Federal bank report

SUMMER TRAINING REPORT

ON

“CREDIT RATING SYSTEM OF FEDERAL BANK LIMITED”

Report submitted in partial fulfillment of post graduate diploma in management(PGDM)

Under supervision of

Ms. Anupama Tewari

Asst. Manager

Submitted by

Durga Devi Nag

Roll No-69

Batch 2009-11

Submitted to

G.L BAJAJ INSTITUTE OF MANAGEMENT AND RESEARCH

Plot no-2, Knowledge park III, Greater Noida-201306

Website: www.glbimr.org

G.L.B.I.M.R Page 1

ACKWONLEDGEMENT

As a management student I dream it a privilege to have experience a panorama of Federal Bank Limited cherished and enviable legacy. I would like to thank all those who have directly or indirectly helped me to accomplish this project successfully.

I would like to express my deep sense of gratitude to my corporate, project guide, Ms Anupama Tewari,Asst Manager, Bhubaneswar whose support and guidance helped me, in converting my conception into visualization and also for the continuance guidance throughout the project.

Special thanks to my institute project guide Prof. Neeraj Saxena whose support and unflinching guidance and encouragement helped me a lot to go with the project.

Durga Devi Nag

(PGDM 2009-11)

G.L.B.I.M.R Page 2

DECLARATION

This is to certify that Miss Durgadevi Nag out of her project work presented in this entitled

“CREDIT RATING SYSTEM OF FEDERAL BANK LIMITED” for the award of PGDM

from G.L.Bajaj Institute of Management & Research under my supervision. The project

embodies result of original work and studies carried out by Student herself and the contents of

these do not form the basis for the award of any other degree to the candidate or to anybody else.

Ms. Anupama Tewari

Asst. Manager

G.L.B.I.M.R Page 3

TABLE OF CONTENTS Page.No

CHAPTER:- 1 INTRODUCTION TO FEDERAL BANK LTD. 1-11

CHAPTER:-2 OBJECTIVE OF THE STUDY 12

CHAPTER:-3 CREDIT RATING SYSTEM 13-61

CHAPTER:-4 RESEARCH METHODOLOGY 62

CHAPTER-5 DATA ANALYSIS & INTERPRETATION(CASE STUDY) 63-88

CHAPTER:-6 RECOMMENDATIONS 89

CHAPTER:-7 CONCLUSION 90-91

BIBLIOGRAPHY

G.L.B.I.M.R Page 4

EXECUTIVE SUMMARY

The project aims to develop a clear cut understanding of credit rating system being adopted by

Federal Bank Limited. The credit appraisal system act as a successful tool for credit assessment

in a bank and credit rating system is the backbone for assessing the risk inherent in a

credit/investment exposure. Thus identification of credit worthiness of credit limit/measurement

of credit risk can be achieved through a sound appraisal system and an appropriate credit rating

system.

At the initial stage through understanding was done as to get overview exposure as to how the

credit rating is organized, and then the parameters that are unique to the credit rating system

were identified. These factors create a major impact on the understanding of what credit should

be given to a particular project, while there prevails intense competition in the banking sector.

Credit rating has become very relevant to judge a project’s status and thereby helping the bank to

take important decisions. Various credit rating models are used by Federal Bank Limited to

assign the appropriate rating to the borrower are also studied. The project focuses more on the

models like what are the factors being used for credit rating

One case analysis is done on Displayline ltd which had applied to find out appropriate rating for

the applicant. As per the model the required parameters were consider to decide the credit rating.

G.L.B.I.M.R Page 5

CHAPTER-1

INTRODUCTION TO FEDERAL BANK LTD.

Federal Bank is a private sector bank in India. The head office of this prestigious bank is located

at Aluva, Kerala. By 2008, the Federal Bank India had successfully introduced 671 branches and

681 ATMs across the nation. In the month of March of 2008 alone, the bank had opened 26

branches across 11 Indian States.

Federal Bank India is well recognized for facilitating even the smaller branches consisting of

rural and partially-urbanized areas with technology enabled services.

BACKGROUND OF FEDERAL BANK:

Previously known as Travancore Federal Bank Limited, the Federal Bank Limited in its entire

span of customer services has seen both ups and downs. The bank started with an auction-chitty

business along with other banking transactions related to agriculture and industry. In the year

1945, the paid-up capital of the bank touched Rs.71000 and a new Board of Directors was

constituted. During this period, the bank also incorporated new Articles of Association. The

same year its branch was openedatAluva.

Subsequently, Federal Bank came with its branches in Angamally (1946) and Perumbavoor

(1947). However, it came with a massive expansion plan in the years 1975 and 1976 by opening

53 and 42 branches respectively.

From that time onwards till today, the bank has continued to incorporate the effective changes to

ensure smooth banking experience for its customers.

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HISTORY OF FEDERAL BANK:

The history of federal Bank dates back to the pre-independence era. Though initially it was

known as the Travancore Federal Bank, it gradually transformed into a full-fledged bank under

the able leadership of its Founder, Mr. K.P Hormis. The name Federal Bank was officially

announced in the year 1947 with its headquarters nestled on the banks on the river Periyar. Since

then there has been no looking back and the bank has become one of the strongest and most

stable banks in the country.

Vision:

Develop into a stronger and more efficient and profitable financial institution with a growing

share of the market, providing an expanding range of products and services to a growing

clientele within and outside the country, adopting best industry practices and employing

contemporary technology, and be counted among the top private banks in the country.

Mission:

Devote balanced attention to the interests and expectations of stakeholders, and in particular:

Shareholders: Achieve a consistent annual post-tax return of at least 20% on net worth.

Employees: Develop in every employee a high degree of pride and loyalty in serving the Bank.

Customers: Meet and even exceed expectation of target customers by delivering appropriate

products and services, employing as far as feasible, the single window, and 24-hour-seven-day-

week concepts, leveraging strengthening branch infrastructure , ATMs, and other alternative

distribution channels, cross selling a range of products and services to meet customer needs

varying overtime, and ensuring the highest standards of service at all times, pursue excellence in

various facets of banking.

Adopt best industry practices.

Develop, adopt, and review a well-conceived business plan for achieving realistic targets of growth,

profitability, and market share over the medium term.

Operate within a well-defined, diversified, risk profile and adopt prudent risk-management norms and

processes and effective control practices.

Employ and leverage appropriate modern information technology to: enhance the quality, speed, and

G.L.B.I.M.R Page 7

accuracy of product/service delivery; provide ‘anytime-anywhere’ banking facility; strengthen

management information and control systems and processes; improve productivity; and reduce costs.

Increase awareness of the "Federal Bank" brand among targeted customer groups through cost-effective

marketing.

Adopt a robust corporate governance code emphasizing a high degree of professionalism of the Board

and the management, and accountability and disclosure to shareholders.

Decentralise decision making with accountability for decisions made, and assign cascading profit

responsibilities to middle and junior management.

Develop a conducive and transparent work environment that fosters staff commitment, competence,

initiative, innovation, teamwork and service-orientation.

Future:

Federal bank is the fourth largest bank in India in terms of capital base and can easily boast of a

Capital Adequacy Ratio of 19.11%, one of the highest in the industry. This along with the existence in

a highly regulated environment has helped the bank to tide over the recession with minimum impact to

its financial stability.

In fact it has been expanding organically over the past few months. It believes in extending its reach to

its customers by making services available to all, 24x7. It has over 690 ATMs and 669 Branches across

India in addition to the Representative Office at Abu Dhabi that serves as a nerve centre for the NRI

customers in UAE.

We are transforming ourselves, keeping our principles in tact, into an organisation that offers service

beyond par.

Being in the service industry we are conscious of our surroundings and what happens in the society.

1931: The Federal Bank Limited (the erstwhile Travancore Federal Bank Limited) was

incorporated with an authorised capital of rupees five thousand at Nedumpuram, a place near

Tiruvalla in Central Travancore on 28/4/1931 under the Travancore Company's Act. It started

business of auction -chitty and other banking transactions connected with agriculture and

industry.The bank though successful in the earlier periods, suffered set backs and was on the

verge of liquidation.

1944: Shri K P Hormis, and his close relatives /friends obtained controlling interest in the Bank.

G.L.B.I.M.R Page 8

1945:The paid up capital was increased to Rs.71000.The Board of Directors of the Bank was

reconstituted in 1945 and fresh Articles of Association adopted. On 18-5-1945, the Regd.Office

of the Bank was shifted to Aluva and the Bank commenced business by opening its first branch

at Aluva.

1946:The Bank opened its second branch at Angamally on 26-1-1946

1947:In the Board Meeting held on 24-3-1947, it was resolved to change the name of the Bank as

"The Federal Bank Limited". The third branch of the Bank was opened at Perumbavoor on 18-4-

1947

1959:The Bank was licensed under Sec.22 of the Banking Companies Act, 1949 on 11-7-1959.

Bank floated several kuries one after another. It also introduced several new deposit schemes.

These strategies helped the Bank to grow at a greater pace

1964:The Bank embarked for a massive take over bids, which accelerated its growth horizontally

and vertically. In that process it took over the assets and liabilities of the following banks

1. The Chalakudy Public Bank Ltd., Chalakudy

2. The Cochin Union Bank Ltd., Trichur

3. The Alleppey Bank Ltd., Alleppey

1965:The St. George Union Bank Ltd. Puthenpally was merged with the Bank

1968:The Marthandom Commercial Bank Ltd. Trivandrum was amalgamated with the Bank

1970:The Bank became a Scheduled Commercial Bank in 1970, which also coincided with the

Silver Jubilee Year, since the Bank commenced its operation in Aluva

1972:Witnessed expansion beyond the home state. The Bank became an Authorised Dealer in

Foreign Exchange in 1972.International Banking Department started functioning from Mumbai

in 1973.Since then, the Bank could substantially increase its market share of the NRI business.

G.L.B.I.M.R Page 9

The International Banking Department was later shifted to Cochin in 1982 as part of

consolidation and centralisation of activities

1973 to 1977:During the period, the bank adopted a massive branch expansion and growth

oriented programmes. To reflect the bank's approach towards the Industrial finance it adopted a

new emblem -Farmer in action encircled by an industrial wheel. A few hallmarks of the period:

In the year 1973,there was a quantum jump in deposits to the tune of 67% and in advances to the

tune of 56% over that of the previous year. The deposits grew by 52% while the advances

registered an increase of 45%. Increase in Priority sector advances was by 63%.

1975:Bank opened 53 branches and in 1976 it opened 42 branches. The total number of branches

reached 276 from a position of 114 in 1973

1977:The paid up capital was increased to Rs.100 Lakhs from a position of Rs.10.66 Lakhs.

1980:Mr.V Verghese took over the reigns of the bank as Chairman and Chief Executive Officer

on 2/7/1980.Having worked long years in State Bank of Travancore with well established

traditions, systems and methods, he placed his faith in introducing time tested and well proven

methods of organisation into the Bank

1983:1. Shri. V.K.Syamasundaran after long innings in Reserve Bank of India took over as

Chairman and Chief Executive Officer of the Bank as a successor to Mr.V.Verghese on 16/7/83.

2. The foundation stone of the multi-storied Administrative Building was laid by the Founder

Shri K.P.Hormis on 26-12-83

1984:As part of the organisation redesigning recommended by National Institute of Bank

Management in November, 1984, Bank has introduced Three Tier Organisational Setup with

Head Office, Regional Offices and Branches. Agricultural Finance Department was set up in

Head Office with technically qualified personnel at central office and field level. Bank's

performance in the field of agricultural and priority sector lending improved substantially

thereafter.

