SUMMER TRAINING PROJECT REPORT

ON

CREDIT APPRAISAL
OF

LORD KRISHNA BANK

IN PARTIAL FULFILMENT FOR THE REQUIREMENT OF TWO YEARS FULL TIME POST GRADUATE PROGRAMME IN MANAGEMENT, 2005-2007 SUBMITTED BY: SONICA CHHABRA PGDBM: SEMESTER II ROLL NO: 46 NEW DELHI INSTITUTE OF MANAGEMENT NEW DELHI

ACKNOWLEDGEMENT I would like to present my sincere thanks to LORD KRISHNA BANK for providing me a first hand experience in this ever expanding Banking Sector. I express my heartiest gratitude towards Mr. P.K. Mahana, credit manger, regional office, ITO, for guiding me and helping me in the successful completion of this project. I also wish to convey my special thanks and veneration to all my seniors as well as my colleagues for providing me a valuable acumen into the banking sector. I would like to express my gratitude towards them for helping me and cooperating with me at every step of my project. Last but not the least I would like to express my gratitude to the teachers at New Delhi Institute of Management for conducting our course with utmost sincerity and Mrs. Prerna Sareen for her guidance and support.

(Sonica Chhabra)

PREFACE

The main business of a banking company is to receive deposits and lend money. Receiving deposits involves no risk, since the banker is the creditor but in case of lending the risk involved is very high since there is no guarantee of the repayment. But lending being the main source of income for the bank although has high levels of risks associated with it is the indispensable function of banking companies .As this lending is not out of his own capital but out of the deposits from the public , the banks have to be follow very cautious policy . The project is a detailed study of credit appraisals done by lord Krishna bank. it is a step by step procedure including companys profile, types of advances, comparative analysis of different bank on certain parameters and lastly concluding the study while putting some recommendation hoping that it would help the bank maintain its expansion path.

TABLE OF CONTENT

Introduction of the Banking Industry Profile of Lord Krishna Bank Loans and Advances Product offerings of the Bank Fund Based Advances Retail Loans Determination of Credit Worthiness and Credit rating Post lending Supervision and Follow Up Non Performing Assets Recommendations Bibliography

EXECUTIVE SUMMARY

. . Lending is an imperative function of a bank .it is the main source of income for the bank although has high levels of risks associated with it because it is done out of deposits of public. This project gives detailed study of how credit appraisals are done .Once the proposal is received ,it is analysed on various parameters like financial,managerial,technical viability.Each proposal is evaluated by the bank by analyzing the candidates psychographic position, demographic position, assets cushion and the status of the financials of the applicant. A process cum recommendation note and a scoring module is prepared by branches and sent to the regional office for the approval of the loan .The bank has developed different scoring modules according to the nature of the various loans.once the loan is sanctioned it is monitored on regular basis.This project involves a comparative analysis of different banks on various parameters like BPLR,MLR,rate of interest on various schemes,NPA..finally I have discussed working capital assessment for service and manufacturing sectorwith the help of case studies.

BANKING INDUSTRY
Banks are very important for the smooth functioning of financial markets as asymmetries. 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 of commercial banks and cooperative banks. Commercial banks can be further grouped in to nationalized banks, the State Bank of India and its group banks, regional rural banks and private sector banks (the old/new domestic and foreign). These banks have over 67000 branches spread across the country. Industry estimates indicate that out of 274 commercial banks operating in India, 223 banks are in the public sector and 51 are in the private sector. The private sector bank grid also includes 24 foreign banks that have started their operations here. In 1991, the Indian economy went through a process of economic liberalization. Recognizing that the success of economic reforms was contingent on the success of financial sector reform as well, the they serve as repositories of vital financial information and can potentially alleviate the problems created by information

government initiated a fundamental banking sector reform package in 1992.These reforms were basically aimed at ensuring the safety and soundness of financial institutions and at the same time at making the banking system strong, efficient, functionally diverse and competitive. The reforms included measures for arresting the decline in productivity, efficiency and profitability of the banking sector.

Banking system plays a significant role in a nations economy. A banking situation is indispensable in a modern society. It plays a pivotal role in the economic development of a country and forms the core of the money market in an advanced country. Being a prime employment of the financial sector it forms an important sector on which nearly all the other sectors depend. Management skills acquired in banking sector can be utilized in other sector but not vice versa. Presently the banking sector contributes handsomely to the nation building process not only by financing the priority/ weaker section but also by including higher monetization in the economy. In June 1969 on the eve of nationalization, the share of priority sector in total credit of SCB was a mere 14% (Rs. 504 Crore). By March 2002, with a massive involvement of PSBs their outstanding lending to priority sector had clam up to Rs 171,185.26 Crores. As percentage of net bank credit the same was 43.12 %( against the mandated 40% share.)

The competitive environment created by financial sector reforms has compelled the banks to gradually adopt modern technology, albeit to a limited extent, to maintain their market share. The Indian banking has finally worked up to the competitive dynamics of the new Indian market and is addressing the relevant issues to take on the multifarious challenges of globalization. Banks that employ IT solutions are perceived to be futuristic and proactive players capable of meeting the multifarious requirements of the large customers base. Private Banks have been fast on the uptake and are reorienting their strategies using the internet as a medium The Internet has emerged as the new and challenging frontier of marketing with the conventional physical world tenets being just as applicable like in any other marketing medium. The Indian banking has come from a long way from being a sleepy business institution to a highly dynamic entity. This transformation has been largely brought about by the large dose of liberalization and economic reforms that allowed banks to explore new business opportunities rather than generating revenues from conventional streams (i.e. borrowing and lending). Modern day banks are not mere suppliers of money. They now provide a basket of services such as selling insurance, mutual funds and investment opportunities and playing the role of an advisor to various individuals as well as Corporate. However, non-bank financial

companies and development finance institutions are also emerging as alternative sources of funding.

Banks are among the main participants of the financial system in India. Banking offers several facilities & Opportunities. This section of the provides comprehensive and updated information, guidance and assistance on all areas of banking in India.

Bank of Hindustan, set up in 1870, was the earliest Indian Bank . Banking in India on modern lines started with the establishment of three presidency banks under Presidency Bank's act 1876 i.e. Bank of Calcutta, Bank of Bombay and Bank of Madras. In 1921, all presidency banks were amalgamated to form the Imperial Bank of India. The commercial banking structure in India consists of: Scheduled Commercial Banks & Unscheduled Banks. Banking Regulation Act of India, 1949 defines Banking as "accepting, for the purpose of lending or investment of deposits of money from the public, repayable on demand or otherwise and withdrawable by cheques, draft, order or otherwise." The Software Packages for Banking Applications in India had their beginnings in the middle of 80s, when the Banks. spurred on by RBI

and the Rangarajan Committee Report, started computerising the branches in a limited manner. The arrival of foreign and private banks with their superior state-of-theart technology-based services pushed Indian Banks also to follow suit by going in for the latest technologies so as to meet the threat of competition and retain customer base. The evolution of IT services outsourcing in the Indian banks has presently moved on to the level of Facilities Management (FM). Banks now looking at business process management (BPM) to increase returns on investment, improve customer relationship management (CRM) and employee productivity. For, these entities sustaining long-term customer relationship management (CRM) has become a challenge with almost everyone in the market with similar products

LATEST TRENDS IN BANKING

Advancements in technology have led to improvement in the ways in which bank process information. Use of cheque imaging, which allows bank to store photographed cheques on computer, is one such example that is implemented by some banks.

Availability and growing use of credit rating software allows loan to be approved in minutes, rather than days making lending department more efficient.

Electronic banking by phone or computer allows customers to pay the bill and transfer the money from one account to another through these channels, bank customer can access information such as account balance and statement history

Many routine banking services that required letter such as making a withdrawal or deposit are now available through ATMs that allow people to access accounts 24 hours a day

Also direct deposit allows cos and government to electronically transfer payments into various accounts.

Many banks now offer customers financial planning and asset management services as well as brokerage and insurance servicesoften through subsidiary or third partyothers are beginning to investment banking services that help cos and government to raise money through issuance of stock and bonds through subsidiary.

As banks respond to deregulation and as competition in this sector grows,the nature of banking industry will continue to undergo significant change.

LORD KRISHNA BANK

IN 1940, LKB was born in a small Kolmet at Kodungallur in Thrissur district of Kerala. Although the bank started at a very modest level, by 1960 the bank was in position to take over three commercial banks: Thiya bank, Josna bank & Kara union bank. From 1999 majority stake in the bank is held by Mohan group (Puri group), which is a pioneer in the field of banking, financial services & international trade etc.

