1.

1 Introduction
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. Credit Appraisal is a process to ascertain the risks associated with the
extension of the credit facility. It is generally carried by the financial institutions
which are involved in providing financial funding to its customers.

Basic types of credit

There are four basic types of credit. By understanding how each works, you will
be able to get the most for your money and avoid paying unnecessary charges.
Service credit is monthly payments for utilities such as telephone, gas,
electricity, and water. You often have to pay a deposit, and you may pay a
late charge if your payment is not on time.
Loans let you borrow cash. Loans can be for small or large amounts and for
a few days or several years. Money can be repaid in one lump sum or in
several regular payments until the amount you borrowed and the finance
charges are paid in full. Loans can be secured or unsecured.
Installment credit may be described as buying on time, financing through the
store or the easy payment plan. The borrower takes the goods home in
exchange for a promise to pay later. Cars, major appliances, and furniture
are often purchased this way. You usually sign a contract, make a down
payment, and agree to pay the balance with a specified number of equal
payments called installments. The finance charges are included in the
payments. The item you purchase may be used as security for the loan.
Credit cards are issued by individual retail stores, banks, or businesses.
Using a credit card can be the equivalent of an interest-free loan if you pay
for the use of it in full at the end of each month.

Factors like
Age
Income
Number of dependents
Nature of employment
Continuity of employment
Repayment capacity
Previous loans, etc. are taken into account while appraising the credit
worthiness of a person.
3 C of credit are must be kept in mind for lending funds: Character
Capacity
Collateral
If any one of these are missing in the lending officer must question the
viability of credit.
Credit can be of two types fund base & non-fund base:
FUND BASED includes:
Working Capital
Term Loan
NON-FUND BASED includes:
Letter of Credit
Bank Guarantee

1.2 Objectives
To study the credit appraisal methods.
To understand the internal steps taken by the bank for scrutinizing the
customers details and credentials.
To understand the commercial, financial & technical viability of the proposal
proposed and its finding pattern.

 To understand the basis of credit risk rating and its significance.

1.3 Scope of the study

Credit appraisal of a proposal helps the firm to,

Be consistent and objective in choosing projects

Make sure its program benefits all sections of the community, including those
from ethnic groups who have been left out in the past.

Provide documentation to meet financial and audit requirements and to

explain decisions to local people.

Appraisal is an important decision making tool

Appraisal involves the comprehensive analysis of a wide range of data,

judgments and assumptions, all of which need adequate evidence. This helps
ensure that projects selected for funding.

1.4 Need of the study

An important need of appraisal is obtaining an understanding of the
anticipated expenditure and benefits of a project, usually expressed in terms
of its inputs (costs) and outputs (results).
The expected timing of this must also be made clear.
It will enable any obviously poor or ineligible ones to be eliminated, avoid
duplication and give an early overall view of the success of the measure.

1.5 Limitations of the study

The data collected from various sources cannot be considered as correct
information.
Time was also a major constraint for the study.
The result of project appraisal cannot consider as 100% correct.

1.6 Literature review

Uwe (2005) analyzed and further development of the building blocks of
modern credit risk management: Definitions of default; Estimation of default
probabilities; Exposures; Recovery Rates; Pricing; Concepts of portfolio
dependence; Time horizons for risk calculations; Quantification of portfolio risk;
Estimation of risk measures; Portfolio analysis and portfolio improvement;
Evaluation and comparison of credit risk models; Analytic portfolio loss distributions.
Christian (2006) focused on the changing intensity of three policies that are
commonly associated with financial repression, namely interest rate controls,
statutory preemption and directed credit as well as the effects these policies had.
The main findings are that the degree of financial repression has steadily increased
between 1960 and 1980, and then declined somewhat before rising to a new peak
at the end of the 1980s. Since the start of the overall economic reforms in 1991, the
level of financial repression has steadily declined. Despite the high degree of
financial repression, no statistically significant negative effects on savings, capital
formation and financial development could be established which is contrary to the
predictions of the financial liberalization hypothesis. Arnoud and Anjan (2007) study
appear as the lead chapter in a readings book on corporate finance, financial
intermediation and market micro structure. The unifying theme in the book is optimal
design, and various chapters deal with the design of contracts, securities,
institutions, market mechanisms, and regulation from an information-theoretic
perspective. Each chapter in the book is an original review article that seeks to
synthesize the literature in a given area. Six topics are covered: design of contracts
and securities; market microstructure; credit market implications of bank size, scope
and structure; bank regulation; and finally the interaction between interbank
competition, regulation and banking stability.
Gary (2009) examined that the 'shadow banking system' at the heart of the
current credit crisis is, in fact, a real banking system and is vulnerable to a banking
panic. Indeed, the events starting in August 2007 are a banking panic. A banking
panic is a systemic event because the banking system cannot honor its obligations
and is insolvent. Unlike the historical banking panics of the 19th and early 20th
centuries, the current banking panic is a wholesale panic, not a retail panic. In the
4

earlier episodes, depositors ran to their banks and demanded cash in exchange for
their checking accounts. Unable to meet those demands, the banking system
became insolvent. The current panic involved financial firms 'running' on other
financial firms by not renewing sale and repurchase agreements (repo) or
increasing the repo margin ('haircut'), forcing massive leveraging, and resulting in
the banking system being insolvent.

2.1 Industry profile

History:
Banking in India has its origin as carry as the Vedic period. It is believed that
the transition from money lending to banking must have occurred even before
Manu, the great Hindu jurist, who has devoted a section of his work to deposits and
advances and laid down rules relating to the interest. During the mogal period, the
indigenous bankers played a very important role in lending money and financing
foreign trade and commerce. During the days of East India Company, it was to turn
of the agency houses top carry on the banking business. The general bank of India
was the first joint stock bank to be established in the year 1786.The others which
followed were the Bank of Hindustan and the Bengal Bank. The Bank of Hindustan
is reported to have continued till 1906, while the other two failed in the meantime.
In the first half of the 19th Century the East India Company established three banks;
The Bank of Bengal in 1809, The Bank of Bombay in 1840 and The Bank of Madras
in 1843.These three banks also known as presidency banks and were independent
units and functioned well. These three banks were amalgamated in 1920 and The
Imperial Bank of India was established on the 27th Jan 1921, with the passing of the
SBI Act in 1955, the undertaking of The Imperial Bank of India was taken over by
the newly constituted SBI. The Reserve Bank which is the Central Bank was created
in 1935 by passing of RBI Act 1934, in the wake of Swadeshi movement, a number
of banks with Indian Management were established in the country namely Punjab
National Bank Ltd, Bank of India Ltd, Canara Bank Ltd, Indian Bank Ltd, The Bank
of Baroda Ltd, The Central Bank of India Ltd .On July 19th 1969, 14 Major Banks of
the country were nationalized and in 15th April 1980 six more commercial private
sector banks were also taken over by the government. 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.
The first phase of financial reforms resulted in the nationalization of 14 major
banks in 1969 and resulted in a shift from class banking to mass banking. This in
turn resulted in the significant growth in the geographical coverage of banks. Every
bank had to earmark a min percentage of their loan portfolio to sectors identified as
6

priority sectors the manufacturing sector also grew during the 1970s in protected
environments and the banking sector was a critical source. The next wave of
reforms saw the nationalization of 6 more commercial banks in 1980 since then the
number of scheduled commercial banks increased four- fold and the number of
bank branches increased to eight fold.
After the second phase of financial sector reforms and liberalization of the
sector in the early nineties. The PSBs found it extremely difficult to complete with
the new private sector banks and the foreign banks. The new private sector first
made their appearance after the guidelines permitting them were issued in January
1993.
Reserve Bank of India is the Central Bank of our country. It was established
on 1st April 1935 under the RBI Act of 1934. It holds the apex position in the banking
structure. RBI performs various developmental and promotional functions.
It has given wide powers to supervise and control the banking structure. It occupies
the pivotal position in the monetary and banking structure of the country. In many
countries central bank is known by different names.
For example, Federal Reserve Bank of U.S.A, Bank of England in U.K. and
Reserve Bank of India in India. Central bank is known as a bankers bank. They
have the authority to formulate and implement monetary and credit policies. It is
owned by the government of a country and has the monopoly power of issuing
notes.
The Structure of Indian Banking
The Indian banking industry has Reserve Bank of India as its Regulatory
Authority. This is a mix of the Public sector, Private sector, Co-operative banks and
foreign banks. The private sector banks are again split into old banks and new
banks.

