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Summer Training Project on

ANALYSIS AND APPRAISAL OF CREDIT REQUIREMENTS

OF LARGE BORROWERS AND SME

A training report submitted in partial fulfillment of the requirement for

POST GRADUATE DIPLOMA IN MANAGEMENT

PGDM

SESSION 2009-11

UNDER SUPERVISION OF SUBMITTED BY

MRS.MEENAKSHI SINGH PRIYA SARASWAT

Sr. LECTURER.S.M.S PG/15/067VARANASI S.M.S. VARANASI


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Declaration

I hereby declare that the dissertation report entitled Appraisal and

Analysis of Credit Requirements of large borrowers and SMEs is written

and submitted by me under the guidance Mrs.Meenakshi Singh, Faculty,

School of Management Sciences,Varanasi is my original work

This project is not copied from any source or other project submitted for

similar purpose and this particular project would only be used for

academic purpose & Organisation in which training is completed.It would

not be considered for any other commercial reason.

PRIYA SARASWAT

PGDM

PG/15/067


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Preface

No one can undermine the importance of Summer training project as a

part of ongoing process to enrich knowledge and skill and levels of oneself.

For management career, it is important to develop managerial skills. In

order to achieve positive and concrete results, along with theoretical

concepts, the exposure of reallife situation existing in corporate world is

very much needed. To fulfill this need, this practical training is required.

I took training in UNION B NK OF INDIA,VARANASI. It was my

fortune to get training in a very healthy atmosphere. I got ample

opportunity to view the working of bank.

This report is the result of my eight weeks of summer training in UNIONBANK OF INDIA as a part of PGDM. The subject of my report is -

APPRAISAL AND ANAL SIS OF CREDIT REQUIREMENTS OF

LARGEBORROWERS AND SMEs.

In the forthcoming pages, an attempt has been made to present a

comprehensive report covering different aspects of my training.

Priya Saraswat

PG/ /

PGDM


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ACKNOWLEDGEMENT

This Report is the outcome of the sincere support and guidance of all

the people who directly or indirectly encouraged and helped me to

complete this report successfully.

Firstly, I would like to express my thanks to The Director Prof. P.N.Jha,

the Dean,my mentor Mrs.Meenakshi Singh & all faculty members for their

guidance & undue support.

I also express my profound sense of gratitude to the authorities of

UNION BANK OF INDIA, VARANASI, especially to Mr. I.ARSHADSenior Manager, for providing me the platform & track for the purpose.

But this could not be possible without the enthusiastic support of my

Summer Training Guide Dr. Meenakshi who helped me during the course

of these investigations.

I am also grateful to my parents without whose constant guidance &

support this survey couldnt have been carried out.

My summer training has added to my practical knowledge and build up my

confidence. I thank once again all the staff members of Union Bank with

the active support of whom I was able to complete my project report

successfully

Thanks.

Priya SaraswatPGDM


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CONTENTS

1. Company Profile Introduction

Location Organizational Structure

Products Markets.

Competitors

Strategies

SWOT Analysis

2. Summer training project

About the project


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EXECUTIVE SUMMARY

Study Topic:APPRAISAL AND ANALYSIS OF CREDIT REQUIREMENTS

OF LARGE BORROWERS AND SMEs

Objectives: -

1) To assess the procedure of granting loans to borrowers

2) To assess the proposal made for credit facilities

Study instrument:

Official documents & profile of bank.

Scheme ofPresentation:

First of all I give the overview of Indian Banking.Then the report presents

a general profile of UNION BANK OF INDIA where the summer training has

been undertaken.

In the third part process of granting credit is covered and analysis is made how

to grant credits to large borrowers and SMEs


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BANKING IN INDIAAN OVERVIEW

Banking in India originated in the first decade of 18th century with The General

Bank of India coming into existence in 1786. This was followed by Bank of

Hindustan. Both these banks are now defunct. The oldest bank in existence in

India is the State Bank of India being established as "The Bank of Bengal" in

Calcutta in June 1806. A couple of decades later, foreign banks like CreditLyonnais started their Calcutta operations in the 1850s. At that point of time,

Calcutta was the most active trading port, mainly due to the trade of the British

Empire, and due to which banking activity took roots there and prospered. By

the 1900s, the market expanded with the establishment of banks such as Punjab

National Bank, in 1895 in Lahore and Bank of India in 1906, in Mumbai- both

of which were founded under private ownership. The Reserve Bank of India

formally took on the responsibility of regulating the Indian banking sector from

1935. After India's independence in 1947, the Reserve Bank was nationalized

and given broader powers.


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Early History:

At the end of late-18th century, there were hardly any banks in India in the

modern sense of the term.Some banks were opened at that time which

functioned as entities to finance industry, including speculative trades in cotton.

With large exposure to speculative ventures, most of the banks opened in India

during that period could not survive and failed. The depositors lost money and

lost interest in keeping deposits with banks. Subsequently, banking in India

remained the exclusive domain of Europeans for next several decades until the

beginning of the 20th century.

(The Bank of Bengal, which later became the State Bank of India.)

At the beginning of the 20th century, Indian economy was passing through a

relative period of stability. Around five decades have elapsed since the India's


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UNION BANK OF INDIA

(A COMPANY PROFILE)


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VISION

To become the bank of first choice in our chosen areas by building beneficial

and lasting relationship with customers through a process of continuous

improvement

MISSION

A logical extension ofthe Vision Statementis the Mission ofthe Bank,which isto gain market recognition in the chosen areas & To promote confidence and

commitment among the staff member.

History

Union Bank of India was founded on 11th

November 1919 as a limited company in

Mumbai.In 1921 Banks registered office was inaugurated by Mahatma

Gandhi,Father ofthe Nation. In 1969 Bank

Nationalised along with 10 otherleading banks & Shri F.K.F.Nariman became its first

Custodian.LaterBank started expanding to new areas & new activities & around 500

Branches were opened at Nalbariin Assam till 1972.Since that period Bank has gain

very

good reputation and share in market.

Union Bank of India (UBI) is one of I i 's largest state-owned banks (the

government owns 55.43% ofits share capital). It has assets of USD 13.45 billion and

all the bank's branches have been networked with its 1135 ATMs. Its online

Telebanking facility are available to all its Core Banking Customers - individual as


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well as corporate. It has representative offices inAbu Dhabi, United Arab

Emirates, and Shanghai, Peoples Republic of China, and a branch

in Hong Kong.

Organizational Structure

Union Bank of India has a lean three-tier structure. The delegated powers have

been enhanced. The decentralised power structure has accelerated decision-

making process and thereby Bank quickly responds to changing needs of the

customers and has also been able to adjust with the changing environment.

Bank has nine General Manager Offices at Ahmedabad, Pune, Lucknow, Delhi,

Banglore, Bhopal, Mumbai, Calcutta and Chennai which function as an extended

arm

of corporate office. It also has two Zonal Offices at Bhopal and Pune. Tier 3

comprises

of 54 Regional Offices at various geographical center of the country

LOCATION


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Union bank of India has its Head office in Mumbai at Nariman point.Bank has a wide

network of its branches all over India. Union Bank Of India is one of the leading bank

of Varanasi.

PRODUCTS

Union Bank of India offers its customers various types of products and services

so that they can make the most of their banking experiences. The wide range of

the services and products consist of:

Personal Banking

y Accounts & Deposits cumulative deposit scheme, deposit reinvestment

certificate, monthly income scheme, union flexi-deposit, senior citizens

scheme, multi gain savings account, no frills saving account, union super

salary account, union classic current account

y Retail Loans union cash, union home, union health, union miles, union

education, union top up, EMI calculator, union smile

y Cards - Classic / Silver / Gold, Corporate Credit Cards, Add-On Cards

y Insurance & Investment mutual fund, union healthcare

y Demat demat accounts, online share trading

y Payment


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NRI Banking

y Remittance - Union E-Remit, Nostro Details for Remittance

y Savings & Deposits - NRO Non Resident Ordinary A/c Scheme, NRE

Non Resident External Rupee, RFC, FCNR(B), Union Unfixed, Foreign

Currency Deposit

y Loan & Services house loans, foreign currency loans, loans against

deposit, immovable property, and shares or debenture

y Payments - Union Bill Pay

Corporate Banking

y CMS - Union Speed, Union Centralized Debits/Credits, Union Prompt

y E-Tax - Customs and Direct taxes, DGFT, Central Excise and Service

Tax

y Trade Finance trade finance for exporters, trade finance for importers,

foreign currency loans, correspondent banking


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y Insurance - Non life Insurance Corporate Agency, Insurance- Corporate

Agency

y Syndication of Loans

y MSM Banking

y Loans & Policies

InternetBanking

y Account Information

y Transfer of Funds

y Bills

y Requests

y Mails

y Trade

y Limits

y Currency

y Uploads

y Customi ation

y Financial enquiries

y Non Financial enquiries

Domestic Operations

Union Bank of India is having a State ofthe Arttreasury, which operates atthe

5th floor ofthe Bank's Central Office building at Nariman Point, Mumbai. In

conformity with the latesttreasury management concept, the Bank has fully

integrated its treasury operations and the Treasury in its present form operates

simultaneously in allthe financial markets vi ,. Money Market, DebtMarket,


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CapitalMarket, Foreign Exchange Market & Derivatives Market. The Treasury

is equipped with an upgraded software system, supported by latestinformation

and communication technologies and manned by a selectteam oftrained,

experienced and dedicated officers. A Mid-office operates within the Treasury,

which gives risk management supportin keeping with a well -documented and

updated risk management policy.