Today, while the bank continues to retain its trademark values of personalized customer care, it has grown exponentially in size and scope, from a local player to a national player. It is one of the oldest & most successful private sector banks in India. The 64 year old Kerala based bank has today 106 branches spread in 11 States and U.T of Chandigarh. To reach out more customers and offer them innovative services and financial products, the bank is opening more fully automated branches across the country. The Bank has opened 10 branches since 31.03.2003.Further the bank holds license for opening 8 more new branches spread over India during the current

fiscal. From traditionally a people driven entity it is redefining relationship banking with the ideal partnership of man and machine. In tune with this the network of 92 branches are well supported by 6 extensions counters & 23 ATMs. The bank has taken important initiatives towards computerizing its network .It is investing heavily in the field of IT. In order to provide easy & better access to its customers, the bank is in negotiation with major software & solution providers. At present 90% of the banks business is computerized. The bank plans to adopt state-of-the-art technology for interconnectivity in anywhere, anytime banking LKB has branches in 11 states and 1 union territory ANDHRA PRADESH DELHI HARYANA GUJARAT KARNATAKA KERALA MAHARASHTRA PUNJAB TAMIL NADU UTTER PRADESH CHANDIGARH

Lord Krishna bank has ambitious plans for business growth in the year ahead.highlights of the plans are

Goals

Total business to cross Rs. 5000 crores Reduce average cost of deposits by increasing focus on mobalisation of low cost clients Quantum increase in customer base through sustained focus on retail and SME clients Achieve zero NPA by 2007 Expand delivery channels through increase in branch network, extention counters,ATMs and alternate banking channels Customize existing products and develop new products in order to attract specific target groups.

KEY PERFORMANCE INDICTORS

PARTICULARS Capital and reserves Average deposits Average advances Investment Working funds CRAR 31-03-04 1392454 17395900 8037000 10471445 26045614 16.68% 31-03-05 1601278 20647300 11339700 8470283 25251505 11.74% % GROWTH 15.00% 18.69% 41.09% -19.11% -3.82%

LOANS AND ADVANCES

The main business of a banking company is to receive deposits and lend money. Receiving deposits involves no risk, since the banker is the creditor but in case of lending the risk involved is very high since there is no guarantee of the repayment. But lending being the main source of income for the bank although has high levels of risks associated with it is the indispensable function of banking companies .As this lending is not out of his own capital but out of the deposits from the public , the banks have to be follow very cautious policy . The banking in India is highly fragmented with 30 banking units contributing to almost 50% of deposits and 60% of advances. Indian nationalized banks (banks owned by the government) continue to be the major lenders in the economy due to their sheer size and penetrative networks which assures them high deposit mobilization. Through aggressive marketing efforts, Lord Krishna Bank increased its gross Advances to Rs.1419 Cr. as on 31.03.2005 as compared to Rs. 1118 Cr for the previous year,registering a growth of 26.92%

during the year.

GENERAL PRINCIPLES OF SOUND LENDING

Safety of funds-the loan should be paid to reliable borrower who could repay it within short period from reasonably dependable sources. Social objective Assured repayment Spread of risk Purpose of loan Law of limitation Security- safety of funds is assured by obtaining marketable security as collateral besides primary security so that in the event of default of repayment of advances by the borrower the banker can fall back upon the securities for the realization of dues to him Profit earning of the bank- the aspect of profitability has remained the ultimate objective of lending. No prudent banker would like to do the business of lending which yields no return

or which results in loss.banks have to see that the profit is kept at an ascending level so as to be able to pay divident at increasing rate year after year to sustain investors interest in the bank. Liquidity of the borrower

LKB offers wide range of retail products

SAFETY OF FUNDS
LIQUIDITY OF BORROWER
LAW OF LIMITATION ACT

PROFIT EARNINGS OF BANK SECURITY

SOCIAL OBJECTIVE
PRINCIPLES OF SPREAD OF PURPOSE LENDING CREDIT RISK OF

LOAN

ASSURED REPAYMENT

Retail products

Used car Loan

Home Loan

Two wheeler Loans

Personal loan

Gold Loan

Car Loan

PARTICULARS Target

Eligible

SALARIED PERSONS Government servants,employees of psus and listed cos of repute Confiremed employee

SELF EMPLOYED Self-employed businessmen Minimum 2 years in existing line of business with 3

Purpose Age

Loan tenure Rate of interest Processing fees Penal interest Cheque return charges Income criteria

Minimum loan amount maximum loan amount Bank statement Eligibility income ratios FOIR PCRI Margin Prepayment charges Clubbing of spouse income Guarantee

Purchase of 2 wheelers Minimum-21 years Maximum-60 years or the age of retirement whichever is earlier 12-36 months 13% Rs.500 2.5% Rs. 1000 per cheque returned Minimum net take home-Rs 8000/month,Rs.1 lac p.a 25000 80% of market value of approved valuer Last 6 months EMI 50% of income after tax N/a 20% 2% of the outstanding amount Allowed Hypothecation of Two wheeler

years of total experience Purachase of 2 wheelers Minimum-21 years Maximum-60 years at the end of repayment period 12-36 months 13% Rs.500 2.5% Rs. 1000 per cheque returned Minimum annual incomers.1.25 lacs 25000 80% of the price Last 6 months EMI 50% of cash generation or income after tax N/a 20% 2% of the outstanding amount Allowed Hypothecation of Two wheeler

HOME LOANS
Purpose Age Maximum loan Bank statement Purchase of land,construction,repair etc Minimum-21 years Maximum-60 years or age of retirement whichever is earlier 50/45/50 times gross monthly salary as per the categories rent income-income upto-65% to be considered Last 6 months

Eligibility criteria Category 1A

1. employee with central government/state

Category 1

General category Rate of interest

government/public sector undertaking/MNCs in supervisorory category without any maximum salary stipulation 2. professional and self employed individuals like doctors,CAs,qualified architects 3. all gazetted officers appointed through UPSC like IAS, IPS, IRS, IFS,and state public service commission and state administrative services 1. employed with central government/state government/MNCs/profit making cos with monthly minimum gross income of 6000 and clubbed income of 10000 2. professionals and self employed individuals like doctors.CAs,Qualified architects,management consultants 3. self employed businessmen having same line of business for last 3 years having latest IT return of minimum 1 lacs 4. cluster home loans through society without any minimum number 5. borrowers having good repayment track of 12 months in respect of existing loans under any category with us or other banks/NBFC/FIs All individuals other than above with minimum declared monthly income of 5000 or above Category 1A and 1 general category Floating rates p/a Upto 5 years-7.25% 8.25% 6-10 years 7.5% 8.5%

11-20 years- 8% fixed rates Upto 5 years-7.5% 6-10 years 7.75% 8.75% 11-20 years- not available available all loans above 10 years shall be floating rates only

9% 8.5% not

CAR LOANS
SALARIED SELF EMPLOYED PERSONS Target Government Self-employed servants,employees of businessmen psus and listed cos of repute Lord Krishna Banks exposure to housing loan for quarter ending 31-03Eligible Confiremed employee Minimum 2 years in 06 is 3.24% existing line of business with 3 years of total experience Purpose Purchase of 2 Purachase of 2 wheelers wheelers PARTICULARS

Age

Minimum-21 years Maximum-60 years or the age of retirement whichever is earlier

Bank statement Eligibility income ratios FOIR PCRI Margin Prepayment charges Clubbing of spouse income Guarantee

Last 6 months EMI 50% of income after tax N/a 10% 2% of the outstanding amount Allowed Hypothecation of Two wheeler

Minimum-21 years Maximum-60 years at the end of repayment period Last 6 months EMI 50% of cash generation or income after tax N/a 10% 2% of the outstanding amount Allowed Hypothecation of Two wheeler

Lord Krishna Banks exposure to vehicle loan for quarter ending 31-03-06 is 0.13%

Personal loan

Purpose Age

Personal needs Minimum-21 years Maximum-60 years at the time of repayment

Tenure 12-48 months 30000 10 times of take home,maximum rs. 5 lacs 6 months Category 1A 13% interest .5% processing fees category 1 14% interest 1% processing fees

Minimum loan Maximum loan Bank statement Rate of interest

EDUCATION LOAN
Eligibility Courses in India school education including +2 stage graduation,phd,PG, professional courses computer certificate courses by universities/institutes accredited to DoE ICWA,CA,CFA Professional courses of foreign universities Studies Abroad Graduation: job oriented professional/technical courses offered by reputed universities approved by AICTE Post graduation: MCA,MBA,MS,courses conducted by CIMA in London and CPA in USA Should be Indian national Secured admission to professional courses through

Student eligibility

Expenses eligible

entrance tests Minors represented by P/G Major jointly with P/G Children of employees eligible: net take home pay minimum 40% Flexibility in income criteria considered upto 10% in deserving cases All fees payable,purchase of books,equipment/uniforms Caution deposit,building fund,refundable deposits Travel expenses/ passage money for students abroad Purchase of computer(for study) Any other expenses like study tour,project work,thesis

Quantum finance

of India Upto and including 4 lacs-nil Above 4 lacs-5% Abroad-15% Scholorship to be treated as margin Security Common for inland and foreign studies Above 4 lacs-security equal to 125% of loan including interest accrued for moratarium period Land/building/government securities/NSC/LIC/KVP etc Rate of interest 12% Processing fees Nil Repayment Holiday/moratarium: course period + 1year Or 6 months after getting job whichever is earliar to be repaid in 5-7 years after commencement of repayment

Lord Krishna Banks exposure to Education loan for quarter ending 3103-06 is .0018%

PROCESSING OF THE RETAIL LOANS

Each proposal is evaluated by the bank by analyzing the candidates psychographic position, demographic position, assets cushion and the status of the financials of the applicant. A process cum recommendation note and a scoring module is

prepared by branches and sent to the regional office for the approval of the loan .The bank has developed different scoring modules according to the nature of the basic factors into consideration:

various loans taking the following

Qualifications of the Applicant Occupation of the Applicant

Experience of Work Age of the Applicant Family Background( Financial Support, No of

Dependents, Saving habits, etc.)

