1. INTRODUCTION

Project financing is an innovative and timely financing technique that has been used on many

high-profile corporate projects. 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 and many more areas. Increasingly, project

financing is emerging as the preferred alternative to conventional methods of financing

infrastructure and other large-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 partnerships, 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 analytical techniques 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; what is most important

is the identification, analysis, allocation and management of every risk associated with the

project.

The purpose of this project is 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 at the

heart of project finance.

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 project is 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

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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 that the risks associated with the project are reduced or eliminated as

far as possible. It is also not surprising that because of the 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 project itself and paid entirely from its

cash flow, rather than from the general assets or creditworthiness of the 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.

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

(unfinanceable). 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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2. OVERVIEW

Banking sector overview:

Banking sector reforms introduced in India in 1992 have impacted major structural changes in

the financial sector. Increasing growth while controlling inflation was the major challenge &

both were taken into account while forming the policy. 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 ownership 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 ownership. Foreign direct investment in 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 improvement in efficiency and

customer service. The share of private and foreign banks in total assets increased to 31.5 per cent

at end-March 2007 from 27.6 per cent at end-March 2006 and less than 10.0 per cent at the

inception of reforms.

Union Bank of India overview:

Union bank of India was inaugurated by the father of the Nation, Mahatma Gandhi at the onset

of 20th century & has traversed the long road of successful Banking of 85 years.

Union Bank of India is committed to maintain its identity as a leading innovative commercial

Bank, alive to the changing needs of the society. Union Bank has offered vast and varied services

to its entire valuable clientele taking care of their needs. Today, with its efficient customer

service, consistent profitability & growth, adoption of new technologies and value added

services, Union Bank truly lives up to the image of, "GOOD PEOPLE TO BANK WITH".

Anticipative banking is an integral ingredient of value-based services. This ability to gauge the

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customer's needs long before he realizes, best reduces the gap between expectations and

deliverance.

Manpower is the key factor for the success of any organization. Union Bank has a dedicated

family of about 26,000 qualified / skilled employees who will and always will be delighted to

extend their services to the customers with heartfelt efforts.

The Bank is a Public Sector Unit with 60.85% Share Capital held by the Government of India.

The Bank came out with its Initial Public Offer (IPO) in August 20, 2002 and Institutions,

Individuals and others presently hold 39.15 % of Share Capital.

The Bank has over the years earned the reputation of being a techno-savvy Bank and is one of

the front runners amongst public sector bank in the field of technology. It is one of the pioneer

public sector banks, which launched Core Banking Solution in 2002. As of March 2005, more

than 600 branches/extension counters of Bank are networked under Core Banking Solution,

powered with the centralized technology platform, the Bank has launched multiple Electronic

Delivery Channels and has installed nearly 351 networked ATMs. Online Tele banking facility is

available to all its Core Banking customers. The multi facility versatile Internet Banking Solution

provides extensive information in addition to the on line transaction facility to both individuals

and corporate banking with the Core Banking branches of the Bank. In addition to regular

banking facilities, today customer can also avail variety of value added services like cash

management service, insurance, mutual funds, Demat from the Bank.

The Bank will continue its endeavor in providing excellent services to its customer and enhance

its businesses thereby fulfilling its vision of becoming "THE BANK OF FIRST CHOICE IN

OUR CHOSEN AREA BY BUILDING BENEFICIAL AND LASTING RELATIONSHIP

WITH CUSTOMERS THROUGH A PROCESS OF CONTINUOUS IMPROVEMENT".

UBI has been ranked at 5th position among the nationalized bank in India.

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Overview on banks deposits and advances:

Items 2003-04 2004-05 2005-06 2006-07 2007-08

Deposits

Investments

Advances

Industrial Finance Branch (IFB) Overview:

The main function of the IFB is to provide the corporate banking product and service to our

corporate customers. Products for corporate customers include term loans (Long term basis,

usually 1-10 years) and advances for the creation or improvement of assets or for the project and

also working capital funding which is on a yearly basis. This branch also provides other services,

such as LG, LC, BG etc.

In branch, corporate customers are from diverse range of industries. UBI have specialized IFBs

located in Mumbai, New Delhi, Chennai, Kolkata, Bangalore, Ahmadabad, Pune and Baroda,

which cater to the needs of customers located at different geographical areas.

Products of IFB:

Term Loans:

Term loans mainly consist primarily of financing for the creation or improvement of assets,

including project finance. Period of the term loans generally varies from 1-10 years depending

on the requirements. In some exceptional cases, it can go up to 10-15 years also. These loans are

typically repaid in installments over the life of the loan. Term loans are sanctioned on the sake of

primary and collateral security like fixed assets, shares etc. by having different charges like first

charge, second charge, pari passu charge etc.

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Cash credit and other working Capital Facilities:

Cash credit facilities are the most common form of working capital financing in India. Bank

offers revolving credit facilities secured by working capital assets, mortgage etc. It is typically

provided for 1 year. Bank also provides overdraft, working capital demand loans, working

capital term loans and bills discounting facilities to our corporate and commercial borrowers.

Letter of Credit:

Letters of credit facilities are often partially or fully secured by assets including cash deposits,

documents of title to goods, stocks and receivables. These facilities are provided as part of

package of working capital financing charge on assets including cash deposit.

Letter of Guarantee:

Bank issue guarantees on behalf of customers to guarantee their payment and performance

obligation. These are secured by account indemnities, a counter guarantee or fixed or floating

charge on the assets of the borrower including cash and deposit.

Other Corporate Products and services:

Other Corporate Products and services consist of Foreign Currency Loan, Export Credits, Import

Finance, Nostro Accounts, Exchange Houses, Union Transport Scheme & Union Channel

finance.

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3. EXECUTIVE SUMMARY

The project studies various criteria’s involve in Credit appraisal. It highlights the

procedure adopted by Union bank of India for credit appraisal. The project lays emphasis on the

way bank scrutinizes the request of the corporate client for credit.

Initially the report gives introduction of UBI & Industrial branch and then explains about

credit appraisal, finance requirement of corporate borrowers, procedure of funding

The project also focuses on the methodology adopted by Union Bank of India for project

appraisal.

OBJECTIVE

The objective of my project:

To get a holistic view of project finance.

To assess the financial health of organizations that approaches Union Bank of India for credit

for import export purposes.

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

To critically analyze the criteria’s involved in appraising of the project and the corporate borrowers.

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4. CREDIT APPRAISAL

What is credit appraisal?

Credit Appraisal is a process to ascertain the risks associated with the extension of the credit

facility. It is generally carried by the financial institutions which are involved in providing

financial funding to its customers. Credit risk is a risk related to non repayment of the credit

obtained by the customer of a bank. Thus it is necessary to appraise the credibility of the

customer in order to mitigate the credit risk. Proper evaluation of the customer is performed this

measures the financial condition and the ability of the customer to repay back the loan in future.

Generally credits facilities are extended against the security know as collateral. But even though

the loans are backed by the collateral, banks are normally interested in the actual loan amount to

be repaid along with the interest. Thus, the customer's cash flows are ascertained to ensure the

timely payment of the principal and the interest.

Companies that intend to seek credit facilities approach the bank. Financial requirements for

Project Finance and Working Capital purposes are taken care of at the Credit Department.

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 of Credit

Companies present its full annual report of that includes audited balance sheets of the current and

previous years. They also present project details for assessment purpose for the bank. All these

things are used to determine the financial health, turnover trends and rise and fall of profitability.

Then by evaluating some ratios based on different parameters, bank gives the comments on those

ratios & financial parameters. Then for each parameter score is calculated on the credit rating

score chart. Then total score is obtained. Based on that score, credit rating is found out. If that

credit rating is within range which bank allows then the loan is sanctioned otherwise it is

rejected.

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The financial health and credit rating are theoretical methods for determining the right interest

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 theoretical approach

and practical approach.