Commercial Banks:
Commercial bank is an institution that accepts deposit, makes business
loans and offer related services to various like accepting deposits and lending loans
and advances to general customers and business man.
These institutions run to make profit. They cater to the financial requirements
of industries and various sectors like agriculture, rural development, etc. it is a profit
making institution owned by government or private of both.

Commercial bank includes public sector, private sector, foreign banks and
regional rural banks:
A. Public sector banks:
It includes SBI, seven (7) associate banks and nineteen (19) nationalized
banks. Altogether there are 27 public sector banks. The public sector accounts for
90 percent of total banking business in India and State Bank of India is the largest
commercial bank in terms of volume of all commercial banks.
SBI and Subsidiaries
This group comprises of the State Bank of India and its seven subsidiaries
viz., State Bank of Patiala, State Bank of Hyderabad, State Bank of Travancore,
State Bank of Bikaner and Jaipur, State Bank of Mysore, State Bank of Saurashtra,
State Bank of India
Nationalized banks:
This group consists of private sector banks that were nationalized. The
Government of India nationalized 14 private banks in 1969 and another 6 in the
year 1980. In early 1993, there were 28 nationalized banks i.e., SBI and its 7
subsidiaries plus 20 nationalized banks. In 1993, the loss making new bank of India
was merged with profit making Punjab National Bank. Hence, now only 27
nationalized banks exist in India.
Public Sector Banks

SBI and SUBSIDIARIES

Nationalized Banks

B. Private sector banks:

Private sector banks (30) are those whose equity is held by private
shareholders. For example, ICICI, HDFC etc. Private sector bank plays a major role
in the development of Indian banking industry.
Private Sector Banks

Old private Sector Banks new private Sector Banks

Old Private Sector Banks

This group consists of the banks that were establishes by the privy sectors,
committee organizations or by group of professionals for the cause of economic
betterment in their operations. Initially, their operations were concentrated in a few
regional areas. However, their branches slowly spread throughout the nation as
they grow.
New private Sector Banks
These banks were started as profit orient companies after the RBI opened
the banking sector to the private sector. These banks are mostly technology driven
and better managed than other banks.
C. Foreign Banks:
Foreign banks are those banks, which have their head offices abroad. CITI
bank, HSBC, Standard Chartered etc. are the examples of foreign bank in India.
D. Regional Rural Bank (RRB):
These are state sponsored regional rural oriented banks. They provide credit
for agricultural and rural development. The main objective of RRB is to develop rural
economy. Their borrowers include small and marginal farmers, agricultural laborers,
artisans etc. NABARD holds the apex position in the agricultural and rural
development.
2. Co-operative Bank:
Co-operative bank was set up by passing a co-operative act in 1904. They
are organized and managed on the principal of co-operation and mutual help. The
main objective of co-operative bank is to provide rural credit.
The cooperative banks in India play an important role even today in rural cooperative financing. The enactment of Co-operative Credit Societies Act, 1904,
however, gave the real impetus to the movement. The Cooperative Credit Societies
Act, 1904 was amended in 1912, with a view to broad basing it to enable
organization of non-credit societies.

10

Three tier structures exist in the cooperative banking:

i.

State cooperative bank at the apex level.

ii.

Central cooperative banks at the district level.

iii.

Primary cooperative banks and the base or local level.

4. Scheduled and Non-Scheduled banks:

A bank is said to be a scheduled bank when it has a paid up capital and
reserves as per the prescription of RBI and included in the second schedule of RBI
Act 1934. Non-scheduled bank are those commercial banks, which are not included
in the second schedule of RBI Act 1934.
5. Development banks and other financial institutions:
A development bank is a financial institution, which provides a long term
funds to the industries for development purpose. This organization includes banks
like IDBI, ICICI, IFCI etc. State level institutions like SFCs SIDCs etc. It also
includes investment institutions like UTI, LIC, and GIC etc

11

Central Bank

Reserve Bank of India

State Bank

of India, Allahabad

Bank, Andhra

Bank, Bank of Baroda, Bank of India, Bank of

Maharastra, Canara Bank, Central Bank of India,
2

Nationalized Banks

Corporation Bank, Dena Bank, Indian Bank, Indian

overseas Bank, Oriental Bank of Commerce,
Punjab and Sind Bank, Punjab National Bank,
Syndicate Bank, Union Bank of India, United Bank
of India, UCO Bank, and Vijaya Bank.
Bank of Rajasthan, Bharath overseas Bank,
Catholic Syrian Bank, Centurion Bank of Punjab,
City Union Bank, Development Credit Bank,

Private Banks

Dhanalaxmi Bank, Federal Bank, Ganesh Bank of

Kurundwad, HDFC Bank, ICICI Bank, IDBI,
IndusInd Bank, ING Vysya Bank, Jammu and
Kashmir Bank, Karnataka Bank Limited, Karur
Vysya Bank, Kotek Mahindra Bank, Lakshmivilas
Bank, Lord Krishna Bank, Nainitak Bank, Ratnakar
Bank,Sangli

Bank,

SBI

Commercial

and

International Bank, South Indian Bank, Tamil Nadu

Merchantile Bank Ltd., United Western Bank, UTI
Bank, YES Bank.

AN OVERVIEW OF BANK LENDINGS:

A developed country like U.S.A. sees its major lending activities done by
Capital & Money market, where banks provide services for merger & acquisition
and other merchant banking activities. In India lending is predominantly done by
Banks. Capital Market & Money Market are not as strong and dependable entities
as yet as banks in a developing country as India and Indian Economy. Banks have
different ways of extending credit to different types of borrowers for a wide variety
of purposes.
12

Principles of Lending and Loan Policy:

1) Principles of Lending
Banks lend from the funds mobilized as deposits from public. A bank acts in the
capacity of a custodian of these funds and is responsible for its safety, security but
at the same time is also required to deliver justified and assured returns over these
borrowings. A bank looks into following aspects before lending:
2) Safety:
The first rule of lending is to ascertain the safety of the advances made. This
means assessment of the repaying capacity of the borrower and purpose of
borrowing. It also includes assessment of contingencies and a fallback plan for the
same. This is ensured by taking adequate security (readily marketable and free of
encumbrances) by way of guarantee, collateral, charges on property, etc.
3) Liquidity:
The second rule of lending is to ascertain how and when the repayment of the
advances made would happen and that the repayment is timely. This is to ascertain
availability of funds in future and make sure that the funds are not locked up for a
long period. This helps in maintaining balance between deposits and advances and
to meet depositors obligation.
4) Profitability:
The third rule of lending is to lend at higher rate of interest than borrowing rate.
This is called as interest spread / margin. One has to strike a balance between
profitability and safety of funds. Interest rates must be charged competitively but at
the same time spread should be adequate.
5) Risk diversion:
An old saying says never put all your eggs in one basket. A lender must
lend to a diversified customer base. Diversification must be made in terms of
geographical locations, borrowers, industry, sector etc. It is done so as to mitigate
adverse financial effects of a business cycle, catastrophe, chain effect etc.