Repayment history of the previous loans Collateral Security Income Category of the applicant (i.e. Salaried Income of the Applicant for the past 2 Years. Status of the Guarantor

or Self Employed )

The relevant score for the applicant is determined for each category and evaluated against the minimum acceptance score, good score and excellent score criteria of the bank. The loan amount for the applicant is determined as follows: Gross Income (A) Add: Income through other sources (Rent etc.)(B) Less: Deductions(C) Eligible Loan Amount = (A+B-C)

The following ratios are also calculated for the quantitative analyses of the financial adequacy of the applicant: Per Capita Residual

Income(PCRI)

Installment to Income Ratio Fixed Obligation to Income LTV Ratio

Ratio

Per Capita Residual Income (PCRI) PCRI = Net Monthly Income - EMI No of Dependents This amount calculated as per this ratio presents the net per capita disposable income of the applicant. Bank prefers an amount of more than Rs. 1000 for sanctioning of the loan. Installment to Income Ratio (IIR) IIR = EMI X 100 Net Income

IIR ratio indicates the percentage of income absorbed by the equal monthly installments of the applicant. A figure higher than 40% implies a high degree of risk for the bank. The bank generally avoids granting loans to such applicants. Fixed Obligation to Income Ratio (FOIR) FOIR= EMI +Deductions from the salary+ Installments of other loans x 100 Gross Income The percentage calculated through this ratio should not be less than 70% LTV RATIO LTV = Loan amount Cost of Property X 100

FUND BASED

NON FUND BASED

CURRENT ASSETS

FIXED ASSETS

CURRENT ASSETS

F IXED
ASSETS

CASH CREDIT,

BANK

LETTER

BANK

GAURANTEE Lord Krishna BankGAURANTE, while confronting OF its competition BANK offers a gallery of banking solutions CREDIT such as: OVERDRAFT, PAYMENT

BILLS PAYABLE, PACKING CREDIT LOAN

GAURANTEE ADVANCES

OVERDRAFT AGAINST DIFFERENT TYPES OF SECURITIES

A borrower generally borrows from the bank against the following: Term Deposits LIC policies Shares and Securities

Advances against Term Deposits

Lord Krishna Bank also grants loans against term deposits, such a loan is granted only on those deposits in respect of which there in no lien. Such deposits should be free from encumbrance, provided the deposits are in the name of the applicants. Loan up to the amount of 90% of the deposit can be sanctioned and a rate of interest of 2% above the deposit rate is charged. A lien is marked on the original term deposit receipt and is retained by the bank. Documents required: Demand Promissory note Letter of Delivery Letter of Cancellation

Advances against LIC Policies

Policies issued by Life Insurance Corporation of India are an approved security by Banks for the grant of advances. A loan amount of 90% against the surrender value of the policy can be sanctioned by the bank. Policies acceptable for Loan Endowment Policies

Whole life Policies Postal life insurance Policies

Policies not acceptable for Loan Childrens endowment policies

until the policies are assigned in favor of the minor on attaining majority.

Policies with nomination under Children Deferred assurance

Marreid womens property act.

policies until the policies are adopted by the minor on attaining majority.

Policies taken on the lives of

minors until they are assigned in their favor on their attaining majority. The following information concerning the policy offered as security should be obtained:
1. Face value, Paid up Value, Surrender Value. 2. Due

dates

of

premium

and

premium

payable

monthly/quarterly /half yearly/ yearly.

3. Whether the age assured has been admitted. If admitted, the

same will be mentioned on the front page of the policy itself. If admitted later (i.e. after issue of the policy), an endorsement would be seen in the policy document.
4. All previous assignments and registration/reassignment of

each such assignment.

5. The latest premium paid receipt. 6. The bank also obtains the surrender value directly from the

insurance where the policy is being serviced. Assignment: The policy is charged in favor of the bank by the assured /beneficiaries on the policy as well as in a separate document. The copy of the assignment, the policy document containing the assignment is sent to the office of the insurer along with his notice of assignment. The same policy is reassigned in the name to the assured on the closure of the loan amount.

Advances against Securities

The bank also issues overdraft against Government securities such as stock certificates, Government promissory notes, NSCs, etc. these government securities constitute the borrowings made by the central and state government from public.

Stock certificates are issued by the

President and the Governor of the state in token for having registered the name of the owner as the proprietor of a certain amount of a specified loan of a particular government. Since stock certificate is not a negotiable instrument, the property therein cannot be transferred by mere endorsement and delivery. Thus these certificates can only be transferred through the means of a transfer deed (printed on the reverse side of the certificate).

Government Promissory Note can be

transferred by endorsement and delivery as they are the promissory notes. Therefore, while taking an overdraft against such a security, the bonds are endorsed by the borrower in favor of the Bank as Pay Lord Krishna Bank Ltd. Before granting the loan the bank examines all the prior endorsements carefully. While granting the overdraft against Stock Certificates and GP Notes a margin of 25- 40% is maintained on the market value for deciding the quantum of advance. The market value of each these securities

can be ascertained from the debt market quotations of any of the leading stock exchange or NSE.

A demand loan or overdraft can be

availed by the borrower against the NSC/KVP of the post office. The quantum of loan is ascertained as a margin of 25% on the face value +accrued interest for NSC and 25% of the purchase value+ accrued interest in case of KVP.

TERM LOANS
Bank term loans are the basic vanilla commercial loan. They typically carry fixed interest rates, monthly or quarterly repayment schedules

and a set maturity date. Bankers tend to classify term loans into two categories: Intermediate-term loans: Usually running less than three years, these loans are generally repaid in monthly installments (sometimes with balloon payments) from a business's cash flow. Repayment is often tied directly to the useful life of the asset being financed. Long-term loans: These loans are commonly set for more than three years. Most are between 3 and 10 years, and some run for as long as 20 years. Long-term loans are collateralized by a business's assets and typically require quarterly or monthly payments derived from profits or cash flow. These loans usually carry wording that limits the amount of additional financial commitments the business may take on (including other debts but also dividends or principals' salaries), and they sometimes require a profit set-aside earmarked to repay the loan.

Cash credit It is fund based working capital credit facility provided to traders/manufactures and the like It is a running account facility extended for a short period say 1 year and is reviewed .on review limits can be renewd ,enchanced

or decreased,after fresh appraisal of working capital credit reqirement of borrower It is a presale finance against stock of raw material,finished goods So the primary security for a banker is stock of goods details of which are furnished by the borrower in the form of statement of stock every monthto the former The drawable limit under cash credit is fixed by bank after applying security margin over the value of stock declared in statement by borrower.therefore borrower can draw funds under drawable limits subject to availability of stock and maintenance of security margin.

The cash credit is extended by taking goods either under hypothecation or under pledge or sometimes coupled with personal guarantee of third party. The stock of goods which is a primary security should have had covered under insurance against all risks of loss such as against fire and other warranties.

Overdraft
It is a running account facility where the account holder should remit and draw funds freely subject to limit granted in the account

It is granted against lien/pledge of current assets like- bills receivables,government securities,units of mulual funds,companys share and debentures,LIC policies,NSC, banks fixed deposit Sometimes ordinary current account which is normally in credit becomes overdrawn by passeage of a cheque drawn for a sum more than credit balance at the foot of the account.it is alone at specific request of account holder to help them tide over their financial problems for a short period.it is reffered to as temporary overdraft.