Project Objectives

1. To evaluate the financial health of organizations that approaches Union Bank of India for

credit purposes. This includes following methods:

Analysis of Balance Sheet

Analysis of Cash Flow Statements

Analysis of Profit & Loss statements

Analysis of projected financial statements

Analysis of CMA data

2. To assess the suitability of the company for disbursement of credit. This would involve

the following actions:

Use of credit rating charts

Evaluation of management risk

Evaluation of financial risk

Evaluation of market-industry risk

Evaluation of the facility

Evaluation of compliance of sanction terms

Calculation of credit rating

3. Determination of interest rate: This would entail the following sequence of actions.

Collect data regarding financial health evaluation

Noting down of credit rating

Referencing the banks’ interest rate guidelines circular

Choosing the interest rate from the circular on the basis of financial health and credit

rating

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Determining Interest Rate

Submission of Project Report along with the Request Letter

Carrying out due diligence

Preparing Credit Report

Preparing and submission of Term Sheet

5. TERM LOAN ASSESSMENT

If not approved if approved

Preparation of proposal

Submission of Proposal to designated authority

If No queries raised If queries raised

Project Rejected Solve the queries

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Sanction of proposal on various Terms & Conditions

Communication of Sanction

Acknowledgement of Sanction

Application to comply with Sanction Terms & Condition & execution of Loan Documents

Disbursement

STEP 1: SUBMISSION OF PROJECT REPORT ALONG WITH THE REQUEST LETTER

Entrepreneur submits in detailed Project Report, which is being prepared by an approved

agency or a consultancy organization. This report provides in-depth details of the why finance is

required for the project, its managerial aspect, technical aspects, the market Condition and

projected performance of the company. It is necessary for the appraising officer to cross check

the information provided in the report for determining the worthiness of the project.

PROJECT DETAILS:

Definition of the project and alternative scenarios and models

List the type and quality of product(s) or service(s) to be marketed.

Specify the time limit, i.e., from the when the project is to be initiated and when it’s

going to be over.

Outline the general business model (i.e. how the business will make money).

Include the technical processes, size, and location, kind of inputs.

Relationship to the surrounding geographical area

Identifies economic and social impact on local communities.

Identifies environmental impact on the surrounding area.   

ORGANIZATIONAL/MANAGERIAL FEASIBILITY

Business structure

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

Identify the proposed legal structure of the business.

Identify any potential joint venture partners, alliances or other important stakeholders.

Identify availability of skilled and experienced business managers.

Identify availability of consultants and service providers with the skills needed to realize the

project, including legal, accounting, industry experts, etc.

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

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MANAGERIAL PERSONNEL

Managerial Personnel play a key role in directing the working of the company. It is

important for an organization to have a pool of efficient personnel who bear the capacity to bail

the company out from crisis situation and work towards optimum utilization of organizational

resources. Such capacity of the personnel can be determined by having complete details on

following key aspects:

Market reputation on the promoter / management of the company

Hands on experience of the management personnel in the industry / Business managed by

qualified personnel

Decision-making – Is it concentrated?

Organisation structure / Succession planning / Labour relations

Are any group company in default / Any Directors on RBI’s negative list / Borrower’s track

record in honouring financial commitment?

Length of relationship with the bank.

FINANCIAL FEASIBILITY

Estimate the total capital requirements

Assesses the capital needs of the business project and how these needs will be met.

Estimates capital requirements for facilities, equipment and inventories.

Determines replacement capital requirements and timing for facilities and equipment.

Estimates working capital needs.

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

Estimates contingency capital needs (construction delays, technology malfunction, market

access delays, etc.

Estimates other capital needs.

Estimated equity and credit needs.

Identifies alternative equity sources and capital availability -- producers, local investors,

angel investors, venture capitalists, etc.

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Identifies and assess alternative credit sources -- banks, government (i.e. direct loans or loan

guarantees), grants, local and state economic development incentives.

Assesses expected financing needs and alternative sources -- interest rates, terms, conditions,

covenants, liens, etc.

Establishes debt-to-equity levels.

Budgets expected costs and returns of various alternatives

Estimates expected costs and revenue.

Estimates the profit margin and expected net profit.

Estimates the sales or usage needed to break-even.

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

identifying "best case", "typical", and "worst case" scenarios or more sophisticated analysis

like a Monte Carlo simulation.

Assesses the reliability of the underlying assumptions of the financial analysis (prices,

production, efficiencies, market access, market penetration, etc.)

Creates a benchmark against industry averages and/or competitors (cost, margin, profits,

ROI, etc.).

Identifies limitations or constraints of the economic analysis.

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

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

operation.

TECHNICAL FEASIBILITY

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

competitive market conditions. Investing in the proper technology is the key to success it

irrespective of size of business thus for achieving its projected performance, it is important for it

to have sound technological background. Such technical competence of the project can be

determined by having detailed study done on following key aspects:

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Determining facility needs

Estimates the size and type of production facilities.

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

Suitability of Production Technology

Investigates and compare technology providers.

Determines reliability and competitiveness of technology (proven or unproven, state-of-the-

art).

Identifies limitations or constraints of technology.

MARKET FEASIBILITY

Industry description

Describes the size and scope of the industry, market and/or market segment(s).

Estimates the future direction of the industry, market and/or market segment(s).

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

through rapid change and restructuring).

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

Industry Competitiveness

Investigates industry concentration (few large producers or many small producers).

Analyzes major competitors.

Explores barriers/ease of entry of competitors into the market or industry.

Determines concentration and competitiveness of input suppliers and product/service buyers.

Identifies price competitiveness of product/service.

Market Potential

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Will the product be sold into a commodity or differentiated product/service market?

Identifies the demand and usage trends of the market or market segment in which the

proposed product or service will participate.

Examines the potential for emerging, niche or segmented market opportunities.

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

Assesses estimated market usage and potential share of the market or market segment.

Sales Projection

Estimates sales or usage. 

Identifies and assess the accuracy of the underlying assumptions in the sales projection.

Projects sales under various assumptions (i.e. selling prices, services provided).

Market Outlets access

Identifies the potential buyers of the product/service and the associated marketing costs.

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

Study Conclusions

The study conclusions contain the information you will use for deciding whether to proceed

business.  The major categories this section should include are:

Identify and describe alternative business scenarios and models.

Compare and contrast the alternatives based on their business viability.

Compare and contrast the alternatives based on the goals of the producer group.

Outline criteria for decision making among alternatives.

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STEP 2: CARRYING OUT DUE DILIGENCE

After the feasibility study has been completed and presented, a carefully study and analysis the

conclusions and underlying assumptions.  Next, you will be faced with deciding which course of

action to pursue. 

Potential courses of action include:

Choosing the most viable business model, for investment.

Identifying additional scenarios for further study.

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

assessment process.

STEP 3: PREPARING CREDIT REPORT

CREDIT REPORT

The credit report is an important determinant of an individual's financial credibility. 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. The lenders to determine the credit worthiness of an applicant mostly use

it. The business credit reports 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 of interest that 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 risk levels associated with a business as well

as its future. These reports also allow businesses to get detailed information about the financial

status of business partners and suppliers.

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Corporate credit rating

Credit rating is an opinion on the inherent credit quality of the borrower and/or credit instrument.

It is a primary indicator of risk associated with credit exposure. The objective of rating is to

provide banks with an adequate measurement of the risks involved while issuing loan to the

borrower.

The most important source of information concerning the creditworthiness of a corporation can

be found in the publicly available financial statements issued by corporation. Credit rating

focuses on information contained within financial ratios derived primarily from financial

statements.

Ratings can be assigned to short-term and long-term debt obligations as well as securities, loans,

preferred stock and insurance companies. Long-term credit ratings tend to be more indicative of

a country's investment surroundings and/or a company's ability to honor its debt responsibilities.

The ratings therefore assess an entity's ability to pay debts.

Coverage:

I. INDUSTRY:

SSI and other than SSI.

II. TRADE SECTOR:

Under priority sector and other than priority sector.

Both retail and wholesale.

Indirect agricultural finance (fertilizer dealer).

III. SERVICES:

Small business.

Self employed – under priority sector.

Self employed – under non-priority sector.

Union health scheme.

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IV. AGRICULTURAL SECTOR:

Allied agricultural activities like diary, poultry, piggery, fishing etc.

Construction of cold storage.

V. Borrower enjoying exclusive export or import credit limit or non-fund based limit.

Various factors are included while rating the borrower; hence, a method based on a multi-

dimensional criterion is developed at Union Bank of India. Following criteria are used for rating

the borrower and different weights are assigned to the criteria to arrive at the final rating:

Financial risk

Balance sheet ratios

Cash flow statement ratios

Management risk

Market industry risk

Conduct of the customer with the bank

All the points allotted to the above criteria are added up and final total is converted into

percentages. Then final rating is allotted according to the percentage, and interest rates are

decided on the basis of rating.

Model coverage

The coverage models cover the following four aspects: -

Borrower rating: cover financial, industrial and management aspect.

Facility rating: cover compliance part, operations in account and repayment experience.

Risk Mitigators: cover value and quality of collaterals.

Business Aspects: cover relationship and income value.