13

6) Loan Policy:
Banks are basically a lending institution. Its major chunk of revenue is earned
from interest on advances. Each bank has its own credit policy, based on the
principles of lending, which outlines lending guidelines and establishes operating
procedures in all aspects of credit management. The policy is drafted by the Credit
Policy Committee and is approved by the banks board of directors.
The credit policy sets standards for presentation of credit proposals, financial
covenants, rating standards and benchmarks, delegation of credit approving
powers, prudential limits on large credit exposures, asset concentrations, portfolio
management, loan review mechanism, risk monitoring and evaluation, pricing of
loans, provisioning for bad debts, regulatory/ legal compliance etc. The lending
guidelines reflect the specific bank's lending strategy (both at the macro level and
individual borrower level) and have to be in conformity with RBI guidelines. The loan
policy typically lays down lending guidelines in the following areas:
7) Credit-deposit ratio:
Banks are under an obligation to maintain certain statutory reserves like cash
reserve ratio (CRR to be kept as cash or cash equivalents), statutory liquidity ratio
(SLR to be kept in cash or cash equivalents and prescribed securities), etc. These
reserves are maintained for asset liability management (ALM) and are calculated
on the basis of demand and time liabilities (DTL). Banks may further invest in non
prescribed securities for the matter of risk diversion. Funds left after providing for
these reserves are available for lending. The CPC decides upon the quantum of
credit that can be granted by the bank as a percentage of deposits.
8) Targeted portfolio mix:
CPC has to strike balance between risk and return. It sets the guiding principles
in choosing preferred areas of lending and sectors to avoid. It also takes into
account government policies of lending to preferred / avoidable sectors. The bank
assesses sectors for future growth and profitability and accordingly decides its
exposure limits.

14

9) Loan pricing:
Risk-return trade-off is a fundamental aspect of risk management. Borrowers
with weak financial position and, hence, placed in higher risk category are provided
credit facilities at a higher price (that is, at higher interest). The higher the credit risk
of a borrower the higher would be his cost of borrowing. To price credit risks, bank
devises appropriate systems, which usually allow flexibility for revising the price
(risk premium) due to changes in rating. In other words, if the risk rating of a
borrower deteriorates, his cost of borrowing should rise and vice versa.
At the macro level, loan pricing for a bank is dependent upon a number of its
cost factors such as cost of raising resources, cost of administration and overheads,
cost of reserve assets like CRR and SLR, cost of maintaining capital, percentage
of bad debt, etc. Loan pricing is also dependent upon competition
10) Collateral security:
As part of a prudent lending policy, bank usually advances loans against some
security. The loan policy provides guidelines for this. In the case of term loans and
working capital assets, bank takes as 'primary security' the property or goods
against which loans are granted. In addition to this, banks often ask for additional
security or 'collateral security' in the form of both physical and financial assets to
further bind the borrower. This reduces the risk for the bank. Sometimes, loans are
extended as 'clean loans' for which only personal guarantee of the borrower is taken
Role of RBI:
The credit policy of a bank should be conformant with RBI guidelines; some
of the important guidelines of the RBI relating to bank credit are discussed below.
-

Directed credit stipulations: The RBI lays down guidelines regarding

minimum advances to be made for priority sector advances, export credit
finance, etc. These guidelines need to be kept in mind while formulating
credit policies for the Bank.

Capital adequacy: If a bank creates assets-loans or investment-they are

required to be backed up by bank capital; the amount of capital they have
to be backed up by depends on the risk of individual assets that the bank
acquires. The riskier the asset, the larger would be the capital it has to
15

be backed up by. This is so, because bank capital provides a cushion

against unexpected losses of banks and riskier assets would require
larger amounts of capital to act as cushion.
Credit Exposure Limits:
As a prudential measure aimed at better risk management and avoidance of
concentration of credit risks, the Reserve Bank has fixed limits on bank exposure
to the capital market as well as to individual and group borrowers with reference to
a bank's capital. Limits on inter-bank exposures have also been placed. Banks are
further encouraged to place internal caps on their sector exposures, their exposure
to commercial real estate and to unsecured exposures.

16

Exposure norms for Commercial Banks

Limit

in India Exposure to

1. Single Borrower

15% of capital fund (Additional 5% on

infrastructure exposure)

2. Group Borrower

40% of capital fund (Additional 10% on

infrastructure exposure)

3. NBFC

10% of capital fund

4. NBFC AFC

15% of capital fund

5.Indian Joint Venture/ Wholly owned 20% of capital fund

subsidiaries abroad/ Overseas step down
subsidiaries of Indian corporate

6. Capital Market Exposure

(a) Banks holding of shares in any company The lesser of 30% of paid-up share
(b) Banks aggregate exposure to capital capital of the company or 30% of the
market (solo basis)

paid-up capital of the banks

(c) Banks aggregate exposure to capital 40% of its net worth

market (group basis)

40% of its consolidated net worth

(d) Banks direct exposure to capital market 20% of its net worth
(solo basis)

20% of its consolidated net worth

(e) Banks direct exposure to capital market

(group basis)

7. Gross holding of capital among banks/ FIs 10% of capital fund

17

APPRAISAL OF PROJECT - A CHECK LIST

An indicative list of issues which need to be looked into while appraising a
project is given below:

1. Reasonable demand projections keeping in view the size of

the market, consumption level, supply position, export
potential, import substitute, etc.
2. Competitors' status and their level of operation with regard
to production and sales.
3. Technology advancement/Foreign Collaborator's Status/Buyback arrangements etc.
MARKETING

4. Marketing policies in practice, for promotion of product(s)

and distribution channels being used. Expenses on
marketing are done so as to popularize the product.
5. Local/foreign consumer preferences, practices adopted,
attitudes, requirements etc.
6. Influence of Govt. policies, imports and exports in terms of
quantity and value.
7. Marketing professionals employed their competence,
knowledge and experience.

18

1. Product and its life cycle, product-mix and their application.

2. Location, its advantages/disadvantages, availability of
infrastructural facilities, Govt. concessions, if any, available
there.
3. Plant and machinery with suppliers' credentials and capacity
attainable under normal working condition.
TECHNICAL

4. Process of manufacturing indicating the choice of

technology, position with regard to its commercialization and
availability.
5. Plant and machinery - its availability, specification, price,
performance.
6. Govt. clearance/ license, if any, required.
7. Labor/ Manpower, type of skills required and its availability
position in the area.

1. Total project cost and how it is being funded/financed.

2. Contingencies and inflation duly factored in project cost.
3. Profitability projections based on realistic capacity utilization
and

sales

forecast

with

proper

justification.

Unrealistic/ambitious sales projections without reference to

FINANCIAL

past performance and justification to be avoided.

4. Break-even analysis, fund flow and cash flow projections.
5. Balance sheet projections should be realistic and based on
latest available data. The components of financial ratios
should be subjected to close scrutiny.
6. Aspect of support of parent company, wherever applicable,
may be taken into account.

19

1. Financial standing and resourcefulness of the management.

2. Qualifications and experience of the promoters and key
management personnel.
3. Understanding of the project in all of its aspects - financing
MANAGERIAL

pattern, technical knowledge and marketing programme etc.

4. Internal control systems, delegation of adequate powers and
entrusting responsibility at various levels.
5. Other enterprises, if any, wherein the promoters have the
interest and how these are functioning.

1. Impact on increase in level of savings and income distribution

in society and standard of living.
2. Project contribution towards creation and rate of increase of
ECONOMIC

employment opportunity, achieving self-sufficiency etc.