The Treasury also functions as the gateway oftransactions forthe Real Time

Gross Settlement (RTGS) system and main hub for Society for Worldwide

Inter-bank Financial Telecommunications (SWIFT) to which banks exchange

dealing branches spread across the country are conne cted. The Treasury has

been discharging a prominent role in messaging and remittance arrangements as

well. Union Bullet utili ing the RTGS gateway, was made available as a

convenient user-friendly product forthe Banks customers. Allthe CBS

branches ofthe Bank are RTGS enabled.

Apart from activities pertaining to management of funds and liquidity, the

domestic wing of Treasury also handles financialinstruments like:

Commercial Papers (CP)

Certificate of Deposits (CD)

Government Securities

Treasury Bills (TB)

Bonds and Debentures

Equities and various other derivatives.

The products and services offered by Treasury caterto the inter -bank market as

well as to the corporate customers ofthe bank. The Bank offers its customers,

including firms, companies, corporate bodies, institutions, provident funds


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trusts, Regional Rural Banks, Urban Cooperative Banks and Non-Banking

Financial Companies opportunities to invest in Government Securities as

allowed by Reserve Bank of India for non-competitive bidding.

Forex Operations

Union Bank of India, one of the major public sector banks in India having a

correspondent relationship with 345 leading international banks at all major

international centers. The bank has entered into Rupee Drawing Arrangements

(RDA) with 23 International Banks and 13 Exchange Houses in Middle East. The

Bank has also introduced a Internet-based Union e-Remit Product for NRIs in

U.K. and U.S.A. as well as for Exchange Houses in Middle East.

The modern state-of-the-art dealing room at its Integrated Treasury Branch at

Mumbai handles exchange business of its clientele. The bank has retained its

primacy as a leading market maker both in spot and forward markets, along with

foreign exchange swap markets.

The forex dealing desk at the Treasury is provided with all modern communication

facilities and is in the process of linking all its authorized branches via Reuters

Automated Dealing (RETAD) System, to provide on-line quotes for foreign

exchange transactions.

Through its large network of authorized branches, the bank caters to the foreign

exchange needs of its clientele engaged in export and import trade and the

Treasury provides rates for conversion of all major world currencies like U S

Dollar, Sterling Pounds, Euro, Swiss Francs, Japanese Yen and other exotic

currencies. The services to the customers of the Bank include hedging of foreign

currency risks by providing forward covers and various derivative products.


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The Bankis in a position to deliverits products promptly and efficiently to its NRI

customers through select pool ofCustomers Relationship Managers (CRMs)

posted at strategic locations. The range of products includes remittance facilities

and acceptance of deposits in Indian Rupees (NRE / NRO) as well as in designated

foreign currencies (FCNR). Resident as well as Returning Indians can avail of

benefits like Resident Foreign Currency Accounts (RFC).

Union Bank of India also offers derivative products like InterestRate Swaps (IRS),

Forward Rate Agreements (FRA) for hedging interest rate risks and for currency

risks, Currency Swaps and Options .

COMPETITORS

Union Bank ofindia has its various competitors like State Bank of India,Punjab

NationalBank,Bank of Baroda,Bank of India,Canara Bank,Oriental Bank,IDBI

Bank,CentralBank of India,Syndicate Bank etc.After a tough competition UBI

clearly scores overits most ofthe peers on various parameters.

STRATEGIES

Union Bank of India has accepted the challenges and has positioned itselfto

opportunities that technology has thrown open. The opening up of the

economy together with near total decontrol from the regulatory authoritieshas added impetus to our efforts. The transition from traditional banking to

technology banking has already begun and a number of technology projects

are under way and also envisaged forthe future. The present and proposed IT


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initiatives ofthe Bank encompasses the following:

All the 2531 branches of the Bank are now under CBS. Leveraging on the

CBS infrastructure Bank has centrali ed back office operations including

clearing, account opening, statement generations etc. in over 30 centres

Forex operations are fully computeri ed at all 69 Authori ed Dealing

branches. This facilitates submission of various statutory returns minimi ing

the chances of default besides ensuring proper monitoring of international

operations.

The Bank has set up a strong ATM networkto extend the reach of bankingservices to the esteemed customers. Presently over 1200 ATMs spread out

across India both Onsite and Offsite.Internet banking services of the Bank

offers variety of features to make the Banking a pleasure. Some of the

services offered online are single view of all the accounts, balance enquiry,

account statement, transaction history, transfer of funds to self as well as

third party accounts, request for cheque book, request for pay order/ DD etc.

Apart from the regular banking services as above, Internet Banking also

provides other value added services such as online ticketing of air & rail,

online tax payment, online trading of shares, online bill payments, online

Dematinformation, online LC opening etc.

Bank has also introduced SMS banking services and is providing both Pull

and Push services. Customer are now able to get alerts for all transactions

happening in their account.

UBI Net connects all the Offices and branches of bank located in 2500+


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594 crs from Rs 466 crs in the previous year.

The Banks CASA deposit portfolio showed an impressive growth of

29.36% to Rs 53957 Crs. as on 31

st

March

10 as againstRs.41711 Crs.in the previous year.

Non-Interest income grew by 33.18% YoY to Rs 1975 crs as against Rs

1483 crs in the previous year. Core fee based income grew by 32.74% to

Rs 896 crs as againstRs 675 crs in the previous year.

The Bank has been consistently showing Return on Average

Assets(RoAA) at 1.25 or greaterin the past 3 years. RoAA forthe year ended

31st

March10 was 1.25 as against 1.27 in the previous year. RoAA for Q410

was at 1.34 as against 1.25 in the corresponding period ofthe previous year.

Financial Highlights

Busi ess row h

Domestic Business mix of the Bank has registered growth of 22.33%

(y-o-y) to Rs.287942 Crore as on 31

st

March10 from Rs 235376 crore

as on 31st

March09.

GlobalBusiness mix ofthe Bank registered growth of 22.92% YoY to

Rs 291289 Crore as of 31st

March10.

Key Financials

The Bank recorded a quarterly Operating profit ofRs.1148 crs for Q410

as againstRs.912 crs for Q409 registering increase of 25.88%.

Net Profit increased from Rs. 466 crore to Rs 594 crore registering a


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growth of 27.47% QoQ.

Net InterestMargin (NIM) for quarter ended 31st

March10 is at 3.39%

as against 2.69% in the corresponding period ofthe previous year.

Capital Adequacy as perBasel II stood at 12.51% as of 31st

March10 as

against 13.27% in the previous year.

Net Worth ofthe Bank posted a rise to Rs. 8758 crs as on 31st

March10

from Rs. 6964 crs as ofMarch 09 due to plough back of profits.

Return on Average Assets (RoAA) was at 1.25% as on 31st

March10 as

against 1.27%. On a quarterly basis, Return on Average Assets has

improved to 1.34% for quarter ended 31st

March10 as against 1.25%

in the corresponding period ofthe previous year.

Asset Quality:

The et PA f the B i ll i eased f .34% as

3st

arch09 t 0.8 % as 3st

arch10. ross PAshas

also i creased to . 0% from1.96% i the revious ear.

ross PA level i creased to s. 671 crore as on 31st

arch10 from s.1923 crore as on 31st

arch09. et PAs

increased in absolute terms from s.326 crore as on 31st

arch09 to s. 965croreason 31st

arch10


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o The Banks domestic deposits as on 31st

March10 reached a level ofRs.

169670 crs from Rs. 138416 crs as on 31st

March09, an increase of

22.58%. In sync with its strategic focus, the Banks CASA deposits grew

by an impressive 29.36% to 53957 crs as on 31st

March10 from Rs.

41711 crs in the previous year.

o Gross domestic advances of the Bank reached a level ofRs. 118272crs as

on 31st

March10, registering an increase of 21.98% over 31st

March09.

o MSME advances grew by 40.47% to Rs.22685 crs as on 31st

March10

from Rs 16149 crs in the previous year. Banks Retail advances (Personal

Segment) grew by 33.83% YoY to Rs.13506 crs from Rs.10092 crs in the

previous year. Home Loans grew by 22.56% to Rs 8115 crs from Rs 6621

crs in the previous year. Educationalloans portfolio of the Bank grew by

32.48% YoY to Rs.1301 crs as on 31st

March10.