CREDIT DEPARTMENT
FUNCTIONING OF CREDIT DEPARTMENT OFFICE,LORD KRISHNA BANK AT REGIONAL

HIERARCHY Chief Manager Manager 3 Assistant managers Banking Assistant

Diagram showing the hierarchy of credit department

REGIONAL HEAD CHIEF MANAGER MANAGER

ASSISTANT MANAGER

ASSISTANT ASSISTANT MANAGER MANAGER

Line of command Reporting system

Work allocation

Lord Krishna bank follows single window concept

It follows parabolic system of reporting which means that everyone repots directly to the regional head. Credit appraisals of 21 branches are done in regional office, Delhi. Branch heads for sanctioning the loans up to certain limits uses managers discretionary power. These proposals subsequently come to regional office for ratification and noting. While sanctioning the loan under MDP, the branch head would:

1. Check for sanctioning power from DP chart 2. Rate of interest 3. Adequacy of security

The following duties have been allocated to the staff of the credit department in the regional office

Chief Manager He is responsible for the appraisals of credit proposals (fresh, review, renew,ad_hoc sanction under RO and AO power) He is handling CP ,Gurgoan<Janakpuri,Noida and Pitampura Branches He is responsible for overall supervision of work of all credit department Manager

He is responsible for the appraisal of credit proposals(fresh,review, renew, ad-hoc sanction under RO and AO power) He is handling Amritsar ,Chandidarh ,kalkaji, lajpat nagar, Ludhiana and rajouri garden branches He is responsible for all matters emanating on the basis of AO Credit circulars Assistant Manager Appraisals of credit proposals (fresh,review,renew, ad-hoc

sanction under RO and AO power) He is handling Ghaziabad, Jalander, Karor Bagh and Shahdara branches He handles cases pending at AO and RO CH118 and its Follow up

Assistant manager 2 All the powers relating to retail loan MDP statement of all branches under the region Appraisals branches of credit proposals (fresh,review,renew, ad-hoc

sanction under RO and AO power) of phagwara and faridabad

Assistant Manager 3 271 R of all branches under the region Appraisals of credit proposals of Jaipur, Paschim Vihar, Patiala, Preet Vihar, branches Banking Assistant MIS ,NPA, Standard and irregular accounts All the proposals for Rs. !crore and above shall be put up by concerned official through Chief Manager to Regional head

APPRAISAL OF CREDIT PROPOSALS

Importance

Proper credit appraisal is vital from the point of view of meeting need based credit facilities, improving recovery performance and keeping the overdues down to minimum. To ensure that scarce lendable resources are allocated judiciously to various segments of the economy and to spread the risk is yet another objective of a sound credit appraisal. Credit information An appraisal of a credit proposal begins with the gathering of adequate background knowledge about the applicants character and creditworthiness. The credentials of the applicant is prime consideration in a proposal. An objective evaluation of applicant with regard to his business standing, means and respectability is required. This will form the basis for taking a decision on the proposal. Information can be gathered tactfully from the following sources;
1. Customers other bankers, if applicant is having dealing with

other banks
2. Income/sales Tax assessment orders 3. Market sources 4. Financial statements 5. Property statement

PROCESSING OF PROPOSALS Information collected relevant to the borrower and business shall be made use of for an objective assessment of credit needs of the applicant. There should not be any compromise or relaxation in this regard. It is also advisable to call for the bank statement and peruse the same to ascertain whether operations in the account are satisfactory. 1.Appraisal report A detailed appraisal report must be prepared which shall cover the following aspects

Purpose of advance Mode and sources of repayment Performance of industry/business Technical and economical aspects of proposal Financial position of the applicant Brief resume of the past dealings of the applicant with the bank/other banks Borrowing, if any from other other banks/institutions Securities offered and their easy realisability Prospects of ancillary business/deposit Comments made, if any by RBI Inspectors, statutory auditors, internal inspectors on the account and rectification details

For proposals that are to be sanctioned by the Board, it is advisable to prepare the above details in the Board note format itself. The decision-making authority based on the above should be in position to take an objective decision on the proposal. GENERAL GUIDELINES Inspection and in- Depth study. The branch manager should study the proposal in depth and discuss the various aspects with the applicant after a spot inspection. He must be satisfied about the bank ability of the proposal. The actual location of the factory/business place, its accessibility and other features will come to light only if a visit is undertaken to the place. A Banker and other lenders. A banker is different from other lenders; the banker lends for a productive purpose and they look for repayment in ordinary course of business of the borrower.Realising the security for the repayment of dues is done only as a last resort as realization of a security is a long drawn out and cumbersome process. The liquidity of every advance should be beyond doubt and is an insurance against any unexpected development. Recommendations. The branch manager while recommending a credit proposal is conveying the meaning that the applicant is a suitable person to carry

out this proposal with the help of this advance. Only the branch manager can do a considered judgment of the applicant, as he is the man on the spot. The remarks and recommendations of the manager should be accurate, specific and precise. Sanction at branch level. If the proposal comes within the powers granted to the branch manager, he should sanction the same by making an order on the proposal. Even when the advance comes within the discretionary powers of the branch manager, there should not be any relaxation in the care and diligence of the examination of the proposal. Renewals. All proposals for renewal should be taken up at least three months before the date of expiry of the limits and such proposals should reach the sanctioning authorities duly completed and with all requirements at least30days prior to the date of expiry. All limits Sanctioned to the same borrower must be taken up for renewal simultaneousely.If a party enjoys limits at more than one branch, the branch, which has originally forwarded the proposal shall be responsible for obtaining and forwarding the renewal papers. In such cases the proposal shall include comments of the respective branch managers as well as details of the accounts at the different branches. No facilities shall be extended to parties against expired credit limits.If for any reson like non-finalization of accounts,borrowers being unavailable at ststion etc.the branch is not in a position to obtain the regular proposal with full details,the branch shall seek provisional

extension of the validity of the credit limits from the sanctioning authority.While seeking such extension branches shall obtain a request for this purpose from the borrower and forward it with suitable recommendations.Such extension of validity of limits shall be sought and obtained before the expiry of the existing limits.Limits sanctioned at branch level under Managers discretionary powers also have to be reviewed and renewed as stated above. Forwarding of proposals to higher authorities for sanction. In case of proposals falling within the powers of the regional office, a copy of the proposal with all requirements and branch recommendation should be sent to the regional office concerned .In case of proposals falling within the powers of the managing director/executive director/chief general manager /general manager one copy each of the proposal is to be sent to the regional office under whose control the branch functions and toAO. Time limit for attending to credit proposals. Branches should not take more than 30 days for disposing of a credit proposal.At Regional office/AO also proposals should be disposed off within 30 days. Lapse and revalidation of sanction. Any advance not availed of within 30 days of the date of the letter of sanction shall stand lapsed .While applying for revalidation branches

Post Lending Follow Up and Supervision

In the present competitive economic scenario, credit worthiness of the borrower is the centre piece of credit appraisal. Post lending follow up and supervision activity is aimed at ensuring compliance of terms of sanction, picking up signals on the health status of the client, taking action and ensuring results of actions on continuous basis. The ultimate objective of follow up is to ensure safety of the bank funds and proper end use by calling for relevant information, both financial and non financial periodically. Such follow up ensues into a better NPA position of the bank by taking timely signals of the safety of the bank fund Information system Follow up: A comprehensive system of follow up is applied in Lord Krishna Bank:

FOLLOW UP SYSTEM

Non Financial Follow up up 1) Post Sanction audit of compliance of terms and Information

Financial Follow 1) Quarterly conditions System.

2) Monthly Stock Statements Rating based follow up. 3) Annual Review, Renewal. . 4) Operations in the account and value of connection Non Financial Follow up Monthly Stock Statement

2) Credit

The actual drawings or borrowings are regulated on the basis of actual build up current assets. Therefore, stock statements indicating the actual levels of inventories and book debts are obtained at the end of every month and the DRAWING POWER (D.P) for the borrower is calculated after deducting the stipulated margins. While calculating this drawing power the unpaid stock is not included.Also, a physical verification of stock is conducted by the Branch Manager on the monthly/ bimonthly basis. Annual Renewal and Renewal of all working capital limits: Since the credit worthiness of the borrower is established by analyzing the financial statements of the borrower including the projections for the following year thereby to protect the quality of

loan assets, the borrowing party is required to submit a complete proposal, giving all relevant details which are critical for taking a credit decision within the 12 months of last sanction. The audited information includes critical information such as credit facilities taken from other banks and the key financial parameters i.e. actual and projections for the next year and current years actual Vis- avis projection submitted, etc. Operation in the account and value of connection A stalk of the various operations conducted through the account is kept by the bank. Such a close watch is required for unwavering feedback about its conduct. A poor turnover in the account, persistent excess drawings, recurrent cash withdrawal, and frequent return of bills or cheques are taken as serious signs of peril. The value of the client for the bank is judged from the total earnings from the accounts accruing through the year. Such earnings include interest on advances, installments for the repayment of loan and service charges earned by the bank, etc.