Borrower Rating: Calculating ratios that determine the short term and long term financial

position of the firm derives the financial ability of the firm.

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Short term ratios include Current Ratio, determines the liquidity position of the company over a

period of one year.

Current ratio = current assets/current liabilities.

According to the guidelines given to UBI the ideal level is at 1.33:1 for industries however the

acceptable level is at 1.17:1(according to RBI guidelines).

Current ratio indicates that for every one rupee of liability, customer has 1.17

worth of current assets to pay of the liability.

It also indicates the funds, which are contributed by the company from the long-term

finance to invest in the short-term finance. When customer comes to bank for finance,

bank does not pay the full amount of loan requirement. The customer has to chip in certain

percentage of finance on its own; this amount will come from long-term finance.

E.g. suppose customer want loan for requirement of buying inventory of Rs.100, Bank

will provide loan on 25% margin i.e. bank will pay Rs. 75 and rest Rs. 25 is to be brought

by the customer. Now the customer has liability worth of Rs.75 which in the form of loan

from bank and the inventory worth of Rs.100 i.e. Current assets of Rs. 100. Thus, Current

ratio will be 100/75 i.e. 1.33:1.

The above example shows us that customer has put in Rs. 25 from his long-

term funds into current assets. Above example also clarifies that current assets will always

be higher than current liability because bank will always provide loan on margin i.e. will

not finance full amount of loan. If current ratio is less than 1, which means customer is not

investing his own money in current assets and is taking full amount of liability from bank,

than bank will not finance such customer.

However at times current ratio may not be a true indicator, 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 it is important for

the evaluator to understand the nature of the industry.

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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.

Debt equity Ratio = debts/ equity.

It can be calculated in two ways as follows

1. Term liability/Tangible net worth : -

Net worth refers the owned funds of the firm. Net worth would comprise of Paid-up capital

plus Free Reserves including Share Premium but excluding Revaluation Reserves (since

revaluation reserve is just book entry and there is no actual flow of funds), plus Investment

Fluctuation Reserve and credit balance in Profit & Loss account, less debit balance in Profit

and Loss account, Accumulated Losses and Intangible Assets. Infusion of capital through

equity shares, either through domestic issues or overseas floats after the published balance

sheet date, may also be taken into account for determining the ceiling on exposure to capital

market.

Term liability here refers to the long-term liability of the firm.

Maximum ratio permissible for term liability/Tangible net worth is 2:1. It indicates that for

every Rs. 2 worth of long-term liability, the firm has Rs. 1 worth of its own funds to meet

liabilities.

2. Total liability/Tangible net worth :

Maximum ratio permissible for total liability/tangible net worth is 4:1. It indicates that for

every Rs. 4 worth of total liability, the company has invested Rs.1 worth of its owned funds.

A high debt equity ratio is not preferable by an investor, as the company already has acquired

high amount of funds from market thereby reducing the investor share over the securities

available, increasing the risk.

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It is also important for the lender bank to assess the firm’s debt paying capacity over a

period. Calculating ratio like Debt Service Coverage Ratio minimum acceptable level is 1.50

derives such capacity.

It is also necessary for the lender to determine the ability of the firm to achieve the projected

growth by evaluating the projected sales with actual. However such parameter remains non

applicable if the business is new.

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 Management Risk also while

evaluating the risk relating to borrower.

It is the management of the company that acts as guiding force for the firm. The key

Managerial personnel should bear the capacity to bail out the company from crisis situation.

In order to remain competitive it is essential to take initiatives. Such skills are developed over

years of experience, thus for better performance it is required to have a team of well qualified

and experienced personnel

After evaluating the risk level involved the lender bank decided on lending Interest Rate.

In UBI they are categorized in 9 segments. In UBI, a business receiving Credit Rating above level 6

are not considered good from point of investment and thus are avoided.

INVESTMENT GRADE NON INVESTMENT GRADE

Credit Quality Rating

Numeric

Aggregate

Score

Credit

Quality

Rating

Numeric

Aggregate Score

Lowest risk CR 1 >90 Risk Prone CR 7 51-55

Minimal risk CR 2 81-90 High Risk CR 8 50 & below

Moderate risk CR 3 71-80 Sub-

Standard

CR 9 Default – NPA

Satisfactory

risk

CR 4 66-70 Doubtful CR 10 -

Acceptable risk CR 5 61-65 Loss CR 11 -

Watch List CR 6 56-60

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STEP 4: DETERMINATION OF INTEREST RATE

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

regularly updated to reflect the bank’s latest credit policies. The rupee credit is based on BPLR

and the foreign exchange loans are based 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 under the following conditions:

Good Client

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

The organization’s actions show that it intends to become a long-term customer of the 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 all the member banks of the consortium follow this

interest rate.

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STEP 5: PREPARING AND SUBMISSION OF TERM SHEET

Following a favorable feasibility check, credit rating the next step is preparing term sheet.

A Term Sheet is brief document that provides details on aspects like:

Account Details

Financial highlights for immediate previous two audited years and projection for

proceeding year

Nature of Project

Cost of Project

Means of finance

1. Nature of Facility

2. Purpose

3. Tenure of Term Loan

4. Interest rate Reset

5. Margin

6. Interest Rate, Commission

Door to Door Tenor i.e. the period within which the entire amount is to be disbursed.

1. Repayment Terms

2. Prime Security

3. Collateral Security

4. Upfront fees i.e. the charges levied by the bank for processing the documents.

STEP 6: PREPARATION OF PROPOSAL

An approved term sheet leads to preparation proposal. A proposal is prepared in standard

format; this enables the bank to keep a proper track record and also facilitates proper

comparison. A proposal a fully fledged document providing details on project submitted and

requesting finance from bank. A proposal contains information on following aspects:

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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 Pattern, Asset Classification and Purpose of the Loan.

Securities: Lenders often feel more confident about a loan if they are given a security

interest in the assets of a business. Then, if the borrower does not repay the loan as promised,

the lender can take the property the borrower pledged, sell it and use the proceeds to repay

(or partially repay) the borrowed amount. It provides detailed information on nature of

securities given in lieu of the Loan. They are of two types, namely: -

i. Prime Securities: ‘Pari Passu’ is a term used in banking transactions which means that

the charge to be created is in continuation of an earlier charge which might be held by the

same institution or by another institution.

ii. Collateral Securities: In lending agreements, collateral is a borrower's asset that is

forfeited to the lender if the borrower is insolvent, i.e., unable to pay back the principal

and interest on the loan. When insolvent, the borrower is said to default on the loan, in

which case the lender becomes the owner of the collateral. It includes details on

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 elements 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

25

Liabilities, Fixed Assets, Investments, Noncurrent 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 of the company also of the Projections made. Such financial highlight plays an

important role in assessing the financial strengths and weakness of the business.

Status of the 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 details, the promoters and

related details of the project. If it is an 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 of the industry

2. Growth level and overall performance of the industry

3. Recent Developments and Trend Evaluation

Conduct of the Account:

This section provides details on:

Regularity in Submission of—

1. Stock Statements / Book Debt Statement

2. QPR Statements / Half Yearly Statement

3. Financial Statements

4. CMA Data

STEP 7: SUBMISSION OF PROPOSAL TO DESIGNATED AUTHORITY

26

Designated authorities are the one who have the authority to sanction the proposal.

Without their approval no fund can be given for the said project.

Below table shows the authorities that have authority to sanction the loan and their limits:

Sr.

no.

Name of designated authority Limit (both fund and non-fund)

(Rs. In crores)

1 General manager (credit) 50

2 Executive director 75

3 Managing director 100

4 Board of director Above 100

STEP 8: SANCTION OF PROPOSAL ON VARIOUS TERMS &

CONDITIONS

There are various terms and condition laid by the bank on the project which is required to

be approved by entrepreneur. Some of terms and condition could be as follows:

For what purpose the amount of loan to be used.

Repayment of the principal.

How the interest is to be paid.

Prepayment penalty.

All the lease and hire purchase assets to be adequately insured.

What will be the drawing power limit?

In case the company commits any default in the repayment of the loan or interest thereon

or any of the agreed installment of the loan on the due dates, the bank/RBI will have

unqualified right to disclose or publish the company’s name or name of the

proprietor/director as defaulters.

27

STEP 9: COMMUNICATION OF SANCTION TERMS & CONDITION

Letter is being sent to the entrepreneur regarding sanction of loan on various terms and

condition, prepared by the bank, seeking for their approval on the same.

