CHAPTER-1 INTRODUCTION

1.1 OVERVIEW OF THE INDUSTRY Bank is the main confluence that maintains and controls the flow of money to make the commerce of the land possible. Government uses it to control the flow of money by managing Cash Reserve Ratio (CRR) and thereby influencing the inflation level. The functions of the bank include accepting deposits from the public and other institutions and then to direct as loans and advances to parties mainly for growth and development of industries. It extends loans for the purpose of education, housing etc and as a part of social duty, some percentage to Agricultural sector as decided by the RBI. The banks take the deposit at the lower rate of interest and give loans at the higher rates of interest. The difference in this transaction constitutes the main source of income for the banks.

Banking in India has undergone startling changes in terms of growth and structure. Organized Banking was active in India since the establishment of The General Bank of India in 1786. The Reserve Bank of India (RBI) was established as the central bank. In 1955, the Imperial bank of India, the biggest bank at that time, was taken over by the government to form State owned State Bank of India (SBI). RBI undertook an exercise to reduce the fragmentation in the Indian Banking Industry post independence by merging weaker banks with stronger banks. The total number of banks reduced from 566 in 1951 To 85 in 1969.

The economic reforms unleashed by the government in early nineties included banking sector too, to a significant extent. Entry of new private banks was permitted by RBI under specific guidelines.

A number of liberalization and deregulation measures like efficiency, asset quality, capital adequacy and profitability have been introduced by the RBI to bring Indian banks in line with International best practices.

With a view of giving the State owned banks operational flexibility and functional autonomy, partial privatization has been authorized as a first step, enabling them to reduce the stake of the government to 51%.

1.2 CREDIT APPRAISAL SYSTEM 1.2.1 Types of Lending:

For a business on the growth phase with a wide range of opportunities to explore timely availability of credit is an integral ingredient needed to scale new heights.

Bank provide services ranging from Funded to Non-Funded, from Short Term to Long Term and from Credit to Trade Services ensures that you get finance the way it is best suited for the business.

1. Cash Credit

Bank offer Cash Credit facilities to meet day-to-day working capital needs. Cash Credit is provided against the primary security of stock, debtors, other current assets, etc., and/or collateral security of movable fixed assets, immovable property, personal or corporate guarantee, etc. Interest is charged not on the sanctioned amount but on the utilized amount.

2. Working Capital Demand Loan

Bank also provides working capital facilities in the form of Working Capital Demand Loan instead of cash credit facility. The primary or collateral security will be as mentioned in cash credit facility. Here also interest is levied on the amount drawn rather than on the amount utilized.

3. Export Finance

Bank provides finance for export activities in the form of Pre-Shipment Credit against firm order and or Letter of Credit and Post shipment credit. Credit is available for procuring raw materials, manufacturing the goods, processing and packaging the goods and shipping the goods. Finance is provided in Indian or foreign currency depending upon the need of the borrower.

4. Short Term Loan

Working Capital facilities can be availed to meet day-to-day working capital needs and Term Loan for the capital expenditure. However there may be occasions where ad hoc or short-term finance is needed for general corporate purposes, meeting temporary mismatches in working capital or for meeting contingent expenses. In such situations Bank provides Short Term Loans for tenure upto a year so as to ensure that business runs smoothly.

5. Long Term Loan

Given the growth opportunities business enjoys, long-term funds may be needed for capex or capacity expansions or plant modernization and so on. Keeping these requirements in mind Bank provides term loans up to acceptable tenor with suitable moratorium, if required, and repayment options structured on the basis of your estimated cash flows. These loans are primarily secured by a first charge on the fixed assets acquired through the loan amount. Suitable collateral security is also taken whenever required.

6. Clean Bill Discounting

Bank provide clean bill discounting facilities to fund receivables. Bank discount bills or receivables from credit worthy clients and provide credit against that. This facility is provided for a period of 3-6 months depending upon the tenor of the bill.

7. LC Backed Bill Discounting

Bank discounts trade bills drawn under Letters of Credit issued by reputed banks to fund the receivables. This facility is provided for a period of 3-6 months depending upon the tenor of the bill or Letter of Credit.