G.L.B.I.M.R Page 10

1985: In tune with the NIBM recommendation, Personnel and Industrial Relations Department

was set up in July, 1985. With the active assistance of Tata Consultancy Service, bank also set up

its computer department. A WIPRO computer was installed at our Head Office on July, 1985

paving the way for computerisation of the Bank. Later, a PSI microcomputer was installed at our

International Banking Department at Cochin. The first Advanced Ledger Posting Machine

(ALPM-a Wipro banker) was installed at Br. Aluva-Bank Junction branch

1987: The long cherished dream of the Federal Family, the multi-storied administrative building

complex was inaugurated by Shri. A Ghosh, Dy. Governor, Reserve Bank of India

1988: Shri. M.P.K.Nair , a seasoned commercial banker trained in the Union Bank of India

assumed the captaincy of the Bank on 1-7-1988 as its Chairman and Chief Executive Officer

1989: Commenced Merchant Banking Operations

1992: Deposits crossed Rs.10,000 Million. Adopted profit sector banking as its slogan

1993: Roped in ICICI group as a shareholder through private placement

1994: Tapped the Capital Market with a public issue in March, 1994. The issue oversubscribed

by about 60 times. Started Leasing Business

1995: Registered 142.44% increase in PAT in FY 94-95.Bank registered a CAGR of 78.13% in

PAT during the period 1991-96. Emerged as a perfect banking partner with diverse products,

global reach and focus on automation and HRM. Deposits cross Rs.35,000 Million

1996: Shri. K Nandan, a veteran banker from State Bank of India took the stewardship on 1-1-

1996: The bank had steady growth. The bank's business crossed Rs.100000 Million mark as on

31/3/98 for the first time

1997: Bank's first ATM was inaugurated at Ernakulam North on 27-02-97

1999:1. On 1-1-1999, Shri. K.P.Padmakumar, the Executive Director of the Bank took over the

baton from Shri. K Nandan. He thus became the first Chairman and Chief Executive Officer of

the bank risen from the rank and file

G.L.B.I.M.R Page 11

2. Bank's 400th branch was inaugurated at Calcutta- Shakespeare Sarani on 19.2.1999. The total

business of the bank exceeded Rs.110000 Million as on 31/03/99

2000:1. On 24.1.2000 Bank started Any Where Banking at Bangalore connecting all branches

located in the Bangalore metro

2. Launched Depository Services in association with NSDL on 24.2.2000

3. The Bank has commenced Internet Banking 'FedNet' on 28th April 2000 with software support

from Infosys Technologies Ltd

4. Federal Millennium CD is released on 18.9.2000

2001:In March 2001, Wide Area Network was launched connecting Regional Offices at

Mumbai, Bangalore, Chennai, Ernakulam and Chennai F & I with Head Office

2002:1. All the 412 branches of the Bank were fully computerised (using FedSoft) as on

31.03.2002

2. The Installation of switch for networking all the ATMs, already installed/proposed to be

installed, started from 17/08/2002

3. Dec 10 2002 Federal Bank introduces FedAlerts, and FedMobile, another first of its kind

service among traditional banks in India. Real time transaction alerts across the globe, and

customisable options make the service unique

2003: International Debit Cards launched

January 2004: Federal Bank becomes the first traditional bank to network all its branches and

attain 100% connectivity

February 2004: Co-branded credit cards launched in association with ICICI Bank

October 2004: RTGS is enabled in all branches of the Bank and becomes the first bank in India

to implement RTGS facility in all the branches. Online Railway Reservation through FedNet

launched. The First Kiosk inaugurated at the Marine Drive ( Kochi) branch

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December 2004:1. First Bank to launch automated telephone bill payment through Interactive

Voice Response System (IVR). Bank launched an innovative product 'Fed-e-Pay' for automated

payment of utility Bills

2. The Bank issued Bonus shares in the ratio of 2:1

February 2005: Federal Bank is awarded for Best Use of Information Technology in Retail

Banking by IBA and Infosys. The runner up status reveals the strength and innovation in

technology initiatives

May 2005: Shri.M Venugopalan joined the Bank as Chairman and Chief Executive Officer Prior

to joining the Bank, he was the Chairman and Managing Director of Bank of India, one of the

leading public sector banks in India, from August 2003 to April 2005, and was an executive

director of the Union Bank of India immediately prior to joining the Bank of India

June 2005: Federal Bank in association with AMRITA super specialty hospital launches

Fed+Amrita, an innovative online system for fixing medical consultation, Health check up, and

inpatient payments from anywhere

January 2006: Federal Bank becomes the first traditional bank to successfully issue GDR.

While the issue of 18 million Global Depository Receipts realised $71.46 million, the green shoe

option of 2 million GDR was also fully subscribed, bringing in a total of $80 million to the bank.

The GDR, each representing an underlying equity share, were priced at $3.97 each — working

out to approximately Rs.175 per share. The issue was subscribed by major banks and Financial

Institutions across the globe.

February 2006: Federal Bank wins two prestigious awards for BEST USE OF IT IN RETAIL

BANKING & BEST PAYMENTS INITATIVE from IBA and TFCI. This is the second

consecutive time that the Bank has won the award for best use of IT in Retail Banking. More

details available here

September 2006:1. Amalgamation of Ganesh Bank of Kurundwad with Federal Bank

2. Bank’s Total No. of Branches crossed 500

November 2006: Bank entered into Life Insurance Joint Venture with IDBI & FORTIS

G.L.B.I.M.R Page 13

January 2007: Bank won the award under category “Best Clearing & Settlement System” in the

Banking Technology Awards 2006 instituted by IBA, Infosys & TFCI

Mar 2007: A full fledged Data Center was set up by the Bank

June 2007: Bank formed a Centralized Processing Centre for centralizing the account opening

process to make it quick and efficient.

September 2007:All branches/offices of the Bank were migrated to Centralised Banking

Solution (CBS), Finacle

January 2008:1. Successfully completed 1:1 Rights Issue

2. Opened first overseas Representative Office at Abu Dhabi, UAE.

March 2008:1. Bank’s Total No. of Branches crossed 600

2. The Asian Banker, together with the Technology Advisory Council of The Asian Banker

Summit, has affirmed Federal Bank as sole recipient of the Best Core Banking Project Award

2007

September 2008: Bank started providing Online Stock Trading facility to the customers in

association with M/s Geojit Financial Services

January 2009: Bank won the award under category 'Best Customer Relationship Achievement'

in the Banking Technology awards 2008 instituted by IBA, Infosys & TFCI for the outstanding

achievements in technology infusion and dissemination. The Bank was winning IBA-TFCI

awards for the fourth time

March 2009:1. Total Business of the Bank crossed Rs.50,000/- Crores

2. Bank becomes BASEL-II compliant

August 2009: Bank has taken an important step in customer Service by dedicating 24 X 7

Contact Center to the customers. Started offering NEFT/RTGS facility through Internet Banking.

Bank started offering Telebanking facility through a Toll-free number

G.L.B.I.M.R Page 14

PRODUCTS AND SERVICES OF FEDERAL BANK LIMITED:

Federal Bank launched its International Debit Cards in the year 2004. The same year, it also

provided Real Time Gross Settlement (RTGS) facility in all the branches, followed by Online

Railway Reservation (with the first kiosk at the Marine Drive branch of Kochi). One year later,

the bank launched Fed+Amrita, an online system for fixing medical consultation, health check

up, and in-patient payments, from anywhere. In 2006, Federal Bank issued GDRs, becoming the

first traditional bank to do so.

Federal Bank also provides the following services:

Advances

BSNL Bill Payment

Cash Management Services

Cash -On- Line Express Cash Remittance

Credit Cards

Depository Services

Easy Pay-On-line Fee Payment System

E-shopping Payment Gateway

Export Credit Insurance Products in association with ECGC

Express Remittance Facility from Abroad - FEDFAST

General Insurance Products in association with United India Insurance

Life Insurance Products, in association with ICICI Prudential

Lock Box Service for NRI's in the US

Merchant Banking Services

NRI Services

Online Kiosks for Customers

Online LIC Insurance Payment

Online Railway Reservation System

Structured Derivative Products

G.L.B.I.M.R Page 15

The Firsts

First traditional bank in India to launch Internet Banking Service (FedNet)

First traditional bank in India to have all its branches automated

First and the only traditional bank in India to have all its branches inter-connected

First bank to launch Electronic Telephone Bill Payment in India

First and only one of the older banks with e-shopping payment gateway

First traditional bank in India introduce Mobile Alerts and Mobile Banking service

First bank in India to implement an Express Remittance Facility from Abroad

First bank in India to provide RTGS facility in all its branches

G.L.B.I.M.R Page 16

CHAPTER-2

OBJECTIVE OF THE STUDY

Nowadays, everyone has become increasingly dependent upon credit, and therefore it's essential

to understand what is a credit rating, why it is important, and how can we maintain a good credit

rating. Most people finance their homes with mortgages and pay for their cars with loans. Young

people often obtain loans to pay for college. And, of course, lots of people make purchases with

credit cards.You can't expect to receive credit as a matter of course, however. You must apply

for it. And just as you would hesitate to lend money to a stranger, banks, retailers, or finance

companies will not grant you credit without knowing something about you.

The main objective of the study of credit rating system is-

To understand about the credit rating system at Federal Bank Ltd.

To know about various advances that Federal Bank Ltd. disburse to its customer.

To determine the level of risk attached with an investment.

To know about the various ratings policy used by the federal bank ltd.

To know about the various rating agencies in india.

G.L.B.I.M.R Page 17

CHAPTER-2

CREDIT RATING SYSTEM

A credit rating assesses the credit worthiness of an individual, corporation, or even a country. It

is an evaluation made by credit bureaus of a borrower’s overall credit history. Credit ratings are

calculated from financial history and current assets and liabilities. Typically, a credit rating tells

a lender or investor the probability of the subject being able to pay back a loan. However, in

recent years, credit ratings have also been used to adjust insurance premiums, determine

employment eligibility, and establish the amount of a utility or leasing deposit. A poor credit

rating indicates a high risk of defaulting on a loan, and thus leads to high interest rates or the

refusal of a loan by the creditor.

Importance of credit ratings:-

Crediting a watch list

Value investing

Smart investing

Learn about market

Developing a trading plan

Maximize your profits

Choosing investment software

Trading opportunities

When to sell?

Finding a broker

Investment clubs

Gearing into a SMSF

Stock selection

Biotech market

Private equity investing

Protected equity loans

Conservatives option strategies

G.L.B.I.M.R Page 18

Evaluating new floats

Tax implication

Investing overseas

Corporate governance

1. Trade cancellation policy

OBJECTIVES OF CREDIT RATING:

The main objective is to provide superior and low cost information to investor for taking a

decision regarding risk return trade off, but it also helps to market participants in the following

ways :-

Improve a healthy discipline on borrowers

Lends greater credence to financial and other representation,

Facilitates formulation of public guidelines on institutional investment

Helps merchant bankers, brokers, regulatory authorities etc. in discharging their functions

related to debt issues,

Encourages greater information disclosure, better accounting standard and improve

financial information (helps investors protection),

May reduce interest cost for highly rated companys,

Acts as a market tool

CREDIT RATING AGENCIES IN INDIA

1. Credit Rating Information Services India limited(CRISIL)

2. Investment Information and Credit Rating Agency of India(ICRA)

3. Credit Analysis and Research(CARE)

4. Duffs Phelps Credit Rating Pvt. Ltd. (DCR India) and

5. Onicra Credit Rating Agency of India Ltd. is an established player in individual credit

assesment and scoring services space in the Indian market.

G.L.B.I.M.R Page 19

CREDIT RATING AND INFORMATION SERVICES OF INDIA LTD. (CRISIL) is

India’s leading Ratings, Research, Risk and Policy Advisory Company. CRISIL’s majority

shareholder is standard &poor’s, a division of The MCGRAW-HILL Companies and the world's

foremost provider of financial market intelligence.

CRISIL offers domestic and international customers with independent information, opinions and

solutions related to credit ratings and risk assessment; energy, infrastructure and corporate

advisory; research on India’s economy, industries and companies; global equity research; fund

services; and risk management.

We began our journey as India's first rating agency. Today, we are a diversified global analytical

platform with leadership positions in the ratings, research and advisory domains. Along the way,

our growth has been closely intertwined with India's development milestones.

We started in 1987 as a credit rating agency, at a time when lending rates in India were fixed,

and there was, therefore, little demand for credit ratings. We firmly established ourselves as the

country's leading rating agency, respected for our fiercely independent, highly credible, and

analytically rigorous views. Shouldering the mantle of a pioneer and a market leader, we

facilitated the development of India's credit market and built investor confidence in our risk

assessment capabilities.

India's transformation into a market-led economy greatly increased its need for capital, and

required extensive reforms and institution building. Accordingly, we diversified into the

infrastructure advisory and business research domains, and quickly built up a reputation for

independent, reliable and incisive information, research, models and advisory services. Today,

our services are key inputs in informed decision-making and the shaping of public policy in

India.