3. Project contribution to the development of the region, its
impact on environment and pollution control

20

2.2 Company profile

Founded in 1806, Bank of Calcutta was the first Bank established in India
and over a period of time evolved into SBI. SBI represents a sterling legacy of over
200 years. It is the oldest commercial Bank in the Indian subcontinent,
strengthening the nations trillion-dollar economy and serving the aspirations of its
vast population. The Bank is Indias largest commercial Bank in terms of assets,
deposits, profits, branches, number of customers and employees, enjoying the
continuing faith of millions of customers across the social spectrum.
State

Bank

of

India

is

an

Indian

multinational,

Public

Sector

banking and financial services company. It is a government-owned corporation with

its headquarters in Mumbai and also its corporate office in Mumbai, Maharashtra.
As of December 2013, it had assets of US$388 billion and 13,000 branches,
including 190 foreign offices, making it the largest banking and financial services
company in India by assets.
State Bank of India is one of the Big Four banks of India, along with Bank of
Baroda, Punjab National Bank and ICICI Bank. 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" in
British India, Bank of Calcutta and Bank of Bombay, to form the Imperial Bank of
India, which in turn became the State Bank of India. Government of India owned
the Imperial Bank of India in 1955, with Reserve Bank of India (India's Central Bank)
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.
State Bank of India is a regional banking behemoth and has 20% market
share in deposits and loans among Indian commercial banks.
Not only many financial institution in the world today can claim the antiquity and
majesty of the State Bank Of India founded nearly two centuries ago with primarily
intent of imparting stability to the money market, the bank from its inception
mobilized funds for supporting both the public credit of the companies governments
in the three presidencies of British India and the private credit of the European and
India merchants from about 1860s when the Indian economy book a significant leap
21

forward under the impulse of quickened world communications and ingenious

method of industrial and agricultural production the Bank became intimately in
valued in the financing of practically and mining activity of the Sub- Continent
Although large European and Indian merchants and manufacturers were
undoubtedly thee principal beneficiaries, the small man never ignored loans as low
as Rs.100 were disbursed in agricultural districts against glad ornaments. Added to
these the bank till the creation of the Reserve Bank in 1935 carried out numerous
Central Banking functions.
Mission
They will be prompt, polite and proactive with our customers.
They will speak the language of Young India.
They will create products and services that help our customers achieve their
goals.
They will go beyond the call of duty to make our customers feel valued.
They will be of service even in the remotest part of our country.
They will offer excellence in services to those abroad as much as we do to
those in India.
They will imbibe state-of-the-art technology to drive excellence.
Vision

My SBI.
My Customer first.
My SBI: First in customer satisfaction.
Values

They will always be honest, transparent and ethical.

They will respect our customers and fellow associates.
They will be knowledge driven.
They will learn and we will share our learning.
They will never take the easy way out.
They will do everything we can to contribute to the community we work in.
They will nurture pride in India.

22

About LOGO

Togetherness is the theme of this corporate loge of SBI where the world of
banking services meet the ever changing customers needs and establishes a link
that is like a circle, it indicates complete services towards customers. The logo also
denotes a bank that it has prepared to do anything to go to any lengths, for
customers.
The blue pointer represent the philosophy of the bank that is always looking
for the growth and newer, more challenging, more promising direction. The key hole
indicates safety and security.
Group Companies:
l.No Product

Company

URL

i)

Life Insurance

SBI Life Insurance Co

www.sbilife.co.in

ii)

General

SBI General Insurance Co. www.sbigeneral.in

Insurance

Ltd.

Mutual Funds

SBI Mutual Funds

www.sbimf.com

UTI Mutual Funds

www.utimf.com

iii)

Franklin

Templeton

Mutual www.franklintempletonindia.com

Funds
Tata Mutual Funds

www.tatamutualfund.com

Fidelity Mutual Funds

www.fidelity.co.in

Others
iv)

Credit Cards

SBI

Cards

&

Payment www.sbicard.com

Services Ltd.
v)

Govt. Securities SBI DFHI LTD

www.sbidfhi.com

and Corp. Bonds

23

SBI Organizational Structure

24

Credit Appraisal Process

Receipt of application from applicant
Receipt of documents
(Balance sheet, KYC papers, Different govt. registration no., MOA, AOA, and
Properties documents)
Pre-sanction visit by bank officers
Check for RBI defaulters list, willful defaulters list, CIBIL data, ECGC caution list,
etc.
Title clearance reports of the properties to be obtained from empanelled
advocates
Valuation reports of the properties to be obtained from empanelled
valuer/engineers
Preparation of financial data
Proposal preparation
Assessment of proposal
Sanction/approval of proposal by appropriate sanctioning authority
Documentations, agreements, mortgages
Disbursement of loan
Post sanction activities such as receiving stock statements, review of accounts,
renew of accounts, etc (on regular basis)

25

3.1 Data collections methods

There are two types of data are there
Primary Data
Secondary Data
3.1.1 Primary Data collection

Relating to study the primary data was collected from different respondents
like salaried people, professionals, business people, and retried people who are
living in different places.
3.1.2 Secondary Data

Auto-magazines, company brochures and trade journal books, magazines

and other trade journals played a major role in collection of secondary data.
Questions formulations and wordings
In general all questions were framed keeping in the mind the following standards:
They should be easily understood by respondents.
They should be concentrating and should conform as much as possible to

the respondents way of thinking.

3.2 RESEARCH INSTRUMENT
The objective of research is to study the Credit Risk Assessment Model of
SBI Bank and to check the commercial, financial & technical viability of the project
proposed & its funding pattern. To observe the movements to reduce various risk
parameters which are broadly categorized into financial risk, business risk,
industrial risk & management risk.
3.3 COVERAGE
Study of credit appraisal in banking sector at State Bank of India
3.4 DATA COLLECTION
Secondary Data
Books & magazines
Database at SBI
Library research
Websites
E-circulars of SBI
26

3.5 STATISTICAL TOOL USED

1) Debt Service Coverage Ratio
Concept: The amount of cash flow available to meet annual interest and principal
payments
Formula =

Net Operating Income

Total Debt Service

Comments: DSCR less than 1 means negative cash flows

2) Debt equity ratio
Concept: Proportion of Debt fund of a company in relation to its equity
Formula =

Long Term Debt

Tangible Net worth

Comments: This ratio is an indicator of leverage of a company It measures a

companys ability to borrow and repay money
3.6 LIMITATION OF STUDY
Due to the time constraint limited study on the project has been done
Access to data ( Credit Appraisal data in detail is not available) has become
difficult

27

A) CREDIT RISK ASSESSMENT & APPRAISAL PROCESS OF SBI

CREDIT RISK ASSESSMENT
RISK: Risk is inability or unwillingness of borrower-customer or counter-party to
meet their repayment obligations/ honor their commitments, as per the stipulated
terms.
LENDER TASK
Identify the risk factors, and
Mitigate the risk
RISK ARISE IN CREDIT: 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
CREDIT & RISK

Go hand in hand.

They are like twin brothers.

They can be compared to two sides of the same coin.

All credit proposals have some inherent risks, excepting the almost negligible
volume of lending against liquid collaterals with adequate margin.

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/ riskhedging capacity & risk-mitigation techniques of the Bank.
28

CREDIT RISK ASSESSMENT (CRA) MINIMUM SCORES / HURDLE RATES

1. The CRA models adopted by the Bank take into account all possible factors which
go into appraising the risks associated with a loan. These have been categorized
broadly into financial, business, industrial & management risks and are rated
separately. To arrive at the overall risk rating, the factors duly weighted are
aggregated & calibrated to arrive at a single point indicator of risk associated with
the credit decision.
2. FINANCIAL PARAMETERS: The assessment of financial risk involves appraisal
of the financial strength of the borrower based on performance & financial
indicators. The overall financial risk is assessed in terms of static ratios, future
prospects & risk mitigation (collateral security / financial standing).
3. INDUSTRY PARAMETERS: The following characteristics of an industry which
pose varying degrees of risk are built into Banks CRA model:
Competition
Industry outlook
Regulatory risk
Contemporary issues like WTO etc.
4. MANAGEMENT PARAMETERS: The management of an enterprise / group is
rated on the following parameters:

Integrity (corporate governance)

Managerial competence / commitment

Expertise

Structure & systems

Experience in the industry

Credibility: ability to meet sales projections

Credibility: ability to meet profit (PAT) projections

Payment record

Strategic initiatives

Length of relationship with the Bank

29

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 a 8 point scale from
SB1/SBTL1 to SB 8/SBTL8.
SALIENT FEATURES OF CRA MODELS
(A) TYPE OF MODELS
S.No.
(i)
(ii)

Exposure Level (FB + NFB

NonTrading Sector Trading Sector

Limits )
Over Rs. 5.00 crore

(C&I , SSI , AGL)

Regular Model

Rs 0.25 crore to Rs. 5.00 crore Simplified Model

B) TYPE OF RATINGS
S. No.
(i)

Model
Regular Model

Type of Rating
Borrower
Rating Facility

(ii)

Simplified Model

Borrower
Rating Rating

New Rating Scales Borrower Rating: 16 Rating Grades

30

(Trade & Services)

Regular Model
Simplified Model

There are different rating given to the different banks. For example
S.