8. Co-Acceptance of Bills

Bank also provides co-acceptance of trade bills depending upon the need of the borrowers Credit Facilities against Guarantee or Stand by Letter of Credit issued by Foreign Banks. Various foreign companies set up subsidiary in India. Bank provides funding to such companies against guarantees or SBLCs of acceptable foreign banks.

9. Letter of Credit

Apart from fund based working capital facilities Bank provide a range of Non-Fund Based facilities such as Letter of credit, Bank Guarantees, Solvency certificates, etc. Letter of Credit is provided to meet trade purchases. These are generally provided for 3-6 months depending upon Trade cycle. Apart from this Bank provide Import Letter of Credit for importing machinery or capital goods. Such LCs are for tenure ranging from 1-3 years depending upon the need of the borrower.

10. Bank Guarantee

Bank provides Bank Guarantee on behalf of the clients to various other entities such as Government, quasi govt. bodies, corporate and so on. Bank provides a range of guarantee such as Performance guarantee, financial guarantee, EPCG etc. The tenure of the Bank guarantees range from 1year to 10years depending upon the purpose of the guarantee.

11. Solvency Certificates

Bank also provide solvency certificate depending upon the need of borrower.

1.2.2 Appraisal Techniques

The entire gamut of credit appraisal can be segregated into 7 categories as under:

1) Borrower Appraisal 2) Technical Appraisal 3) Management Appraisal 4) Financial Appraisal 5) Economic Appraisal 6) Market Appraisal 7) Environmental Appraisal.

1) Borrower Appraisal: Confidence is the basis of all credit transaction, which a lender should have in the honesty, ability & willingness of the borrower to repay the loan amount. The basis of this confidence is derived from 5 Cs of the borrower as given hereunder.

a) Character: It is constituted by honesty, sobriety, good habits, personality, the ability & willingness to keep his words under all circumstances.

b) Capacity: The ability of the borrower to manage an enterprise successfully with the resources available to him. His educational, technical, & professional qualification, his present activity, experience in the line of business, experience of family, special skill, knowledge, past record would indicate his capacity to manage the show & repay the loan successfully.

c) Capital: It is the ability of the borrower to meet the loss, if any, sustained in the business from his own investment or capital without shifting it to his creditor or banker. Unless a borrower has stake in the business, he may not take interest in its success.

d) Conditions: It is the ability of the borrower to meet the conditions stipulated by the Bank

e) Collateral: It is the ability of the borrower to provide collateral for safety of the loan .
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2) Technical Appraisal: It involves detailed study of following aspects:

a. Availability of infrastructure e.g. land, location, power, water etc b. Leasing/registration requirements.

c. Selection of technology

d. Availability of suitable technical process.

e. Availability of raw material, skilled labor etc.

3) Management Appraisal:

a) In case of Proprietorship firm/Partnership firm/Enterprises run by individuals, careful appraisal of the individual borrowers shall be the deciding factor to finance the project.

b) In case of corporate borrowers and large borrowers, it is usually a set of professionals who manage the entity in specific areas of management i.e. production, finance, marketing, personal etc. Unless there is a complete integration of all these functions within an organization, it cannot function effectively.

c) In all the above cases branches must ensure that concern has necessary key expertise required for the critical functions.

4) Financial Appraisal: It refers to the following aspects of the project/unit:

a. Determination of the cost of the project.

b. Assessment of the source of funds/means of financing of the project.

c. Profitability Estimates
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d. Break Even Analysis

e. Cash flow projection

f. Projected Balance Sheet.

5) Economic Appraisal:

a) The performance of a project is influenced by variety of other social, economic & cultural factors viz. employment potential, development of industrially backward areas, environmental pollution etc.

b) The project must yield best possible return to the society in general & the investor in particular.

c) One of the most important of appraising this is the computation of Internal Rate of

d) Return of the Project (IRR).

6) Market Appraisal: Following aspects of market survey are taken into account:

a) General market prospects of the product: various aspects such as Import/export policies ,licensing norms, monetary & fiscal policies of RBI as well as total number of units producing similar products, their installed capacity, degree of health, special incentives or support program of the Govt. are looked into.

b) Position of the product vis--vis the competitors: Requires in-depth study of competitive strength/weakness of the proposed product in relation to its rivals/competitors to decide future strategies.

c) Size of the market & share of the proposed unit: After the above studies, now, it is required to estimate the share of the market that may be claimed by the new product.

d) Price: The price assumed by the entrepreneur should be realistic vis--vis those of his competitors. If the products are new, they must have competitive edge to make the presence felt.