Capital & Net Worth:

o The Banks Capital Adequacy Ratio (CRAR) is at 12.51% as on 31st

March

2010 as perBasel II.

o The Banks Net Worth increased by 25.76% and stood atRs. 8758 crore as

on 31st

March 10 as compared to Rs.6964 crore in the previous year.

Financial Performance (12 Months):

o The Net Interest Margin (on interest earning assets) of the Bank stood at


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2.71% forthe year ended 31st

March10 as against 3.24% in the previous

year.

o The Banks Net Interest Income increased from Rs.3813 crs to Rs

.4192 crs, a growth of 9.94% YoY.

o The banks non-interest fee based income grew by 33.18% to Rs 1975 crs

in FY 10 as against Rs 1483 crs in the previous year. Core fee based

income grew by 32.74% to Rs 896 crs from Rs 675 crs in the previous

year.

o Operating expenses are atRs.2508 crs in 31st

March10 as againstRs.2214

crs in the previous year. The ratio of Operating expenses to Average

working funds reduced to 1.52% as of 31st

March10 as against 1.63% in

the previous year.

Ratio Analysis (Yearly):

o Net Interest Margin (NIM) was at 2.71% for 31st

March10 as against

3.24% in the previous year.

o Return on Average Assets (ROA) was at 1.25% as on 31st

March10 as

against 1.27% in the previous year.

o Return on Equity is at 23.69% as on 31

st

March10 as against 24.79% in theprevious year.

o EPS and Book value showed improvementto Rs. 41.08 and Rs. 173.38 as

on 31st

March10 from Rs.34.18 and Rs. 137.87 respectively in the


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previous year.

o Cost to Income Ratio has improved to 40.66% as of 31st

March10 from

41.81 % in the previous year.

EMPLOYEE PRODUCTIVITY

o Business per Employee increased to Rs.853 lacs as of 31st

March10 from

Rs. 694 lacs as on 31st

March09.

o Net Profit per Employee increased to Rs.7.47 lacs as of 31

st

March10 from

Rs 6.28 lacs as on 31st

March09.

FUTURE PLANS

y The Bank aims for a deposits growth of approx. 22% and advances

growth of 25% for 2010-11.

y Banktargets CASA Ratio of 35% by 31st

March 2012.

y Return on Equity to be 25.00% and Return on Average Assets to be

1.25% by 31st

March 2011.

y Transaction through electronic mode to reach 50% of total

transactions by 31st

March 2011.

y Bank will endeavour to reign in Gross NPAs below 2.10% by 31st


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March 2011.

SWOT ANALYSIS

Strengths

Has been able to maintain healthy asset quality. In Q1 FY09, Gross NPAs

were 2.08%

and Net NPAs were 0.15% with healthy coverage ratio of 93.05%. UBI willcontinue to

operate with Gross NPAs of 2.00% with delinquency ratio below 1.00%.

Very good costto income ra tio of 38% in FY08 as the bank has managed to

bring down

and contain its costs significantly. Has one ofthe best operating efficiencies

in the banking

sector space.

SuperiorROE (24.67% inFY08) reflect high profitability of

the bank.

UBI has an excellenttechnological platform with 100% core banking

solution rollout and

increased use of electronic mode in transactions (12% ofthe total

transactions). This

helps the bank reduce risk, improve efficiency and reduce costs significantly.

Weaknesses

Higherinterest rates are putting pressure on NIM, as the bankis facing


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difficulty in passing

on increasing cost of funds to its customers.

CD ratio has reached 73.1% in FY08. It means the bank has to rely on bulk

deposits to

finance advances growth.

Opportunities

UBI still has a scope forimproving its CASA, which is currently at 34.76%.

The bank has

planned to achieve a CASA target of 40% by 2012.

Increasing share of fee-based income in operating income represents very

good opportunity

forthe bank. The bankis expecting its fee-based income to grow in excess of

a CAGRof

30%.

Opening of 400 new branches and expansion in the international market by

increasing its

presence in 10 countries with stress on Australia, Canada, Abu Dhabi and

United Kingdom

Threats

Rising interest rates coupled with slowdown in the economy could resultin

higher

delinquencies.

Increasing money supply and inflationary pressures may prompt RBI to

continue monetary

tightening atleastin the short-term..


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TOPIC OF THE PROJECT

APPRAISAL AND ANALYSIS OF CREDITREQUIREMENTS OF LARGE

BORROWERS AND SMEs


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Introduction

Project financing is an innovative and timely financing technique that has been

used on many high-profile corporate projects, including Euro Disneyland and

the Eurotunnel. Employing a carefully engineered financing mix, it has long

been used to fund large-scale natural resource projects, from pipelines and

refineries to electric-generating facilities and hydro-electric projects.

Increasingly, project financing is emerging as the preferred alternative to

conventional methods of financing infrastructure and otherlarge -scale projects

worldwide.

Project Financing discipline includes understanding the rationale for project

financing, how to prepare the financial plan, assess the risks, design the

financing mix, and raise the funds. In addition, one must understand the cogent

analyses of why some project financing plans have succeeded while others have

failed. A knowledge-base is required regarding the design of contractual

arrangements to support project financing; issues for the host government

legislative provisions, public/private infrastructure partnershi ps, public/private

financing structures; credit requirements of lenders, and how to determine the

project's borrowing capacity; how to analyze cash flow projections and use

them to measure expected rates of return; tax and accounting considerations;

and analyticaltechniques to validate the project's feasibility

Project finance is different from traditional forms of finance because the credit

risk associated with the borrower is not as important as in an ordinary loan

transaction; whatis mostimportantis the identification, analysis, allocation and

management of every risk associated with the project.


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The purpose ofthis projectis to explain, in a brief and general way, the manner

in which risks are approached by financiers in a project finance transaction.

Such risk minimization lies atthe heart of project fin ance.

In a no recourse or limited recourse project financing, the risks for a financier

are great. Since the loan can only be repaid when the projectis operational, if a

major part of the project fails, the financiers are likely to lose a substantial

amount of money. The assets that remain are usually highly specialized and

possibly in a remote location. If saleable, they may have little value outside the

project. Therefore, it is not surprising that financiers, and their advisers, go to

substantial efforts to ensure thatthe risks associated with the project are reduced

or eliminated as far as possible. Itis also not surprising that because ofthe risks

involved, the cost of such finance is generally higher and it is more time

consuming for such finance to be provided.

Project finance is the financing of long-term infrastructure and industrial

projects based upon a complex financial structure where project debt and equity

are used to finance the project. Usually, a project financing scheme involves a

number of equity investors, known as sponsors, as well as a syndicate of banks

which provide loans to the operation. The loans are most commonly non-

recourse loans, which are secured by the projectitself and paid entirely from its

cash flow, ratherthan from the general assets or creditworthiness ofthe project

sponsors. The financing is typically secured by all of the project assets,

including the revenue-producing contracts. Project lenders are given a lien on

all of these assets, and are able to assume control of a project if the project

company has difficulties complying with the loan terms.

Generally, a special purpose entity is created for each project, thereby shielding

other assets owned by a project sponsor from the detrimental effects of a project

failure. As a special purpose entity, the project company has no assets otherthan


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the project. Capital contribution commitments by the owners of the project

company are sometimes necessary to ensure that the project is financially

sound. Project finance is often more complicated than alternative financing

methods. It is most commonly used in the mining, transportation,

telecommunication and public utility industries.

Risk identification and allocation is a key component of project finance . A

project may be subject to a number of technical, environmental, economic and

political risks, particularly in developing countries and emerging markets.

Financial institutions and project sponsors may conclude that the risks inherent

in project development and operation are unacceptable.To cope with these risks,

project sponsors in these industries (such as power plants or railway lines) are

generally completed by a number of specialist companies operating in a

contractual network with each other that allocates risk in a way that allows

financing to take place. The various patterns of implementation are sometimes

referred to as "project delivery methods." The financing of these projects must

also be distributed among multiple parties, so as to distribute the risk associated

with the project while simultaneously ensuring profits for each party involved.


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AN OVERVIEW

(Banking Sector)

There have been major structural changes in the financial sector since bankingsector reforms were introduced in India in 1992. Since then Banks have been

lending aggressively providing funds towards infrastructure sector. Major policy

measures include phased reductions in statutory pre-emption like cash reserve

and statutory liquidity requirements and deregulation of interest rates on

deposits and lending, except for a select segment. The diversification of

ownershi p of banking institutions is yet another feature which has enabled

private shareholding in the public sector banks, through listing on the stock

exchanges, arising from dilution of the Government ownershi p. Foreign direct

investmentin the private sector banks is now allowed up to 74 per cent.

The co-existence of the public sector, private sector and the foreign banks has

generated competition in the banking sector leading to a significant

improvementin efficiency and customer service.

Rationale for the study

Offering creditis an operation fraught with risk. Before offering creditto an

organization, its financial health must be analyzed. Credit should be disbursed

only after ascertaining satisfactory financial performance. Based on the

financial health of an organization, banks assign credit ratings. These credit

ratings are used to fix the interest rate and quantum ofinstallment.