Borrower

Range of scores

Rating
1No. SB1

94-100

Risk level
Virtually Zero risk

Comfort Level
Virtually Absolute safety

2
3

SB2
SB3

90-93
86-89

Lowest Risk
Lower Risk

Highest safety
Higher safety

4
5

SB4
SB5

81-85
76-80

Low Risk

High safety
Adequate safety

Moderate Risk with

Adequate Cushion

6
7
8
9

SB6
SB7
SB8
SB9

70-75
64-69
57-63
50-56

Moderate Risk

10
11
12

SB10
SB11
SB12

45-49
40-44
35-39

13
14

SB13
SB14

30-34
25-29

Acceptable
Borderline
risk
Risk
(Risk
High Risk
Tolerance
Higher risk
Threshold)
Substantial risk

15

SB15

< 24

Average risk

Pre-Default Risk

Moderate Safety
Above Safety Threshold
Safety
Inadequate
Threshold
Low safety
safety
Lower safety
Lowest safety
Nil

(extremely Vulnerable to
default)

16

SB16

Default
Grade

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
does not give loans after SB8 rating.

31

FACILITY

RANGE

RISK LEVEL

COMFORT

GRADES

OF

FR1

94-100
SCORES

Virtually Zero Risk

FR2

87-93

Lowest Risk

Safety
Highest Safety

FR3

80-86

Lower Risk

Higher Safety

4
5

FR4
FR5

73-79
66-72

LEVEL

Low Risk
Moderate Risk with

Virtually Absolute

High Safety
Adequate Safety

Adequate Cushion
6
7

FR6
FR7

59-65
52-58

Moderate Risk

Moderate Safety

8
9

FR8
FR9

45-51
38-44

Average Risk

Above Safety

Acceptable Risk (Risk

Threshold
Safety Threshold

Tolerance Threshold)

10

FR10

31-37

11

FR11

24-30

Higher Risk

Low Safety

12

FR12

17-23

Higher Risk

Lower Safety

13

FR13

11-16

Substantial Risk

Lowest Safety

14

FR14

5-10

15
16

FR15
FR16

1-4
0

Highest Risk

NEW RATING SCALES - FACILITY RATING: 16 RATING GRADES

CREDIT APPRAISAL PROCESS OF SBI WITH GANESH ROADLINES
TRANSPORT COMPANY, HYDERABAD
COMPANY: Ganesh Roadlines Transport Co.
FIRM: Partnership
Shri Surender Bansal;
Shri Jesang Chaudhary;
Shri Vinod kumar;
Shri Pratap Singh
32

NILL

INDUSTRY: Transport Activity

SEGMENT: C& I
DATE OF INCORPORATION: 03.09.97
BANKING WITH SBI SINCE: 14 years as a current
A/C holder
BANKING ARRANGEMENT: Multiple Banking Arrangement
ADMIN. OFFICE: Kachiguda Station Rd, Basant
Nagar Colony, Kachiguda, Hyderabad, Telangana
500027
Ganesh Roadlines Co. is a partnership firm established in 1997 for
carrying a transport business. As the company is in this business since
incorporation & the unit has good contracts with Indian Oil since last 10 years so
it has a good repo with Indian Oil. As the company has a good repo with Indian
Oil, the Indian Oil outlook of the business is considered positive. The firm has
approached for term loan of Rs. 295 Lacs to finance the purchase of MahindraBolero. The total project cost is estimated to be Rs. 363.44 Lacs.
BRIEF OF CONTRACT
(1). Fixed hire charges/ taxi/ month: Rs. 29150(With fixed 3000 Km run/ month &
12 hours duty/ day)
(2). Additional/ km charges beyond 3000 km. Rs. 3.57
(3). Duration of contract = 3 Years
PROPOSED CREDIT REQUIREMENT
Fund Based= Rs. 295 Lakhs

33

PERFORMANCE DETAILS
A. PERFORMANCE AND FINANCIAL INDICATORS

Aud.

Aud.

Esti.

Proj.

Proj.

Proj.

Proj.

2013

2014

2015

2016

2017

2018

2019

501.78

546.65

713.8

898.65

898.6

898.6

898.65

5
404.08

425.06

1st March

Net Sales
Operating Profit (after

149.64

182.92

2
234.24

326.69

5
374.32

2.90

22.48

92.62

125.4

143.5

151.96

7
13.96

1
15.97

16.91

125.4

143.5

151.96

224.2

212.6

interest)
1.20

PBT
PBT/Sales (%)

0.24

0.53

3.15

PAT

1.20

2.90

22.48

39.05

Cash Accruals

40.51

129.2

10.31
92.62

233.74

200.36

PBDIT

54.44

52.41

150.0

266.99

247.2

226.2

203.72

Paid up Capital

21.04

22.56

1
91.00

113.48

1
181.1

0
256.5

340.08

TNW

21.04

22.56

113.4

181.10

256.5

340.0

427.04

Adjusted TNW

21.04

22.56

8
113.4

181.10

7
256.5

8
340.0

427.04

TOL/TNW

12.22

12.80

8
5.04

2.15

7
1.01

8
0.47

0.27

TOL/Adjusted TNW

12.22

12.80

5.04

2.15

1.01

0.47

0.27

Current Ratio

1.57

1.42

2.22

2.53

2.71

3.80

6.47

2.34

1.97

3.93

4.49

5.66

5.83

6.47

100.20

103.87

386.1

349.18

323.8

361.2

438.25

Current

Ratio

installments)

NWC

(Excl.

TL

34

B. SYNOPSIS OF BALANCE SHEET

Sources of funds
Share Capital
Reserves and Surplus

31.03.2013
21.04
2.57
102.87
39.92

Secured Loans : short term

: long term
Unsecured Loans
Deferred Tax Liability
Total

31.03.2014
22.56
14.66
100.10
36.21

166.40

173.53

52.48

39.3

Inventories (Movable Assets)

110.59

134.66

Sundry debtors

92.61

78.70

Cash & bank balances

11.93

48.15

Loans & advances to others

10.58

10.49

( Less : Current liabilities )

109.22

136.74

(Less : Provisions )

2.57

1.03

Net Current Assets

113.92

134.23

Application of Funds
Fixed Assets (Gross Block)
Less Depreciation
Net Block
Capital Work in Progress
Investments

Loans & advances to

subsidiaries and group companies

Misc. Expenditure
(To the extent not written off or adjusted )
Total

166.40

35

173.53

C) MOVEMENT IN TNW
2013

2014

2015

2016

2017

2018

2019

Opening TNW 17.63

21.04

22.56

113.48

181.10

256.57

340.08

Add PAT

2.90

22.48

92.62

125.47

143.51

151.96

10.17

68.44

25.00

50.00

60.00

65.00

181.10

256.57

340.08

427.04

1.20

Add. Increase 8.42

in

equity

premium
Add./Subtract
change

in

intangible
assets
Adjustprior
year
Deduct
expenses

6.21

11.55

21.04

22.56

Dividen
d
Paymen
Closing TNW

113.48

t
/Withdrawals
APPRAISAL MEMORANDUM FOR TERM LOAN
CIRCLE: Kachiguda
BRANCH: Kachiguda
COMPANY: Ganesh Roadlines Transport Company
TERM LOAN
A) PROPOSAL: Term Loan of Rs.295.00 lacs under the Transport plus
Scheme
B) PROJECT/PURPOSE: To purchase 59 new Mahindra Bolero under tieup arrangement with Indian Oil
C) APPRAISED BY: In-house examined by the Branch and found to be
economically viable