7) Environmental Appraisal: Now that environmental issues can also hamper the performance of a project, obtaining certificate from pollution control board (if required) etc should be looked into before financing.

1.2.3. Financial Evaluation

It involves evaluation of financial statements of the borrowers to ascertain the financial health of the company. Financial statements are rearrangement as described in detail below and rearranged financial statements are used to ascertain the capital requirements, liquidity, long-term solvency, debt-repayment capacity etc. of the business involved. Various components of financial evaluation are as follows:

Classification and Rearrangement of Balance Sheet items

Financial statements contain the information about the financial health of enterprise. Since different applicants use different formats and classification of some of the items present in the balance sheet is subjective, it becomes necessary to re-arrange the balance sheet items to achieve standardization. Various components ofthe balance sheet are used in calculating ratios like Debt Equity Ratio (DER), Debt-Service Coverage Ratio (DSCR), Current Ratio, Fixed Asset Coverage Ratio (FACR), Maximum Permissible Bank Finance (MPBF) etc. There are guidelines from the RBI and Bank on the permissible values of these ratios and relaxation permissible, if any. Proper rearrangement of financial statements becomes critical in credit lending decision making.

Classification of items into various heads depends on the policies of the bank. For BOB Classification of a particular liability as a current liability or long term liability etc. depends on the internal guidelines of the Bank. The reclassifications to be done as per the Banks/RBIs guidelines are detailed below:

Current Liabilities

Current liabilities include the known obligations to be within a year. These are classified as:

1. It will include all short term bank borrowings, whether secured or unsecured, including bills purchased or discounted. 2. All liabilities which are maturing within a year will be treated as current liability, whether secured or unsecured. 3. Term loan instalments, repayment of deposits etc. due less than one year will be treated as current liability for the purpose of balance sheet analysis but not so for assessment of working capital. 4. Preference share capital to be redeemed within a year will be shown as current liability.

5. Provision for payment of taxes is to be netted with advance payment of tax.

6. Advances received from customers against supply of goods are to be treated as current liabilities. Whenever these are required to be statutorily invested in specified assets, to that extent netting may be allowed.

7. Deposits from dealers, security deposit, earnest deposit received, tender deposits received etc. should be treated as long term liability, irrespective of its maturity.

8. Disputed liabilities in respect of excise duty, income tax/customs duty shown as contingent liability should not be taken as current liability for the purpose of calculation of MPBF, if these are delayed beyond one year and borrower may be
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asked to make suitable provisions.

Current Assets

1. Bank balance will include any credit balance in any deposit account like savings bank, current account with any bank. It will not include fixed deposit.

2. Investments include only government securities which are unencumbered and fixed deposits which are not under lien for any facilities like bank guarantee, letters of credit etc.

3. Dead, obsolete, non-moving inventories should not be treated as current assets.

4. Sundry debtors which are very old should not be treated as current assets.

5. Loans and advances for supply of plant & machinery should not be included in current assets.

6. Advances paid to suppliers including associate concerns for supplies of more than normal trade practice should not be treated as current assets.

7. Advance payment of tax and provision for taxation should be netted.

8. Deposit kept with public bodies for normal business operations like security deposit, earnest deposit, tender deposit should not be treated as current assets, irrespective of its maturity.

9. Export receivables will be treated as current assets.

10. Bills discounted and bills purchased outstanding will be included under receivables and corresponding amount shown as bank borrowings under current liabilities.

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Calculating key Financial Ratios:

Current financials of existing operations, project funding information like sources of funds etc. and future projections are used for calculating key financial ratios for a period of time. These ratios tell us a lot about a unit's liquidity position, managements' stake in the bbtusiness, capacity to service the debts etc. The financial ratios which are considered important are discussed as under:

Debt-Equity Ratio (DER)

DER =

This ratio indicates relationship between the external term borrowings and the own funds of the concern. Bank takes total term liabilities as Debt i.e. total liabilities minus net worth and total current liabilities. Equity means net worth of the concern minus intangible and fictitious assets. However, the subordinated funds (i.e. longterm unsecured loans from friends and relatives, etc.) may be considered as quasiequity, generally for non-corporate borrowers, and included in equity while arriving at ratio, if the borrower retains the same at the existing level/ projected level during the currency of Bank Loan. The subordinated debt however should not exceed borrowers tier I capital i.e. capital plus free reserves less intangible assets. A ratio of 3:1 is considered satisfactory.

