35 2.75 -

1.69 4.22 80 3.52 12.65

0.80 1.49

2.82 3.82

0.35 0.79

0.45 1.03

Raw Materials & SIP The company has started its activity in the beginning with job works for BHEL (BHEL used to provide material). As such the company did not have any raw material and negligible level of SIP in FY10. However they have started regular commercial operations four months back in FY11 on the stipulations of various units of BHEL and other units at Bangalore and going for expansion in view of the change in the style of activity and also going to add some more products to their existing product profile. The RM SIP holding period is going to stabilize from 2012 onwards. Receivables The receivables are estimated at 1.49 M. However it is estimated to increase to 3.82 M in view of the expansion and increase in sales. Creditors The amount of creditors includes creditors for CAPEX which is funded through long term sources by bringing additional equity. In view of this the creditor realization period is estimated to improve to 0.35 M in FY11 and it is increased by 0.45 M in Fy12 due to the expansion and increase of raw materials required for finished goods.

81

Assessed Bank Finance

Particulars 2010
LAST YEAR AUDITED

( in crores)
2011
CURRENT YEAR ESTIMATED

2012
Following Year PROJECTED

Total Current Assets Other Current Liabilities Working Capital Gap Net Working Capital Assessed Bank Finance NWC to TCA (%) Bank Finance to TCA (%) Other CL To TCA (%)

1.98 3.91 -1.93 -2.53 0.60 -127.78 30.30 197.47

3.27 1.17 2.10 1.10 1.00 33.64 30.58 35.78

6.86 2.25 4.61 3.61 1.00 52.62 14.58 32.80

The ve NWC is due to utilization of short term sources for capex. However the NWC is expected to improve with utilization of internal accruals for funding of current assets and brining of addition equity of Rs 50 lacs in FY12. NWC will be prime funding factor of current assets from 2012

onwards which is a welcome sign. AS PER NAYAK COMMITTEE RECOMMENDATIONS (in crores) 2011 1. Gross Turnover estimated for the year 2. Working Capital required [25% of 1] 3. Eligible Minimum Bank Finance - 80% of [2] 4. Borrower's Margin required - Minimum - 20% of [2] 5. Net Working Capital available 6. Additional Margin to be infused. 6.45 1.61 1.29 0.32 -2.53 2.85

82

The company is eligible for a fund based WC limit of Rs 1.29 crores as per Nayak Committee Method while the company is requesting for renewal of the limits at enhanced level of Rs 1 crores. Efficiency Ratios

Particulars

YR.BEFORE LAST AUDITED 2009

LAST YEAR AUDITED 2010 0.77 []

CURRENT FOLLOWING YEAR YEAR ESTIMATED PROJECTED 2011 0.71 2012 0.59

Net Sales to Total Tangible Assets

0.93

PBT to Total Tangible Assets[%]

3.65%

4.03% []

8.78%

9.98%

Operating Cost to Sales [%]

87.00%

87.00% []

76.00%

67.00%

Bank Finance to Current Assets[%]

9.47%

30.30% []

30.58%

14.58%

Inventory / Net Sales + Receivables / Gross Sales[Days]

85

129 []

150

238

Net Sales to TTA: The ratio is estimated to be lower than that of FY 10 in view of the increase in current assets. This is due to change in the operations from job work to regular commercial sales. The ratio is low in the year 2012 also due to the acquiring of fixed assets PBT to TTA: The profitability shows upward trend. Operating Cost to Sales: The operating cost to sales ratio shows decreasing trend.

83

The other efficiency ratios are in sync with line of activity. The increase in INV+Rec/ net sales for 2011 & 12 is due to change in the line of activity.

6.4Computation of BG limits
The company was sanctioned BG limit of Rs 10 lac as sub limit under CC (HYP) in the last sanction. The company has not utilized the limits so far. But the company is requesting for enhancement of the limit to Rs 100 lac as they will be required to furnish BG for performance of the contracts awarded by units of BHEL as the activity is changed from job works to regular sales. (Rs in lacs) B G O/S as at 31.12.10 Nil

Estimated BGs requirement in next 12 100 months ( performance) 10% of Rs 10 cr Expiry of BGs in next 12 months Requirement of BG limit BG limit recommended Nil. 100 100

2010 Long Term Sources Long Term Uses Net Long Term Surplus 0.55 0.96 -0.41

2011 6.01 2.38 3.63

2012 5.58 3.07 2.51

The long term deficit is on account of utilization of short term sources for CAPEX. However the position is expected to improve in FY11 & FY12 with infusion of additional capital.