These terms and condition can be modified with the negotiation between entrepreneur and bank;

however proposal again required approval of designated authority.

STEP 10: ACKNOWLEDGEMENT OF SANCTION

If the company agree to the given terms and conditions send their acknowledgements to the

bank.

STEP 11: APPLICATION TO COMPLY WITH SANCTION TERMS &

CONDITION & EXECUTION OF LOAN DOCUMENTS

Under this step company comply with all the pre-requirements like getting document

stamped, submitting demand promissory note in case of term loan and letter continuing security

in case of working capital, mortgage paper and all the other formalities and thus proceeds with

the execution of loan.

STEP 12: DISBURSEMENT

After submission Proposal to Designated/ Sanctioning Authority for sanctioning the Term

Loan. The authorities may raise queries, if any relating to projects and thereby convey it to the

processing officer the processing officer in turn addresses them to the borrower for necessary

step to be taken; such queries are required to be solved to the earliest by the applicant for further

processing of the proposal.

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If the authorities are satisfied and have no further queries with respect to proposal, the Loan gets

sanctioned and the disbursement would be released in as per the 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 bank to understand and assess the utilization of funds

disbursed by the lender Bank. Such evaluation is done by obtaining Lender’s Engineer Report; it

is report that provides complete details of the status of the project. It is 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.

29

6. WORKING CAPITAL APPRAISAL

MEANING:

The amount of funds required for the smooth and uninterrupted functioning of the normal

business operations of a unit ranging from the procurement of raw materials, converting it into

finished goods for sale and realizing cash along with profit from the account receivables that

arise from the sale of finished goods on credit.

OPERATIVE CYCLE:

Operating cycle means cash to cash cycle. The cycle begins from acquiring raw material, to

ultimate finished goods, to conversion into debtors through sales, to realization of debtors into

cash. In the process entrepreneur gets credit on raw material and services. This shortens the

cycle.

THE COMPONENT OF WORKING CAPITAL:

Amount of raw materials / goods of various kinds in store or in transit

Amount of stored consumables stores and other material required for production purposes

Value of stock in process

Value of all finished goods including in transit

The composition of working capital

Amount of receivables or sundry debtors

Monthly expenses generally reflected through the current assets other than those

mentioned above such as cash and bank balances, advance allowed, prepaid expenses etc.

FACTORS INFLUENCING WORKING CAPITAL:

Nature of business

Seasonality of operations

Production policy

30

Market conditions

Conditions of supply

Paying habits of customers

Government policy

PROCEDURE FOR WORKING CAPITAL ASSESSMENT:

STEP I - ESTIMATING THE PROJECTED LEVEL OF OPERATIONS

Fixed assets are like structure of a body, which cannot generate income of it. It has to be used

with the working capital. Working capital is the life and blood of an enterprise. A business or a

unit cannot run without working capital. It is used to carry on day-to-day operation. Entrepreneur

who had applied for WC loan should first estimate what will be his projected level of operation.

He has to take into consideration

◙ Future requirement

◙ Realistic sales projections

31

◙ Percentage of rise or fall in net sales

◙ Available capacity - utilization, marketability of product, availability of raw material

◙ Comparison of projections with peer units in case of a new unit

Step-II Estimating The Reasonable Level Of Total Working Capital Required

For Achieving The Projected Level Of Operations

For the purpose of estimating WC finance, level of TCA required for achieving the

projected level of operations is to be calculated.

WC should be adequate to complete operating cycle since:

Inadequate WC

- Under utilization of capacity leading to financial difficulties.

Excessive WC

- Unproductive use and unnecessary interest burden.

- Possibility for diversion of fund.

Operating cycle means cash to cash cycle. The cycle begins from acquisition raw material

to possessing into work in progress to ultimate finished goods.

Similarly debtors are taken into consideration.

STEP-III ESTIMATING THE REASONABLE LEVEL OF SUNDRY

CREDITORS AND OTHER CURRENT LIABILITIES AND FINDING OUT

THE WORKING CAPITAL GAP

Funds blocked up in various current assets minus the credit available from the suppliers

can be treated as the working capital gap.

Working capital gap represents the extent to which total current assets cannot be financed out of

other current liabilities. This WCG need to be financed from 2 other sources namely:

32

1. Net Working Capital (NWC)

2. Short term Bank Borrowings (BB)

Therefore, WCG=NWC + BB

Also, WCG= TCA – OCL

Where, TCA = total current assets

OCL = other current liabilities.

Thus,

STEP-IV DETERMINING REASONABLE LEVEL OF NET WORKING

CAPITAL AND FINDING OUT PERMISSIBLE BANK FINANCE;

PROJECTED TOTAL CURRENT ASSETS LEVEL METHOD (FOR MFG.

UNITS):

Two methods by which we can arrive at PBF or flexible bank finance.

Projected TCA level Projected Turn Over

Method Method

1. PROJECTED TCA LEVEL METHOD (FOR MFG UNITS):

Net Working Capital= Total Current Assets – Total Current Liabilities

33

WCG= TCA-OCL= NWC=BB

Working Capital Gap = Projected Total Current Assets – Projected Other Current Liabilities

Permissible Bank Finance = Working Capital Gap – (25% of Working Capital Gap or Net

Working Capital whichever is higher)

2. PROJECTED TURN OVER METHOD

Net Working Capital = Total Current Assets – Total Current Liabilities

Permissible Bank Finance = 20% of Projected sales – (5% of Projected sales or NWC

whichever is higher)

Turn over Method as per loan policy 2003-04 for credit limits upto 100 lacs (500 lacs in

case of SSI):

PBF = (A+B) – (Higher of B or C)

Where, A= 20% of Projected accepted sales.

B= 5% of Projected accepted sales.

C= NWC

NOTE: Projected TCA level method is used when credit limit is below 100 crores.

34

7. APPRAISAL OF NON FUND BASED CAPITAL Non Fund Based Limits are normally to be sanctioned for exiting customer only who

already enjoy fund based limits

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

Borrower’s background and experience of meeting commitments to be examined in details.

LC limit to be considered as per terms of Purchase or contract, lead period and minimum

economical quantity of supply of stocks

Non Fundable Limits are to be supported by necessary fund based limits.

Past experience of payment of bill sunder LC to be verified before considering new request.

While Assessing the LG Limit contract or agreement which is the base for LG, should be

examined in details for any ambiguous clauses.

Any request for financial Guarantee to be critically examined before taking decision.

35

8. CASE STUDY – 1 (TERM LOAN)

Proposal Request: Term loan of Rs. 100 Crores

36

Account Name: ABC Limited

Status of Account: New Account

Banking: Multiple

Constitution: Public Limited Company

Date of incorporation: December 2005

Business Line: NBFC- Consumer and Commercial financing

Nature of activity: ABC Limited is focused on the business of Consumer and Commercial

financing. Its target market comprises of Micro-entrepreneurs (the self employed running small

business and the small salary earners). The company is in the business of serving customers in

the mass market. It offers salaried people personal loans, two wheelers loans and mortgage

products. For small entrepreneurs, it offers unsecured business loans to buy inventory, raw

materials, renovation of premises, working capital and for personal requirements as well. Besides

this, ABC Limited also distributes third party general and life insurance products to this segment,

with great success (success ratio of around 80%), where there is very low penetration of

insurance.

Background of Promoters:

ABC Limited is 100% subsidiary of DEF, which in turn is wholly owned by GHI. GHI is 100% owned by the Ministry of Finance Singapore. By virtue of this, ABCL is 100% subsidiary of Ministry of Finance Singapore. The immediate parent company is JKL Limited which is a 100% subsidiary of DEF Limited.

GHI:

GHI is an Asia investment house headquartered in Singapore. They are 100% owned by the Minister of Finance (Incorporated). GHI manages a portfolio of over S$185 billion, or more than US$134 billion, focused primarily in Asia and Singapore. The shareholder’s return since inception 34 years ago is more than 18% compounded annually.

37

GHI is rated AAA/Aaa by Standard & Poor's and Moody's respectively, it has investment in diverse industries covering banking & financial services, real estate, transportation & logistics, infrastructure, telecommunications & media, bioscience & healthcare, education, consumer & lifestyle, energy & resources, engineering as well as technology.

DEF, Singapore:

DEF invests in financial institutions in emerging markets, managing a portfolio of 12 financial institution investments throughout Asia. The prime areas of focus are in both Business banking and Consumer banking. Business banking focus is on the Commercial, SME and Self Employed Mass Market segments, and Consumer banking focus is on the Mass Affluent and Mass Salaried segments.