Tangible Net Worth to Total Outside Liabilities (TNW/TOL):

TNW/TOL=

This ratio gives a view of borrower's capital structure. If the ratio shows a rising trend, it indicates that the borrower is relying more on his own funds and less on outside funds and vice versa.

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Profit-Sales Ratio:

PSR=

This ratio gives the margin available after meeting cost of manufacturing. It provides a yardstick to measure the efficiency of production and margin on sales price i.e. the pricing structure.

1.2.4. Working Capital

Introduction:

(i) Any business enterprise whether engaged in manufacturing or purely trading activity, has to have sufficient capital to finance both, its fixed and long term assets, viz. land, building, machineries, etc. and to maintain certain level of short term assets for smooth conduct of day to day business activities/ production schedule. Such short term assets which are required for day to day operation are called the current assets.

(ii) The amount of current assets required for a smooth conduct of business is dependent on the nature of the activity, availability of the raw materials, level of production, storage capacity and funds available. So the funds/capital actually required to maintain this required level of current assets, is called the gross working capital.

(iii) Out of the level of gross working capital, required as above, the borrower raises the necessary funds from many sources, viz.:

(a) Share Capital (b) Retained Profits (c) Bank Borrowings

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(d) Trade Creditors (e) Advance from Purchasers

(iii) Out of the above, credit available in the form of trade creditors and advance from purchasers etc., are sources of finance which are short term in nature and are available as per trade practices and market conditions. The remaining resources are, therefore, to be raised from own capital or through bank borrowing. Such short term credits available to the firm are called current liabilities and the difference of gross working capital and the current liabilities is called the 'Net Working Capital'.

Net Working Capital:

There are two concepts of working capital:

1. Gross working capital

2. Net working capital

The gross working capital is the capital invested in the total current assets of the enterprises current assets are those Assets which can convert in to cash within a short period normally one accounting year.

Net working capital is the excess of current assets over current liability, or say NET WORKING CAPITAL = CURRENT ASSETS CURRENT LIABILITIES.

In a narrow sense, the term working capital refers to the net working.

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1.2.5 Appraisal of Bank Finance:

The appraisal of bank finance for working capital thus involves the following steps:

(i) Estimation of the Level of Gross Working Capital

(ii) Estimation of the Level of Current Liabilities

(iii) Computation of Net Working Capital Gap

(iv) Computing the share of NWC Gap required to be brought by the borrower as Margin.

(v) Computation of the Level of Bank Finance.

Estimation of Gross Working Capital:

For a systematic and proper estimation of the gross working capital requirements of a firm, it is essential

to identify its various components and analyze them in detail.

(A) Operating Cycle Method Every business unit has an operating cycle which indicates that a unit procures raw material from its funds, convert into stock in process which again is converted into finished goods which can be sold for cash and thus transformed into fund. Alternatively it can be sold on credit and on realization thereof gets converted into fund.

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Thus every rupee invested in current assets at the beginning of the cycle comes back to the promoter with the profit element added, after the lapse of a specific period of time. This length of time is known as operating cycle or working capital cycle.

Figure 1.1: Operating Cycle

In order to keep the operating cycle going on, certain level of current assets are always required, the total of which gives the amount of total working capital required. Thus total working capital can be obtained by assessing the level of various components of current assets.

The operating cycle is therefore measured in terms of days of average inventory held for every major category of working capital components.

(B) Components of Gross Working Capital:

In any typical manufacturing unit, the components that constitute the gross working capital or current assets are as under :

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i. Raw materials

ii. Consumable stores and spares

iii. Stock in process

iv. Finished goods

v. Receivables

vi. Cash and bank balance

vii. Other current assets.