36

D) COST OF PROJECT & MEANS OF FINANCE

Cost
MAHINDRA Bolero DI-2WD
Insurance
RTO Tax
WC Margin
Total

328.63
15.34
19.47
363.44

Means
Equity :

Debt:
Total

68.44

295.0
363.4
0
4

E) ON COST OF PROJECT & MEANS OF FINANCE (IN BRIEF)

Each vehicle shall cost Rs. 6.16 Lakhs as per details
given below:
Basic Price: Rs. 5.57 Lakhs
RTO: Rs. 0.33 Lakhs
Insurance: Rs. 0.26 Lakhs
The cost mentioned above is as per the quotation submitted by Shri Motors.
The firm is required to purchase 59 Mahindra Bolero for this purpose. Total
cost of vehicle including the insurance and R.T.O. is Rs.363.44 Lakhs.
The project is proposed to be financed by way of medium term loan of Rs.295.00
Lacs and firm shall raise capital of Rs. 68.44 Lakhs as a margin.

37

BREAK-EVEN AND SENSITIVITY ANALYSIS AND WHETHER ACCEPTABLE

Break even analysis

31/03/15 31/03/16 31/03/1 31/03/18 31/03/1

Net Sales (A)

713.82

898.65

7
898.65

898.65

9
898.65

Variable costs
Power and Fuel
Other operating Exp.

223.76
44.89

253.68
47.39

253.68
48.89

253.68
50.89

253.68
55.98

Total Variable Cost(B)

268.65

301.07

302.57

304.57

309.66

72.40

85.52

87.52

90.72

94.07

8.50

9.50

10.50

11.50

12.50

Interest Expenses

20.76

33.25

22.96

13.54

3.36

Depreciation

106.77

141.12

98.78

69.15

48.40

Total Fixed Cost ( C)

208.43

269.39

219.76

184.91

158.33

Contribution (D=A-B)
Contribution ratio (E=D/A)

445.17
0.62

597.58
0.66

596.08
0.66

594.08
0.66

588.99
0.66

BE sales (F=C/E)

336.18

408.17

332.97

280.17

239.89

BE sales as % of Net Sales 47.10

45.42

37.05

31.18

26.69

Fixed

without 101.66

128.27

120.98

115.76

109.93

depreciation (H=A-B)
G
Contribution

445.17

597.58

596.08

594.08

588.99

Contribution ratio (I=D/A)

0.62

0.66

0.66

0.66

0.66

Cash BE sales (J=G/I)

163.97

194.35

183.30

175.39

166.56

21.63

20.40

19.52

18.53

Fixed Costs
Direct Labor
Selling, Admin. & General
Expenses

cost

CASH BE sales as % of Net 22.97

Sales

38

COMMERCIAL VIABILITY
Year ending 31st March
Capacity utilization %

2015

2016

2017

2018

2019

100%

100%

100%

100%

100%

Sales

713.82

898.65

898.65

898.65

898.65

Net Profit

22.48

92.62

125.47

143.51

151.96

536.04

Depreciation

141.12
233.74

98.78
224.25

69.15
212.66

48.40
200.36

464.22

Cash Accruals

106.77
129.25

Interest

20.76

33.25

22.96

13.54

3.36

93.87

TOTAL

150.01

266.99

247.21

226.20

203.72

1094.13

TL / DPG repayments

83.75

132.92

94.58

93.85

43.02

448.12

Interest

20.76

33.25

22.96

13.54

3.36

93.87

TOTAL
Gross DSCR

104.51
1.44

166.17
1.61

117.54
2.10

107.39
2.11

46.38
4.39

541.99

Net DSCR

1.54
2.02
2.23

1.76

2.37

2.27

4.66

Average Gross DSCR

Average Net DSCR

Total

1000.26

DEVIATIONS IN LOAN POLICY/ SCHEME

Parameters

Indicative
Min/Max

Company's
level

level

as

as on 31/03/2015

per Scheme
Liquidity
TOL/TNW
Average gross DSCR (TL)
Promoters contribution (under

Min. 1.33
Max. 3.00
Min. 2.00
Min. 10 %

tie- up)
Profits in the last two

Min.Rs.3.00

Others

1.42
12.80*
2.002
18.86%
lakhs Actual profit Rs.1.20 lacs

with rising trend

for

Nil

Rs.2.90 lacs for year 2007Nil

08*

39

year

2006-07

and

RATE OF INTEREST
As applicable to Transport plus Scheme. At present 14.00 % (0.25%
above SBAR-presently 13.75% w.e.f 12/08/2010) with monthly rests. This is
subject to change as per Banks Instruction.
Interpretation:
Ganesh Roadlines Transport Company is an existing profit making unit
The main chunk behind giving loan is that Ganesh Road lines Transport
Company is doing contract with Indian Oil since incorporation
The promoters are having considerable experience as transport contractor
with Indian Oil
A letter of authority from Indian Oil was received, that if Ganesh Road
lines transport Company will not make the payment than Indian Oil will
directly make the payment to the bank
The promoters contribution to the project is 18.86% which is above the
margin requirement
The current ratio is 1.42 that is satisfactory
Profits in the last two years: Min. Rs. 3 lakhs with rising trend
Actual profit Rs. 1.20 lakhs for year 2009 & Rs. 2.90 lakhs for the 2010
If the partners remuneration & interest is included, the profit for the year
ended 31.03.09 & 31.03.10 is Rs. 4.81 lakhs & Rs. 6.21 lakhs
TOL/TNW should be max. 3 which is 12.80 here, as the co. has done
multiple banking arrangement it has o/s loans with other banks also
but the co. is regularly making the payment of loans of principal amount
along with the interest so the loan is given.
Also the contract awarded is backed by guarantee from Indian Oil
regarding direct payment of monthly bills to SBI. Hence, surety of
repayment is assured.
The bank also checks commercial viability of the company & found that the
DSCR for term loan is 2.02 which is considered satisfactory
Despite that the bank has also done B.E. analysis & found that the B.E.
sales was 47.10% of net sales for this current year
40

 The net sales & PAT of the company is increasing year after year so
overall profitability is good
The overall projected performance & financial of the unit are considered
satisfactory

41

2) Details of case study

Company: - Andhra Pradesh Khadi & Village Industries Board
Firm: - Partnership Firm (M/S Umiya)
* Shri Amrutbhai Laljibhai Desai
* Shri Gunvantbhai Ambaramdas Patel
* Shri Natvarlal Mohanlal Patel
* Shri Dharamsinhbhai Lallubhai Desai
* Shri Kanjibhai Maljibhai Desai
Industry:- Manufacturing
Activity:- Maufacturing of HDPP woven sacks
Segment:- SSI
Date of Incorporation: - 1957
Banking arrangement: - Sole Banking
Regd. & Admin. Office: - 10-4-2, Masab Tank Road, NMDC Colony, Masab Tank,
Hyderabad, Telangana 500028
The unit will have installed capacity of 2520 MT. The unit is expected to start
commercial production from first week of September, 2008. The capacity utilization
for the year 2008-09 has been projected at 70% of installed capacity in terms of the
utilization of the machines. Accordingly the unit is projected to achieve a sale of
Rs.9.26 crores for the year 2008-09 in the first six months of operations.
Further, the unit is projected to achieve capacity utilization of 80% during the
year 2009-10 (the first full year of operations) and accordingly the sale for the year
is projected at Rs.19.77 crores. The projections are considered acceptable in view
of the following factors:
i)

The unit plans to initially market its product in Gujarat, Maharashtra,

Rajasthan and sale to Central Govt. who purchases the HDPP woven
sacks for grains through open tenders. The unit has started negotiating
for booking of the orders for the proposed plant and results are promising
as advised.