With increasing globalization, we also focused on making our income streams more global. We

acquired Irevna, a pioneer in the investment research outsourcing space; Irevna has since been

G.L.B.I.M.R Page 20

voted no.1in high-end investment research and analytics outsourcing by the US-based Brown

and Wilson Group two years in a row in 2006 and 2007. We have a thriving business that meets

increasing global demand for better understanding of the Indian business environment, through

the services offered by our research and advisory groups.

Guided by our core values of integrity, independence, innovation, analytical rigor and

commitment, we are proud to have built a globally-acknowledged institution of repute over these

20 years. We have facilitated the setting up of credit rating agencies in several countries around

the world. Our association and integration with standard & poor’s has further enhanced our

capabilities and opened up newer vistas of opportunity, for our businesses and people.

The macro environment trends, both in India and globally, present myriad business

opportunities. At a youthful 20, we are ideally positioned to service the needs of our expanding

client base by maintaining our focus on our mission:

» Making markets function better

» Helping clients manage and mitigate business and financial risks

» Shaping public policy

CRISIL GROUP businesses:

» Ratings

» Research

» Advisory

G.L.B.I.M.R Page 21

http://www.crisil.com/about-crisil/crisil-businesses.htm#advisory

http://www.crisil.com/about-crisil/crisil-businesses.htm#research

http://www.crisil.com/about-crisil/crisil-businesses.htm#ratings

CRISIL Ratings

CRISIL Ratings is the only ratings agency in India to operate on the basis

of sectoral specialization. It reflects our sharpness of analysis, the

responsiveness of the process and the large-scale dissemination of opinion.

CRISIL Ratings plays a leading role in the development of the debt

markets in India.

The Rating Criteria & Product Development Centre, responsible for policy research, new product

development and ratings' quality assurance, has developed new ratings methodologies for debt

instruments and innovative structures across sectors.

CRISIL Ratings provides technical know-how to clients worldwide. We have helped set up

ratings agencies in Malaysia (RAM), Israel (MAALOT) and in the Caribbean.

CRISIL Research

CRISIL Research is India's largest independent

integrated research house providing accurate and reliable

research, analysis and forecasts on the Indian economy,

industries and companies to over 500 Indian and

international clients across financial, corporate,

consulting and public sectors.

CRISIL Research leverages on its unique, integrated research platform and capabilities

spanning the entire economy-industry-company spectrum to deliver superior perspectives and

insights to its clients, through both, subscription products and customized solutions. CRISIL

Research also offers consistent, high quality financial data analysis to users within and outside

the CRISIL group, enhancing the efficacy of the conventional financial analysis frameworks

G.L.B.I.M.R Page 22

adopted in the marketplace

CRISIL FUND SERVICES :

CRISIL Fund Services is India's leading provider of fund evaluation

services and risk solutions to the mutual fund industry.

Through innovative analytics, benchmarks and analytical tools, CRISIL

Fund Services plays a significant role in shaping investor confidence and

facilitating the introduction of best practices in the mutual fund industry.

Widely reputed as the industry standard, CRISIL Fund Services is the official provider of

valuation tools and market benchmarks.

THE CENTRE FOR ECONOMIC RESEARCH

The Centre for Economic Research is uniquely positioned to provide benchmarks and analyses

for India's policy and business decision makers.

Manned by a team of senior economists, the Centre applies economic principles to live business

applications, creating conceptual and contextual linkages that are unique to CRISIL.

The Centre also works with other CRISIL businesses, contributing to both the range and depth of

products, services and consulting assignments that CRISIL offers.

INVESTMENT RESEARCH OUTSOURCING

Irevna

CRISIL added equity research to its wide canvas of work, by acquiring

Irevna, a leading global equity research and analytics company.

G.L.B.I.M.R Page 23

http://www.irevna.com/

http://www.crisil.com/about-crisil/crisil-businesses.htm#top

Irevna, a division of CRISIL, provides high-end customized equity research and analytics, and

knowledge process outsourcing, to the world's leading financial institutions, investment banks,

private equity firms and consulting companies, helping them achieve sustainable competitive

advantage.

Irevna offers investment research services to the world's leading investment banks and financial

institutions. Founded in 2001, Irevna pioneered the 'outsourced research' concept, where the firm

helps large financial institutions to carry out investment research, at a time when accepted

wisdom did not consider this possible.

POLICY, REGULATORY AND TRANSACTION ADVISORY

CRISIL INFRASTRUCTURE ADVISORY

Our Infrastructure Advisory enhances CRISIL's franchise in the areas of

policy-making and economic development. Our spectrum of activities

includes catalyzing economic development through creation of appropriate

policy frameworks, sector reforms, regulatory support, project structuring

and global competitive bid process management for large and complex

projects.

CRISIL Infrastructure Advisory blends the best global practices with analytical excellence and a

deep understanding of the local environment to provide policy, regulatory and transaction level

advice to governments and leading organizations across sectors.

We work closely with our clients to facilitate an environment for public-private partnerships and

ensure the success of projects undertaken.

INVESTMENT AND RISK ADVISORY

Investment and Risk Management Services

G.L.B.I.M.R Page 24

CRISIL Risk Solutions business provides integrated risk management

solutions and advice to Banks and Corporate by leveraging the experience

and skills of CRISIL in the areas of credit and market risk.

Taking cognizance of the market needs for integrated solutions that

quantify and manage complex risks, CRISIL Risk Solutions uses cutting-

edge research and

methodologies. Also, the Group brings together the experience of all business teams to offer

modular or integrated solutions and advisory services that are customized to meet client needs.

Credit rating is useful for the determination of the risk---

A credit rating is important, if not the most important measure o f the financial health of a

company. It gives an indication of how the company is performing in absolute terms and is also

makes it possible to compare a company credit worthiness against other company’s in similar

markets or industries worldwide. It gives indication of how a company in similar markets or

industries company expected to perform in the future and whether it is well placed to repay its

debts downgrade can see a company share price tumble as markets are particularly sensitive to

news of his nature a downgrade can also result in higher costs of capital lowering profitability

which can also lower the share price.

Credit ratings agency uses different alphanumeric and alphanumeric scales to rate companies

(such as AAA, Aaa for the highest rated companies,BB+,Ba1,for medium risk and D for the

lowest ).

However, it is relatively easy to compare the ratings of different agencies to see if there is any

difference in the assessment of the same company.

In addition, most ratings include an outlook forecast such as ‘stable’, positive, or negative giving

a signal as to which direction the credit ratings is likely to move in the future.

G.L.B.I.M.R Page 25

Essentially, there are two kinds of credit ratings. The more traditional rating agencies put out

what are known as qualitative ratings- these ratings are essentially opinions about a company’s

financial health by analysts who use a combination of financial data, company interviews and

ither market information to determine a rating. These ratings are more subject to bias as they

involve an analyst’s opinion in their determination- in the Enron debacle traditional ratings

agencies and investment houses came under intense scrutiny and criticism for failing to spot the

problems at the energy giant, with some even recommending the company as good investment

just months prior to its collapse.

The qualitative ratings market is dominated by only few major global player who are entrenched

with very strong brand names.

CREDIT RATING BY FEDERAL BANK LIMITED

Credit rating of Banks deposits and Debt instrument:

The rating factors in the long standing track record of the bank, high level of capitalization added

by the successful GDR issue and internal accruals, strong solvency position, higher profitability

and improving risk management systems and technology orientation.

Shorty term deposits: P1 + by CRISIL:

This rating ‘p’ indicates that the degree of safety regarding timely payment on the instrument is

very strong.

The “+” (plus) sign for ratings reflects a comparatively higher standing within the category.

Certificate of Deposits: P1+ by CRISIL

The Certificate of deposit issued by the bank are rated P1 + by CRISIL.

This rating ‘P’ indicates that degree of safety regarding timely payment on the instrument is

very strong.

The ‘+’ (plus) sign for ratings reflect a comparatively higher standing within the category.

G.L.B.I.M.R Page 26

Long term debt- AA- (ind) by FITCH

‘AA’ national ratings denote a comparatively low credit risk relative to other issuers or issues in

the country. The credit risks inherent in these financial commitments differ only slightly from the

country’s highest rated issuers or issues.

The suffix ‘(ind)’ refers to national ratings assigned by Fitch India.

CUSTOMER RELATIONS:

Ever since its inception, Federal bank has constantly being striving to make your banking

experience as enjoyable and comprehensive as possible. Even while embracing the latest in

technology to offer you state of the art services like ATM, Internet banking , Mobile banking and

any branch banking , we at federal bank have always take utmost care to retain the vital element

touch in our relationship with customers. Be in 24*7 phone banking service; or the opening of

representative office at Abu Dhabi , which turn out to be a boon to the large number of NRIs in

the middle east; or the implementation of the modern concept of customer relationship

management(CRM) and priority banking with dedicated relationship managers; or the ambitious

branch expansion plan undertaken by the bank ; or the recent launch of the innovative facility of

online account opening; the business initiative of federal bank has consistently been customer

oriented. Coupled with this, our dedicated and customer friendly staff ensures you a banking

experience that is unmatched.

FINANCIAL STANDING:

Financial risk are measured by taking into consideration the borrower’s liquidity, financial

strength, loan serving capability and the ability of the unit in generating optimal returns from the

capital employed

Here, the financial ratio of the firm and its operating efficiency are evaluated and analyzed for

the rating. Some of the factors are discussed here which may vary from companies to companies

depending on the type of the industry and its operations.

G.L.B.I.M.R Page 27

Current ratio is very important to judge the liquidity of the borrower. Low ratio gives poor

signal for the company, thus making it to get less mark in rating. But at the same time, it also

depends on type of industry & business.

Return on capital employed is an indicator of managerial effectiveness and method of earning

by the borrower. Higher ratio is good for the company. It gives the capital convertibility

capability of the firm. it is the ratio between profit before interest and tax to the total capital.

This ratio should be as a general rule of thumb more than the interest rate on the long term

borrowed capital.

PAT/net sales –indicated the ultimate accretion to the net worth. It shows the strength and

potential for the future growth.

Total liabilities/tangible net worth – determines the overall financial strength of the

company .gearing over 4 times should be regarded as critical risk. The ideal risk, however,

differs from industry to industry which needs to be kept in mind while appraising.

Interest service coverage ratio –in volatile markets, it is essential to estimate the number of

times the gross earning cover the interest payable. It is measure of comfort that the profitability

of the unit provides to the lender.

Debt services coverage ratio—it gives the number of times earning of the firm cover payment of

interest and repayment of the principal. Basically it tells us the capacity of a firm to pay loan out

of its profit. It indicates the margin of safety which exists for the bank and is a very important

parameter in case of term loans.

Management parameters:

Here the managerial capability of the promoter with the commitment to the company the data is

collected from both past and present records. In brief it judges the quality and goodwill of the

company.

Bank evaluates the policies and measures for the management of inventory and receivables on

monthly basis. The transparency in accounting statements is also judged from different angle of

G.L.B.I.M.R Page 28

the firm to have a fair picture in the bank’s point of view. The firm transaction with bank, if it is

an existing account is also analyzed to draw a clear picture of the borrower with the bank.

Firm standings:

Various aspects of the firm is analyzed under this heading. Like the age of the firm which

determines its experiences in the industry, reputation with customers and suppliers, the firms

credit track record. Technology also plays an important role over here. It shows whether the firm

is also improving according to the whole industry or not. The firm’s ability to raise funds, its

reputation with bank, supplier quality and concentration customer quality and concentration are

also analyzed. Accordingly scores are given based on the parameters.

Customer dealing with BANK/compliance:

The behavior of the customer as reflected in the books of Bank to be taken into account as a

likely behavior in the future and hence they are factored into. It is desirable to minimize

subjectivity while allocating marks under this head.

In case of new borrowers, item may ignore and accordingly marks allotted there of needs to be

deducted from the total assigned score to work percentage then accordingly allot appropriate

rating.

Score obtained and rating to be assigned

Based on the scores, various ratings are given to the project for example:

Score obtained Ratings to be assigned

80% &above AAA

65% to 79% AA

50% to 64% A

Below B

G.L.B.I.M.R Page 29

Description of the ratings:

AAA

Quality of lending is considered to be high and risk is at minimal. Probability of default and

perceived loan loss is minimal. Historically, it is recorded that the borrower is maintaining

liquidity and financial strength consistently for the last 3 to 4 years. Business is having enough

potential to service the debt and interest there on. Management is known for the sharing the

factual position of business happenings with bank honoring their commitments in time. Risk

mitigators are sound enough to safe guard bank interest in the unlikely event of default.