Data required for assessment of working capital requirement

For assessing the working capital needs of an organization, bank follows CMA (Credit Monitoring Arrangement). It is required by banks and other financial institutions, to introspect or study the minutes of balance sheet and other financial statements of a body corporate for financing their projects. In other words it is the detailed explanation of the balance sheet and other financial ratios of the firm or any other corporate.

The CMA includes analysis of following six documents:

i)

Existing and proposed banking arrangements

ii)

Operating statement

iii)

Analysis of Balance Sheet

iv)

Build-up of current assets and current liabilities

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v) Calculation of MPBF (Maximum Permissible Bank Finance)

vi) Fund Flow Statement

Estimation of Level of Current Liabilities under MPBF method:

Once the gross working capital or current assets are computed as above, it is essential to find out the amount of credit available to the borrowers in purchase of raw materials, advance payment received from buyers, deposits from dealers, provisions for statutory liabilities, etc. The RBI had issued guidelines on classification of various items constituting current liabilities for the purpose of assessment of working capital. They are listed below with guidelines on composition of these items.:

(a) Short term bank borrowings: o Includes bills purchased, bills discounted from the bank, etc. o Unsecured loans. o Public deposits, viz. fixed deposits maturing within one year. o Sundry creditors (trade) for raw materials and consumable stores and spares:

It is assessed on the basis of normal credit available for purchase of

raw material.

If usance letter of credit facility is proposed, the period of credit

available due to availment of such letter of credit facilities should be reflected in the level of sundry creditors.

Projected level of sundry creditors should be reasonable with reference

to the quantum of purchases, market practice and past trends.

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(b) Interest and other charges accrued but not due for payment: It should be related to the amount of loans and debts due and its period for which such liabilities are accrued.

(c) Advance/progress payments from customers:

Where deposits are required in terms of regulations formed by the Government to be invested in a specified manner (advance for booking of vehicles), the benefit of netting may be allowed to the extent of such investment in approved securities and only the balance amount need be classified as current liability.

Where on account of different accounting procedure progress payments are shown on the liabilities side without deduction from work-in-progress, bank may set off progress payments against work-in-progress. Advance payment received are also adjusted progressively from the value of work completed.

Outstanding advance payment are to be reckoned as current liabilities or otherwise depending upon whether they are adjustable within a year or later.

(d) Deposits from dealers, selling agents, etc.:

Deposits from dealers, selling agents, etc. may be treated as term liabilities irrespective of their tenure, if such deposits are accepted to be repayable only when the dealership/agency is terminated after due verification by banks.

The deposits which do not satisfy the above condition should continue to be classified as current liabilities.

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(e) Instalments of term loans, deferred liabilities, debentures, redeemable preference shares and long term deposits payable within one year:

It should be proportionate to the total liabilities under each of the items above. The RBI has directed that for the purpose of Working capital assessment only such installments of term loan, debentures, etc. due within a year need not be treated as current liability. In other words, such items will be treated as current liabilities only for the purpose of balance sheet analysis and computation of current ratio.

(f) Statutory Liabilities: Provident fund dues. Provision for taxation. Sales tax, excise, etc. Obligations towards workers considered as statutory. Others.

In cases where specific provisions have not been made for the estimated or accrued liabilities and will be eventually paid out of general reserves, estimated amount should be shown as current liabilities.

Disputed excise liabilities shown as contingent liability or by way of note to the balance sheet, need not be treated as a current liability for calculating the permissible bank finance, unless it has been collected or provided for in the accounts of the concern.

Provision for disputed excise duty should be classified as current liabilities, unless the amount is payable in instalments spread over a period exceeding one year as per the orders of competent authority like the Excise Department or in terms of the directions of a competent court. In such cases, instalments payable are to be classified as long term liability.

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Where the provisions made for disputed excise duty is invested separately, say in fixed deposits with banks, such provision may be set off against the relative investment.

Disputed liabilities in respect of income tax, customs and electricity charges need not be treated as current liability for computing maximum bank finance, except to the extent provided for in the books of the concern.

(j) Miscellaneous Current Liabilities:

(i) Dividends payable

(ii) Liabilities for expenses

(iii) Gratuity payable within 1 year

(iv) Other provisions

(v) Any other payment due within 12 months

The amount would be based on estimated or accrued amount which are anticipated to cover expenditure within the year for known obligations, viz. the amount which can be determined only approximately as for example, provisions, accrued bonus, taxes, etc.