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This project aims to analyze the credit health of organizations that ap proach

Union Bank of India for credit facilities. After analyzing credit health, the credit

rating is determined. On the basis of credit rating, the interest rate guidelines

circularis consulted to fix a price forthe credit facilities i.e. determine the

interest rate.

Credit disbursement at Union Bank of India

Financial requirements for Project Finance and Working Capital purposes are

taken care of at the Credit Department. Companies that intend to seek credit

facilities approach the bank. Primarily, credit is required for following

purposes:-

1. Working capital finance

2. Term loan for mega projects

3. non fund based Limits Like Letter of Guarantee, Letter ofCredit

Companies present audited balance sheets of the current and previous years.

These are used to determine the financial health, turnover trends and rise and

fall of profitability. Then credit rating is done.

The financial health and credit rating are theoretical methods for determining

the rightinterest rate. However, in practice, banks consider other factors such as

history with client, market reputation and future benefits with clients. Thus, a

difference exists between theory and practice.

Objectives of the project

To assess the financial health of organizations that approach

Union Bank of India for credit forimport export purposes. This

would entail undertaking ofthe following procedures:


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37

y Analysis of past and present financial statements

y Analysis of Balance Sheet

y Analysis of Cash Flow Statements

y Examination of Profitability statements

y Examination of projected financial statements

y Examination of CMA data

y To assess the suitability of the company for disbursement of credit.

This would involve the following actions:

y Use of credit rating charts

y Evaluation of management risk

y Evaluation of financial risk

y Evaluation of market-industry risk

y Evaluation of the facility

y Evaluation of compliance of sanction terms

y Calculation of credit rating

Determination of interest rate: This would entail the following sequence

of actions.

y Collect data regarding financial health evaluation

y Noting down of credit rating

y Referencing the banks interest rate guidelines circular

y Choosing the interest rate from the circular on the basis of financial

health and credit rating


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38

Term Loan Assesment

Ste s in term loan rocessin

Submission of Project Report along with the Request Letter.

Carrying out due diligence

Preparing Credit Report

Determining Interest Rate

Preparing and submission of Term Sheet

If not approved if approved

Pre aration o ro osal

Submission of Proposal to designated authority

IfNo queries raised Ifqueries raised

Project Rejected Solve the queries

Sanction o

ro osal onvariousTerms & Condition

Communication o

SanctionTerms & Condition

Ackno

led ement o

Sanction

A lication to comply

it Sanction Terms &Condition & e

ecution o

Disbursement


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CONDUCTING FEASIBI ITY STUDY

The success of a feasibility study is based on the careful identification and

assessment of all ofthe importantissues for business success. A detailed Project

Report is submitted by an enterpreneur , prepared by a approved agency or a

consultancy organisation. Such report provides in depth details of the project

requesting finance. It includes the technical aspects, Managerial Aspect, the

MarketCondition and Projected performance ofthe company. Itis necessary for

the appraising officerto cross checkthe information provided in the report for

determining the worthiness ofthe project.

ProjectDetails:

Definition ofthe project and alternative scenarios and models.

y Listthe type and quality of product(s) or service(s) to be marketed.

y Outline the general business model (ie. how the business will make

money).

y Include the technical processes, size, location, kind ofinputs

y Specify the time horizon from the time the projectis initiated untilitis up

and running at capacity.

Relationship to the surrounding geographical area.

y Identifies economic and socialimpact on local communities.

y Identifies environmentalimpact on the surrounding area.


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4

ARKET FEASIBI ITY

Industrydescription.

y Describes the size and scope of the industry, market and/or market

segment(s).

y Estimates the future direction of the industry, market and/or market

segment(s).

y Describes the nature of the industry, market and/or market segment(s)

(stable or going through rapid change and restructuring).

y Identifies the life-cycle of the industry, market and/or market segment(s)

(emerging, mature)

Industry Competitiveness.

y Investigates industry concentration (few large producers or many small

producers).

y Analyzes major competitors.

y Explores barriers/ease of entry of competitors into the market orindustry.

y Determines concentration and competitiveness of input suppliers and

product/service buyers.

y Identifies price competitiveness of product/service.

Market Potential.

y Willthe product be sold into a commodity or differentiated product/service

market?

y Identifies the demand and usage trends ofthe market or market segmentin

which the proposed product or service will participate.


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4

y Examines the potential for emerging, niche or segmented market

opportunities.

y Explores the opportunity and potential for a "branded product".

y Assesses estimated market usage and potential share of the market ormarket segement.

Sales Projection.

y Estimates sales or usage.

y Identifies and assess the accuracy of the underlying assumptions in the

sales projection.

y Projects sales under various assumptions (ie. selling prices, services

provided).

Access to Market Outlets.

y Identifies the potential buyers of the product/service and the associated

marketing costs.

Investigates the product/service distribution system and the costs involved.

ORGANIZATIONAL/MANAGERIAL FEASIBILITY

Business structure.

y Outline alternative business model(s) (how the business will make money).

y Identify the proposed legal structure ofthe business.

y Identify any potentialjoint venture partners, alliances or other important

stakeholders.


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4

y Identify availability of skilled and experienced business managers.

y Identify availability of consultants and service providers with the skills

needed to realize the project, including legal, accounting, industry experts,

etc.y Outline the governance, lines of authority and decision making structure.

Managerial Personnel

Managerial Personnel play a key role in d irecting the working ofthe company.

Itis important for an organisation to have a pool of ef ficient personnel who bear

the capacity to bail the company out from crisis situation and work towards

optimum utilisation of organisational resources. Such capaci ty ofthe personnel

can be determined by having complete details on following key aspects:

Market reputation on the promoter/ management ofthe company

Hands on experience ofthe management personnelin the industry /Business

managed by qualified personnel

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

crisis (for example, this could be derived from a strong group company) Decision making Is it concentrated

Organisation structure / Labour relations

Is any group company in default / Any Directors on RBIs negative list /

Borrowers track-record in honoring financial commitment.

Length of relationship with the bank

TECHNICAL FEASIBILITY

Technology plays an important role in maintaining a competitive position in this

highly competitive market conditions. Investing in the propertechnology is the

key to success itirrespective of size of business thus for achieving its projected

performance, it is important for it to have sound technological background.


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4

Such technical competence ofthe project can be determined by having detailed

study done on following key aspects:

Determining Facility Needs.

y Estimates the size and type of production facilities.

y Investigates the need for related buildings, equipment, rolling-stock

Suitability of Production Technology.

y Investigates and compare technology providers.

y Determines reliability and competitiveness of technology (proven or

unproven, state-of-the-art).

y Identifies limitations or constraints oftechnology.

Availability and Suitability ofLocation.

y Access to markets.

y Access to raw materials.

y Access to transportation.

y Access to a qualified labor pool.

y Access to production inputs (electricity, natural gas, water, etc.).

y Investigate emissions potential.

y Analyze environmentalimpact.

y

Identifies regulatory requirements.y Explores economic developmentincentives.

y Explores community receptiveness to having the business located there .

Raw materials.


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44

y Estimates the amount of raw materials needed.

y Investigates the current and future availability and access to raw materials.

y Assesses the quality and cost of raw materials and markets of easily

substituted inputs.

Other inputs.

y Investigates the availability oflaborincluding wage rates, skilllevel, etc.

y Assesses the potential to access and attract qualified management

personnel.

FINANCIAL FEASIBILITY

Estimate the total capital requirements.

y Assesses the capital needs ofthe business project and how these needs will

be met.

y Estimates capital requirements for facilities, equipment and inventories.

y Determines replacement capital requirements and timing for facilities and

equipment.

y Estimates working capital needs.

y Estimates start-up capital needs until revenues are realized at full capacity.

y Estimates contingency capital needs (construction delays, technology

malfunction, market access delays, etc.

y Estimates other capital needs.

y Estimated equity and credit needs.

y Identifies alternative equity sources and capital availability -- producers,

localinvestors, angelinvestors, venture capitalists, etc.


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4

y Identifies and assess alternative credit sources -- banks, government (ie.

directloans orloan guarantees), grants, local and state economic

developmentincentives.

y

Assesses expected financing needs and alternative sources -- interest rates,terms, conditions, covenants, liens, etc.

y Establishes debt-to-equity levels.

Budgets expected costs and returns of various alternatives.

y Estimates expected costs and revenue.

y Estimates the profit margin and expected net profit.

y Estimates the sales or usage needed to break-even.

y Estimates the returns under various production, price and sales levels. This

may involve identifying "best case", "typical", and "worst case" scenari os

or more sophisticated analysis like a Monte Carlo simulation.

y Assesses the reliability ofthe underlying assumptions ofthe financial

analysis (prices, production, efficiencies, market access, market

penetration, etc.)

y Creates a benchmark againstindustry averages and/or competitors (cost,

margin, profits, ROI, etc.).

y Identifies limitations or constraints ofthe economic analysis.

y Determines project expected cash flow during the start -up period.

y Identifies project an expected income statement, balance sheet, etc. when

reaching full operation.