Financial Follow Up

Quarterly information system The information system for the financial follow up as

recommended by the Chore Committee (a modification of the recommendations made by the Tandon committee) requires a submission of the following statements by the borrowers enjoying a capital limit of Rs. 50 lakh and above:
I. Estimates for the ensuing quarter:

The form contains the following information such as:

Projected level of current assets and current liabilities,

including short term bank borrowings.

Estimates of production and sales for the current year i.e.

including the ensuing quarter.

Operating statements furnishing the details of sales, cost of

goods sold, selling, general and administrative expenses, interest paid and operating profit on the quarterly basis including the estimates for comparison.
The Funds Flow Statement giving the details of sources and

uses of funds for the last year(actual), current year(budgeted),

last half year (estimates and actual) and current half year (estimates). The timely submission of this information is very important on the part of the borrower to avoid the penalty levied by the bank. The actual of the last half year are compared with the projected figures and reasons for any large variations over and above the standard norm such as 10% are ascertained. The estimates of the current year checked and ensured that the projected bank borrowings are within the MPBF.

Credit Rating Based Follow Up

On the basis of the credit worthiness and credit rating, the borrowers are classified into eight categories. This rating is

applicable for both fund based capital rating limits as well as Demand loans and other Term Loans which are over and above 25 lacs. The following credit rating parameters are taken into consideration while ascertaining such rating:
1. Current ratio 2. Debt Equity Ratio 3. Tangible Net worth Ratio 4. Fixed asset to coverage ratio. 5. Interest coverage ratio 6. Debt service coverage ratio(DCSR) 7. Achievement of projected Sales 8. Profit or loss 9. Timely Repayments 10. Operations in the account: Utilization of working capital limits,

BP/BD returned unpaid and cheques and bills returned.

11. Renewal and submission of stock /book debt statements,

Audited

Financial

Statements

and

other

performance

indicators.
12. Availability of collateral security 13. Value of relationship with the client. 14. The economic scenario of the industry and the efficiency of

the management.

For the above parameters a scoring module including all the parameters has been designed to facilitate quantitative analysis of the performance of the borrower.

For example, If, Current Ratio is Marks

i. Above 1.5

10
ii. Less than 1.5 but more than 1.33

8
iii. Less than 1.33 but more than 1.20

6
iv. Less than 1.20 but more than 1.17

4
v. Less than 1.77 but more than 1

2
vi. Less than 1

Similarly the relative scoring for each of the above parameter is determined. The total marks scored are converted into percentage terms to arrive at the applicable slab rate for chargeable rate of interest on the basis of the, level of risk associated with the borrower. Example: Total Marks scored =85 In percentage terms the same is equivalent to 85%

The various weight ages can be analyzed in the following manner: Range on weight age on a scale of 100 96% and above 91% to 95% 86% to 90 % 81% to 85% 76% to 80% 71% to 75% Rate Code INTEREST RATE Top notch grading rate Top rating grading rate Blue chip companies Moderate risk categories Moderate risk Categories Moderate risk Categories BPLR-2% BPLR-1% BPLR-0.5% BPLR BPLR+1% BPLR+2%

RRR++ RRR+ RRR RR+ RR R+

66% 70% 60% 65% Less 60%

to R

to R-1 than

More than normal risk categories BPLR+3% More than BPLR+3.5% Normal risk Categories Not to be financed

The blue chip borrowers falling in the top three categories do not require more than normal monitoring on the behalf of the bank.

Similarly borrowers falling into the next three slots (RR+, RR and R+) also require normal monitoring. These borrowers are kept under effective watch with the help of non financial follow up and financial follow up. However, for the borrowers falling into the category of R and R-1, a more frequent follow up is conducted, thus for such categories the bank frequently follows up the fortnightly/weekly stock statements, monthly statement of statutory dues, etc. These are considered as high risk borrowers and are kept under high alert /watch list till their position improves and classification is updated. A separate rate of interest is charged from different categories i.e. a borrower in the RR+ category shall be charged a higher rate of interest than a borrower in the RRR+ category.

0% 3% 2% 6% 8% 17% 17% 11% 36% RRR++ RRR+ RRR RR++ RR R+ R R-1 below R-1

BORROWERS RATING STANDARD ADVANCES.

WISE

DISTRIBUTION

OF

MONITORING
The following reports are required for monitoring of loan
1. 271R to check overdraw on weekly basis 2. FRR-first review report is sent by branch to regional office

within 45 days from thye date of disbursement

3. Compliance

Certificates-it

is

signed

by

the

customer

acknowledging that he will comply with terms and conditions after the loan proposal has been sanctioned by the branch
4. Legal Report made by rating agencies or advocates like clear

title certificates

5. Valuation report prepared by approved valuer. 6. CH_118 report-it is a report generated by regional office and

sent to branchs to check overdrawals of any account.

7. cash credit and overdraft are subject to renewal after 12

months from the date of sanction.Regional office has to follow up 3 months before the expiry of 12 months
8. If cash credit limit is more than 500000,then regional office

requests for audited balance sheetin case audited balance sheet is not available RO would ask for CA certified provisional balance sheet with the condition that the customer will have to submit audited balance sheet
9. review report-it is prepared at the time of renewal of cash credit

or overdraft.it contains all the information about the accounts like frequency of overdrawals,maximum amont drawn,minimum amount drawn.

SCHEME FOR LOAN AGAINST RENT RECEIVABLES.

1. rent

discounting/repayment

period:The

maximum

rent

discounting/repayment period enchanced to 84 monthssubject to enabling renewal clause in lease/rent agreement

2. guidelines for arriving at the loan quantum where leave and

licence system is in vogue

3. prepayment charges:prepayment charges stands reduced from

2% to 1%
4.

The amount paid under various heads by licence as part of total monthly payment for usage of the building/premises along with fixture and furniture stipulated in lease, rental may be considered for the purpose of discounting and arriving at loan quantum.

5. Financial analysis of the borrower- relaxation

The main criteria for considering loans under the scheme shall be on the future cash flow out of rent,lease,strength of lessee and security(property) being situated in good commercial area and easily marketable
6. Maximum exposure shall be limited to 10% of gross advances

PURPOSE For meeting any business and/or personal needs of applicants. ELIGIBILITY

a. bonus

of

commercial

property/house

property.getting regular income as per lease/rent deed

b. commercial

properties rented out to reputed cos,govt

corporates,MNCs,Banks,insurance department,PSUs etc

c. house property located in good and posh locality

owned by individuals and let out to reputed corporates, banks,mncs,insurance cos etc the house property should be free from all encumbrances HUF properties can be accepted The building proposed to be mortgaged should be not older than 25 yrs and should be in good condition RATE OF INTEREST The rate of interest to be charged is PLR +2% i.e. 14.5% at present.However where branch desires to charge lower rate depending on the merits of proposal like reputation of lessee and lessor, value of security,loan amount,other business connections. REPAYMENT PERIOD

Repayment period to be arrived at based on net amount available for EMI for unexpired period subject to maximum of 60 months SECURITY Mortagage of property against which lease rentals are to be securitised. Any of the following may be accepted as substituted securities
1. Alternate commercial

,residential property with clear title

equivalent to 150% of loan amount.

2. LIC policies with adequate surrender value upto 125% of loan

amount.
3. NSCs /KVPs/ IVPs having face value/invested amount upto

125% of loan amount.

4. Banks own term deposit either in name of borrower or 3rd party

deposits and 115% of loan quantum in other cases.

LOAN AMOUNT The lessor can get a loan upto an amount that can be serviced by rent receivables for the unexpired period of lease,excluding TDS,Building tax/municipal tax/security deposit/advance deposit,amrgin for meeting maintenance,repair and other expenses

ASSESSMENT OF A LOAN
1. Gross rent receivables for the unexpired lease periodexcluding

subsequent renewals in-built in lease deed. LESS

a. TDS b. Building Tax,Municipal Tax c. Security deposit d. Advance rent

= Net rent receivables LESS margin 20% = Margin available for EMI EXAMPLE Eligibe loan amount is to be worked out as follows 1. Gross rent received 2. Unexpired period of lease(months) 3.Rent advance/security deposit(6months) 3.00Lacs/month 48 months 18.00 Lacs

Rent receivable for the unexpired period of lease (3.00 lacs *48) LESS:TDS @ 16.5%

144

23.76 ---------120.24

LESS: security deposit

18.00 ----------102.24

LESS Building Tax/Municipal Tax

.50 ---------101.74

LESS: margin of 20%

20.35 -----------

Amount available for repayment of principal interest 81.39 -------------

Based on the amount available for repayment we have to arrive at eligible loan amount as follows Rate of interest 16% Loan period (max) 48 months Amount available for EMI 1.69 L

(Rs. 81.39 lacs/28 months) Eligible loan amount Repayment factors for 48 mths @16%=35.4230 1.69 L * 35.4230=58.86 Lacs

Lord Krishna Banks exposure to loan againt rent receivables for quarter ending31-03-06 is .0289%

Rate of interest charged by different banks for loan against rent receivables Name of bank Lord Krishna bank United bank of india Punjab and sind bank Rate of interest 14.5 12.5 10.5

15 lord krishna bank punjab and sind bank united bank of india 0 BANKS

10

CASE

STUDY

DEPICTING

LOAN

AGAINST

RENT

RECEIVABLES WHERE LKB BRANCH IS A TENANT.