84

6.5 COLLATERAL SECURITY

Primary: CC, BG & TL S No 1. 2. 3. Property details Hypothecation of all chargeable current assets of the Company. Charge over Plant & Machinery proposed to be acquired under bank finance EM of all that piece of land belong to M/s Paark Turbo Profiles together with Building and Sheds to be built in Plot No. 23-C, (Part), part of Sy. No. 359 & 409, Phase I, IDA, Patancheru, Medak District, A.P. admeasuring 10030.07 Sq. Yards.

Collateral: CC, BG & TL

S No

Property details

Valuation as per Branch Panel valuer dt. Value 31.12.10 60.00

Assessed

1.

EM of Shed No. D -12, measuring area 72.28 1540 Sq. Yards, built up area of 2735 Sft. In Sy. No. 15/part & 18/part situated at Industrial Estate, Patancheru, G.P. Bandalguda, Dist. Medak, Patancheru Municipality belonging to M/s Paark Turbo Profiles Pvt Ltd E.M of Plot No. 12/D, admeasuring 458.6 145.00 Sq. Yards with Building and Shed in Sy. No. 419 & 435 situated at Industrual Estate, Patancheru, Medak District, belonging to M/s. Paark Turbo Profiles Pvt Ltd E.M. of Plot No. 12/A, admeasuring 377.6 Sq. Yards with Building and Sheds in Sy. No. 419 & 435 situated at Industrial Estate, Patancheru, Medak District, belonging to M/s Paark Turbo Profiles Pvt Ltd Hyp of Existing unencumbered 148.11 Machinery WDV as on 31.03.10
85

125.00

3.

4.

148.11

Total

365.39

333.11

Guarantees NAME Personal Guarantees of 1. Shri E.Siddhartha(As on 4.1.11) 2. Smt Shri Vani (As on 4.1.11) 3. Shri S.Srikanth ( As on 04.1.11 ) NET WORTH ( Rs in 30.03.2010 187.00 21.00 78.00 lac) as on

Worth of the guarantors is net of collaterals and investment in the business. Collateral percentage For SBI For others : 50.16 %( 333.11/664) : NA

(Besides the collateral, Bank has cushion of EM of 10030.07 Sq yards of project site which is taken as primary security for bank exposure of Rs 100 lac towards civil structures. The document value of the land itself is Rs 136.13 lac).

RATE OF INTEREST: Facility CRA Comments, if pricing differs from CRA -----

Pricing 7.25%above SBBR 6.50% above SBBR

Term Loan Working Capital

SB 7 SB 7

86

REPAYMENT SCHEDULE The term loan is repayable in 22 quarterly installments starting from Dec 2011 as per schedule given below. Interest is to be serviced on monthly basis.

PROCESSING FEE 1.50% of the loan amount for term loan ( Upfront fee) and Rs 400 per lac for WC limits

INSURANCE: All the chargeable assets of the company should be comprehensively covered, with Banks Clause.
OTHER CRITICAL CONVENANTS: (These covenants are in addition to the Banks standard covenants applicable to Working Capital limits). The company shall provide copies of all statutory permissions obtained from the regulatory authorities to the Bank. Disbursement will be done progressively based on the certificates from Chartered Civil Engineer & Chartered Accountant. The promoters should finance any shortfall in project expenditure from their own resources to ensure smooth implementation of the project.

87

CHAPTER VII FINDINGS

7. FINDINGS

88

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

Credit and risk go hand in hand SBI loan policy contains various norms for sanction of different types of loans and all norms does not apply to each & every case

SBI norms for providing loans are flexible & it may differ from case to case Banks main function is to lend funds/ provide finance but it appears that norms are taken as guidelines not as a decision making

A bankers task is to identify/ assess the risk factors/ parameters and manage/ mitigate them on continuous basis

The CRA models adopted by the bank take into account all possible factors which go into appraising the risk associated with a loan and 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

89

CHAPTER VIII RECOMMENDATIONS AND SUGGESTIONS

RECOMMENDATIONS AND SUGGESTIONS

90

Banks has to grant the loans for the establishment of business at a moderate rate of interest. So that the people can repay the loan amount to bank regularly and promptly. The Bank should keep on revising its Credit Policy which will help Banks effort to correct the course of the policies. Insufficient data on the SMEs, the lack of credible published information about their financial health, the high vulnerability of small players in a liberalizing market and the inadequacy of risk management systems in banks are factors leading to higher NPAs and lower profitability than potential in SME lending. This can be overcome by collection of authentic data on the SME segment, educating the enterprises on the need for reliable financial data, evolving suitable risk models and close monitoring of accounts by the bank. Follow the tight set of rules and restrictions in assessing the working capital and term loan for the sectors of those with higher NPAs Extend the loans to the SMEs is the relationship-lending rule, where the lending partly bases its decision on proprietary information about the firm and its owner through a variety of contacts over time. The information may be gathered from such stakeholders as suppliers and customers, who may give specific information about the owner of the firm or general information about the business environment in which it operates.
SBI bank has to update the details of debtors to Credit Information Bureau of India Limited (CIBIL) so that they can take necessary measures of not issuing or providing new loan.