Study Conclusions


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4

The study conclusions contain the information used for deciding whether to

proceed business. The major categories this section should include are:

y Identify and describe alternative business scenarios and models.

y Compare and contrastthe alternatives based on their business viability.

y Compare and contrast the alternatives based on the goals of the producer

group.

y Outline criteria for decision making among alternatives.

Next Step

Afterthe feasibility study has been completed and presented, a carefully study

and analysis the conclusions and underlying assump tions. Next, it will be

decided which course of action to pursue.

Potential courses of action include:

y Choosing the most viable business model, forinvestment

y Identifying additional scenarios for further study.

y Deciding that a viable business opportunity is not available and moving to

end the business assessment process.

CREDIT REPORT AND CREDIT RATING

The credit report is an important determinant of an individual's financial

credibility. They are used by lenders tojudge a person's creditworthiness. They

also help the person concerned to narrow down on the financial problem areas.

Credit report is a document, which comprises detailed information about the

credit payment history of an applicant. It is mostly used by the lenders to

determine the credit worthiness of an applicant. The business credit reports


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4

provide information on the background of a company. This assists one to take

crucial business related decisions. People can also assess the amount of business

risk associated with a company and then decide whether they would be

comfortable in providing them with credit facilities. The degree ofinterestthat

would be shown by investors in their company can also be gauged from the

business credit reports as they can get an idea of the conception of their

customers regarding themselves. Since these records are updated at regular

intervals of time they enable people to identify the risklevels associated with a

business as well as its future. These reports also allow businesses to get detailed

information aboutthe financial status of business partners and suppliers.

Union Bank of India follows a finely defined CreditRating Model for assessing

the creditworthiness of the applicant. The credit rating model asses various

aspects ofthe projects and assigns scores againstthem thereby determining the

risklevelinvolved with the project.

Itis divided in Four Sections:

1.Rating of the Borrower

Financial Risk

Management Risk

2.Market Condition/ Demand Situation

3.Rating of the Facility

4.Business Consideration

5.Cash Flow related parameters

)Rating oftheBorrower: This part of credit rating model deals

with assessing the financial and managerial ability of the borrower. The


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4

financial ability of the firm is derived by calculating ratios that determine the

shortterm and long term financial position ofthe firm

Shortterm ratios include CurrentRatio, determines the liquidity position ofthe

company over a period of one year. The current ratio is an indication of a firm's

market liquidity and ability to meet creditor's demands. It is excess of current

assets over current liability. If current liabilities exceed current assets (the

current ratio is below 1), then the company may have problems meeting its

short-term obligations. Ifthe current ratio is too high, then the company may not

be efficiently using its current assets.

According to the guidelines given to UBI the ideallevelis at 1.33:1 howeverthe

acceptable levelis at 1.17:1.

However attimes current ratio may not be a true indica tor, the current ratio for

road projects is very high but this does not indicate that the company is not

using its assets well but the ratio is high because the activity involves more in

dealing with current assets. Hence itis important forthe evaluator to understand

the nature ofthe industry.

Long term ratio include Debt Equity Ratio is a financial ratio indicating the

relative proportion of equity and debt used to finance a company's assets. This

ratio is also known as Risk, Gearing or Leverage. A high debt equity ratio is not

preferable by an investor as the company already has aquired high amount of

funds from market thereby reducing the investor share over the securities

available, increasing the risk.

Itis also important forthe lender bankto assess the firms debt paying capacity

over a period. Such capacity is derived by calculating ratio like Debt Ser vice

Coverage Ratio minimum acceptable levelis 1.50.

It also necessary forthe lenderto determine the ability ofthe firm to achieve the

projected growth by evaluating the projected sales with actuals.However such

parameter remains non applicable ifthe business is new.


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4

Financial risk evaluation is only one of the parameter and not the only

parameter for determining the risk level. It is important to evaluate the

ManagementRisk also while evaluating the risk relating to borrower.

Itis the management ofthe company that acts as guiding force forthe firm. The

key managerial personnel should bear the capac ity to bail out the company

crisis situation. In order to remain competitive itis essentialto take initiatives.

Such skills are developed over years of experience, thus for better performance

itis required to have a team of well qualified and experienced personnel.

2) Market potential/ Demand Situation

A Company does not operate in isolation there are various market forces that

acts in either favourable or unfavourable mannertowards its performance. Thus

the rating would not give true picture if does take market or demand situation in

consideration.

The demand supply situation / market Potential plays an important role in

determining the growth level ofthe company like

i) Level of competition : monopoly , favourable , unfavourable

ii) seasonality in demand : affected by short term seasonality, long term

seasonality or may not be affected by seasonality in demand.

iii)Raw Material Availability:

iv)Locational Issues like proximity to market, inputs, infrastructure:

Favourable, neutral, unfavourable.

v)Technology ie, proven Technology- not to be changed in immediate future,

technology undergo change, outdated technol ogy.vi)Capacity utilisation

3)Rating of the Facility:

The company can start functioning only after completing statutory obligations

laid down by the governing authority. Such statutory obligation involves


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obtaining licenses, permits for ensuring smooth operations. Preparation and

Submission of Financial Statements, Stock statements in the standard format

within the given time schedule.

4)Business Consideration:

The length of relationship with the bank enables the lenderto assess the

previous performance ofthe account holder. A good track record acts in the

favour ofthe applicant,

Thus CreditRating ofthe Business takes into consideration various aspects that

directly orindirectly bears an effects the performance ofthe business.

After evaluating the risklevelinvolved the lender bank decided on lending

InterestRate.

In UBI they are categorised in 9 segements

1.lowest Risk CR-1

2.Minimal Risk CR-2

3.Moderate Risk CR- 3

4.Satisfactory Risk CR- 4

5.Acceptable Risk CR- 5

6.Watch list CR- 6

7.Risk Prone CR- 7

8.high risk CR- 89.Substanadar CR- 9

10. Doubtful CR-10

11. Loss/NPA CR-11


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In UBI, a business receiving Credit Rating above level 6 are not considered

good from point ofinvestment and thus are avoid ed.

DETERMINATION OF INTEREST RATE

The interest rate is determined from the interest rate guidelines circular.

This circularis regularly updated to reflectthe banks latest credit policies.

The rupee creditis based on BPLRand the foreign exchange loans arebased on LIBOR.

The guidelines define how much interest rate is to be assigned for a

particular credit rating and credit duration. However, credit rating and its

use in determining interest rate is a theoretical concept and the bank may

allow a reduction in interest rate underthe following conditions:

Good Client

The organization is a long term client and brings good business to the bank.

The organizations actions show thatitintends to become a long term

customer ofthe bank

Banking Consortium

The organization is seeking credit from a consortium of banks. In some

cases like this, the lead bank might decide the interest rate and allthe

member banks ofthe consortium follow this interest rate.

TERM SHEET


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Following a favourable feasibility check, credit rating the next step is preparing

term sheet . A Term Sheet is brief document that provides details on aspects

like:

y

Account Detailsy Financial highlights for immediate previous two audited

years and projection for proceeding year

y Nature of Project

y Cost of Project

y Means of finance

1.Nature of Facility2.Purpose

3.Tennure ofTerm Loan

4.Interest rate Reset

5.Margin

6.Interest Rate, Commission

Door to Door Tenor ie.the period within which the entire

amount is to be disbursed.

o Repayment Terms

o Prime Security

o Collateral Security

oUpfront fees i.e. the charges levied by the bank for

processing the documents.


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PROPOSAL

An approved term sheetleads to preparation proposal. A proposalis prepared in

standard format, this enables the bank to keep a proper track record and a lso

facilitates proper comparison. A proposal a full fledged document providing

details on project submitted and requesting finance from bank. A proposal

contains information on following aspects:

* Details of Account: It includes name of the Account Holder, Date of

incorporation, Line of Activity, Internal Credit Rating level, Address of the

Registered Office, Name of Directors, Share Holding Pa ttern, Asset

Classification, Purpose ofthe Loan.

* Securities:Lenders often feel more confident about a loan ifthey are given a

security interestin the assets of a business. Then, ifthe borrower does not repay

the loan as promised, the lender can tak e the property the borrower pledged, sell

it and use the proceeds to repay (or partia lly repay) the borrowed amount.I t

provides detailed information on nature of securities given in lieu of the

Loan.they are oftwo types Prime securities, Collateral Secu rities

Prime Securities: Pari Passu is a term used in banking transactions which means

thatthe charge to be created is in continuation of an earlier charge which might

be held by the same institution or by an otherinstitution.

Collateral Securities: In lending agreements, collateralis a borrower's assetthat

is forfeited to the lender if the borrower is insolvent --- that is, unable to paybackthe principal and interest on the loan. When insolvent, the borroweris said

to default on the loan, in which case the lender becomes the owner of the

collateral. Itincludes details on


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Nature / Description of collateral security indicating area & location of

property

Value in Rupees.