JKL Ltd, Singapore:

JKL Ltd is the Investment arm of Asia Financial Holdings. JKL is a 100% subsidiary of DEF.

Capital Structure: (As on 31-12-2008)

Particulars Amount Rs.(000)

1. Share Capital  

1a. Authorized Share Capital (equity capital of Rs. 10 each) 250,00,000

1b. Issued, Subscribed & Paid-up Equity Share Capital (equity capital of Rs. 10 each fully paid up) 135,70,913

2. Share Premium Account 69,600

SHAREHOLDING PATTERN:

Sr. No. Category No. of Shares

Face Value (Rs.) % Holding

1 Promoter (JKL) 1,35,70,90,744 10 99.9999627%

2 Others 506 10 0.0000373%

  Total 1,35,70,91,250   100%

TOTAL INDEBTEDNESS:

38

(Rs. in crores)

NON-FUND BASED FUND BASED TOTAL

Existing Proposed Existing Proposed Existing Proposed

Our Bank- - - - - -

Working Capital - - - - - -

Term Loan - - - 100.00 - 100.00

Sub-Total - - - 100.00 - 100.00

Other Banks- WC- - 93.00 93.00 93.00 93.00

Other Banks- TL- - 875.00 1275.00 875.00 1275.00

Sub-Total - - 968.00 1368.00 968.00 1368.00

TOTAL - - 968.00 1468.00 968.00 1468.00

FINANCIAL INDICATORS:

(Rs. In crores)

Year Ending 31.3.2006

(Aud.)

31.3.2007

(Aud.)

31.3.2008

(Est.)

Paid up Capital 212.9 654.75 855.16

Share Application money 209.18

Reserves & Surplus 8.65 8.65 8.65

Intangible Assets 19.32 81.60 336.78

Tangible Net Worth 202.23 581.80 736.21

Long Term Liabilities 2.20 214.45 1422.07

39

Capital Employed 204.43 796.25 2158.28

Net Block 5.53 38.54 136.86

Investments _ -- --

Non Current Assets 142.64 705.88 1982.75

Net Working Capital 56.26 51.82 38.67

Current Assets 78.04 145.44 288.17

Current Liabilities 21.78 93.62 249.50

Current Ratio 3.58:1 1.55:1 1.15:1

Debt Equity Ratio 0.01:1 0.37:1 1.93:1

TOL/TNW 0.12:1 0.53:1 2.27:1

Net Revenue/ income 5.43 69.59 350.65

Other Income _ _ _

Net Profit Before tax -28.37 -47.51 -241.09

Net Profit After Tax -19.61 -57.47 -244.60

Depreciation 1.13 3.86 25.89

Cash Accruals - 18.48 -53.61 -218.71

COMMENTS:

40

1. The paid up capital of the company has increased from Rs. 654.75 crores as of 31.03.2007 to Rs. 855.16 crores as of 31.03.2008. During 2007-08 the company has infused additional equity of Rs.200.41 crores by issuing 200410000 equity shares of Rs.10/- each.

2. Net worth of the company stood at Rs 736.21Crores as on 31st March’08 against Rs 581.80 Crores as on March’07.

3. Long term liabilities increased from Rs.214.45 crores as of 31.03.2007 to Rs.1422.07 crores as of 31.03.2008. It pertains to term loans from Bank of Rs.490.00 crores and Commercial papers (CP) of Rs. 931.99 Crore and other secured loans of Rs. 0.08 Crores.

4. Net block increased from Rs.38.54 crores as of 31.03.2007 to Rs.136.86 crores as of 31.03.2008.

5. Investments are Nil. However other current investments of Rs.50.00 crores as of 31.03.2008 are taken into current assets. It pertains to various mutual funds.

6. Non-current assets increased from Rs.705.88 crores as of 31.03.2007 to Rs.1982.75 crores as of 31.03.2008. It pertains to installments in the loan accounts beyond one year.

7. Net working capital decreased from rs.51.82 crores as of 31.03.2007 to Rs.38.67 crores as of 31.03.2008 due increase in current liability.

8. Current Ratio as of 31.03.2008 is 1.15:1 which is below the acceptable level. The company has informed that they will infuse adequate equity (to the extent of Rs. 300.00 Crore Approx) in the business to improve the financial ratios.

9. DER (TL/TNW) as of 31.03.08 is 1.93:1 and DER (TOL/TNW) as of 31.03.08 is 2.27:1 which are at acceptable levels. NBFCs can leverage eight to 10 times of the equity capital, but leverage as reflected by the Debt Equity ratio and the TOL/TNW ratio is much less when compared to peers or the limit allowed (Industry standard is 6)

10. Net Revenue of the Company has increased from Rs. 69.59 Crores during 2006-07 to Rs. 350.65 Crores during 2007-08. The increase in the income is about 404% compared to previous year.

11. The company has been in loss for three years consecutively. The loss during the year 2006-07 was Rs. 57.47 Crore which has increased to Rs. 244.60 Crore during 2007-08. The loss suffered in the past years is mainly due to the rapid expansion carried out by the company for making it as one of the largest NBFC in retail funding (as per the company). First two years of operations were mainly on account of expenses for setting up the branches as per the roll-out plan. The company has already set up 800+ branches throughout the country in ‘brick and mortar’. The company projects to break even in FY 2008-09.

The company has been maintaining a healthy CAR throughout as per table below

2005-06 2006-07 2007-08 2008-09*

Capital Adequacy Ratio (CAR) 132% 74.78% 32.30% 27.15%

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Current Performance:

Company’s current financial performance upto September 2008 is as under:

Particulars Amount ( Rs. in crores)

Income from Financing Operations

466.49

Other Income 5.53

Profit Before Tax ( 71.03)

Profit After Tax (74.37)

Key financial figures of the DEF Ltd. (Holding company)

Income Statement 2007 (S$ millions) 2006 (S$ millions)

Net interest income 1,683 1,476

Net interest income 1,683 1,476

Net operating income 3,662 2,246

Allowance for loan losses 405 275

Operating expenses 1,481 1,220

Profit before income tax 1,780 755

Profit for the year 1,533 619

Balance Sheet2007 (S$ millions)

2006 (S$ millions)

Loans to customers 15,475 12,438

Derivative financial instruments 79 20

Investment securities 33,391 30,013

Other assets 10,844 11,253

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Total assets 59,710 53,704

Liabilities

Deposits from customers 17,238 16,221

Loan from parent 10,298 10,659

Other liabilities 6,109 5,287

Total liabilities 33,645 32,167

Shareholder equity 26,065 21,537

COMMENTS ON CASH BASIS: (Rs. In crores)

31.03.2007 31.03.2008

Net cash from operating activities (A) (566.55) (1448.06)

Net cash from investing activities (B) (51.11) (219.69)

Net cash from financing activities ( C ) 636.86 1555.77

Net decrease in cash & cash equivalents (A+B+C)

19.20 (111.98)

Cash & cash equivalents at the beginning of the year

72.33 91.53

Cash & cash equivalents at the end of the year 91.53 (20.46)

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MANAGEMENT EVALUATION:Market reputation:

ABC Limited is 100% subsidiary of DEF, which in turn is wholly owned by GHI. GHI is 100% owned by the Minister of Finance Singapore.

GHI is known in the global investment community as a responsible and disciplined long-term investor with a mandate to maximize sustainable shareholder value, with a strong reputation for high standards of integrity and corporate governance

GHI manages a portfolio of over S$185 billion, or more than US$134 billion, focused primarily in Asia and Singapore. The shareholder’s return since inception 34 years ago is more than 18% compounded annually.

GHI is rated AAA/Aaa by Standard & Poor's and Moody's respectively

Management experience:

As per ICRA’s rating rationale “"The ratings are also supported by the experienced management team that has established and managed similar businesses, management’s strong focus on establishing systems and processes,..."

ABC is managed by the team of exceedingly rich experienced professional who all are experts in their individual trade line of business activity, whether it is business development, risk management, human resource management, compliance, rural initiatives, technology etc.

ABCL's senior and middle management teams, roped in from leading retail financiers, bring in vast experience in setting up and running a retail finance business. All business heads carry a risk management background, which forms the core of managing and growing a retail lending portfolio, to a perceivably vulnerable customer segment. The expertise residing at the executive management level could ensure profitable growth in business volumes for ABCL.