AA

Well established borrowers with the financial liquidity, strength and stability. The probability of

default and risk perception among this group of clients is a little higher than the of AAA

borrowers. They share business results freely with the bank and are to honor to their

commitments in a reasonable time. Risk mitigators ‘value is lower than on case of AAA

customer.

A

This group belongs to the lower end quality range. Their financial liquidity, financial strength

and stability are relatively weak. Lending to such borrowers is, no doubt, sound but temporary

disruptions. More likely to be affected by fluctuation in business cycles and thereby may look for

intermittent support by way of additional funds etc. they demand for constant monitoring.

B

The borrowers are average liquidity, financial strengths and stability. Unless they are with bank

for long with satisfactory dealings it cannot be said they are risk free.

LIMITATIONS OF MODELS:

The existing model at that time was evaluated by risk management consultants as a part of

setting up credit risk management system. And it was found out that those models have some

limitations like:-

G.L.B.I.M.R Page 30

Those models were mainly judgmental models wherein the parameters & weight ages

were fixed by the sharing of experience of staff involved in the model designing.

Number of rating was four with one upgrade (AAA to prime). There should be at least 6

performing & 2 non-performing risk grades, to ensure granularity.

The predictive power of models needed to be improved.

The risk score model didn’t take into account qualitative factors crucial for proper credit

evaluation for small accounts like

i. Assessment of management skills & reputation

ii. Business condition

In small business, experience suggests that quality of financial information may not be up

to a desired level and this needed to be factored into the model.

Thus, in 2005, as a part of the risk management consultancy some rating models have been

developed which have been demonstrated better predictive power. These credit risk models have

been developed on the basis of bank’s own data and have also been validated on bank’s data. The

rating models have been classified according to the limits sanctioned to the borrower (both

fund & non-fund based taken together).

i. Large corporate market

ii. Mid segment model ( fund/non-fund based limits of Rest. 1 crore & above but not

exceeding Rs 5 crore & turnover below Rs 50 crores)

iii. SBS (including SSI up to the limits specified) Model (fund/non-fund based limits of Rest.

10 lacs & above but not exceeding Rest. 1 crore.

LARGE CORPORATE MODEL:

It is a statistical model (using multiple discriminant analysis) developed using bank’s own data.

It was affected from 01.

From 01.11.2006.

G.L.B.I.M.R Page 31

This model is applicable to the following categories of borrowers-

All domestic exposures for which credit limit (fund/non-fund based) is Rs 5 crore &

above or turnover of the borrower is Rs 50 crore or above.

ECBs (External commercial borrowings and)

Syndicate loans.

The following advantages are not covered by the model

Certain agriculture/ other priority sector advances.

Advances against deposits/NSC/LIC policies/relief bonds etc.

Advances to stock brokers ( only for stock exchange branch)

PARAMETERS OF THE MODEL:

The model considers both quantitative (financial) & qualitative parameters.

Quantitative parameters like generic ratios which give financial information, while qualitative

parameters like management risk. Firm standing & industry risk are considered in this model.

QUANTITATIVE PARAMETERS:

Generic ratio Parameter Remarks

Leverage Tangible net worth/

total outside

liabilities

(TNW/TOL)

TNW: Equity/preference capital + free reserves + P&L

Ac- Misc. Expenditure (Intangible assets) + unsecured

loans (long-term unsecured loans from promoters)

Liquidity Net working

capital/total assets

Long-term

profitability

Retained

earnings/total

assets

Long –term profitability (measures the extend of

financing total assets through internal accruals. A higher

ratio shows a higher level of historical profitability &

greater financial resilience in the face of an economic

downtown)

profitability Earnings before tax

G.L.B.I.M.R Page 32

&interest/ total

assets (EBIT/TA)

Efficiency Sales/ Total assets The ratio (commonly known as asset turnover ratio)

shows how efficiently the firm uses its assets to generate

sales. Higher levels indicate greater efficiency)

QUALITATIVE PARAMETERS:

Parameters

1. Management risks

A. Management character B. Management capacity

a. Integrity (willingness to pay) a. key managerial persons (promoters & key

persons) competence

b.Diversion of funds b.Key managerial persons (promoters & key

persons) Business experience

c. Business environment c. Industrial/ employee relations

d. payment record of group cos. With the bank. d. Internal control

e. corporate governance e. Business planning

f. financial strength/ Group support

g. Intra company/Group conflicts

C. Management succession

a. Succession planning

b. succession preparation

II. Firm standing III. Industry risk

a. Age of firm a. Industry phase

b. Reputation with the customers & suppliers b. Competition impact on GP margin

c. Competitive position of firms c. Regulatory issues/ fiscal policy risk

d. Technology d. Technology dependence.

e. Customer quality & concentration e. Environmental concern

f. supplier quality & concentration f. Demand supply situation

G.L.B.I.M.R Page 33

g. Ability to raise funds (next 12 months)

h. reputation with bank

i.Business loan history

j. credit track record

The values of the quantitative & qualitative parameters are combined to arrive at a discriminant

score which is mapped to the different risk grades (on the basis of relationship established

through discriminate analysis).

The model consists of 10 borrowers risk grades from LC1 to LC10. The risk grades represent as

follows

LC1 & LC2 Good quality credit

LC3 & up to LC5 No immediate concern

LC6 Require intensive monitoring

LC7 & up to LC10 NPA/ could turn NPA over the midterm term

The minimum grade for considering sanction of advance (including additional limits) to a

borrower other than PSU is LC5. For PSU the minimum grade for considering sanction is LC7.

As these borrower risk grades will be used as a basis for calculating probability of default, which

will be an input of capital charge calculation under the advanced approaches of Basel II, It is

very important that all eligible borrowers be rated. The credit rating grades will also represent the

risk of the asset. The borrower risk grade is to be input as credit rating of the borrower in the

CCIS returns.

Adjusted borrower grade:

For existing accounts the account operation will impact the Borrower risk grade & the adjusted

borrower grade will be arrived at by upgrading/downgrading the borrower risk grade based on

the monitoring parameters. While borrower risk grade will be used for entry level as mentioned

G.L.B.I.M.R Page 34

above & for arriving at the probability of default, the adjusted borrower grade will be considered

for monitoring.

Various monitoring factors proposed to be considered for adjusted borrower grade are:

Number of days delay in receipt of

Installment’s (principal/equated)

Interest

Submission of progress reports/stock statements

Compliance with sanctioned/disbursement conditions

Key employee turnover

Conduct of the account

Comments during site visits

Number of time rescheduling/relief obtained from lending institutions

The spreads for fixing rate of interest for the risk grades will be as follows

Grade Quality Representation Spread applicable

LC1 to LC2 Good quality credit As applicable to existing ‘AAA’

accounts

LC3 to LC4 No immediate concern As applicable to existing ‘AA’

accounts

LC5 No immediate concern As applicable to existing ‘A’

accounts

LC1 to LC2 Require intensive monitoring As applicable to existing ‘A’

accounts

LC1 to LC2 NPA/couls turn NPA over the

medium term

As applicable to existing ‘B’ rated

accounts

SBS Model:

G.L.B.I.M.R Page 35

This is a scoring model with immediate effect. SBS model is applicable to all borrowers with

aggregate limits less than Rs1 crore including the following:

Small business & services (SBS) borrowers who are involved in trade & services &

manufacturing with aggregate limits between Rs 10 lacs to less than Rest 1 crore

Small Scale Industries (SSI) accounts with aggregate limits between rest 10 lakhs & less

than 1 crore

The model doesn’t cover the following advances:

All advances up to Rs 10 lacs (fund based + non-fund based)

Certain agriculture/other priority sector advances.

Advances against deposits/NSC/LIC policies/Relief bonds etc.

All staff loans

All other personal loans

Education loans

Final risk score is calculated from financial, management & business score & is risk graded on a

1 to 10 scale as specified in the score sheet attached.

SBS1 to SBS 3 Good quality credit

SBS 4 to SBS 6 No immediate concern

SBS 7 Require intensive monitoring

SBS 8 to SBS 10 NPA/ could turn NPA over the medium term

The following risk grades are to be treated as minimum grades for considering sanction of

advance to a borrower-

For SBS obligors, an entry grade of SBS 5.5 (total score of 196)

For SSI obligors, an entry grade of SBS 5.0 (total score of 180)

The spreads for fixing rate of interest for the risk grades will be as follows:

Grade Quality Representation Spread applicable

SBS 1 to SBS 3 Good quality credit As applicable to existing

G.L.B.I.M.R Page 36

‘AAA’ accounts

SBS 4 to SBS 6 No immediate concern As applicable to existing ‘AA’

accounts

SBS 7 Require intensive monitoring As applicable to existing ‘A’

accounts

SBS 8 to SBS 10 NPA/could turn NPA over the

medium term

As applicable to existing ‘B’

accounts

SBS model (Accounts less than 1 crore):

This model uses three components i.e. financial, management, industry parameter which is

giving different weightings (given below) & converted into a risk score by multiplying the factor

by respective weight assigned to that factor.

Components Weight age

Financial risk score 24%

Management risk score 52%

Business risk score 24%

The aggregate score is then used to arrive at the final grade of the borrower.

A. Financial risk score

Sales growth

Profitability: PBDITA/sales

Leverage:TOL/TNE

Liquidity: Current ratio

Coverage

I. DSCR

II. Interest coverage

Each parameter is filled in by considering 1 as the best tier & 4 as the worst tier. Each financial

factor is given a weight age of 4%.

G.L.B.I.M.R Page 37

B.Management risk score:

Management factors Sub factors weight age

Management character Diversion of funds 4

Integrity 4

Business environment 4

Management capacity Financial strength 4

Competence 2

Business expertise 2

Internal control 2

Employee quality 2

Management succession Successor identification 4

Successor preparedness 4

Management reputation Business loan history 4

Credit track record 4

Firm’s age 8

Reputation with customer &

supplier

4

52

C.Business risk score:

Business factors weight age

Customer quality & concentration 4

Supplier quality & concentration 4

Impact of competition on GP margins 4

Sales trend 4

Regulatory/ fiscal risk 4

Technology dependence (product) 2

Environmental impact (product) 2

24

G.L.B.I.M.R Page 38

Parameters Measure Assigned

Score

I. Financial Risk Based on latest Balance Sheet(audited/provisional)

1. Sales Growth 15% & above increase over previous

year

1

5% & above but below 15% increase

over previous year

2


over previous year

3

Negative over previous year 4

2. Profitability

(PBDITA/SALES)*100

25% & above increase over the

previous year

1


over previous year

2


over previous year

3

Negative over previous year 4

3. Liquidity

(Current ratio)

1.33 & above 1

Less than 1.33 but more than 1.25 2

1.24 to 1.1 3

Less than 1.1 4

4. leverage

( TOL/ TNW)

0 above but below 1 1

1 & above but below 3 2

3 & above but below 4 3

4 & above 4

G.L.B.I.M.R Page 39

5. Coverage

Debt service coverage

ratio

2 & above 1

1.5 & above but below 2 2

1 & above but below 1.5 3

-1 & above but below 1. 4

Interest Service Coverage

Ratio

2 & above 1

1.5 & above but below 2 2

1 & above but below 1.5 3

-1 & above but below 1. 4

G.L.B.I.M.R Page 40

(i)Diversion of funds There is no possibility of diversion of

funds & there are no group companies.

1

Diversion of funds is unlikely, though

there are group entities, marginal

amounts may be divided for personal

use.

2

Diversion of funds is likely on a

regular basis to group entities & for

personal use.

3

The borrowing entity is only a front for

diversion to the rest of the group or for

personal use.

4

SUB TOTAL OF FINANCIAL RISK SCORE (A1TO A5 ABOVE)

(B) Management risk score

(1) Management character

G.L.B.I.M.R Page 41

G.L.B.I.M.R Page 42

G.L.B.I.M.R Page 43

(ii) Integrity Well established member of the

community whose integrity is

unquestionable.

1

Generally respected by peers & by the

community.

2

Does not always act in an upright &

honest manner.

3

Should repayment capacity be

impaired, management may not

cooperate with lender or no

information could be obtained about

management’s integrity.