Date of valuation along with name of Valuer

Insurance Amount & Date of Expiry

Personal guarantee / Corporate Guarantee if any, includes Name of the

guarantor, Value of Guarantee.

* Financial Highlights:

It provides details of important financial el ements over a period of years. It

includes

Details on Paid capital, Tangible Net worth, Net working Capital,Current

Assets, Current Liabilities, Net Profit, Net Sales, Reserves and Surplus,

Intangible Assets, Long Term Liabilities, Fixed Assets, Investments, Non

current Assets like guarantees , Cash Accruals, Capital employed.

It also includes ratios like Debt Equity Ratio, Current Ratio, Debt Service

Coverage Ratio and so.

The interpretation of the financial data presented provides information on the

performance trend ofthe company also ofthe Projections made. Such financial

highlight play an important role in assessing the financial strengths and

weakness ofthe business.

* Status ofthe project:

A brief of Project

In this part of proposal a brief about the project is explained, it includes

information on nature, type of project, purpose of the project, commencement


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details, the promoters and related details of the project. Ifitis a on-going project

it also gives details on progress and status of progress

* Evaluation of Industry :

This Section gives brief details on the

1. Scope ofthe industry

2. Growth level and overall performance ofthe industry

3. Recent Developments and Trend Evaluation

* Conduct ofthe Account:

This section provides details on :

Regularity in Submission of

Stock Statements /Book Debt Statement

QPRStatements / Half Yearly Statement

Financial Statements

CMA Data

* Compliance to Terms of Sanction

It furnishes information on following aspect:

Completion ofMortgage formalities

Registration ofCharges with RoC

Whether documents valid and in force

Compliance ofRBI guidelines

Whether consortium meetings held at prescribed periodic intervals where

the Bankis the leader.

* Exposure details from banking system (existing) (Incl. OurBank)


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The sharing pattern of the banks is mentioned in this section of proposal. It

includes

Name ofthe bank

Percentage of share forthe fund based and non Fund based Limits

Amountin Rs.

Non Fund based credit are in form of guarantees like Letter of Credit (L/c),

Letter of guarantee (L/g)

Letter ofCredit

A Letter of credit also known as documentary credit is the most commonly

accepted instrument of settling internationaltrade payments. A letter of creditis

an arrangement whereby a bank, acting atthe request of a customer, undertakes

to pay a third party by a given date, on documents being presented in

compliance with the conditions laid down.

Letter of Guarantee

A letter from a bank stating that a customer owns a particular security and that

the bank will guarantee delivery ofthe security. A letter of guarantee is used by

an investor who is writing call options when the underlying stockis notin his or

her brokerage account. A Call Option is an agreementthat gives an investorthe

right (but not the obligation) to buy a stock, bond, commodity, or other

instrument at a specified price within a specific time period .

Financial Guarantee:

A non-cancelable indemnity bond guaranteeing the timely payment of

principal and interest due on securities by the maturity date. If the issuer

defaults, the insurer will pay a fixed sum of money to holders of the

securities. Financial guarantees are similar to a Standby Letter of Credit,

but are issued by an insurance company. A Standby Letter of Credit is a


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form of insurance on an underlying agreement or obligation (contract),

insuring all parties to the contract against failure to perform or pay on the

part of one or another party to the contract. Standbys are issued by banks.

Assessment of Non Fund Based Limit

1. Non Fund Based Limits are normally to be sanctioned for exixting

customer only who already enjoy fund based limits

2. If new borrower full processing as applicable to Fund Based Limits to be

carried.

3. Borrowers background and experience of meeting commitments to be

examined in details.

4. L/c limit to be considered as per terms of Purchase or contract, lead

period and minimum economical quantity of supply of stocks

5. Non Fund based Limits are to be supported by necessary fund based

limits.

6. While Assessing the L/g Limit contract or agreement which is the base

for L/g, should be examined in details for any ambiguos clauses.

7. Any request for financial Guarantee to be critically examined before

taking decision.

* Details of Sister/ Allied Concerns:

This section provides information aboutthe Sister/ Allied Concerns aspects like

the performance, promoters, share holding pattern, operation exposure andexperience from various banks.

* Terms and Condition:


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Itis important both forthe bank and the applicantto safeguard its interest, this

could be achieved by settling at mutually acceptable terms and condition in

orderto ensure that both the parties the lender and borrower perform their part

of obligation thereby not putting other party atloss. Allloans are subjectto

regulations and conditions. The legal information relating to these regulations

and conditions can be viewed in this section. Itis advisable for both the parties

to read this information carefully before approval.

DISBURSEMENT:

After submission of Proposal to Designated/ Sanctioning Authority for

sanctioning the Term Loan. the authorities may raise querries, if any relating to

projects and thereby convey itto the processing officerthe processing officerin

turn addresses them to the borrower for necessary step to be taken, such querries

are required to be solved to the earliest by the applicant for further processing of

the proposal.

If the authorities are satisfied and have no further querries with respect to

proposal,the Loan gets sanctioned and the disbursement would be released in as

perthe terms decided.

FOLLOW-UP:

This is most crucial stage in process of term loan assessment. Since amount of

credit required is usually high, such amounts are disbursed in one installment,

they are paid in installments.This helps the lender bankto understand and assess

the utilisation of funds disbursed by the lenderBank. Such evalua tion is done by


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obtaining Lenders EngineerReport, it is report that provides complete details

ofthe status ofthe project. Itis prepared on monthly basis. It also provides CA

Report, it verifies the Financial details furnished to bank for further

disbursement.This is known as renewal of account.

AnalysisofCredit proposals

Cash Creditrequirementby M/s Swadeshi Aahar Private LimitedofRs.acs forpurposeofFood & Agro Based Processing Units Category

M/S Swadeshi Aahar is a private ltd company and was established in 2002.

The total Authorised Capital of the company is Rs.360 lacs & Paid up

capital of the company is Rs.364.10 Lacs The company is engaged in Flour

Milling business and has its Manufacturing Unit at A-4, Industrial Area,

Ramnagar, Chandauli.

.Directors of the company are Mr.Vijay Kumar Gupta, Mr.Neekay Lal,

Mrs.Godawari Devi & Mr.Rajendra Prasad Jaiswal All the three promoter

directors are having vast experience in the field of Flour Mill and Food Processing unit..

PROPOSAL FOR: ENHANCEMENT

PURPOSE OF THE NOTE: RENEWAL OF CC(HYP.) LIMIT AT Rs.680.00 LACS & SANCTION OFTERM LOAN OF Rs.160.00 LACS UNDER FOOD & AGRO BASED PROCESSING UNITSCATEGORY.

GROUP : No specific GroupBANKING ARRANGEMENT : Multiple LEAD BANK: N.A.MONTH OF REVIEW : June 2010 OUR SHARE: 95%ASSET CLASSIFICATION : StandardINTERNAL CREDIT RATING : CR-4STATUS OF ACCOUNT Regular

Early Alert

SystemSpecial Mention

Account


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1. a) NAME OF THE ACCOUNT : M/s Swadeshi Aahar Pvt. Ltd.

b) BRANCH / ZONE : Varanasi Main / CZ-I

c) DATE OF INCORPORATION : 02.09.2002. Incorporation No.U15313UP2002PTC 026895, ROC,Kanpur

2. CONSTITUTION : Private Limited Company

3. LINE OF ACTIVITY : Flour Mill / Atta Chakki

4. ADDRESS -4.1 Regd. / Admn. Office : 8/20 Telia Nala Raj Ghat Varanasi.

4.2 Unit / Works : A-4, Industrial Area Ramnagar,Chandauli.

5. NAMES OF PROPRIETOR /PARTNERS / DIRECTORS & THEIRMEANS

:

(Rs. in lacs)

Name of the Directors

Means as perCR

dtd.27.05.2009

1. Mr.Vijay Kumar Gupta 93.942. Mr. Neekay Lal 302.503. Mrs. Godawari Devi 181.33

4.Mr. Rajendra PrasadJaiswal (EmployeeDirector) N.A.T o t a l 577.77

6. BACKGROUND OF PROMOTERS /DIRECTORS / PROPRIETOR / PARTNERS

:

Except the 4 th Director, the remaining directors are close relatives and familymembers. Mr. Vijay Kumar Gupta, aged about 37 years, has more than 20 years ofexperience in food processing industry. His father Mr. Neekay Lal is engaged in foodprocessing industry since 1970. His mother Smt. Godawari Devi is also looking after thefamily business since 1977. Thus all the three promoter directors are having vastexperience in the field of Flour Mill and Food Processing unit.

7. CAPITAL STRUCTURE :

Authorised Capital : Rs.360.00 lacs (3,50,000 shares of Rs.100/-each)

Issued & Subscribed Capital : Rs.355.10 lacs (2009-10)Paid Up Capital : Rs.355.10 lacsBook Value : Rs.142.37 ps. (As on 31.03.2009-Provl.)Market Value : Not listed.