Proposal for loan against rent receivables of Mr. Praveen kapoor, Ms. Sunita kapoor,Ms.neeru kapoor for 50 lacs(land loard of branc premises)

Calculation of eligible amount

Gross rent received Unexpired period of lease Period for which rent is discounted Rent advance/security deposit

3 lacs per month 106 months 60 months 9 lacs for 3 months

Rent receivable for the unexpired period of lease (3 lacs * 60) less TDS say @10.5%

180 lacs

29.7 150.3

less security deposit

141.3 less building tax/municipal tax 136.3 5.0

less margin 20% amount available for repayment of principal and interest

27.26

109.04

amount available for repayment interest and principal rate of interest loan period amount available for EMI (112.64 )

109.04

9% 60 months 1.82 lacs

( 60 mnths ) amount available for loan 1.82 = 87.02

2077 amount applied for loan EMI 50 lacs 103850

THE LOAN PROPOSAL IS SANCTIONED ON FOLLOWING TERMS AND CONDITIONS Facility- loan against rent receivable by discounting of rent paid for pitam pura branch Limit- 50 lacs ROI- BPLR-3.5%=9% Period of 60 months Repayment reduction from DP to the extent of EMI i.e. 104000 every month SC/PC-nil SecurityPrimary security-assignment of rent to be paid by our branch Collateral security-nil Personal guaranteePraveen kapoor- net worth -232.57 lacs Neeru kapoor- net worth 134.90 lacs Sunita kapoor- net worth 133.72 lacs

CASE STUDY DEPICTING ASSESSMENT TO CASH CREDIT UNDER TRADE LOAN SCHEME

M/S Banbros Engineering pvt ltd is a company having 2 directots on its board i.e. Mr. V.S. Bansal (aged 44) and Mr. Sunil Garg (aged 35). The company was eastablished in the year 1996 and is engaged in the business of trading and assembling of scientific equipment like profile projectors, industrial microscope and microphotography, image analysis etc They have approached lord Krishna bank for cash credit limit of 20 lacs and FLC limit of 5 lacs. The details are given below. Borrower : m/s Banbros engineer Address : 105 usha chambers Dealing with bank jan 04 Constitution : pvt ltd company Director: V.S. Bansal Sunil Garg Activity trading and assembling Classification: non priority sector Present requirement: CC (HYPO) of 20 lacs FLC of 5 lacs

FINANCIAL INDICATORS OF THE FIRM

Last year 31-0303 Sales and 89

Current year 31-0304 59.2 .30 8.31 70.39 .63 8.94 101 1.57 10.51 31-03-05 projected 31-03-06

other income Net profit /loss .50 Paid up capital 8.01 and reserve and surplus Total net worth 8.01 Unsecured 1.13 loan from 1 others Unsecured loan from

8.31 .43

8.94 .04

10.51

4.3

4.3

7.5

others Term loan .86 Current loan 44.3 Total outside 47.29 liabilities Fixed assets 11.69 Current assets 43.58 Debt equity .11 ratio TOL/TNW 5.9 Current ratio .98 Net working -.72 capital

3.76 39.89 48.42 11.24 45.47 .45 5.83 1.14 5.58

2.9 29.48 36.72 10.5 35.14 .32 4.11 1.19 5.66

0 32.22 39.72 9.82 40.40

3.78 1.25 8.18

Assessment of PBF (as per Nayak committee) Acceptable projected sales for the year ending 06 25% of projected sales (i.e. rs 101 lacs) 1/5 less margin 4/5 PBF @ 20% of projected sales 101 lacs 25.25 lacs 5.05 lacs 20.02 lacs

Assessment as per trade loan scheme Average of last 2 yrs sale (59.20 +70.39)/2 = 67.79 lacs projected sales for current year 120 % of 64.74 = 77.75 PBF based on projection = 20% of 77.75=15.55 lacs

Branch as has recommended CC limit of 20 lacs which is justified from Nayak committee method The loan was sanctioned on the following terms.
1. primary security- hypothecation of stock and book debts with

25% and 40% margin respectively.

2. rate of interest 11.5% 3. period 12 months 4. commission on flc as per bank norms 5. period 90 days 6. margin-25% 7. collateral security

EM of residential property
8. servise charges 1.1% upfront 9. Third party guarantee

Mr. V.s. Bansal networth 62.41 lacs Mr. Sunil Garg networth 46.93lacs

Lord Krishna Banks exposure to Trade loan for quarter ending 31-0306 is .101%

Rate of interest under trade loan scheme

NAME

OF

THE TYPE

OF RATE OF INTEREST BPLR+2=13.5 BPLR+1=12 BPLR-1=11.5 BPLR-2=10.5 BPLR+.75=12

BANK BANK Punjab and sind Public State Bank Of State bank Patiala ING Vysya Private Lord Krishna bank private United bank of Private India

14 12 10 8 6 4 2 0 BANKS

lord krishna bank state bank of patiala ING vysya punjab and sind united bank of india

CASE TRADE

STUDY LOAN

DEPICTING TO

ASSESSMENT

OF

ROAD

TRANSPORT

OPERATORS
Mr.Fateh singh Libra is the promoter and MD of M/s libra highways (p) ltd.The company is a leading bus service operator of north India. The company was floated in the year 1973 and is having fleet of approximately 60 deluxe /semi deluxe and Volvo buses. The companys buses are plying on different routes of Punjab and

adjoining states including the prestigiousDelhi Lahore route. The group cosare already running 3 volvo buses under the agreementwith the DTC.The present proposal is for the purchase of Volvo bus and 1 super deluxe bus which will ply on all India tourist permit as per the resolution passed by the company. He approaches lord Krishna bank for the sanction of term loan of Rs. 54 lacs for the purchase of Volvo bus at a cost of 60.36 lacs. ASSESSMENT OF TERM LOAN The following calculations have been made by assuming that the proposed bus will run 600 km/day and the payment will be RS.13.16/km as per rates of association of state transport undertaking

S.N O 1 2 3 4 5 6

ITEM

Year 1

Year 2 108000 418000 20000 90000 400000 960000

Year 3 95000 418000 50000 90000 350000 0 768000

Year 4 83000 418000 120000 90000 200000 614000

Year 5 70000 418000 120000 90000 150000 491500

Insurance 125000 Maintenance 418000 s Tyre tubes 18000 Staff 90000 Term loan 500000 installments Depreciation 120000 0

TOTAL

235100

199600 0 288204 0 886040

177100 0 288204 0 111104 0

152540 0 288204 0 135664 0

132950 0 288204 0 155254 0

EXPENSES 0 Total income 288204 profit 0 531040

Calculation of DEBT SERVICE COVERAGE RATIO Year 1 PAT 5.31 Dep 12 Term loan 5 interest Term loan 14.64 installment DSCR 1.52 Year 2 8.86 9.6 4 14.64 1.53 Year 3 11.11 7.68 3.5 14.64 1.52 Year 4 13.57 6.14 2 14.64 1.48 Year 5 15.52 4.91 1.5 10.97 1.97

Average DSCR= 1.61 The average DSCR ratio is above the benchmark norm of Bank i.e. 1.5

The above proposal was accepted on following terms Nature: term loan Limit: 54 lacs ROI :BPLR 3% i.e. 9% as against ROI of 15.5% SC/PC : .25% as against applicable SC/PC of 1.1% Purpose: 1. for the purchase of bus chasis volvo make at the cost of Rs.41.06 lacs as per invoice dated 30.05.05 2. for construction of body at cost of Rs. 19.3 lacs period: 60 months repayment: 57 EMI of 116900 to commence 3 months after disbursement. Interest to be serviced every month during moratorium of 3 months margin 1.06 lacs on chassis(2.58%) _ 5.3 lacs on the body(27.46%)

primary security hypothecation of Volvo bus collateral nil personal guarantee MR. Kesar singh ENW rs. 46.20 lacs Mr. Jasjit singh ENW Rs. 85 lacs

lord Krishna banks exposure to road transport operators for quarter ending 31-03-06 is .006%

Lord Krishna Banks exposure to service sector loan for quarter ending 31-03-06 is .169%

Case study depicting assessment of cash credit facility for a manufacturer.