Credit Rating:

ABC is assigned a rating of “F1+(Ind)” from FITCH for Rs. 2500 Crore and second rating of “A1+” from ICRA Limited for Rs.3000 Crore for the short term debt / Commercial paper programme. ABC is also assigned an Issuer’s rating “LAAA” from ICRA Limited for long term for Rs. 2000 Crore. These ratings are the highest-credit-quality ratings.

44

INDUSTRY EVALUATION:

The retail lending space has grown rapidly over the last few years – outstanding retail portfolio now accounts for 24% of the total bank credit compared to less than 5%, 10 years ago.

Retail lending is expected to grow because of the following factors:

1. Favourable demographics:

At average age of 28.4 years, India is a young nation. The country’s population profile is characterized by declining dependency ratio, i.e. increasing percentage of working age population.

2. Changing consumer mindset towards borrowing: Indian consumer no longer considers borrowing as a taboo – purchase of assets using leverage is quite an accepted practice now, at least in urban India. The concept of modest borrowing for consumption purposes (domestic/ overseas holidays, marriages or other functional needs) is also developing rapidly to improve lifestyle.

3. Increasing household income: Households are migrating to higher income groups – as a result, higher income households are growing at a faster rate than lower income ones.

4. Low asset ownership: Asset ownership continues to be quite low – especially in high-ticket items such as housing and cars. Even in low-ticket items, most categories have not reached saturation levels (which is placed at 80% asset ownership).

Based on these factors, retail finance opportunity is expected to be worth US $69 bn by FY09 and 22% CAGR in annual disbursements.

Credit Worthiness and leverage:

The very survival of NBFCs depend on effective sourcing of funds. The yardstick bank loans as a percentage of owned funds. This yardstick shows the extent to which an NBFC has been able to leverage its assets to obtain bank finance and measures an NBFC's exposure to the banking system

NBFCs can leverage eight to 10 times of the equity capital, but leverage as reflected by the Debt Equity ratio and the TOL/TNW ratio is much less when compared to peers or the limit allowed (Industry standard is 4.9%)

45

ABC is assigned a rating of “F1+(Ind)” from FITCH for Rs. 2500 Crores and second rating of “A1+” from ICRA Limited for Rs.3000 Crores for the short term debt / Commercial paper programme. ABC is also assigned an Issuer’s rating “LAAA” from ICRA Limited for long term for Rs. 2000 Crores. These ratings are the highest-credit-quality ratings. Copies of the rating letters are attached.

TERM LOAN ASSESSMENT:Present Request: The company has approached various Banks for Financial assistance by way of Term Loan. They have also approached us with a request for sanction of term loan of Rs.300.00 crores. We however, propose to take Rs.100.00 crores as term loan.“In principle approval” has been given.

Nature of Limit Term Loan

Amount Rs.100.00 crores

Rate of Interest BPLR i.e. 12.50% p.a.,( At present) payable monthly

Repayment period

Loan shall be repaid in 3 years with equated quarterly installment commencing from the date of first draw own.

Security Pari-passu charge on receivables (Either present unencumbered securities or created out of loan money) with existing / proposed lenders.

Upfront Fees 1% of loan amount

Justification:

The loan portfolio of the company is growing at a fast pace, business wise disbursements done by the company are as below:

Presently the company is availing credit facilities under Multiple Banking arrangement. The details of this is as follows

Name of the Bank

Nature of Facility

Amount Present Outstanding

46

HDFC Bank Ltd WC 33 Cr 0 Cr

Standard Chartered Bank

WC 60 Cr 0 Cr

The company at present avails Term Loans under ‘Multiple Bank Arrangement’ as detailed below:

Name of the Bank

Nature of Facility

AmountPresent

Outstanding

HSBC Yen Loan Term Loan 65 Cr 65 Cr

HSBC Bank Term Loan 460 Cr 461 Cr

Yes Bank Term Loan 275 Cr 276 Cr

Bank Of America

Term Loan 75 Cr 75 Cr

The Company does not accept any deposit from the Public. Based on the annual report details and information from the management, the Company

has not defaulted in repayment of dues to a financial Institution, Bank or Debenture holder.

As per the Auditor's Report in Annual Report 2007-08, no funds raised on short term basis have been used for long term investment.

Company Business:

ABC follows a unique community led, branch centric relationship based approach to serve the mass market by dealing with the customer directly, eliminating intermediaries which are a common practice with most financial service companies. The company services the market directly through its own branch network providing one stop financial solution shop where the customer can access a wide range of financial products under one roof. ABC’s employee market and service the customer directly to build a relationship and provide quality post purchase customer service.

This model offers many advantages, branches increases access to customers. Employees belong to the local communities and therefore understand the language and culture of the place. They service the community in close proximity of the branch giving them in-depth

47

knowledge of the customer base and their credentials. Localized credit assessment and appraisals helps in servicing the customer’s needs speedily.

The company works on the following pyramid, which is based on approaching and targeting the mass market of the self employed and salaried group.

In order to understand and to offer customized solutions to each segment, ABC decided to segment the market by the type of customers rather than its products. ABC has created two independent and robust business verticals. The Company’s business structure is appropriately termed as the ‘Community Business Model’, as it is built not only on the basis of products, but also customer segments. The well-defined verticals for salaried individuals as well as the self-employed segment comprising of owners of small sized, traders and entrepreneurs, are:

COMPLIANCE FORMALITIESCredit Rating:

ABC is assigned a rating of “F1+(Ind)” from FITCH for Rs. 2500 Crore and second rating of “A1+” from ICRA Limited for Rs.3000 Crore for the short term debt / Commercial paper programme. ABC is also assigned an Issuer’s rating “LAAA” from ICRA Limited for long term for Rs. 2000 Crore. These ratings are the highest-credit-quality ratings.

Net Owned Funds:

The Net Owned Funds as on 31.03.2008 works out to Rs.736.64 crores.

The NOF of ABCL is Rs. 736.64 crores as of 31.03.2008. As per the extant guidelines of the Bank, outer limit for credit exposure will be Rs.2209.92 crores. The limits of Rs.1468.00 crores sought by the company from the Banks are well within the outer limit of the Bank.Capital Adequacy Ratio

NBFCs are to maintain a minimum capital adequacy norm of 15% of the risk weighted assets and off balance sheet items. The Capital may be either in the form of Tier I or Tier II capital subject to a condition that the total Tier II capital at any point in time shall not exceed one hundred percent of Tier I capital.

The company has been maintaining a healthy CAR throughout as per table below

2005-06 2006-07 2007-08 2008-09*

Capital Adequacy Ratio (CAR) 132% 74.78% 32.30% 27.15%

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Financial support from Parent company:

With a capital adequacy ratio of 27.17%, ABCL's capitalization levels were comfortable as of 31st October 2008. Gearing levels remained moderate at 2 times despite the growth in the loan portfolio as a result of the periodical capital infusion from the Parent. It should be noted that the industry average is 5.0. As a result of the US$ 50 million fresh capital infusion from GHI upto October 2008, the networth of the company stood at Rs. 1357.1 Crore despite losses reported by the company during the past 3 financial years. Given the Parent’s long term plans in the Indian financial sector, ICRA expects capitalization to remain comfortable given the commitment from GHI to financially support this entity over the medium term.

Expansion plans:

The current financial crisis have put a severe strain on the fund raising capacities of NBFCs and as a result lot of NBFCs have either stopped their business or have gone slow in disbursement. However, Fullerton is still disbursing loans to the customers. Company finds this as opportunities to increase its market share and to become the largest NBFC of the country. It can pick and choose the asset quality, further the acquisition of the assets are undergoing a thorough scrutiny. This will result in a strong portfolio with lesser bad cases.

PROJECTED P & L Accounts: (Rs in Crores)

Particulars31-

Mar-0631-

Mar-0731-

Mar-0831-

Mar-0931-

Mar-1031-

Mar-11

Income            

Income from Financing Operations 4.83 66.09 340.94 1,010.65 1,596.63 2,239.75

Other income 0.6 3.5 9.71 118.25 44.47 59.35

Total 5.43 69.59 350.65 1,128.90 1,641.10 2,299.11

Expenditure            

Employee’s' Cost 10.94 49.01 248.25 348.55 368.71 456.52

Administrative and Other Expenses 9.98 44.19 233.89 270.27 297.3 327.03

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Depreciation 1.13 3.86 25.89 47.42 49.87 57.17

Financial Expenses 2.06 19.21 66.21 261 430.07 581.29

Bad Debts Written off 9.7 0.84 17.5 192.7 404.48 559.94

Total Expenditures 33.8 117.1 591.74 1,119.94 1,550.43 1,981.94

PBDT -28.37 -47.51 -241.09 8.96 90.67 317.17

Tax Expense            

Income Tax     - - - 28.69

Deferred Tax Expenses/(Credit) -9.35 9.26 - - - -

FBT 0.08 0.7 3.51 5.07 5.95 6.54

Excess tax provision Written Back 0.51 - - - - -

PAT -19.61 -57.47 -244.6 3.89 84.73 281.94

Dividend            

Equity Dividend            

Preference Dividend            

Dividend Distribution Tax            

Balance taken to Bal Sheet -19.61 -57.47 -244.6 3.89 84.73 281.94

Cash Flow Projections:

(Rs. in crores)

ABC Ltd.