The company increased share capital from Rs.350.00 lacs to Rs.360.00 lacs andallotted 14000 shares of Rs.100/ - each at a premium of Rs.400/- each during the


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current FY. Form 2 and form 5 for increase in share capital & allotment of shares arefiled with ROC. Therefore, the paid capital of the company increased to Rs.355.10 lacsand share premium is at Rs.56.00 lacs. Branch already submitted a certificateDt.21.05.2009 from M/s Divedi Gupta & Co.

7 (a) SHAREHOLDING PATTERN :

Share Holder No of Shares Face Value Holding %

Directors 2,06,830 100/- 58.24%Others 1,48,270 100/- 41.76%TOTAL 3,55,100 100.00%

8. IN CASE OF PARTNERSHIP FIRMSINDICATE CAPITAL CONTRIBUTEDBY EACH PARTNER SEPARATELY

: N.A.

9. SECTOR / BSR CODE : SSE / 15301

10. COMMENTS ON LATEST CREDIT /SEARCH REPORT

: Our charges for CC limit of Rs.680.00lacs were registered with ROC as persearch report dt.25.08.2009 of M/sDwivedi Gupta & Co, CAs, held by theBranch.

10 DUE DILIGENCE : Account was taken over in previous yearafter due diligence.

11. WHETHER A/C IS TAKEN / TO BETAKEN OVER. IF SO NORMS FORTAKE OVER ARE FULFILLED

: Account was taken over in September2008.

12. a) DEALING WITH BANK SINCE : August 2008

b) CREDIT FACILITIES SINCE : September 2008

13. TOTAL INDEBTEDNESS :(Rs. in lacs)

NON-FUND BASED FUND BASED TOTALExisting Proposed Existing Proposed Existing Proposed

Our BankWorking Capital - - 680.00 680.00 680.00 680.00Term Loan - - - 160.00 - 160.00

Sub-Total

- - 680.00 840.00 680.00 840.00

Other Banks - - - - - -

Fin. Institutions - - 32.08 32.08 32.08 32.08TOTAL - - 712.08 872.08 712.08 872.08

13.1 Brief Background :

M/s Swadeshi Aahar Private Limited was incorporated in 2002 and registered with theRegistrar of Companies, Kanpur vide certificate of incorporation No. 20-U


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15313UP2002PTC 026895. The company is engaged in Flour Milling business and has itsManufacturing Unit at A-4, Industrial Area, Ramnagar, Chandauli. The plant consists ofroller mill and chakki having capacity of 60,000 TPA and 15,000 TPA respectively.

The company was initially incorporated as a joint venture between Mr. Pawan KumarTulsyan and Mr. Bhola Ram Agrawal. The main promoter Mr. Pawan Kumar Tulsyan and hisfamily have invested substantially in iron & steel industry during the last 3-4 years. Theyhave set up iron ore crushing unit, sponge iron plants, induction furnaces and rolling millsetc. They were implementing major expansion in the said sector as well as relatedsectors. They were planning to set up power plant also. All these require substantialcapital investment as well as time and attention. For Mr. Tulsyan it was graduallybecoming difficult to pay due attention to the flour mill and he was also not willing tospare further funds to meet the need based working capital requirement of the unit. Mr.Tulsyan initiated disinvestment from Floor Mill Industry about 3 years back in form of totaldisinvestment of his entire stake from Kanodia Flour Mill and this recent one in SwadeshiAahar Pvt. Ltd. was a further step. The other promoter Mr. Bhola Ram Agrawal, thoughinclined to continue in the flourmill industry, was finding it difficult to run the unitsmoothly in absence of adequate support from the main promoter, Mr. Tulsyan. So it wasdecided by the then management that ownership and management be changed and the

ownership be transferred to some others, having primary interest in the flour mill/ foodprocessing industry.

Accordingly offers were invited. Mr. Vijay Kumar Gupta, promoter of M/s Simran Food PvtLimited, with capacity of 75000 TPA atta mill, offered to buy entire stake of the oldpromoters of the company, which was finally accepted by the old promoters in the boardmeeting held on 05.06.2008 and new promoters were appointed on the board.

M/s Simran Food Pvt. Ltd. is an atta mill and adding in the line this one M/s SwadeshiAahar Pvt. Ltd. which is a diversified product food (Atta, Maida, Suji, Bran etc.) processingmill would enable Mr. Gupta to reinforce his business from present level as he is getting inone hand pre maintained customer base of unit under proposal M/s Swadeshi Aahar Pvt.Ltd. and in another hand, will be in a position to serve additional demand with diversified

range to the existing customers of his exiting unit M/s Simran Food Pvt. Ltd.

14. FINANCIAL INDICATORS :( Rs. in lacs )

Mar-07 Mar-08 Mar-09 Mar-09 Mar-10 Mar-11(Aud) (Aud.) (Est.) (Prov) (Proj) (Proj)

Paid up Capital 341.10 341.10 341.10 341.10 364.10 364.10Reserves & Surplus 74.61 86.41 116.66 145.89 258.16 365.73Intangible Assets 2.16 - - 1.37 2.53 1.89TNW 413.55 427.51 457.76 485.62 619.73 727.94

Term Liabilities 2.00 2.22 72.22 21.08 148.60 103.20Capital Employed 415.55 429.73 529.98 506.70 768.33 831.14Net Block 363.88 362.22 345.46 425.31 620.40 586.26Investments - - - - - -Non Current Assets 12.11 2.06 2.06 3.56 3.56 3.56

NWC 39.56 65.45 182.46 77.83 144.37 241.32Current Assets 507.75 392.32 773.77 773.56 1045.26 1213.62Current Liabilities 468.19 326.87 591.31 695.73 900.89 972.30Current Ratio 1.08 1.20 1.31 1.11 1.16 1.25


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DER (TL/TNW) 0.00 0.01 0.16 0.04 0.24 0.14DER (TOL/TNW) 1.14 0.77 1.45 1.48 1.69 1.48Net Sales 2655.07 2182.46 3586.22 2477.79 4340.55 6098.74Other Income 6.95 12.53 9.00 9.52 10.69 12.04PBT 8.89 13.28 33.71 16.18 72.77 119.92PAT 7.79 11.80 30.24 14.47 65.27 107.57

Depreciation 13.48 13.53 16.76 14.29 22.68 34.14Cash Accruals 21.27 25.33 47.00 28.76 87.95 141.71

(i) Comments on Financial Indicators :

The comments are based on the audited financials as of March 2008 vis--vis March 2007:

Paid up capital is at the same level at Rs.341.10 lacs. As of March 2009 (Provl.) alsoit is at the same level.

Reserves & Surplus include subsidy of Rs.50.00 lacs and balance of profit. As ofMarch 2009 (Provl.) it also include share application money of Rs.45.00 lacs.

TNW increased from Rs.413.55 lacs to Rs.427.51 lacs due to additions of profits. It

has further increased to Rs.485.62 lacs due to share application money & P&Laccount.

Term Liability for 2007-08 is unsecured loans from the directors of previousmanagement. The company has projected to introduce unsecured loans ofRs.72.22 lacs for March 2009 at the time of previous sanction, but as of March2009, there are no unsecured loans in the system. As per provisional figures ofMarch 2009, it is term loan from SIDBI for purchase of generator, excludinginstallments repayable within 12 months.

The company informed that they have proposed and raised unsecured loan ofRs.72.22 lacs during the financial year 2008-09. But, as the unsecured lenderswere demanding high interest rate, which if paid, would have adversely affectedprofitability of the company and therefore, the company has decided to raise share

capital for the matching amount. As the unsecured lenders were pressing forinterest, the entire unsecured loans were repaid before the end of FY 2008-09 andthe company raised share capital by Rs.45.00 lacs during the FY ended 31st March2009. The company further informed that they have further raised shareapplication money of Rs.25.00 lacs between the period from 01.04.2009 to 21st May2009. The company has submitted CAs certificate in this regard. As per theinformation available on Intranet, the authorised capital is at Rs.360.00 lacs andthe paid up capital is Rs.355.10 lacs as on 23.05.2009. The company furtherinformed that in order to strengthen the NWC, it is proposing to raise share capital(including share premium) further by Rs.20.00 las during the current FY 2009-10before release of enhanced limit.

The company had purchased DG Set by availing loan from SIDBI without obtaining

permission from us. The company informed that due to frequent power cuts in thearea, they have to purchase DG Set urgently. They has availed Term loan fromSIDBI.

Net block decreased from Rs.363.88 lacs to Rs.362.22 lacs due to depreciation. Ithas increased to Rs.425.31 lacs (Provl.) mainly due to purchase of Generator &additions in Plant & Machinery. Net Block includes CWIP of Rs.146.38 lacs by wayoffactory building, P&M & electric installation. The company informed that CWIPwas incurred in respect of expansion of plant capacity from 45000 TPA to 75000TPA during the FY 2007-08 and 2008-09. As the installed capacity has increased to


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4

75000 TPA from 01.04.2009, CWIP will be allocated to various heads of fixed assetsduring the FY 2009-10.

Non Current Assets have decreased from Rs.10.06 lacs to Rs.2.06 lacs, due toclassification of receivables > 6 months as Current Assets as the Company hasproduced CA Certificate intimating that BDs more than 6 months are Nil. Hence,under the NCA only item categorised is Security deposit as of March 2009.