There is a critical need to devote substantial resources to improving the skills and capabilities of banks' lending officers, especially with regard to the analysis of the SMEs' financial statements.
91

Understanding the nature of the borrower's business and the cash-flow required is paramount to preventing the creation of NPAs. They need to innovate their delivery platforms by using Internet banking, mobile banking and card-based platforms for delivery of transaction-banking as well as credit products, and enhance the service element. SMEs look for convenience and simplicity in their banking requirements and banks should deliver these through an effective use of technology. The Chairman and Managing Director/Executive 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.

92

CHAPTER IX CONCLUSION

9. CONCLUSION
93

SBI load policy contains various norms for sanction of different types of loans. There all norms do not apply to each & every case. SBI 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, my conclusion was such that, in SBI, credit appraisal system is not only looking for financial wealth. Other strong parameters also play an important role in analyzing creditworthiness of the firm. During the study at SBI I learnt how the theoretical financial analysis aspects are used in practice during the working capital and term loan assessment. I have realized during my project that a credit analyst must own multi-disciplinary talents like financial, technical as well as legal. The method of assessing working capital facilities is mainly done depending on the companys segment. In my case study the company is eligible for a fund based WC limit as per Nayak Committee Method. the chance of getting project approved for loan depends on the technical, financial ecological and managerial feasibility, Debt Service Coverage Ratio, Breakeven analysis and Collateral security.

The CRA models 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, and management risks & are rated separately.
94

In the case study 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 played crucial role in getting project approved for loan

95

CHAPTER X BIBLIOGRAPHY

10. BIBLIOGRAPHY
WEBSITES http://www.rbi.org.in

96

http://www.sbi.co.in http://www.indianbankassociation.com http://www.bankersindia.com http://www.iibf.co.in http://www.projectfinancemagazine.com http://en.wikipedia.org http://www.iba.org.in BOOKS

D. D. Mukherjee, Credit Appraisal, Risk Analysis and Decision Making, 5th edition, copy right 2010, Snow White Publications Pvt Ltd

G. Vijayaragavan, Bank Credit Management, Himalaya Publishing House IM Pandey (2005), Financial Management 9th edition, Vikas Publication House Pvt Ltd, New Delhi

Brigham and Houston (2009), Fundamentals of Financial Management 10th edition, South Western Cengage learning, USA

JOURNALS Banks risk assessment of Swedish SMEs taken from journal Venture Capital, Vol.10, No.2, April 2008, pages 171-194 by Volker Bruns and Margaret Fletcher

97

Delineating the predominant criteria for subcontractor appraisal and their latent relationships taken from the journal Construction Management & Economics Mar, 2008, Vol. 26 Issue 3, p249-259 by Thomas Ziwei and Tang Debt financing of corporate enterprises in India: a study showing impact of industry, size and age factors taken from the journal Journal of Advances in Management Research, Year: 2006, Vol. 3, Issue: 2, p54-67 by Ashish Kumar Rastogi, P.K.Jain, Surendra S. Yadav Biases in Appraising Creditworthiness taken from International Journal of Bank Marketing Year: 1992 Vol. 10 Issue:3 p10-16 by Bala Shanmugam, Philip Bourke The relationship between networking practices and business excellence: a study of small to medium enterprises (SMEs) taken from the journal: Measuring Business Excellence, Year: 2003, Vol. 7, Issue: 2, p78-92 by Mile Terziovski Internationalization of SMEs in India: Fostering entrepreneurship by leveraging information technology taken from the journal International Journal of Emerging Markets, Year: 2007, Vol. 2, Issue: 2, p166-180 by Patricia R. Todd, Rajshekar G. Javalgi The Adoption of e-business and knowledge management in SMEs taken from journal Benchmarking: An International Journal, Mar2007, Vol. 14, Issue: 1, p37-58 by S. Maguire, S. C. L. Koh, A. Magrys