Particulars31-Mar-

0831-Mar-

0931-

Mar-1031-Mar-

1131-Mar-

12

EBDTA -215.2 56.38 141.65 397.05 565.62

Less Tax 3.51 5.07 5.95 54.95 174.77

50

Add: Bad Debts 17.5 192.7 404.48 559.94 681.24

(Increase)/Decrease in working capital 55.58 -35.89 30.68 61.68 34.84

Cash From Operations -145.63 208.12 570.87 963.73 1,106.93

Inflow          

Adjustment in Debit bal of PL due to merger   36      

Increase in Share Capital 409.59 405.87 - - -

Increase in Secured Loans 189.38 1,071.002,224.0

0 1,275.00 1,575.00

Increase in Unsecured Loans 1,018.24 1,917.00 675 1,519.00 1,070.00

Collections 1,731.63 2,277.661,771.7

2 2,496.30 3,418.00

Total 3,348.84 5,707.534,670.7

2 5,290.30 6,063.00

Uses          

Increase in Fixed Assets 134.79 30.18 13.5 67.75 75

Increase in Investment 37.96 137- - -

Decrease in Secured Loans   65 150 881 1,150.00

Decrease in Unsecured Loans   1,689.001,360.0

0 675 825

Disbursements 3,026.00 3,895.003,876.7

9 4,628.46 5,080.67

Total 3,198.75 5,816.185,400.2

9 6,252.21 7,130.67

Opening Balance 107.22 111.69 211.16 52.46 54.28

Surplus/(Deficit) 4.47 99.47 -158.7 1.82 39.25

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Closing Balance 111.69 211.16 52.46 54.28 93.53

CONSORTIUM ARRANGEMENT: The company is presently banking under multiple arrangement.

CREDIT RATING

Parameters Score Marks Secured

Current year.31.03.2008

Financial Risk 46 21/40

Asset Quality 13 13/13

Capital Adequacy 12 12/12

Resource Raising Capacity 8 8/8

Competition and Market Position

7 7/7

Management 20 17/20

Total Marks with grade 100 78/100

Recommendations:

By studying overall performance of the company Term Loan of Rs.100.00 crores in favour of M/s ABC Ltd. is sanctioned.

52

CREDIT RATING CR-4

9. CASE STUDY – 2 (WORKING CAPITAL LOAN)

Proposal Request: RENEWAL/ENHANCEMENT OF LIMITS

53

Account Name: XYZ PVT.LTD

Status of Account: Regular

Banking: Consortium

Constitution: Public Limited Company

Date of incorporation: 1966

CAPITAL STRUCTURE:

Authorised Capital : Rs.30.00 crores(30000000 equity shares of Rs.10/- each)Paid-up Capital : Rs.27.20 crores Book Value (31.03.08) : Rs.39.50 per share of Rs.10/- each

Business Line: Engineering, design and fabrication of equipments and machineries for

Chemical, Fertilizers, Petro- chemicals and nuclear industries. Besides they are engaged in

Shipping by fabrication, repair and leasing barges.

TOTAL INDEBTEDNESS:

(Rs. In crores)

FUND BASED NON-FUND BASED TOTAL

Existing Proposed Existing Proposed Existing Proposed

Our Bank

Working Capital 1.80 5.63 36.00 51.75 37.80 57.38

W.C.(Adhoc) -- -- 13.00 13.00 13.00 13.00

Term Loan -- -- -- -- -- --

Sub-Total 1.80 5.63 49.00 64.75 50.80 70.38

54

Other Banks (WC)6.20 19.37 124.00 178.25 130.20 197.62

Other Banks (Adhoc)

-- -- 62.00 62.00 62.00 62.00

Fin. Institutions -- -- -- -- -- --

TOTAL 8.00 25.00 235.00 305.00 243.00 330.00

BRIEF BACKGROUND OF THE COMPANY:

XYZ Ltd started its manufacturing in the year 1967 and has two manufacturing units located at Bangalore in South India and Tarapur in Western India. Both the units are fabricating custom made equipment for Process Industries like Petrochemical, Fertilizer, Chemical and Nuclear Industries. Also the company has a shipyard at Goa, manufacturing flat bottom self propelled barges for transportation of Iron Ore. They also own a fleet of barges, which are available for hire to Iron Ore exporters. XYZ group also has rerolling mill at Bangalore for manufacture of Torr Steel. (Reinforcement Steel and Round Bars).

The above 2 workshops are approved by various international inspection agencies such as Lloyd’s, Bureau Veritas, Det Norske Veritas, Engineers India Ltd., Kvaerner Power gas, H and G, Projects and Development India Ltd and Bechtel.

FINANCIAL PARAMETERS:

(Rs. In crores)

Year Ended/Ending

Mar.2007

(Aud.)

April.2008

(Aud.)

Before de-

merger

As on 1.05.08

(Prov.)

After de-merger

Mar.2009

(Est.)

Mar.2010

(Proj.)

12 M 13 M 13 M 11 M 12 M

Paid up Capital27.20 27.20 5.44 5.44 5.44

Reserves & Surplus 47.73 80.38 87.54 94.53 107.49

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Intangible Assets - 0.14 0.08 -- --

TNW 74.93 107.44 92.90 99.97 112.93

Long Term Liabilities

32.06 67.24 18.74 23.59 24.08

Capital Employed 106.99 174.68 111.64 123.56 137.01

Net Block 39.82 60.97 17.01 21.81 34.72

Investments - - - - -

Other Non Current Assets

7.94 26.64 23.43 24.75 11.65

Net Working Capital

59.23 87.07 71.20 77.00 90.64

Current Assets 112.45 180.13 156.96 169.68 227.01

Current Liabilities 53.22 93.06 85.76 92.68 136.37

Current Ratio 2.11 1.94:1 1.83:1 1.83 1.66

DER (TL/TNW) 0.43 0.63:1 0.20:1 0.24 0.21

DER(TOL/TNW) 1.14 1.49:1 1.12:1 1.16 1.42

Net Sales 113.10 176.11 -- 246.00 320.00

Other Income 8.78 31.91 -- 2.90 2.00

Net Profit before Tax

18.14 42.93 -- 15.32 26.69

Net Profit after Tax 11.81 30.26 -- 10.11 17.62

Depreciation 4.27 6.87 -- 2.88 5.19

Cash Accruals 16.08 37.13 -- 12.99 22.81

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COMMENTS:

1. Capital of the company remained constant at Rs.27.20 crores as of 30.04.08. Reserves & Surplus increased from Rs.47.73 crores as of 31.03.07 to Rs.80.38 crores as of 30.04.08 mainly due to retention of profit of 30.21 crores.

2. TNW therefore improved from Rs.74.93 crores as of 31.03.07 to Rs.107.44 crores as of 30.04.08.

3. Term Liabilities increased from Rs.32.06 crores as of 31.03.07 to Rs.67.24 crores as of 30.04.08.

4. 14.1.4 Net Block increased from Rs.39.82 crores as of 31.03.07 to Rs.60.97 crores as of 30.04.2008.

5. The non-current assets of Rs.26.64 crores as of 30.04.08 comprised of company’s loans to subsidiary companies of Rs.6.46 crores, Debtors older than six months of Rs.4.06 crores, investment in subsidiaries Rs.0.06 crores and other current assets of Rs.16.06 crores.

6. The CR of 1.94, TL/TNW Ratio of 0.63 and TOL/TNW Ratio of 1.49 as of 30.04.2008 are within acceptable levels.

7. The Net Profit of the Company for 2007-08 amounted to Rs.30.26 crores as against the estimate of Rs.35.00 crores for the year.( Last year net profit of Rs.11.81 crores ) The shortfall in the net profit was due to non-completion of order of HPCL, which was to be completed before December-2007. During the current FY 2008-09, the company has estimated net profit of Rs.10.11 crores, which is lower than the profit earned in FY 2007-08. The profit of the erstwhile company for the FY 2007-08 includes an amount of Rs.15.90 crores being a profit on sale of fixed assets arising out of the conversion of Bangalore property in Technology Park and receipt of lease rentals of Rs.6.79 crores. The profit on sale of fixed assets being an amount of non- recurring nature will not be present in the ensuing year. The receipts from lease rentals henceforth will be the income of PQR Ltd., demerged company of erstwhile XYZ Ltd. from current FY 2008-09.