4

(iii) Business commitment Promoter is highly in this business, has

long standing exposure in the business

contributes significantly to his overall

business environment.

1

Promoter is fairly committed to this

business but has substantial investment

in other business.

2

This business occupies only small

portion of his time & investment & his

most significant business interest lies

elsewhere.

3

No involvement by the promoter,

business merely a legacy or promoter

diversifying into other areas where his

involvement will increase in future or

unable to gauge commitment.

4

B1 SUB TOTAL MNAGEMENT CHARACTER SCORE

(2)Management capacity

(i) Financial strength Financial very strong : high net worth

& flourishing group entities (if any)

1

Good financial strength: minor group

entity may not be doing well or short

term personal problems.

2

Financial strength is ok: however poor

group entity could the borrowing

entity.

3

Very poor financials Or financial

strength couldn’t be ascertained or

widely differing opinions obtained.

4

(ii) Competence Management is very good: person is

well organized & knowledgeable about

the company & the industries in which

he operates.

1

Person has reasonable management

skills but weakness in one or two areas

is evident. Tasks are performed

satisfactory.

2

Person exhibits limited managerial

skills. Individual doesn’t have a

complete understanding of a business.

3

Person exhibits a total lack of skills.

Decisions are illogical & loan

repayment could be at risk.

4

G.L.B.I.M.R Page 44

G.L.B.I.M.R Page 45

(i) Business experience Several years of sound business

experience in the same line &

extremely successfully.

1

Fairly long experience in the same line

of business with limited success.

2

Fair experience but related line of

business

3

Very short or no experience in any

business.

4

(ii) Internal controls Internal control is fairly good & is

dependent on the owner’s long

standing relationship with his

employees.

1

Internal control is not very light &

employees have too much discretion

2

Internal control is totally dependent on

the owner’s presence in the business

location & his personal supervision.

3

No internal control at all the owner

does not have a clue to what is

happening.

4

(iii) Employee quality Motivated & loyal employees who

have a sound understanding of the

business.

1

Employees are loyal but don’t have

much experience.

2

Employees are not motivated & don’t

contribute their best.

3

Employees are neither motivated nor

competent.

4

G.L.B.I.M.R Page 46

B2 SUB TOTAL OF MANAGEMENT CAPACITY SCORE

(2)Management succession

G.L.B.I.M.R Page 47

B3 SUB TOTAL OF MANAGEMENT SUCCESSION SCORE (3(i) TO

G.L.B.I.M.R Page 48

(i) Succession identification Well defined succession plan in place,

business not dependent in one person.

1

Business dependent on one person at

present.

2

Succession is not addressed adequately

& hence dealing with a change in the

management team could adversely

affect the company’s performance

however the damages can be obtained.

3

Succession is not addressed & in the

event of incapacitation of the key

person, the business would suffer

financial setbacks.

4

(ii) Successor preparedness Successors have far more than the

necessary skills, experience &

knowledge about the business.

1

Successors have adequate skills,

experience & knowledge.

2

They have some skills. But a lot of

learning adjustment needed to be fully

capable of replacing current

management.

3

Successors are poorly prepared for

assuming the role of current

management & are not currently, nor

could they be made capable of

replacing current management.

4

3(ii)

(i) Business history Obligation to creditors are met before

or within agreed terms.

1

Payments are extended beyond agreed

upon terms of an infrequent basis.

2

Often borrower allows bills to extend

60-9- days beyond permanent date

3

Credit checks indicate the borrower is

consistently late without cause in

paying its suppliers.

4

(ii) Credit track record Company has never violated any terms

& condition of its loan agreement

1

Company rarely does not meet all

terms & conditions of its loan

agreement.

2

Now & then the company breaches a

significant term of condition of the

credit agreement.

3

Company consistently violates loan

agreement covenants.

4

(iii) Firm’s age More than 10 years 1

More than 5 years 2

More than 2 years 3

Less than 2 years 4

(iv) Reputation with

customers & suppliers

Excellent relationship with suppliers

with no disruption of suppliers.

Excellent relationship with customers

resulting in growth & timely payments.

1

Good relationship with suppliers with 2

G.L.B.I.M.R Page 49

some disruption of suppliers. Fair

reputation with customers resulting in

growth & generally timely payments.

Fair relationship with suppliers with

frequent disruption of suppliers. Fair

relationship with customers but

increase in credit period & some

defaults.

3

Poor relationship with suppliers. Poor

relationship with customers but

substantial increase in credit period &

high defaults.

4

(4) Management reputation

SUB TOTAL OF MANAGEMENT REPUTATION SCORE

B4 SUB TOTAL OF MANAGEMENT RISK SCORE

Business/industry Risk Score

(i) Customer quality &

concentration

Diversified customer having

reasonable size, stable Purchase

pattern from the firm & likely to pay

outstanding invoices on a timely basis.

1

Generally diversified customer based

that may not have either a reasonable

size or a stable purchase pattern from

the firm but is likely to pay

outstanding invoices on a timely basis.

There may be a few large customers.

2

Customer has neither reasonable size 3

G.L.B.I.M.R Page 50

nor a stable purchase pattern from the

firm but is likely to pay outstanding

invoices on a timely basis. The firm

may have only a few customers with

little product diversification.

Customers are not expected to pay on

time. The firm may have only 1-2

customers.

4

(ii) Supplier quality &

concentration

Firm has a choice of suppliers

supplying quality goods & services.

1

Firm has a choice of suppliers

supplying average quality of goods &

services.

2

Firm has very few suppliers supplying

quality goods & services. Quality of

goods & services isn’t very good.

3

Monopolistic situation with no control

over quality.

4

(iii) Impact of competition on

GP margins

Current industry structure not expected

to lead to decline in GP margin.

1

Industry competition may result in

marginal decline in margins.

2

Industry competition has resulted in

significant decline in margins.

3

GP margins have declined significantly

due to competition & expected to

decline further.

4

(iv) Sales trend (product) Product have no substitutes, regulatory

threats demand will remain stable or

grow.

1

Product has limited substitute & 2

G.L.B.I.M.R Page 51

regular threats.

Demand for product may be affected

by lower price substitutes &

regulation.

3

Demand faces serious threats due to

substitutes & regulation.

4

(v) Regulatory/ fiscal risk There are no foreseen changes in the

direct/ indirect tax structure or

import/export restrictions which could

impact the industry profitably.

1

While some changes in the direct/

indirect tax structures or import/ export

restrictions which impact the industry

are fore seen, these may have some

impact on industry profitability.

2

Some changes are foreseen in the

direct/indirect tax structure or

import/export restrictions which

impact the industry. These may have

major impact on industry profitability

& affect viability of marginal players.

3

Significant changes are foreseen in the

direct/indirect tax structures or

import/export restrictions which

impact the industry. These may have

significant impact on industry

profitability & viability players.

4

(vi) Technology dependence Technology is tested & not expected to

change in the long run.

1

Technology is tested & not unlikely to 2

G.L.B.I.M.R Page 52

change in the medium term

Technology is tested but likely to

change in the medium term.

3

Outdated technology or tech. subject to

very fast obsolescence or technology

as yet untried/untested.

4

(vii) Environmental impact Unlikely to face pollution related

problems in future.

1

Limited likelihood to face pollution

related problems in future.

2

Polluting industry but complies with

current norms which are subject to

change.

3

Polluting industry & doesn’t comply

current norms.

4

SUB TOTAL BUSINESS/ INDUSTRY RISK SCORE (C(i) to (vii) above

VBA MODEL (VERY LARGE BORROWER ACT)

This model is for an amount of 5 crore or above credit. It helps in quantification of certain

qualitative factors, which are very crucial in determining the credit worthiness of a borrower.

Though the quantification is not so accurate but it is precise one. Various factors consider in this

model are:

1. Financial risk

2. Management risk

3. Business risk

G.L.B.I.M.R Page 53

4. Monitoring risk

FINACIAL RISK

Sales Sales generated in connection with the

principal operation of the business

should be entered in this head. Trading

sales should be clubbed with gross

sales. Income & revenues from other

source should be included with other

operating income.

GST/VAT/Turnover tax/National

security levy

GST/VAT/Turnover tax/National

security levy or any other indirect tax.

Excise duty Excise duty paid on sales. If sales are

shown net of excise duty then this

should be left blank.

Raw material and consumables used Expenses arising out of material &

related expenses used to produce

finished goods. Example of account

names raw material consumed,

packing material, trading purchases.

Changes in inventories of finished

goods and WIP

This head relates to change in opening

& closing stock of finished goods &

goods in progress or work in progress.

Other direct expenses This head relates to other direct

expenses incurred during production or

break up of expenses isn’t given then

cost of sales fig. may be input here.

Example of account names- power &

fuel, coal costs, repairs & maintenance

on plant & machinery etc.

Employee expenses Expense arising out of the payment of

G.L.B.I.M.R Page 54

wages & or salaries. Example of

accounts- salaries, wages, bonus,

allowances, contribution to provident

fund, gratuity, employee welfare.

Selling and distribution expenses All operating expenses relating to

selling & marketing efforts, example

of account names- sales expenses,

sales commission, marketing expenses,

advertising expenses, sales man’s

salaries, bad debt written off, freight

outward.

Administrative expenses and

establishment expenses

All general & administrative operating

expenses not specially identified & it

shouldn’t include any depreciation &

amortization expenses. Example of

accounts names-office expenses,

insurance, supplies, donations, repairs,

& maintenance on office & travel.

Other operating expenses All other operating expenses.

Work performed by enterprise and

capitalized

All revenue expenses incurred before

commencement of commercial

borrowings. Example of accounts-

interest on long-term loans, cash

credit, debentures, loss of foreign

exchange fluctuations etc.

Lease expenses Total interest expense incurred on

lease obligations.

MANAGEMENT RISK

G.L.B.I.M.R Page 55

INTERGITY (WILLINGNESS TO PAY) SCORES

Excellent Promoter/group well known to meet its

commitment even under adverse circumstances.

1

Good Known group/promoter who generally meets its

commitment.

2

Marginal Known group/promoters who doesn’t always

meet its commitment?

3

Doubtful No information could be obtained about

management’s integrity or promoter already in

default with some institutions.

4

DIVERSIION OF FUNDS SCORES

Excellent No diversion of funds was observed in the past. 1

Good Minor diversion of funds was observed in the

past.

2

Marginal Diversion of funds has been a regular affair in

the past.

3

Doubtful The borrowing entity has been the front for

diversion to funds.

4

BUSINESS COMMITMENT SCORES

Very high Promoter is highly involved in this business,

has long standing exposure in the business &

the business contribute significantly to his

overall business investment.

1

High Promoter is fairly committed to this business

but has substantial investment in other business.

2

Marginal This business occupies only a small portion of

his time & investment & his most significant

business interest lies elsewhere.

3

G.L.B.I.M.R Page 56

Low No improvement by the promoter, business

merely a legacy or promoter diversifying into

other areas where his involvement will increase

in future or unable to gauge commitment.

4

KEY MANAGERIAL PERSONS-BUSINESS EXPERIEENCE SCORES

Excellent Excellent business experience & management

skills in the same line of business.

1

Good Adequate business experience & requisite

management skills in the same line of business.

2

Marginal Limited business experience or managerial


3

Inadequate Very little business experience or weak

managerial skill in the same line of business.

4

KEY MANAGERIAL PERSONS-COMPETENCE SCORES

Excellent Excellent business experience & management


1

Good Adequate business experience & requisite

management skills in the same line of business.

2

Marginal Limited business experience or managerial skill

in the same line of business.

3

Inadequate Very little business experience or weak

managerial skill in the same line business.

4

INDUSTRIAL/EMPLOYEE RELATION SCORES

Excellent No labour problems in past 2 years & cordial

relationship.

1

Good Minor labor problems in past 2 years & cordial 2

G.L.B.I.M.R Page 57

relationship.

Marginal Labour problems in past 2 years lending to

disruptions.

3

Weak Frequent labour problems & weak relations. 4

SUCCESSION PREPARATION

Excellent Successors have far more than necessary skills,

experience & knowledge about the business.

Good Successors have adequate skills, experience &

knowledge about the business even though there

would be some learning & adjustment needed to

be capable of replacing current management.

Marginal Successors are somewhat prepared for assuming

the role of current management but are expected

to be capable of replacing current management.

Inadequate Successors are weakly prepared for assuming the

role of current management & are not currently,

nor could they be made capable of replacing

current management.