98

ANNEXTURE

ANNEXTURE-A
OPERATING STATEMENT PAARK TURBO PROFILES PRIVATE LIMITED As per profit and loss account actual/
99

estimates for the year ended/ending 2009 2010 2011

YR.BEFORE LAST AUDITED

[` in crores]

2012
Following Year PROJECTED

LAST YEAR AUDITED

CURRENT YEAR ESTIMATED

1. Gross Sales [i] Domestic Sales [ii] Export Sales Add other revenue income Total 2. Less Excise Duty Deduct other items 3. Net Sales[item 1 - item 2] 4. % rise [+] or fall [-]in net sales as compared to last year [annualized] 5. Cost of Sales i] Raw materials[including stores other items used in the process of manufacture] [a] Imported [b] Indigenous ii] Other spares [a] Imported [b] Indigenous iii] Power & fuel iv] Direct labour[Factory wages] v] Other mfg. Expenses vi] Depreciation vii] SUB-TOTAL [i to vi] viii] Add:Op. stocks-in-process Sub-total &

5.57

4.81

6.45

8.86

5.57

4.81

6.45

8.86

5.57

4.81

6.45

8.86

NA

-13.64%

34.10%

37.36%

2.85 2.85

2.60 2.60

3.44 3.44

3.62 3.62

0.71 0.71

0.74 0.74

0.85 0.85

1.02 1.02

0.16 0.41 0.12 0.26 4.51

0.15 0.15 0.10 0.26 4.00 0.00

0.23 0.44 0.22 0.26 5.44 0.00 5.44

0.30 0.52 0.29 0.64 6.39 0.85 7.24

4.51

4.00

100

2009 ix] Deduct: Cl. stocks-in-process x] Cost of Production xi] Add: Op.Stock of F.G. Sub-Total xii] Deduct: Cl. stock of F.G. xiii] Sub-Total [Total cost of sales] 6. Selling, Genl.& Admn.Expenses 7. SUB-TOTAL [5+6] 4.51 0.07 4.58 0.04 4.54 0.55 5.09 0.48 0.26
0.26

2010

2011 0.85 4.59 0.01 4.60

2012 1.35 5.89 0.00 5.89

4.00 0.04 4.04 0.01 4.03 0.42 4.45 0.36 0.11

0.11

4.60 0.57 5.17 1.28 0.48

0.37

5.89 0.72 6.61 2.25 0.74

0.11

8. Op.Profit before Interest [3-7] 9. Interest [on all loans]

2009 & 2010 Total Int.,2011 onwards CC Int.

10. Op.profit after Interest [8-9] 11. [i] Add other non-op.income [i] [ii] Sub-total [income] [ii] Deduct other non-op.exp. [i] [ii] Sub-total [expenses] [iii] Net of non-op.income/exp [iii] Expenses Amortised 12. Profit before tax/loss [10+11 (iii)] 13. [a] Provision for taxes [b] Provision for Deferred Tax 14. Net Profit/loss [12-13]
101

0.22

0.25

0.80

1.51

0.00

0.00

0.00

0.00

0.00 0.00

0.00 0.00

0.00 0.00

0.00 0.00

0.22 0.05

0.25 0.07

0.80 0.27

1.51 0.45

0.17

0.18

0.53

1.06

15. [a] Equity dividend paid-amt [Already paid+B.S.Prov] [b] Dividend Rate 16. Retained Profit [14-15] 17. Retained Profit/Net Profit[%] 0.17 100.00 0.18 100.00 0.53 100.00 1.06 100.00

ANNEXTURE-B
LIABILITIES

PAARK TURBO PROFILES PRIVATE LIMITED

[` in crores] 102

2009
YR.BEFORE LAST AUDITED

2010
LAST YEAR AUDITED 2

2011
CURRENT YEAR ESTIMATED 3

2012
FOLLOWING YEAR PROJECTED 4

CURRENT LIABILITIES 1. Short-term borrowings from banks [incld bills purchased, discounted & excess borrowing placed on repayment basis] [i] From applicant Bank [ii] From other Banks [iii] [of which BP & BD] Sub-Total [A] 2. Short term borrowings from others 3. Sundry Creditors [Trade] 4. Advance payment from customers/deposits from dealers 5. Provision for taxation 6. Dividend payable 7. Other statutory liabilities [due within one year] 8. Deposits/Installments of term loans/DPGs/Debentures, etc.. [payable within one year] 9. Other Current Liabilities & Provisions[due within 1 year]

0.16

0.60

1.00

1.00

0.16

0.60

1.00

1.00

3.23 0.15

3.52 0.14

0.35

0.45

0.05

0.07

0.27

0.45

0.44

0.22

0.18

0.55

0.91

Sub-Total [B]