42

ii)

HDPP woven sacks are widely used as packaging material in Cement,

Fertilizer, and storage of the AGL commodities. All these segments are
reported to have good demand for the HDPP/PE woven sacks in the
Indian market.

iii)

As per ICRA report, grading and research services (2006) Flexible

packaging sector is expected to grow at the rate of 12.40%.

iv)

The promoters have sufficient experience in the line of activity. The

promoters had already made negotiations of the some of the industries
as detailed under for selling the HDPP woven sacks:

v)

Indian Farmers Fertilizers Company Limited

Gujaco masol

Birala cement

Sanghi Cement

Ambuja cement

Various grain & Food Export units of Gujarat, etc.

The firm has also started marketing activity for their products by making
personnel contacts & writing introductory letters to potential customers &
as the promoters are in the same line of business activity for the last 15
years they are having very good market contacts for the sales of the
Finished Goods.

vi)

The orders worth Rs.2.50 crores is expected to be finalized by end of

August, 2008 and before commissioning of the plant as advised.

Proposal:
Sanction for;
i)

FBWC limits of Rs.2.25 crores

ii)

Fresh Term Loan of Rs.2.00 crores

Approval for:
i)

CRA rating of SB- 6 (71 marks) based on projected financials as on 31.03.2010.

ii)

Pricing for WC facilities @1.00% above SBAR as applicable for SB-5 minimum
@13.75and for TL 1.50% above SBAR minimum @14.25%

43

Performance & Financial Indicators:

(Rs. in Crores)

Year

2009

2010

2011

2012

2013

2014

Installed cap Qty.

2520

2520

2520

2520

2520

2520

(approx) (MT)

1029

2016

2091

2142

2217

2268

Net Sales (Value)

9.26

19.77

20.58

21.09

21.82

22.34

(Export)

0.00

0.00

0.00

0.00

0.00

0.00

Operating profit

0.44

1.18

1.19

1.23

1.31

1.33

Profit before tax

0.43

1.17

1.18

1.22

1.30

1.32

PBT/Net sales (%)

4.64

5.92

5.73

5.78

5.96

5.91

Profit after tax

0.29

0.78

0.79

0.82

0.87

0.88

Cash accruals

0.66

1.10

1.09

1.15

1.24

1.32

PBDIT

1.20

2.04

1.96

1.97

2.02

2.05

Paid up capital

0.95

0.95

0.95

0.95

0.95

0.95

Tangible net worth

1.23

2.01

2.80

3.62

4.49

5.38

Adjusted TNW

1.73

2.51

3.30

4.12

4.99

5.88

TOL/TNW

4.11

2.50

1.67

1.19

0.88

0.66

TOL/Adjusted TNW

2.64

1.80

1.27

0.92

0.81

0.62

Current ratio

1.34

1.52

1.53

1.53

1.57

1.81

NWC

1.01

1.71

2.40

2.57

2.74

3.28

(MT/pa.)
Net Sales Qty.

44

Balance Sheet:

(Rs. In crores)

Sources of funds

31.03.2009

31.03.2010

Share Capital

0.95

0.95

Reserves and Surplus

0.29

1.07

Secured Loans : short term CC

2.25

2.25

2.00

1.60

0.50

0.50

5.99

6.37

Fixed Assets (Gross Block)

2.67

2.67

Less Depreciation

0.37

0.69

Net Block

2.30

1.98

Inventories

1.73

2.13

Sundry debtors

1.85

2.40

Cash & bank balances

0.15

0.15

Loans & advances to suppliers of

0.14

0.12

0.10

0.23

0.31

0.67

3.66

4.36

0.03

0.03

5.99

6.37

: long term TL
Unsecured Loans
Deferred Tax Liability
Total
Application of Funds

Capital Work in Progress

Investments

Raw material / spares

Advance tax
( Less : Current liabilities )
(Less : Provisions )
Net Current Assets
Misc. Expenditure
(To the extent not written off or adjusted )
Non-Current Assets/ Deposits
Total

45

Movement in TNW:Movement in TNW

Projected
31.03.2009

31.03.2010 31.03.2011

Opening TNW

0.00

1.23

2.01

+ PAT

0.29

0.78

0.79

+ Inc. in Equity / Premium

0.95

+/- Change in Int. Assets

-0.01

2.01

2.80

+/- Adj. of prior year exp.

- Dividend payment
Closing in TNW

1.23

Bank Income Analysis

From

(Rs. in crores)
Projection

Projection

31.03.2009

31.03.2010

WC Int.

0.16

0.27

TL Int.

0.14

0.29

LC

BG

Bill

Others loan processing

0.03

0.01

Total

0.33

0.57

46

Deviations in Loan Policy:

Parameters

Indicative

Company's

Company's

Min/Max level

level as on

level as on

as per loan policy

31.03.2009 @

31.03.2010

Liquidity

1.33

1.34

1.52

TOL/TNW

3.00

4.11

2.50

2.64

1.80

TOL/Adj. TNW
Average gross DSCR (TL)

1.75

2.54

2.54

Debt / equity

2:1

2.01:1

1.03:1

1.15:1

0.64:1

Debt/Quasi equity
Any others

Defaulters List:Whether names of promoters, directors, company, group concerns figure in :

RBI defaulters list dated 30.09.2007

No

Wilful defaulters list dated 31.12.2007

No

ECGC caution list

No

Warning signals / Major irregularities in

Credit audit:
inspection report :

Not applicable new unit

Other audit reports :

Adverse observations in Balance sheet

Not applicable new unit

Adverse observations in Auditors report

Nil.

Any NPAs among associate concerns

None

About unit and the promoters:

The khadi and village industries commission (KVIC) is a statutory body
established by an act of parliament (No. 61 of 1956, as amended by act No. 10 of
2006. In April 1957, it took over the work of former all India khadi and village
industries board.
47

The firm consists of total six partners. The brief background of the partners is as
follows:

Name

Age

Brief Background

M/s Umiya Polymers

46

Sri Prahaladbhai Hargovandas Patel is the

main partner in M/s Umiya Polymers with 30
share. Sri Prahaladbhai is SSC and have 10
years of experience as Production Manager in
Asia Woven Sacks Ltd., Kadi who are
engaged in similar activity. M/s Umiya
Polymers are engaged in plastic waste
recycling at Kadi.

Sri Amrutbhai Laljibhai

43

Desai

Sri Desai is SSC and have 15 years of

experience as Production Manager in reputed
Gopala Polyplast Ltd., Santej. He had good
contacts in the market and will look after
production department & raw material
purchases.

Shri Dharamsingbhai

35

Lallubhai Desai
Shri Kanjibhai Malibhai

unit M/s Ajay Ginning Industries, Kadi

44

Desai
Shri Gunvantbhai

Sri Dharamsinhbhai is a partner in the local

Sri Kanjibhai is a farmer by profession and

sleeping partner.

42

Ambaramdas Patel

Sri Gunvantbhai also is a partner in M/s Ajay

ginning Industires, Kadi and has been
inducted in the partnership as a investment
partner.

Shri Natvarlal Mohanlal

Patel

48

Shri Natvarlal Patel is a B.Com. and has 10

years of experience in accounting. He is also
partner in M/s Shiv Shakti Steel, Kadi. He will
be looking after general administration and
accounts of the firm.

The overall quality of the management is considered satisfactory.