INTERNAL CONTROL

Excellent Internal control is fairly good or has obtained

international certification like ISO certificate etc.

Good Internal control is adequate or the company has

applied for international certificate like ISO

certificate.

Marginal Internal control is totally dependent on the

management’s presence in the business location

& their personal supervision.

Inadequate No internal control at all. The management

doesn’t have a clue to what is happening.

G.L.B.I.M.R Page 58

FINANCIAL STRENGTH/ GROUP SUPPORT SCORES

Excellent Financially very strong, high net worth &

flourishing group entities.

1

Good Good financial strength; few group entities

mayn’t be doing well.

2

Marginal Financial strength is adequate; however, group

situation may affect the borrowing entity

adversely.

3

Inadequate Weak financial or financial strength couldn’t be

ascertained or widely differing opinions

obtained.

4

PAYMENT RECORD OF GROUP COMPANIES SCORES

Excellent All the group companies are meeting their

commitments without any delay.

1

Average Group companies are meeting their

commitments. However delays of < 1 quarter

are observed in some companies.

2

Weak Group companies are delaying payments

beyond 1 quarter.

3

Not applicable If there are no group companies with the bank. 4

BUSINESS PLANNING SCORES

Excellent Management is highly committed in strategic

planning & has a long track record in meeting

targets.

1

Good Management is committed in strategic planning

& has a reasonable track record in meeting

targets.

2

Marginal Management is committed in strategic planning 3

G.L.B.I.M.R Page 59

but has short comings in meeting targets.

Inadequate Management is unable to develop strategic plan

& the company lacks future direction.

4

CORPORATE GOVERNANCE SCORES

Above average The company has complied with all the

conditions of corporate governance.

1

Average The compliance with the condition of corporate

governance as stipulated.

2

Below average The compliance with the condition of corporate

governance as stipulated.

3

Not applicable The company is not a listed company & no

information is available.

4

INTRA COMPANY / GROUP CONFLICTS SCORES

Excellent The relationship among promoters/directors is

excellent.

1

Good The promoters/directors enjoy good

understanding.

2

Marginal There have been instances of conflicts between

promoters/ directors, which could affect the

performance of the company.

3

Weak Major differences between promoters/directors,

which is adversely affecting the performance of

the company.

4

FIRM STANDING SCORES

AGE OF FIRM

>10 1

G.L.B.I.M.R Page 60

5-10 years 2

2-5 years 3

<2 years 4

REPUTATION WITH CUSTOMERS AND SUPPLIERS SCORES

Excellent Excellent relationship with the supplier with no

disruptions of supplies. Excellent reputation

with customers resulting in growth & timely

payments.

1

Good Good relationship with the suppliers with some

disruptions of supplies. Good reputation with

customers resulting in growth & generally

timely payments.

2

Marginal Fair relationship with the suppliers with

frequent disruption of supplies. Fair reputation

with customers but increase in credit period &

some defaults.

3

Unfavorable Poor relationship with the supplier. Poor

reputation with customers resulting in

substantial increase in credit period & high

defaults.

4

BUSINESS LOAN HISTORY SCORES

Excellent Obligation to the creditors are met before or

within agreed terms.

1

Good Payments have extended beyond agreed terms

on an infrequent basis.

2

Marginal Often companies delay bills to the extent of 60-

90 days beyond payment days.

3

Weak Credit checks indicate the company is

consistently late, without cause in paying its

suppliers or information couldn’t be obtained

4

G.L.B.I.M.R Page 61

on how the borrower handles its payment

responsibility.

CREDIT TRACK RECORD SCORES

Excellent Companies have never violated any term &

condition of its loan agreement.

1

Good Companies sometimes break terms &

conditions of its loan agreement which are not

significant.

2

Marginal Now & then the company breaches a significant

term or condition of the credit agreement.

3

Weak Company regularly violates loan agreement

covenants.

4

COMPETITIVE POSITION OF THE FIRM SCORES

Very high A significant player & has strong ability to

increase or maintain market share.

1

High A significant player with adequate ability to

maintain market share.

2

Marginal A marginal player with moderate ability to

maintain market share.

3

Low Low market share & not likely to withstand the

market competition.

4

TECHNOLOGY- FIRM STANDING SCORES

Excellent Latest proven technology, which is leading to

efficiencies.

1

Good Widely accepted technology which is fairly 2

G.L.B.I.M.R Page 62

efficient.

Marginal Technology is likely to be phased out in the

medium term.

3

Unfavorable Outdated technology. 4

CUSTOMER QUALITY AND CONCENTRATION SCORES

Excellent Diversified customer base having reasonable

size & stable purchase pattern from the firm.

1

Good Generally diversified customer base that may

not have either a reasonable size or a stable

purchase pattern from the firm. There may be a

few large customers.

2

Marginal Customer has neither reasonable size nor a

stable purchase pattern from the firms. There

may be only a few customers with little product

diversification.

3

Unfavorable Customer concentration is high. 4

SUPPLIER QUALITY & CONCENTRATION SCOR

ES

Excellent Firm has a choice of suppliers supplying

quality goods & services.

1

Good Firm has a choice of suppliers supplying

average quality goods & services.

2

Marginal Firm has a very few suppliers supplying goods

& services. Quality of goods & services is not

very good.

3

Unfavorable Monopolistic situation with no control over

quality.

4

REPUTATION WITH BANKERS/FINANCIAL INSTITUTION SCOR

G.L.B.I.M.R Page 63

ES

Excellent Excellent reputation with bankers for timely

payments of commitments.

1

Good Good reputation with bankers for timely

payment of commitments.

2

Marginal Fair reputation with bankers. However there

are some delays in meeting commitments.

3

Unfavorable Poor reputation with bankers or no

information.

4

BUSINESS RISK

INDUSTRY PHASE SCORES

Growth Industry is in growth phase. 1

Stable Industry is in stable phase. 2

Uncertain Industry susceptible to unfavorable changes in

the economy.

3

Decline Industry is in declining phase. 4

COMPETION IMPACT ON GP MARGIN SCORES

Excellent Current industry structure (including

substitutes/entry barriers) not expected to lead

to decline in GP margin.

1

Good Industry competition may result in marginal

decline in margins.

2

Marginal Industry competition has resulted/may result in

significant.

3

Unfavorable GP margins have declined significantly due to

competition & expected to decline further.

4

REGULATORY ISSUES/ FISCAL POLICY DEPENDENCE SCORES

Low There are no foreseen changes in the 1

G.L.B.I.M.R Page 64

regulations, which could affect the industry

profitability. These changes include

direct/indirect tax structure, import/export

restrictions etc.

Moderate Some changes in the regulation, which affect

the industry, are foreseen. These may have

some impact on industry profitability.

2

High Some changes are foreseen in regulations.

These may have a major impact on industry

profitability & affect viability of marginal

players.

3

Very high Significant changes are foreseen in regulations.

These may have a major impact industry

profitability & viability of players.

4

TECHNOLOGY DEPENDENCE SCORES

Low Technology isn’t expected to change in the

long-term.

1

Moderate Technology is unlikely to change in the

medium term.

2

High Technology is likely to change in short term. 3

Very high Outdated technology or technology subject to

very fast obsolescence or technology as yet

untried/untested.

4

DEMAND SUPPLY SITUATION SCORES

Excellent Demand exceeds supply & the situation is

unlikely to change in medium term.

1

Good Demand is likely to match supply in the

medium term.

2

G.L.B.I.M.R Page 65

Marginal Moderate oversupply in the industry & low

demand growth envisaged in the medium term.

3

Unfavorable Significant oversupply in the industry, which is

unlikely to change in medium term.

4

MONITORING RISK

SUBMISSION OF PROGRESS REPORTS SCORES

Within due date 1

<=15 days Within 15 days 2

<=30 days Within 30 days 3

>30 days Over 30 days 4

COMPLIANCE WITH SANCTIOND/DISBURSEMENT CONDITIONS SCORES

Excellent Complied fully-security & financial covenants 1

Good Complied with creation of security. 2

Marginal Complied with financial covenants only. 3

Not complied The sanctioned/disbursement conditions have

not been complied.

4

KEY EMPLOYEES TURNOVER SCORES

Low No significant change in the key employees in 1

year, other than for a valid reason.

1

Medium Few changes in the key employees in last 1

year.

2

High Moderate change in the key employees in the

last 1 year.

3

Abnormal Frequent change in the key employees in the 4

G.L.B.I.M.R Page 66

last 1 year.

COMMENTS IN OPERATIONS / ASSETS DURING SITE VISITS SCORES

Excellent No adverse comments & turnover greater than

90%.

1

Good Normal adverse comments & turnover between

75% to 90%.

2

Marginal Major adverse comments & turnover between

50% to 75%.

3

Unfavorable Comments causing anxiety or turnover below

50%.

CHANGE IN ACCOUNTING PERIOD DURING THE LAST FIVE YEARS

Not done 1

Once 2

Twice 3

More than twice 4

NO. OF TIMES RESCHEDULING / RELIEFS OBTAINED FROM LENDING

INSTITUTIONS

Not done 1

Once 2

Twice 3

More than twice 4

NO. OF TIMES OVERLIMIT / AD-HOC LIMIT ALLOWED SCORES

Two times Twice a year 1

Four times Four times a year 2

Six times Six times a year 3

G.L.B.I.M.R Page 67

>six times More than six times or exceeding six months

total in a year.

4

NUMBER OF CHEQUES/BILLS RETURNED SCORES

<6 per year Less than 6 per year 1



> 24 per year More than 24 per year 4

CHAPTER-4

RESEARCH METHODOLOGY

The research was mainly of secondary research consisted of literature search and internet search.

Regarding the research on the topic “credit rating system of federal bank ltd.” I have used all the

methods adopted by credit rating agency i.e CRISIL for calculating credit rating . The methods

include:-

I. Credit rating methodology Bond/debenture rating

Equity rating

Commercial paper rating

Fixed deposits rating

Individuals rating

Mutual fund rating

Rating structure obligations

II. Credit rating process

Receipts of information

Analysis of information

G.L.B.I.M.R Page 68

III. The major ratios computed

Coverage ratio

Financial leverage ratio

Liquidity ratio

Cash flow ratio

Profitability ratio

CHAPTER-5

DATA ANALYSIS & INTERPRETATION (CASE STUDY)

ABC Pvt. Ltd had applied for a loan above an amount of 1 crore. Thus, on the basis of the

amount one credit rating model was applied to find out the appropriate rating for the applicant.

As per the model, the required parameters were considered to decide the credit rating. Those

parameters are –

Financial standing

Information system

Financial discipline

General observations in conduct of the account & ancillary business.

Based on these factors scores were given & according to the score obtained, the rating was done.

ASSESSMENT OF WORKINGCAPITAL REQUIREMENTS OF ABC PVT. LTD.

G.L.B.I.M.R Page 69

Amounts in Rs Lakhs

Last 2 years actual Current year Estim.