M/s Shellhon Fibres ltd ,a joint stock company established in the year 1980 is manufacturing acrylic and cotton yarn, which has a requirement of 30 lacs term loan and 120 lacs cash credit ,approaches LKB for the enhancement of cash credit limit from 80 lacs to 120 lacs.

Profit and loss account Particulars Expenditure Opening stock Raw material Work in process 31.03.05 31.03.06 31.03.07

25.3 9

311.1 9 24.2 393.1 36.8 39.5

44.5 10.5 29.5 537.2 42.1 54.1

Finished goods 25.7 Raw material 324.2 purchased Finished goods 35.6 purchased Wages other and 32.1 direct

labour Power and fuel 25.2 Repair and 1.5 maintenance Salaries and 7.5 wages other than factory Interest ion 9.5 working capital Interest on term 4 loan Other bank .5

32.1 1.9 9.2

42.3 2.2 13

15 6.5 .7 0

20 5.5 10 0

charges Loss on sale of .2

fixed assets Depreciation Selling expenses Profit before tax Total Tax paid Dividend payable Income Sales Interest securities Dividend

19 6 45.3 570.6 14.2 11.1

37.5 9.2 55.9 701.7 20 15.9 39 15.6 104.5 961 34 205

503.9 on 1.5 .5

614.2 1.8 .1 2 0

839.4 2.7 .1 0 1.2

received Profit on sale of .4 fixed assets Insurance claim 0 relating previous year Closing stock Raw material Work in process Finished goods total 31.1 9 24.2 570.6 to

44.5 10.5 29.5 701.7

64.2 16 36.5 961

ANALYSIS OF BALANCE SHEET

Particulars

31.03.05

31.03.06 (actual) 31.1 393.1 44.5 379.7 39.5 32.1 451.3 9.0 10.5 449.8

31.03.07 (projected) 44.5 537.2 64.2 517.5 54.1 42.3 613.9 10.5 16.0 619.4

(actual) Opening raw material 25.3 Add: raw material purchased 324.2 Less closing stock of raw 31.1 material Raw material consumed Add: factory wages Add: power and fuel Prime cost Add: opening work in progress Less: closing work in progress 318.4 32.1 25.2 375.7 9.0 9.0 375.7

Add repair and maintenance

1.5 1.9 9.2 37.5 498.4 24.2 29.5 493.1 2.2 13.0 39.0 673.6 29.5 36.5 666.6

Add: salaries Add: depreciation Cost of production

7.5 19.0 403.7

Add: opening stock of finished 25.7 goods Less : closing stock of finished 24.2 goods Cost of production of goods 402.5 sold Add: selling expenses Cost of sales 6.0 411.2

9.2 502.3

15.6 682.2

For the calculation of MPBF following figures have been taken

Raw material

45

Work in progress 8 Finished goods 21 Debtors Creditors 45 20

Particulars Raw material

31.03.0 5 closing raw 35.65

31.03.06 42.77

31.03.07 45.28

material *365 Raw material consumed Work in progress W.I.P *365 Cost of production Finished goods goods*365 Debtors debtors*365 Credit sales Creditors creditors*365 Credit purchases closing 38 20.4 16.9 Cost of sales closing 43 42.2 47.85 closing finish 21.4 21.4 19.53 closing 8.1 7.69 8.67

CALCULATION FINANCE.

OF

MAXIMUM

POSSIBLE

BANK

In lacs Raw material consumed (45*517.5)/365 63 14.8 39.24 103.48 29.43 191.09 47.77 143.32 Work in progress (8*673.6)/365 Finished goods (21*682.2)/365 Debtors collection period (45*839.4)/365 Less Creditors payment period (537.2*20)/365 Working capital gap Less 25% margin maximum possible bank finance

Assessment of PBF (as per Nayak committee) In lacs Acceptable projected sales for the year ending 07 25% of projected sales 1/5 less margin 4/5 PBF @ 20% of projected sales 839.40 209.85 41.97 167.88

2004-05

PERFORMANCE HIGHLIGHTS KEY RATIOS Current Ratio L.T debt to equity Ratio Net profit ratio Gross profit ratio Growth of sales Net worth

20052006 06 -07 Last 2 years Current actual Year Projectio n 1.22 0.64 6.17 18.07 700 1.31 0.76 5.84 21.63 22% 900 1.36 0.38 8.39 28.37 37% 1550

1800 1600 1400 900 1200 800 1000 700 600800 500600 400400

net worth

sales

300200 200 0 100 0

1st Qtr

2nd Qtr

3rd Qtr

1st Qtr

2nd Qtr

3rd Qtr

0.8 0.7 0.6

1.4 0.5

0.4 1.35
1.3

debt-equity ratio

0.3 0.2
curre nt ratio

1.25 0.1 1.2 0 1.15 1st Q tr 2nd Q tr 3rd Q tr

1st Qtr

2nd Qtr

3rd Qtr

Should the Bank Sanction the Credit Limit?

On the basis of the above analysis the bank is in position to grant the desired credit limit to the borrower. The credit worthiness of XYZ Ltd has been analyzed by keeping all the prescribed parameters in mind.

The industrial market for the product profile of the company is growing there is no significant competitor in this industry which promises greater profit margins for the company for the following years.

The future of the company is secure under the management of its current promoter Mr. A, who through his managerial competence along with his expertise and experience in the

industry can help the company to achieve new heights of success.

The financial analysis of the company also provides a satisfactory delineation of the business. sales figures are showing upward trend

The net worth of the company is also showing a steady increase

Overall, the financial position of the company is at the desired level of profitability and the credit sanctioned by the bank to the borrower involves low level of risk.

Non fund Based Advances

The non fund based advances of the bank include instruments such as

Letters of Credit Bank Guarantee

Letters of Credit Letters of Credit is an instrument which facilitates trade and commercial transactions. It is an undertaking issued by the banker on the behalf of the buyer to the seller, to pay for the goods and services, provided that the seller presents documents that satisfy the terms and conditions stipulated in the L/C .The documents under a L/C include transport documents, bills of exchange, commercial invoice, special invoice, certificate of origin, packing list, inspection report or quality certificate or the beneficiary certificate. Such a letter is issued by the bank at the request of the buyer (customer) in favour of a seller (beneficiary).

Letters of Credit is broadly classified into two categories:

Inland letter

Foreign letter

By issuing a L/C, the banker is undertaking a future financial commitment. Hence it becomes imperative for the banker to analyze the following factors:
Credit worthiness of the Applicant.

 Integrity shown by the applicant in the conduct of the

business.
The financial solvency of the business.

Projected liquidity of the business when the payment is due.

Whether the applicant meets the requirements for exchange

control and trade control, if any.

The maximum limit of L/C.

Determination of Maximum Limit for L/C Various different variables are taken into consideration while computing the L/C limit which is taken as part of determining the overall working capital credit requirements of the enterprise. The major variables that are taken into consideration for this purpose are:
a) Annual consumption of materials under purchase

b) The lead time from opening of credit to shipment.

c) The transit period for goods till they arrive at the factory.

d) Credit period

Reserve bank of India has issued detailed guidelines to commercial banks in respect of credit for their customers who enjoy credit facilities with them.some of the important points to be kept in view in this regard are discussed below Letter of credit
1. bank has to normally open letter of credit for their own

customers who enjoy credit facilities with them.customers maintaining current account only and not enjoying any credit limits should be granted L/C facilities except in cases where no other credit facility is needed by the customer.
2.

the request of such customer for sanctioning and opening of letter of credit should be properly scrutinized to establish the genuine need of the customer.the customer may be required to submit a complete loan proposal including the financial

statements to satisfy the bank about his needs and also his financial resources to retire the bills drawn under L/C.
3. where customer enjoys credit facilities with other bank,the

reason for his approaching the bank for sanctioning l/c limits have to be clearly stated.the bank opening l/c on the behalf of such customer should invariably make a reference to the existing banker of the customer.
4. in all cases of opening of letter of credit,the bank has to ensuer

that the customer is able to retire the bills drawn under l/c as per the financial arrangement already finalized.

Guarantees
1. the conditions relating to obligant being a customer of the bank

enjoying credit facilities as discussed in case of letter of credit are equally applicable for guarantees also.in fact,guarantee facilities also cannot be sanctioned in isolation.
2.

financial guarantees can be issued by the bank only if they are satisfied that the customer will be in a position to reimburse the bank in case the guarantee is invoked and bank is required to make the payment in terms of guarantee.