48

Commercial viability:

(Rs.in crores)

Year ending

2008-

2009-

2010-

2011-

2012-

2013-

Total

31st March

09

10

11

12

13

14

Net Sales

9.26

19.77

20.58

21.09

21.82

22.34

Net Profit

0.29

0.78

0.79

0.82

0.87

0.88

Cash Accruals

0.66

1.10

1.09

1.15

1.24

1.32

6.56

Interest on TLs

0.16

0.27

0.22

0.16

0.11

0.05

0.97

Sub Total (A)

0.82

1.37

1.31

1.31

1.35

1.37

7.53

Total

0.00

0.40

0.40

0.40

0.40

0.40

2.00

Interest on TL

0.16

0.27

0.22

0.16

0.11

0.05

0.97

Sub Total (B)

0.16

0.67

0.62

0.56

0.51

0.45

2.97

DSCR (Gross)

5.13

2.04

2.11

2.34

2.65

3.04

Net DSCR

2.75

2.73

2.88

3.10

3.30

Average

2.54

repayment

Gross DSCR
Average Net

3.28

DSCR

49

Break-even and sensitivity analysis and whether acceptable: (Rs.

in

crores)
Break even analysis

31/03/09 31/03/10 31/03/11 30/03/12 31/03/13 31/03/14

Capacity Utilization

70%

80%

83%

85%

88%

90%

Net Sales (A)

9.26

19.77

20.58

21.09

21.82

22.34

Raw material

8.74

17.13

17.77

18.20

18.84

19.27

Consumable spares

0.00

0.00

0.00

0.00

0.00

0.00

Power and Fuel

0.26

0.47

0.50

0.53

0.56

0.59

Other operating Exp.

0.09

0.13

0.15

0.16

0.17

0.18

Stock Changes

0.73

0.39

0.06

0.03

0.04

0.04

8.36

17.34

18.36

18.86

19.53

20.00

0.08

0.13

0.14

0.15

0.16

0.17

General Expenses

0.06

0.10

0.11

0.12

0.13

0.14

Interest Expenses

0.40

0.55

0.48

0.42

0.35

0.29

Depreciation

0.37

0.32

0.30

0.33

0.37

0.44

Total Fixed Cost ( C) 0.91

1.10

1.03

1.02

1.01

1.04

Contribution (D=A-B)

0.90

2.43

2.22

2.23

2.29

2.34

(E=D/A)

0.10

0.12

0.11

0.11

0.10

0.10

BE sales (F=C/E)

9.10

9.17

9.36

9.27

10.10

10.40

98.27

46.38

45.48

43.95

46.29

46.55

Variable costs

Total Variable
Cost(B)
Fixed Costs
Direct Labour
Selling, Admin. &

Contribution ratio

BE sales as % of Net
Sales

50

Inter firm Comparison: (To be given only where data from comparable units
is available.)
Name of Company

FBL

NFBL

Year

Sales

PBT /

TOL /

Sales

TNW

CR

%
Ahmedabad

3.30

1.20

2007

23.11

2.16

1.47

1.16

6.70

--

2010

15.19

6.52

2.90

1.90

7.44

1.00

2008

22.98

4.53

3.14

1.08

4.25

--

2010

19.77

5.92

2.50

1.52

Packaging Industries
Ltd.
Singhal Industries Pvt.
Ltd
Asia Woven Sacks
Pvt. Ltd.
Akshat Polymers

Raw material The major raw material for this plant is HDPP in the form of
granules. This raw material is available locally by sales & distribution network of the
major suppliers as under:

Reliance Industries Limited

Nand Agencies

Labdhi International

Hadlia petrochemicals Ltd.

Sharada Polymers

IPCL

The raw materials are purchased from the suppliers against the advance
payment only and cash discounts are offered resulting in the increase n profitability.
Any variation in the cost of raw material is proposed to be passed on to the finished
products and will not affect the profitability.

51

Interpretation: The firm is into manufacturing of HDPP woven sacks which are widely used
as packaging material in cement, fertilizer, etc.
As per ICRA report, grading and research services (2006) Flexible
packaging sector is expected to grow at the rate of 12.40%.
The promoters have sufficient experience in the line of activity. The
promoters had already made negotiations of the some of the industries as
detailed under for selling the HDPP woven sacks:
Indian Farmers Fertilizer Co. Ltd
Birala cement
Sanghi cement
Ambuja cement
Various grain & Food Export Unit of Gujarat
The orders worth Rs.2.50 crores is expected to be finalized by end of August,
2008 and before commissioning of the plant as advised.
The companys borrower rating is SB-6 based on projected financials as on
31.03.2010 (the first full year of operations).
Projected financials are in line with the financials of the some of the unit in
similar line of activity and production level.
The promoters are having experience of more than 15 years in the line of the
activity.
The affairs of the firm are expected to be managed on professional lines
based on their past experience.
The conduct of accounts of associate with the existing bankers has been
satisfactory.
The short and medium term outlook for the industry is stable
Availability of collateral security reflected in collateral coverage of 50.566%.
Gross average DSCR of 2.54.
Average security margin of 48%.
52

 The company has adequate management skills and production/marketing

infrastructure in place to achieve the projected trajectory. There is steady
demand for the product.

53

5.1 Findings:
Credit appraisal is done to check the commercial, financial & technical
viability of the project proposed and its funding pattern & further checks the
primary or collateral security cover available for the recovery of such funds.
For each type of loan, there are different norms as per the guidelines of RBI.
SBI loan policy contains various norms for sanction of different types of loans
These all norms does not apply to each & every case
SBI norms for providing loans are flexible & it may differ from case to case
After case study, we found that in some cases, loan is sanctioned due to
strong financial parameters
From the case study analysis it was also found that in some cases, financial
performance of the firm was poor, even though loan was sanctioned due to
some other strong parameters such as the unit has got confirm order, the
unit was an existing profit making unit & letter of authority was received for
direct payment to the bank from ONGC which is public sector

5.2 Suggestions:
SBI should adopt effective promotional strategies to increase the awareness
level among the consumers.
SBI should ask for their consumer feedback to know whether the consumers
are really satisfied or dissatisfied with the service and product of the bank. If
they are dissatisfied, then the reasons for dissatisfaction should be found out
and should be corrected in future.
The SBI brand name has earned a lot of goodwill and enjoys high brand
equity. As there is intense competition, SBI should work hard to maintain its
position and offer better service and products to consumers.

5.3 Conclusion:
Credit is the core activity of the banks & important source of their earnings
which go to pay interest to depositors, salaries to employees & dividend to
shareholders
Credit & risk go hand in hand

54

 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 &
manage/mitigate them on continuous basis.

55

Bibliography
Uwe Wehrspohn (2005) Credit Risk Evaluation: Modeling - Analysis Management, Center for Risk & Evaluation , Vol. 33 , pp 345-356, June 14, 2005
Christian Roland(2006) Banking Sector Liberalization in India Indian Institute of
Capital
Markets 9th Capital Markets Conference Paper, January 25, 2006.
Arnoud W. A. Boot, Anjan V. Thakor (2007) Corporate Finance, Financial
Intermediation
FINANCIAL

and Banking:

An Overview,

INTERMEDIATION

AND

CORPORATE FINANCE,

BANKING:

AN

OVERVIEW,

Amsterdam Center for Law & Economics Working Paper No. 2007-07, Oct. 23,
2007.
Gary B. Gorton (2009) Securitized Banking and the Run on Repo National Bureau
of Economic Research (NBER), Research Paper Series No.G01, G1, G12, G18,
G21.
Abhijit V. Banerjee (2002) Contracting Constraints, Credit Markets and Economic
Development, MIT Dept. of Economics Working Paper No. 02-17 , April 25, 2002
Agarwala, R.G., Banking Finance A Leading Monthly of Banking & Finance
Published by Sashi Publications, Vol. XXII No.1 January, 2008,ISSN-0971-4498
Alan D. Morrison (2001) Banking Sector Liberalization in India Oxford Financial
Research Centre Working Paper No.2001-FE-01.

56