Table-5.1 (As per audited a/cs)

Year 31st Mar

07

31st Mar 08 31st Mar

09

31st Mar

10

1. Gross sales

i. Domestic sales 310.95 438.24 647.79 906.90

ii. Export sales - - - -

iii. Other operating/revenue

income

- - - -

Total 310.95 438.24 647.79 906.90

2. Less Excise duty - - - -

3. Net sales (1-2) 310.95 438.24 647.79 906.90

4. % rise (+) or fall (-) in net sales as

compared to previous year

(annualized)

N/A 40.94% 47.82% 40.00%

5. Cost of sales

i. Raw materials (including

stores & other items used in

the process of manufacture)

a) Imported

b) Indigenous

0.00 0.00 0.00 0.00

ii. Other spares

a) Imported

b) Indigenous

0.00 0.00 0.00 0.00

iii. Power & fuel - - - -

iv. Direct labour (factory wages

& salaries)

- - - -

v. Other manufacturing expenses 279.31 390.03 578.19 780.56

vi. Depreciation 1.15 1.35 1.22 1.03

Other costs - - - -

G.L.B.I.M.R Page 70

vii. Sub- total (i-vi) 280.46 391.38 579.41 781.59

viii. Add: Opening stock in

process

0.00 0.00 0.00 0.00

Sub-total (vii-viii) 280.46 391.38 579.41 781.59

ix. Deduct: Closing stock in

process

- - - -

x. Cost of production 280.46 391.38 579.41 781.59

xi. Add: Opening stock of

finished goods

0.00 0.00 0.00 0.00

Sub- total (x-xi) 280.46 391.38 579.41 781.59

xii. Deduct: Closing stock of

finished goods

- - - -

xiii. Sub- total (Total cost of sales) 280.46 391.38 579.41 781.59

6. Selling, general & administrative

expenses

22.00 34.96 43.93 76.72

7. Sub- total (5+6) 320.46 426.34 623.34 858.31

8. Operating Profit before interest (3-7) 8.49 11.90 24.45 48.59

9. Interest 1.48 2.00 2.50 3.25

10. Operating profit after interest (8-9) 7.01 9.90 21.95 45.34

11. i. Add: Other non- operating income

a) Sold of old newspapers

b) Comm. Received from ABC

ltd.

c) Fly high incentive &

incentive Dharitri

d) Rent research & mis.income

Sub- total ( income)

iii. Deduct: Other non- operating

expenses

iv. Net of other non- operating

income /expenses

0.03

0.22

0.00

0.00

0.25

0.00

0.03

0.00

0.57

0.42

1.02

0.00

0.05

0.00

0.00

0.00

0.05

0.00

0.04

0.00

0.00

0.00

0.04

0.00

G.L.B.I.M.R Page 71

0.25 1.02 0.05 0.04

12. Profit before tax/ loss (10+

11(iii))

7.26 10.92 22.00 45.38

13. Profit for taxes - - - -

14. Net profit/loss (12-13) 7.26 10.92 22.00 45.38

15. A) Equity dividend paid amount

(already paid + B.S prov.)

B) Dividend rate (%)

-

-

-

-

-

-

-

-

16. Retained profit (14-15) 7.26 10.92 22.00 45.38

17. Retained profit/ net profit (%) 100% 100% 100% 100%

ANALYSIS OF BALANCESHEET LIABILITIES

Amounts in Rs. Lakhs

Last 2 year actual Current Estimated

Table-5.2 (As per audited a/cs) year year

Year 31st Mar

07

31st mar

08

31stMar

09

31st Mar

10

CURRENT LIABILITIES

1. Short-term borrowing from banks

(including bill purchased, discounted

& excess borrowing placed on

repayment basis)

i. From applicant bank

ii. From other banks

iii. (of which BP & BD)

Sub- total (i+ii) (A)

6.63

6.63

20.00

20.00

20.00

20.00

20.00

20.00

2. Short term borrowings from others 1.00 2.00 2.50 2.50

G.L.B.I.M.R Page 72

3. Sundry creditors (trade) 52.87 88.14 111.82 108.00

4. Advance payments from customers/

deposits from dealers

- - - -

5. Prov. For taxation 1.41 2.88 6.17 12.50

6. Dividend payable - - - -

7. Other statutory liabilities (due within

1 year)

- - - -

8. Deposits/ installments of term loans/

DPGs/ debenture etc. ( due within

1 year )

- - - -

9. Other current liabilities & Provisions

(due within 1year)

2.22 2.60 3.30 7.00

a. Liabilities for exps

b. Branch division

1.95

0.27

2.60 3.30 7.00

Sub- total (2-9) (B) 57.50 95.62 123.79 130.00

10. Total current liabilities (A+B) 64.13 115.62 143.79 150.00

TERM LIABILITIES

11. Debentures ( not maturing within 1

year)

- - - -

12. Preference shares (redeemable after

1 year)

- - - -

13. Term loans (excluding installments

payable within 1 year)

1.59 1.06 0.63 0.20

14. Deferred payment credits (excluding

installments due within 1 year)

- - - -

15. Term deposits (repayable after

1year)

- - - -

16. Other term liabilities - - - -

17. Total term liabilities (11-16) 1.59 1.06 0.63 0.20

18. Total outside liabilities (10-17) 65.72 116.68 144.42 150.20

NET WORTH

G.L.B.I.M.R Page 73

19. Ordinary share capital 11.67 17.58 30.68 66.06

20. General reserve - - - -

21. Revaluation reserve - - - -

22. Other reserves (excluding provision) - - - -

23. Surplus (+) or deficit (-) in profit &

loss A/C

- - - -

24. Net worth 11.67 17.58 30.68 66.06

25. Total liabilities (18+24) 77.39 134.26 175.10 216.26

ANALYSIS OF BALANCESHEET ASSETS

AMOUNTS IN Rs LAKHS

Last 2 years actual Current Estimated

Table-5.3 (As per audited b/s) Year Year

Year 31st Mar

07

31st Mar

08

31st Mar

09

31st Mar

10

Current Assets

26. Cash & bank balances 0.11 0.22 0.13 0.18

27. Investments (other than long-term)

i. Govt. & other trustee securities

ii. Fixed deposit s with banks

1.65 2.42 2.42 2.42

28. i. Receivables other than deferred &

exports (including bills purchased &

discounted by banks)

iii. Export receivables (including

bills purchased & discounted

by banks)

66.68 121.50 162.28 203.77

G.L.B.I.M.R Page 74

29. Installments of deferred receivables

(due within 1 year)

- - - -

30. Inventory:

i. Raw materials (Including

stores & other items used in the

process of manufacture)

a) Imported

b) Indigenous

ii. Stock in process

iii. Finished goods

iv. Other consumable spares

a) Imported

b) Indigenous

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

31. Advances to suppliers of raw

materials & stores/spares

1.50 0.00 0.00 0.00

32. Advance payment of taxes 1.71 4.04 4.91 5.00

33. Other current assets 0.00 0.00 0.00 0.00

34. Total current assets (26-33) 71.75 128.18 169.74 211.37

Fixed Assets:

35. Gross block (land, building,

machinery, work-in-progress)

6.79 7.43 6.58 5.92

36. Depreciation to date 1.15 1.35 1.22 1.03

37. Net block (35-36) 5.64 6.08 5.36 4.89

Other Non- current Assets:

38. Investments/book

debts/advances/deposits which are not

current assets.

i. a) Investments in subsidiary

companies/affiliates

c) others

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

G.L.B.I.M.R Page 75

ii. Advances to suppliers of

capital goods & contractors

iii. Deferred receivables (Maturity

exceeding 1 year)

iv. Others

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

39. Non- consumable stores & spares - - - -

40. Other Non-current assets (including

dues from directors)

- - - -

41. Total other noncurrent assets - - - -

42. Intangible assets (patents, goodwill,

prelim, expenses)

- - - -

43. Total assets (34+37+41+42) 77.39 134.26 175.10 216.26

44. Tangible net worth 11.67 17.58 30.68 66.06

45. Net working capital (34-10) 7.62 12.56 25.95 61.37

Adjusted TNW 11.67 17.58 30.68 66.06

46. Current ratio (34/10) 1.12 1.11 1.18 1.41

47. Total Outside liabilities/ tangible net

worth (18/44)

5.63 6.64 4.71 2.27

48. Total term liabilities/ tangible net

worth (17/44)

0.41 0.06 0.02 0.00

49. TOL / adjusted TNW 5.63 6.64 4.71 2.27

FUNDSFLOW STATEMENT OF ABC PVT. LTD.

Amounts in Rs lakhs

Table-5.4 Last year Current year Estimated year

Year 2008 Prov. 31st Mar 09 31st Mar 10

1. Sources

G.L.B.I.M.R Page 76

a. Net profit 10.92 22.00 45.38

b. Depreciation o.20 -0.13 -0.19

c. Increase in capital 5.91 13.10 35.38

d. Increase in term liabilities (including

public deposits)

- - -

e. Decrease in

i. Fixed assets

ii. Other non-current assets

0.85 0.66

f. Others - - -

g. Total 17.03 35.82 81.23

2. Uses

a. Net loss - - -

b. Decrease in Term liabilities

(including public Deposits)

0.53 0.43 0.43

c. Increase in

i.Fixed assets

ii.Other Non current assets

0.64

0.00

-

0.00

-

0.00

d. Dividend payments 0.00 0.00 0.00

e. Others 10.92 22.00 45.81

f. Total 12.09 22.43 45.81

3. Long-term surplus (+)/ Deficit (-) 4.94 13.39 35.42

4. Increase/decrease in current assets (As per

details given below)

56.43 41.56 41.63

5. Increase/Decrease in current liabilities

other than bank borrowings

38.12 28.17 6.21

6. Increase/decrease in working capital gap 18.31 13.39 35.42

7. Net surplus/Deficit(-) -13.37 0.00 0.00

8. Increase/ decrease in bank borrowings 13.37 0.00 0.00

9. Increase / decrease in Net sales 127.29 209.55 259.11

10. Increase/decrease in Receivables

a) Domestic 54.72 40.78 41.49

G.L.B.I.M.R Page 77

b) Export 0.00 0.00 0.00

11. Increase/decrease in other current assets 1.71 0.78 0.14

Total 56.43 41.56 41.63

Given below is the model which is used in the case analysis.

Table-5.5

Parameters Measure Assigned score

I. Financial Risk (Static) Based on latest Balance Sheet(audited/provisional)

Current Ratio 1.33& above 5

Less than 1.33 but more than

1.25

4

1.24 to 1.1 2

Less than 1.1 0

Total liabilities to tangible net

worth

Less than 2 5

2 to 3 4

3 to 4 2

More than 4 0

Interest service coverage ratio More than 3 5

3 to 2 4

1.99 to 1.5 2

Less than 1.5 1

PAT/Net sales (%) 5% & above 5

Average between 4% & 5% 3

Between 3% & 4% 2

Less than 3% 1

Loss 0

G.L.B.I.M.R Page 78

II. Financial Risk - moving averages (Dynamic) (Based on last 3 years' balance sheets)

Current ratio 1.33& more than during last 3

years with increasing trend

4

1.33 & more during last 3

years with uneven or

decreasing trend

3

Between 1.33 & 1.1 during

last 3 years with increasing

trend

2

Between 1.33 & 1.1 during

last 3 years with uneven or

decreasing trend

1

All others 0

Total liabilities to tangible net

worth

3 & less during the last 3

years with decreasing trend

4

3 & less during the last 3


increasing trend

3

More than 3 but less than 4

during the last 3 years with

decreasing trend

2

More than 3 but less than 4

during the last 3 years with

uneven or increasing trend

1

All others 0

Interest service coverage ratio 3 & more during last 3 years

with increasing trend

4

3 or more during last 3 years

with uneven or decreasing

3

G.L.B.I.M.R Page 79

trend

Between 3 & 2 during last 3

years with increasing trend

2

Between 3 &2 during last 3


decreasing trend

1

All others 0

Net sales Increasing trend & last year

achievement more than 90%

of projection

5

Uneven or decreasing trend &

last year’s achievement more

than 90% of projection

4

Increasing trend & last year’s

achievement more than 75%

of projection but less than

90%

3

Decreasing/uneven trend &

last year’s achievement more

than 75% of projection but

less than 90%

2

Others 0

III. Market Risk

1. Competition including

threat from imports

Monopoly situation/highest

market shares

3

Increasing market shares 2

Supply exceeds demand yet

the unit has a niche market of

its own

1

Low capacity utilization 7

company with insignificant

0

G.L.B.I.M.R Page 80

market share / high threat

from imports

2. Industry cycle Fairly stable industry cycles;

with long-term prospects

2

Susceptible to unfavorable

changes in the

market/industry cycle on the

upswing/downswing

0

3. Regulatory risk Not affected by regulatory

frame work

2

Regulatory 7 legislative

issues likely to create stress

but company has got capacity

to tackle them properly

1

Regulatory changes likely to

threaten viability

0

4. Technology Proven technology; not

subjected to changes in the

immediate future/ leading

technology in the industry

2

Technology likely, to undergo

changes & the company is

capable of surviving the

change

1

Outdated

technology/technology not

tested/substitutes are many

0

IV. Managerial Risks

1. Expertise Promoters directors/owners of

the unit are highly qualified

professionals or employing

5

G.L.B.I.M.R Page 81

qualified professionals

Owner managed with no

professionals but by persons

with experience

3

Owner managed (with no

professionals)/ new company/

firms

0

2. Track record Financially disciplined;

commitments to lenders

honored timely & no defaults

in the group companies

4

Accounts are regular but

repayment s is slightly

delayed. Group companies

are not doing well but mgt.

co-operates in settling them

3

Repayments are delayed but

account continues to be

standard; overall performance

of group companies is

average

2

No financial discipline; poor

adherence to sanction terms;

accounts are frequently

irregular, group companies in

default

0

V. Security Value

1. Assets (including

collaterals, cash margins

etc.) coverage ratio % (this

>175 4

>150 but <175 3

>100 but <150 2

G.L.B.I.M.R Page 82

is to total exposure

including NFB limits)

<100 0

2. Guarantees Central Govt./ reputed

scheduled banks

2

Promoter –Directors

guarantee/3rd party guarantee

1

No guarantee 0

VI. Capital Market Perception

1. Dividend payment Continuously for the last

3 years 2

2 years 1

Less than 2 years O

2. P/E ratio Above sector/ industry

average

2

At average 1

< average 0

VII. Contingent Risk

1. Balance sheet practices Unqualified audit report for

the past 3 years

2

2 years 1

Other cases 0

2. Contingent liabilities (% to

total net worth) (only such

liabilities which may

affect net worth/profit of

the borrower to be taken

into account)

<10 2

>10<30 1

>30 0

3. Reliability/accuracy of

data including QIS etc.