NWC increased from Rs.39.56 lacs to Rs.65.45 lacs. As per provisional B/s as ofMarch 2009, it has further increased to Rs.77.83 lacs.

The break up of Current Assets is as under:(Rs. In lacs)

Mar-07 Mar-08 Mar-09 Mar-09 Mar-10 Mar-11(Aud) (Aud.) (Est.) (Prov) (Proj) (Proj)

Cash & Bank Balances 188.94 28.16 8.87 17.47 6.02 32.42Receivables 143.02 174.39 359.52 380.37 506.63 610.17Inventory 124.12 133.05 404.63 266.41 524.61 561.03

Loans & Advances 51.67 56.72 109.31 5.00 6.00Advances payment of Tax - - - - 2.00 2.50Pre paid insurance /other CA - - 0.75 - 1.00 1.50Total Current Assets 507.75 392.32 773.77 773.56 1045.26 1213.62

The break up of Current Liabilities is as under:(Rs. In lacs)

Total Current Assets 507.75 392.32 773.77 773.56 1045.26 1213.62Short Term Bank Borrowings 390.99 306.75 560.00 515.95 680.00 680.00Inst. Payable within 12months 10.32 - - 11.00 45.40 45.40

Sundry Creditors Trade/exp 65.20 17.88 11.31 142.41 122.99 189.55Provision for taxation, etc. 1.08 1.48 - 1.67 7.50 12.35Deposits from others - - - 24.62 - -

other CL 0.60 0.76 20.00 0.08 45.00 45.00

Total Current Liabilities 468.19 326.87 591.31 695.73 900.89 972.30

Current Ratio improved from 1.08:1 to 1.20:1. However, as of March 2009 (Provl.),it has declined to 1.11:1. If installments of term loan are excluded, CR is at 1.13:1still below the minimum level. Branch informed that as the company hascontinued the expansion of capacity undertaken by the old management and alsoavailed term loan for purchase of DG Set from SIDBI, the Current Ratio wasaffected. However, as the unit is comes under SSE category, minimum CR of 1.10:1can be considered for manufacturing unit.

DER(TL/TNW) slightly declined from positive to 0.01:1 and further declined to0.04:1 as of March 2009, but well within the acceptable level of 2:1.

TOL / TNW Ratio improved from 1.14:1 to 0.77:1. But, it has declined to 1.48:1 as

of March 2009 (Provl.), but well within the acceptable level of 4:1.

Net sales declined from Rs.2655.07 lacs to Rs.2182.46 lacs. However, they haveimproved to Rs.2477.79 lacs as of March 2009 (Provl.).

Other income consists of misc. Receipts, interest received, machine rent receivedetc., increased from Rs.6.95 lacs to Rs.12.53 lacs. It has declined to Rs.9.52 lacsas of March 2009 (Provl.).

PBT increased from Rs.8.89 lacs to Rs.13.28 lacs. It has further increased toRs.16.18 lacs as of March 2009 (Provl.)


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PAT also increased from Rs.7.79 lacs to Rs.11.80 lacs and further increased toRs.14.47 lacs as of March 2009 (Provl.).

The company informed that increase in estimated / projected net profit is due toincrease in production level and sales, as the fixed overheads do not increaseproportionately with increase in production. Further informed that, as there wouldbe substantial increase in production quantity and sales, it will result in improved

operating margin and as a result, net profit will grow to the estimated / projectedlevel.

Depreciation charges for the years ending March 2007, 2008 and 2009(Provl.) areRs.13.48 lacs, Rs.13.53 lacs and Rs.14.29 lacs respectively.

Cash accruals increased from Rs.21.27 lacs to Rs.25.33 lacs and further increasedto Rs.28.76 lacs as of March 2009 (Provl.).

The overall financial position of the company is satisfactory.

(ii) Audit Notes in Balance Sheet if any, to bespecified

: No adverse comments in auditedBalance Sheet for March 2008.

(iii) Comments on Financial Indicators onCash Basis

: N.A.

15. EVALUATION OF MANAGEMENT :

The directors are enjoying good reputation in the market. None of the director is technicalexpert but they are having adequate business acumen and relevant industry exposure.They are already running similar units successfully. The companys activities will bemanaged by the directors viz Mr. Vijay Kumar Gupta and Sri Neekay Lal with the help ofexperienced persons. The directors are having business acumen. They are having industrialbackground and having capacity to handle business of voluminous turnover. The directorshave ability to bail out the company in case of crisis as they are the persons of means withgood financial track record and having other source of income than the subject unit. Theproduction decision will be taken at Factory itself, by works manager in consultation withthe directors. As such the decision making will be concentrated in the hands of directors.Being a Pvt. Ltd. company and the directors 1 to 3 are family members, successionplanning is envisaged. The directors have consistently maintained conducive relationswith staff and labour and have never faced any labour problem. None of thegroup/associate company is in default with any bank/financial institutions as perinformation available on Intranet. The Borrowers track record in honoring financialcommitments is satisfactory.

16. EVALUATION OF INDUSTRY :

The Flourmill industry caters to one of the basic needs of life. There is ever increasing

demand of food products in India on account of its increasing population. The products of

the flourmill are also used for further processing. Raw material required is available in

plenty. Flour mill industry being food industry is accorded high priority as it involves value

addition to agricultural produce. Secondary food processing units such as bakeries,

confectioneries, traditional food units are also dependent on flour mills. Major consumers


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of the products are general households developing with tremendous pace in India. Bran is

consumed by cattle and like Atta its demand is increasing with increase in population

The demand in (I) Eastern Uttar Pradesh, (II) West Bengal, (III) Whole of Bihar and Orissa issignificantly higher than the present production quantity. The demand is likely to furtherincrease on account of population growth. As such there is a potential demand-supplygap. Therefore, there are good prospects for flourmills at Varanasi.

Many other flourmills are also operating in the area and engaged in catering the need ofsame geographical region. However, the promoters are now well established in this line ofbusiness and have also developed strong customer base across the state as well as abovenoted other states. The company is also selling through brokers as is the trend of theindustry. Hence the promoters are confident to secure the required market and towithstand the market competition.

Flour Mill industry is fragmented and there are small and big flour mills. It is not aseasonal industry as demand of materials remains round the year and they would not beany effect on seasonal day.

Since liberalization, there is no license requirement for setting up or capacity expansion of

roller / chakki flourmills. There is no licensing policy for wheat milling and Milling Industry

is open for small scale as well as medium scale industries. The mills can obtain their

wheat supply from any source. Also there are no license requirement or

price/distribution controls on manufacture of wheat products. In view of growing economy

there is a good growth in the packaging industry.

17. EVALUATION OF BUSINESS RISK :

The company will not depend upon one or two customers. The group is having goodconnection with various customers. It is a fragmented industry and Market share cannotbe ascertained. Wheat is available in open market and can also be purchased directlyfrom local agriculturists. Wheat Production in the adjoining area is more than enough tocater the needs of the plant. If need be, it can also be purchased from FCI. Cost of wheatvaries during the year. However, fluctuation in cost is absorbed in selling price of finishedproduct. Margin of millers generally remain constant. Mainly, the unit is selling throughbrokers operating in the market, as is the trend of the industry. Additionally, thepromoters also have established network of dealers and retailers and are also sellingdirectly to them. The company is using the latest available technology and also upgradingthe machinery year after year.

18 (A) CONDUCT OF THE ACCOUNT :(i) Regularity in submission of

-Stock Statements / Book DebtStatement

: Regular

-MSOD : Not submitted.-QPR Statements / Half YearlyStatement

: Regular


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-Financial Statements : Regular. Company has submittedprovisional Balance Sheet for March2009.

-CMA Data : Submitted.

(ii) Name of the Statement / Return No. of Statements/ Return recd.During the year

Last Stat. / Returnrecd.

Stock Statement / BD 4 July 2009MSOD - -QPR/ Half Yearly Statement 1 July 2009

B. COMMENTS ON OPERATIONS /OVERDUES

:

(1) Turnover in the account is commensurate with the limits:

The turnover in the account for the FY 2008-09 from 23.09.2008, is as follows:(Rs. in lacs)

Debit Credit Avg. Utilisation Max. Dr. Bal2600.38 2048.43 466.05 574.87

The sales as per the provisional balance sheet for March 2009 are Rs.2477.79 lacs. Thecompany had been routing sales turnover since September 2008 only and previous it wasrouted through the account with SBI, SME Branch, Varanasi by the old management.Taking into consideration the value of sundry debtors & previous turnover with SBI, it canbe terms that the turnover in the account is commensurate with sales.

The turnover in the account from April 2009 to August 2009 is as under:(Rs. in lacs)

Debit Credit Avg. Utilisation Max. Dr. Bal1623.10 1659.56 547.37

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