3.

performance guarantee will be issued by the banks only on the behalf of those customers with whom the bank has sufficient experience and is satisfied that the customer has the necessary

experience and means to perform the obligation under the contract and is not likely to commit any default.
4. banks should not normally issue guarantees on behalf of those

customers who enjoy credit facilities with other banks.

Co-acceptance of bills
1. limits for co-acceptance of bills will be sanctioned by the banks

after detailed appraisal of customers requirement is completed and bank is fully satisfied about the genuineness of the need of the customer.
2. co-acceptance facilities will normally not be sanctioned to

customers enjoying credit limits with other banks.

A contract of guarantee is a contract to perform the promise or discharge the liability of a third party in case of his default. The bank which gives the guarantee is called Guarantor, the person in respect of whose default the guarantee is given is called The Principal Debtor and the person to whom the guarantee is given is called the Beneficiary. A guarantee can be oral or written.

There are two types of Guarantees: Financial Guarantees These are guarantees issued for purely monetary obligations. Such guarantees are usually requested by contractors who are engaged in civil works for various Government departments like PWD, CPWD, etc. since these departments insist for specific amount as a percentage of work from the contract bid, bank guarantees are issued by the banks in lieu of the amount. The Guarantees are also issued by the bank in lieu of customs duty payment, dealers of large companies as security for securing dealership, release of money from a company or department for works which are yet to be inspected, etc. Performance Guarantees These are guarantees issued in respect of performance of a contract or obligation. In such guarantees, in the event of non or short performance of the obligation, the bank is called upon to make good the monetary loss arising out of non fulfillment of the obligation. A guarantee is a source of income as the bank charges a commission on the guarantees.

For example, on a Performance Guarantee Lord Krishna Bank Charges Rs. 100 + 0.50% of the guarantee amount per quarter or part thereof with a minimum of charges for six months. Similarly on Financial Guarantee the rate charged by Lord Krishna is Rs.100 + 0.75% of the guarantee amount per quarter or a part thereof with a minimum of charges for six months. The procedure for the appraisal of bank guarantee requirements of an enterprise can be described in the following steps:
1. The purpose of the bank guarantee proposed is examined

according to the business needs of the borrower. The documents such as Partnership Deed or Memorandum of Association are also studied.
2. A check of the frequency of bank guarantees is also examined.

The cash flow and operational performance of the borrower is examined.

3. In case of a bank guarantee has been availed by the borrower

from any other bank , a check has to be performed to determine if the guarantee has ever been involved at any stage and the time taken by the borrower to overcome the crisis.

4. The adequacy of the collateral security offered by the applicant

to the bank is checked in terms of margin.

The table showing BPLR of different banks for the fiscal 2006-2007 NAME OF THE BANK Lord Krishna bank ING Vysya State bank of India Standard Chartered bank ICICI State bank of Patiala Andhra bank Punjab and Sind bank United Bank Of India Bank of India Punjab national bank HSBC TYPE OF BANK Private Private State bank Foreign bank Private State bank Public Public Private Public Public Foreign BPLR 12.5 12.5 12 12 11.75 11 11 11.5 11.25 10.75 10.75 9.5

14 12 10 8 6 4 2 0

lord krishna bank state bank of patiala andhta bank punjab and sind bank of india punjab national bank hsbc icici BANKS standard charted state bank of india

MAXIMUM LENDING BANKS

RATE

OF

DIFFERENT

NAME

OF THE BANK Punjab and Sind Lord Krishna bank United bank of India

TYE OF BANK Public Private Public

RATE OF INTEREST BPLR+4%=15.5% BPLR+3%=15.5% BPLR+3.5%=14.75

15.6 15.4 15.2 15 14.8 14.6 14.4 14.2 BANKS lord krishna bank punjab and sind bank united bank of india

NON PERFORMING ASSETS

The effectiveness of the bank credit appraisal and evaluation scheme is reflected by its percentage of Non Performing Assets.NPA loan or advance where
1. Interest or installment of principal remains overdue for a period

is a

of more than 90 days in respect of term loan.

2. Accounts remain out of order in respect of overdraft/ cash

credit.
3. Bills remain overdue for a period of more than 90 days in case

of bill purchased and discounted

4. Interest or installment of principal remains overdue for 2 harvest

seasons but for a period not exceeding 2 half years in case of advance granted for agricultural purposes
5. Any amount to be received remains overdue for a period of

more than 90 days in respect of other discounts. Categories of NPAs

Substandard assets Doubtful assets Loss assets

1. Standard Assets:

Standard assets are those assets which do not cause any problem and which do not carry more than the normal risk attached to their business. These are also referred to as performing assets. Advances such as Term Deposits, National Saving

certificates (NSCs) eligible for surrender, Indira Vikas Patra, Kisan Vikas Patra and Life Insurance policies are referred to as standard assets as no provision is required in these accounts.
2. Sub Standard Assets:

These assets are those which have been classified as NPA for a period not exceeding two years. In such cases, the current net worth of the borrower /guarantor or the current market value of the security charged to the bank is not enough to ensure recovery of the dues in full. In other words, such an asset will have explicit weakness that may jeopardize the recovery of the debt in full. There are distinct chances that the bank will sustain some loss, if deficiencies are not rectified.
3. Doubtful Assets

These assets are such which have remained NPA for a period exceeding two years. The loans of this category have all the weaknesses intrinsic in those classified as Sub standard with the added characteristic that the weaknesses make collection or liquidation in full, highly questionable and improbable.

4. Loss Assets

A loss asset is the one where the loss has been identified by the bank or internal or external auditors or the RBI inspectors, but the amount has not been written off, wholly or partly. In other words, such an asset is considered unrealizable and is of such a modest value that its continuance as a bankable asset is reprehensible, albeit there may be some salvage value or recovery value. A provision to the complete amount of the loan has to be maintained by the bank as the realizable value of the security is negligible or near zero.

LKBs NPA for the quarter ending 31st march 2006 is about 2-2.5% of total advances. NPA of different banks for the year ended 2006 Name of bank United bank of India Punjab national bank Punjab and sind bank Gross NPA in percentage 4.21 4.1 9.61 Net NPA 1.95 .29 2.43

2.5 2 1.5 1 0.5 0 net NPA punjab national bank united bank of india pujab and sind bank

15.00% 10.00% 5.00% 0.00% lord krishna bank

2001

2002

2003

2004

2005

lord krishna bank 12.92% 9.85% 6.33% 6.05% 4.22%

Lord Krishna Bank has been working diligently towards reducing its NPAs and improving its profitability. By detonating vigorous follow up and recovery drives the Net NPA of the Bank has ebbed from 6.05% for the previous year to 4.22% for the year ended 31.03.2005, which is a commendable achievement in comparison with the industry. Indeed NPA for quarter ending march 2006 was around 2.5%.

RECOMMENDATIONS
With the changing face of Indian consumer, Lord Krishna Bank

should lay more emphasis on designing innovative products to secure a competitive edge instead of adopting tailor made products.

The bank needs to follow a more aggressive Relationship Management and Business

approach and special emphasis should be laid on Customer Intelligence Implementation ,such initiatives shall provide the bank with an integrated view of the customer across products and delivery channels, thereby providing an opportunity to the bank to fine-tune its offerings to suit the specific needs of each customer.

Presently since all banks are focusing on the

upwardly mobile urban salaried class. Over-dependence on this segment is likely to bring in inflexibility in the business. An attempt should be made towards spreading the operations into segments like self- employed and the semi-

urban rich. For example the bank can establish special Help and Loan counters for agriculturalists in areas such as Gurgoan.

Many software companies are developing new

improved credit based solutions. For example, eCredit a next-generation credit management system developed by TCS can be used to build credit rating / scoring models, and can be easily integrated with third-party risk management tools. It provides wide functional coverage, encompassing credit policy, credit appraisal, credit monitoring, and MIS. It also aids in financial analysis by providing several decision support tools for ratio analysis, credit rating, group exposures, and break-even analysis.

It should adopt IT for automation of cheque

and payment processing, document management and imaging solutions etc, which shall lead to cost cutting for the bank.

Lord Krishna Bank should take the Direct

Selling Agent (DSA) route whereby low-end jobs like sourcing or transaction processing are outsourced to small regional layers. This route is foreign and private sector banks being followed by many

BIBLIOGRAPHY

Manual of instructions LORD KRISHNA BANK Indian financial systems and commercial banking-book by Indian institute of bankers Annual report book of lord Krishna bank Analysis of balance sheet- T.N.Soor How to borrow from banks and financial institutions Internet web siteshttp://www.bankindianet.com http://www.lordkrishnabank.com