No deviation/deviation

moderate

1

G.L.B.I.M.R Page 83

furnished Deviation to considerable

extent

0

VIII. Compliance

1. Submission of stock

statements. Various

statements under QIS

& MSOD

Timely submission 2

Delayed /Irregular submission

up to 30 days

1

Non-submission /delayed

submission beyond 30 days

0

2. Submission of audited

balance sheet & P/L

A/Cs & financial data

in CMA forms

Timely submission i.e. at least

1 month before due date of

review

2

Delayed/ irregular submission

(within 2 months after due

date of review)

1

Non-submission /delayed

submission beyond 2 months

after due date of review

0

3. Over limit business No occasions generally for

over limits/adhocs/drawals

beyond sanctioned/drawing

limits without prior

approval/no return of cheques

for financial reasons

3

Occasions for over

limits/adhocs/drawals beyond

sanctioned/drawing limits

without prior approval/return

of cheques for financial

reasons, for not more than

twice in a year

2

Occasions for over 0

G.L.B.I.M.R Page 84

limits/adhocs/drawals beyond

sanctioned/drawing limits

without prior approval/return

of cheques for financial

reasons, for more than twice in

a year

4. Compliance with terms

of sanction

Complied with no deviation 3

Major terms/creation of

securities complied

2

Major terms pending 0

Risk rating parameter Max. score Max.

applicable

score(B)

Marks scored(c)

Financial risk static 20

Financial risks-dynamic 17

Market risks 9

Managerial risks 9

Security value 6

Capital market perception 4

Contingent risks 5

Compliance 10

Total 80

Percentage on risk factors= C/B*100

IX. Additional Factors to determine price

1. General observations

in conduct & ancillary

Extent conduct of account ,

trouble-free nature of

operations, group business /all

5

G.L.B.I.M.R Page 85

business the business routed through us

Satisfactory conduct of

account with some ancillary

business diverted to others

with or without bank’s

approval

2

Unsatisfactory conduct of

account with some ancillary

business diverted to others

with or without bank’s

approval

0

2. Length of satisfactory

relationship

More than 10 years 3

More than 5 years but less

than 10

2


than 5

1

Less than 3 years 0

3. Share in non-fund

based business

100% share with our bank 3

Proportionate to our share in

fund based limits

2

Others 0

4. Collateral coverage

available for total

limits (%)

More than 100% cover 3

Between 90% & 100% 2

Between 70% & 90% 1

Others 0

5. Threat of loss of

business due to

competition

Significant 2

Not much significant 1

No threat 0

6. Rater’s perception

about long-term

benefit to bank from

Substantial large 2

Not large but definite benefits 1

G.L.B.I.M.R Page 86

the borrower/group

expected

Others 0

7. overall image/reputation of

the company/group

Excellent image 2

No adverse factors 1

Others 0

Grand summary for pricing

Table-5.6

Parameters Max. marks Marks applicable to

the particular

customer (B)

Marks secured (c)

Risk factors (items 1

to 7)

80

Additional factor for

pricing (item 9)

20

Total 100

Percentage obtained=(C/B)*100

Table-5.7

Percentage obtained Final rating

80% above ‘AAA’

65% & above but below 80% ‘AA’

50% & above but below 65% ‘A’

Below 50% ‘B’

CALCULATIONS:

According to the information, all above parameters analyzed & scores have been given to them.

G.L.B.I.M.R Page 87

1. Financial Risk (static):

a) Current ratio= C.A/C.L=169.74/143.79= 1.18

b) Total liabilities to tangible Net worth=TOL/TNW=175.10/30.68=5.70

c) PAT/Net sales (%)=22/647.79=3.39%

Table-5.8


Current ratio 1.18 2

Total liabilities to tangible Net

worth

5.70 0

PAT/Net sales (%) 3.39% 2

2. Financial Risk (Dynamic):

a) Current ratio= (1.12+1.11+1.18)/3=1.14

b) Total liabilities to tangible Net worth

2007 2008 2009

77.39/11.67=6.63 134.26/17.58=7.63 175.10/30.68=5.70

Avg. = (6.63+7.63+5.70)/3=6.65

Table-5.9


Current Ratio 1.14 1

Total liabilities to Tangible

Net worth

6.65 0

3. Market Risk:

G.L.B.I.M.R Page 88

Table-5.10


Competition Increasing market share 2

Industry cycle Fairly stable 2

Regulatory risk Not affected by regulatory

framework

2

Technology Technology likely to go

under changes

1

4. Management Risk:

Table-5.10


Expertise Highly qualified 5

Track record Repayments are slightly

delayed

3

5. Security value:

Table-5.11


Assets >175 4

Guarantee Promoter- directors 1

Security= Principal+ collateral security/ Facility & security covered (proposed)

= 1455.95 +156.75/647.79 =248%

6. Capital market perception:

a) Dividend payment- No score is given

b) P/E ratio- No score is given

7. Contingent risk:

G.L.B.I.M.R Page 89

a) B/S practices- Other cases-0

b) Contingent liabilities-

c) Reliability:- No deviation- 1

8. Compliance

Table-5.12


Submission of stock

statement

Timely submission 2

Submission of audited B/S

& P/L A/C

Timely submission 2

Over limit business No occasions 3

Compliance with terms of

sanction

No deviation 3

Table-5.13

Risk rating

parameter

Max. score Max. applicable

score

Marks scored

Financial risks-static 20 15 4

Financial risks-

dynamic

17 8 1

Market risks 9 9 7

Managerial risks 9 9 8

Security value 6 6 5

Capital market

perception

4 0 0

Contingent risks 5 3 1

Compliance 10 10 10

G.L.B.I.M.R Page 90

Total 80 60 36

Percentage on Risk factors= (36/60)* 100= 60%

9. Additional factors:

Table-5.14

Parameters Measure Score

General observation in

conduct of business

Satisfactory 3

Length of satisfactory

relationship


than 5

1

Share of non-fund based

business

Proportionate to our share in

fund-based limits

2

Collateral coverage

available for total business

Others 0

Threat of loss of business

due to competition

Significant 2

Rater’s perception about

long-term benefit to bank

from the borrower

Not large but definite

benefits expected

1

Overall image of the

company

No adverse factors 1

Collateral/Total business= 156.75/647.79=24.19%

G.L.B.I.M.R Page 91

Grand summary of pricing:

Table-5.15

Parameters Max. marks (A) Marks available to

the particular

customer (B)

Marks scored (C)

Risk factors (item 1

to8)

80 60 36

Additional factor for

pricing (item 9)

20 20 10

Total 100 80 46

Percentage obtained=Marks scored/marks available to a customer(C/B)*100

=(46/80)*100=57.5%

Table-5.16

Percentage obtained Final rating

80% & above ‘AAA’

65% & above but below 80% ‘AA’

50% & above but below 65% ‘A’

Below 50% ‘B’

Thus, the final rating for ABC pvt. Ltd. was found to be ‘A’

G.L.B.I.M.R Page 92

ANALYSIS OF THE CASE:

From the above analysis we came to know that credit rating plays an important role to evaluate

the credit worthiness of an individual or corporation. It tells a lender or investor the probability

of the subject being able to pay back a loan. Almost every financial dealing that everyone

undertake will involve credit in some manner. Hard, liquid cash is obsolete and credit worthiness

is what helps lenders decide how much credit to extend and to whom. This reality has brought

out the need for a universally accepted and standardized means of evaluating a person's credit

worthiness. Here we have calculated credit ratings from the financial history and balance sheet of

ABC Ltd. And finally we rated “A”to the company as it has scored 57.5%. A good credit rating

system helps a lender or an investor against bankruptcy. It helps for the easy understability of the

investment proposal and in choosing profitable investment security. It also saves resources i.e

time and money of investors as the rating task is performed by the credit rating agency like

CRISIL in the above example. Providing independent objective assessments of the credit

worthiness of companies and countries, a credit ratings company helps investors decide how

risky it is to invest money in a certain country and/or security.

A credit rating is a useful tool not only for the investor, but also for the entities looking for

investors. An investment grade rating can put a security, company or country on the global radar,

attracting foreign money and boosting a nation's economy. Indeed, for emerging market

economies, the credit rating is key to showing their worthiness of money from foreign investors.

And because the credit rating acts to facilitate investments, many countries and companies will

strive to maintain and improve their ratings, hence ensuring a stable political environment and a

more transparent capital market

G.L.B.I.M.R Page 93

http://www.investopedia.com/terms/c/creditrating.asp

As investment opportunities become more global and diverse, it is difficult to decide not only

which companies but also which countries are good investment opportunities. There are

advantages to investing in foreign markets, but the risks associated with sending money abroad

are considerably higher than those associated with investing in your own domestic market. It is

important to gain insight into different investment environments but also to understand the risks

and advantages these environments pose. Measuring the ability and willingness of an entity -

which could be a person, a corporation, a security or a country - to keep its financial

commitments or its debt, credit ratings are essential tools for helping you make some investment

decisions.

G.L.B.I.M.R Page 94

CHAPTER-6

RECOMMENDATIONS

In any business, the first & foremost thing is to acquire the right customers. It is always

important to target right customers. Thus, the bank must try to get to know its customer,

their business & occupation details. Asking questions where they find problems in surety.

Sharing the information of the products & services that the customer is interested in is

very much necessary. Ensuring all the relevant literature is provided to the customer

upfront. A customer who makes an informed decision is much more likely to stay with

the bank.

Time is always an important factor. Every customer wants his/her job to be over in the

earliest possible time. Bank must try to ensure that by the use of modern technologies the

customers must be served in time. So that it will be easy to retain the existing customers.

G.L.B.I.M.R Page 95

CHAPTER-7

CONCLUSION

Generally a bank is found to be of sound health, if its credit portfolio is also sound.

An effective credit portfolio of a bank largely concentrates on the achievement of the following 3

benchmarks

Qualitative deployment of credit to ensure maximum yield.

Containment of fresh generation of NPA through their monitoring follow up and

timely action in all levels.

Up gradation & reduction of NPAs

An ideal advance is one which is granted to a reliable customer for an approved purpose in

which the customer has adequate experience, safe in knowledge that the money will be used to

advantage & repayment made will be within a reasonable period from trading receipts or known

maturities does on or about given data. So emphasizing on the above all points discussed Federal

bank limited have also designed its loan policy document and manual of instructions with a

broader concept maximizing its credit facilities to the right borrower. The bank, before

sanctioning a loan, the bank officials have to follow all instructions and guide from the loan

policy document, which is reviewed every year. The bank have to try all is effort to look into that

the advances made should not turn into NPAs in future. The credit department is also having a

proper and systematic approach for the supervision, monitoring and follow –up of advances. For

this reason Federal bank have given lot emphasis on the credit appraisal system and credit rating

G.L.B.I.M.R Page 96

system before sanctioning and disbursement of any type of loans whether it is retail finance, cash

credit, term loan or any nonfund based credit facilities.

Bank has given a huge effort to make its credit appraisal system a successful tool for its credit

assessment.

BIBLIOGRAPHY:

www.Google.com

www.federalbank.co.in

www.wikipedia.com

www.scribd.com

G.L.B.I.M.R Page 97

http://www.wikipedia.com/

http://www.federalbank.co.in/

http://www.Google.com/

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