3.65

3.91

1.17

2.25

103

10.TOTAL CURRENT LIABILITIES [total of 1 to 9 excluded 1 [iii]]

3.81

4.51

2.17

3.25

2009 TERM LIABILITIES 11. Debentures [not maturing within one year] 12. Preference shares [redeemable after one year] 13. Term Loans [excluded installments payable within one year] 14. Deferred Payment Credits [excluding installments due within one year] 15. Term Deposits [repayable after one year] 16. Other term liabilities 17. TOTAL TERM LIABILITIES 0.05 0.73 4.54 0.68

2010

2011

2012

1.30

4.20

0.05 0.05 4.56

0.90 2.20 4.37

0.72 4.92 8.17

18. TOTAL OUTSIDE LIABILITIES

[Item 10 plus item 17] NETWORTH

19. Ordinary share capital 20. General Reserve 21. Revaluation Reserve 22. Other reserves [excluding provisions]

0.30 1.09

0.39 1.26

2.84 1.26

4.00 1.26

0.09

104

23. Surplus(+) or Deficit(-) in Profit & Loss Account. 23 a. Deferred Tax Liability [DTL] 23 b. Others [specify] 24. NET WORTH 25. TOTAL LIABILITIES 1.48 6.02 1.65 6.21

0.64

1.70

4.74 9.11

6.96 15.13

ANNEXTURE-C
ASSETS

105

Name: PAARK TURBO PROFILES PRIVATE LIMITED

106

2009
YEAR.BEFORE LAST AUDITED

2010
LAST YEAR AUDITED

2011
CURRENT YEAR ESTIMATED

[` in crores] 2012
FOLLOWING YEAR PROJECTED

CURRENT ASSETS 26. Cash and Bank balances 27. Investments [other than long term investments] [i] Government & other Trustee securities [ii] Fixed deposits with Banks 28. [i] Receivables other than deferred & exports [included. bills purchased and discounted by banks] [ii] Export receivables[including bills purchased and discounted by banks] 29. Installments of deferred receivables [due within one year] 30. Inventory: [i] Raw Materials[including stores & other items used in the process of mfr.] [a] Imported [b] Indigenous [ii] Stocks in process [iii] Finished goods [iv] Other consumable spares [a] Imported [b] Indigenous 31. Advances to suppliers of raw materials & stores/spares

0.01 0.18

0.00 0.16

0.06 0.24

0.41 0.30

0.18 1.26

0.16 1.69

0.24 0.80

0.30 2.82

0.04 0.00

0.01 0.00

1.85 1.00

2.95 1.30

1.00

1.30

0.00 0.04 0.00 0.00

0.00 0.01 0.00

0.85 0.00 0.00

1.35 0.00 0.30 0.30

0.10

0.06

107

32. Advance payment of taxes 33. Other current assets [specify] 0.10 0.06 0.32 0.38

34. TOTAL CURRENT ASSETS [Total of 26 to 33]

1.69

1.98

3.27

6.86

2009 FIXED ASSETS 35. Gross Block [land & bldg. & machinery] Capital Work in Progress 36. Depreciation to date 37. NET BLOCK [35-36] OTHER NON-CURRENT ASSETS 38. Investments/book debts/ advances/deposits which are not Current Assets [i] (a) Investments in subsidiary Co.s/affiliates (b) Others [ii] Advances to suppliers of capital goods & contractors [iii] Deferred receivables [maturity exceeding 1 yr] [iv] Others 39. Non-consumable stores & spares 40. Other non-current assets including dues from directors 41.TOTAL OTHER NON-CURR.ASSETS 42. a. Intangible assets (patents,goodwill prelim. Expenses, bad/doubtful
108

2010 5.37 1.94 3.43

2011 7.75 2.21 5.54

2012 10.82 2.85 7.97

5.19 1.66 3.53

0.80

0.80

0.00

0.00

0.80

0.80

0.30

0.30

0.80

0.80

0.30

0.30

expenses not provided for etc. b. Deferred Tax Assets [DTA] 43. TOTAL ASSETS [34+37+41+42] 44. TANGIBLE NET WORTH [24-21-42] 45. NET WORKING CAPITAL [(17+24)-(37+41+42)] 46. Current Ratio 47. Total Outside Liabilities/TNW 48. Total Term Liabilities/TNW 6.02 1.48 -2.12 6.21 1.65 -2.53 9.11 4.74 1.10 15.13 6.96 3.61

0.44 3.07 0.49

0.44 2.76 0.03

1.51 0.92 0.46

2.11 1.17 0.71

109