8. The overall financial position of the company is satisfactory.

COMMENTS ON CASH BASIS:

(Rs. in Crores)

Year 2006-07 2007-08

Net cash from operating activities (20.37) (53.74)

57

Net cash used in investment activities (36.01) 1.44

Net cash from financing activities 7.12 45.44

Net cash Generation 8.52 (6.86)

Opening cash balance as on 1st April 0.29 8.81

Closing cash balance as on 31st March 8.81 1.95

MANAGEMENT EVALUATION:

Market reputation:

XYZ has already established itself as a leading engineering company. The company is professionally managed by technocrats and enjoying high reputation in their field. The company has developed enough experience and expertise in their field. Crisis Management:

The present promoters of the company are committed towards the project and can be reasonably expected to support the same in case of crisis though on their own.

Organisation structure / Succession Planning / Labour relations

The company has well defined structured organisation and maintain cordial industrial relations.

INDUSTRY EVALUATION:Industry competition:

Though there are competitors in this field, the company has proved themselves as a reliable manufacturer- supplier for petro industries and nuclear establishments. The company has acquired expertise and experience in supplying tailor made products to suit to the requirement of the customers. Hence they are considered as a preferred supplier in these industries.

Industry structure:

The industry is a consolidated with select players as it requires technical expertise of a high order in meeting the stringent quality requirement. Government policies

With emphasis being self reliance in the power, fertilizer and petroleum refining sectors, the Government policies are conducive to the growth of the Engg. good industry.

58

Business risk:

Diversity in customer base and productsCompany caters to the capital goods requirements of giant enterprises, mainly from Public Sector, in different industries like Fertilisers, Power and Petrochemicals. In that sense the customer base can be termed as well spread. The products manufactured by them are specialised and for specific use of the industry.

Market share of the company’s main productsThe company’s products have sizeable share in the industry esp. high tech petro storage and nuclear industries.

Availability of raw materialThe raw materials for this industry are technology and special alloy steel to meet the specification of the customers.

Selling and distribution arrangementThe company has already established itself as a leading manufacturer/ supplier of high tech process units and storage tanks for petroleum industries and specific spares supplier for nuclear industry with representative office/ centres in Mumbai, Bangalore and Goa.

Technology issues if anyThe company mainly deals with petro process units and storage facilities. The company has reasonable technological base in the form of technology, trained man power, products and contemporary focus, hence it does not foresee any issues in this front.

WORKING CAPITAL ASSESSMENT:

Present Request:

The Company has requested the consortium for enhancement in existing fund based working

capital limits from Rs. 8.00 Crores to Rs. 25.00 Crores and NFB limits from Rs.160.00 crores

to Rs.230.00 crores to meet the additional working capital requirement for achieving the

increased net sales from Rs.176.11 Crores during FY 2007-08 to Rs. 320.00 Crores during

the FY 2009-10.

The company has further informed that the average outstanding under buyer’s credit during

the last two years was Rs 24 to 25 Crores. The company has now proposed enhancement in

Cash Credit limit because of the fear of appreciating dollar in the last few months. Besides

59

this the company has received bulk order of Rs 340.00 Crores from M/s STU Ltd, Bhatinda.

The execution period of such orders will generally be of 18 to 24 months. As such the

turnover arising out these orders will reflect in next two years.

The company has submitted the CMA data based on actuals of 30.04.2008 and estimates and projections for the next two years to the lead Bank i.e. Bank of Maharashtra. The lead Bank has assessed company’s working capital requirements as under.

Sales Projections:The company has estimated sales turnover of Rs.225.00 crores for FY 2007-08 against which it has achieved Rs.176.11 crores i.e. 75.76% of their estimate. The company, has achieved sales of Rs.182.95 crores upto January-2009. The company has estimated sales of Rs.246.00 crores in FY 2008-09. Considering the present work orders of Rs.778.90 crores, the company is hopeful to achieve estimated sales.

Considering the past performance and future business prospects, the sales projections are on conservative basis and achievable and hence lead bank has accepted the projections.

Assessment of working capital limits

The holding level of the company is as under:-

(Rs. in Crores)

Sr. No. Particulars 06-07 07-08 08-09 09-10

1 Raw Materials

(Months’ consumption)

15.86

3.61M

24.77

2.66M

31.91

3.27M

43.12

3.00M

2 Work in Progress

(Months’ cost of production)

22.02

2.91M

67.94

6.87M

45.61

2.50M

53.40

2.50M

3 Receivables

(Months’ sales)

20.32

2.48M

43.76

3.34M

67.09

3.00M

80.00

3.00M

4 Creditors excluding Buyers Credit 8.70 15.99 19.50 28.75

60

(Months’ purchases) 1.98M 1.72M 2.00M 2.00M

Raw Materials

Holding of raw materials is slightly decreased during FY 07-08 as compared to previous years. However it will be increased to 3 months for the next two years. The reasons are as under:

1. The company is buying steel in bulk quantities to take care of flow of orders.

2. The necessity of business requirements.3. To derive the cost benefits.

Stock In Process

The holding period for stock in process is 2 to 3 months and represents time required for fabrication of the large columns, heat exchangers, oil tankers and other heavy equipments as per specifications required by its customers. As these jobs are tailor made, the processing period can sometimes increased beyond six months.

Receivables

The estimated / projected receivables for the FY 2008-09 & 2009-10 are at 3.00 months resp., which is less than actual. As the company’s main clienteles are from big corporate and public sector undertakings, quality of debtors and realization of the same are good. We therefore accept the receivables level as reasonable

Creditors

The creditors level for manufacturing is estimated and projected at 2.00 months i.e. as per the past trend. This is because company wants to avail bank finance instead of credit from suppliers.

CREDIT RATING

a)

Year 31.03.2007 31.03.2008

Total score obtained 70/87 i.e. 81% 75/92

Grade CR-3 CR-2

61

b)

Para meters Marks obtained

31.03.2007 31.03.2008

Borrower rating 55/62 58/67

Facility rating 14/15 14/15

Risk Mitigators 0/6 0/6

Business aspects ¼ 3/4

Total Marks with grade 70/87 i.e. 81% 75/92 i.e. 81.52%

Recommendations:

By studying satisfactory financial position of the company and the past satisfactory operations in the account, we recommend renewal of limits at enhanced level for further period of one year.

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10. SUMMARY & CONCLUSION

Credit Appraisal is a process of appraising the credit worthiness of loan applicants. The funds

of depositor’s, i.e., general public are mobilized by means of such advance/investment. Thus it

extremely important for the lender bank to assess the risk associated with credit; thereby ensure

the security for the funds deposited by the depositors.

In UBI the credit appraisal is done by thorough study of the project which involves following:

1) Evaluation of Management: A detailed study about the promoters is carried out in order

to ensure promoters are experienced in the line of business and are capable to implement

and run the project

2) Technical Feasibility: A detailed study about the technical aspects is done to determine

the technical soundness of the project

3) Financial Viability: A detailed study relating to financial viability of the project is done;

thereby ensuring that project will generate sufficient surplus to repay the loan installment

and interest

4) Risk analysis: it determines the risk associated with the project this is done by performing

a Sensitivity analysis and Credit Rating. With Sensitivity Analysis the projects capacity

to service debts under worsened conditions is determined. Credit rating, provides rating

for various parameters like management, financial, market and so, thereby determine the

credit worthiness of the borrower

It is on the basis of the credit risk level, collateral securities to be given by the borrower are

determined.

This shows Union Bank of India has sound system for providing finance & appraising the credit

of the corporate borrowers.

63

11. REFERENCES & BIBLIOGRAPHY

BOOKS:

Hand Book of Banking Information

N. S. Toor

Bank Finance- Practical Aspects

D. N. Chaudhari

Alok Kulshreshtha

Credit Appraisal & Risk Analysis

K. M. Chitnis

Banking Strategies, Credit Appraisal & Learning Decision

Hrishikesh Bhattachrya

WEBSITES:

www.ubi.com

www.wikipedia.com

www.indianexpress.com

www.economictimes.com

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