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Computation of Net Working Capital:

(i) Net working capital is defined as gross working capital minus total current liability.

(ii) Total Current Liability is Short Term Bank Borrowing + Other Current Liabilities.

(iii) If a short term bank borrowing is NIL, then the gross working capital is financed entirely by other current liability. Normally it is not the case.

(iv) So the difference between gross working capital and other current liabilities (excluding bank borrowings) is called the working capital gap. The question is how much of this gap is to be financed by the bank and how is the borrower required to make up the remaining amount.

Margin required to be brought by borrower under various methods of lending:

The extent upto which the working capital gap can be financed by the bank will depend upon the method of lending under which the assessment of working capital is required to be made.

(A) First Method of Lending (I METHOD):

Under the first method of lending, the borrower is required to contribute a minimum of 25% of the working capital gap from the long term sources. The balance amount i.e. 75% of the working capital gap represents the maximum permissible bank finance (MPBF). Where the net working capital is more than the amount required to be provided by the borrower, the maximum permissible bank finance would get reduced to that extent. To ensure compliance under this method of lending, the current ratio of the concern should not be less than 1.17:1.

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(B) Second Method of Lending (II METHOD):

The second method of lending stipulates that the borrower is required to contribute a minimum of 25% of the total current assets from the long term sources(Net Working Capital) irrespective of the working capital gap. The maximum permissible bank finance will, therefore, be working capital gap less the amount to be so contributed by the borrower. Where the net working capital is more than the stipulated minimum contribution, the maximum permissible bank finance would get reduced to that extent. To ensure compliance under this method of lending, the current ratio of the concern should not be less than 1.33:1. The above two methods can be illustrated by an example given hereunder:

In the example, it is observed that under the first method of lending the borrower is entitled for an MPBF of 165 only, whereas he has availed bank borrowing of 200, thus resulting in an excess borrowing of 35. Under the second method the MPBF works out to 128 only and the excess borrowings increases to 72.The borrower is thus, required to bring in additional long term funds of Rs. 35/- and 72/-under first and second method of lending respectively.

Current Liabilities Creditors for purchase Other Current Liabilities Total Current Liabilities other than Bank borrowing Bank Borrowing including bills discounted with bankers 200 Total Current Liabilities 350 150 100 50

Current Assets Raw materials SIP 200 20

Finished goods Receivables including bills discounted with bankers Other Current Asset Total Current Asset

90

50 10 370

1st Method Total Current Asset 370

2nd Method Total Current Asset 370

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Less: other than

Current

Liabilities

bank borrowings Working Capital GAP Less: Caiptal GAP Maximum Permissible Bank 25% of Working

150 220

Less: 25% of Current Asset

92 278

Less: Current Liabilities other than bank 55 borrowing 150

Maximum Finance Excess Borrowing Current Ratio 165 35 1.17 Finance

Permissible

Bank 128 72 1.79

Excess Borrowing Current Ratio

TABLE 1.1

Assessment of Non-Fund Based Working Capital Facility

The credit facilities given by the banks where actual bank funds are not involved are termed as 'non-fund based facilities'. These facilities are divided in three broad categories as under: Letters of credit Guarantees Co acceptance of bills/deferred payment guarantees.

Units for the above facilities are also simultaneously sanctioned by banks while sanctioning other fund based credit limits.

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Facilities for co acceptance of bills/deferred payment guarantees are generally required for acquiring plant and machinery and may, technically be taken as a substitute for term loan which would require detailed appraisal of the borrower's needs and financial position in the same manner as in case of any other term loan proposal.

Letter of Credit: Letter of credit (LC) is a method of settlement of payment of a trade transaction and is widely used to finance purchase of raw material, machinery etc. It contains a written undertaking by the bank on behalf of the purchaser to the seller to make payment of a stated amount on presentation of stipulated documents and fulfillment of all the terms and conditions incorporated therein. Letters of credit thus offers both parties to a trade transaction a degree of security. The seller can look forward to the issuing bank for payment instead of relying on the ability and willingness of the buyer to pay.

Letter of Credit Mechanism

Any business/industrial venture will involve purchase transactions relating to machine/other capital goods and raw material etc., and also sale transactions relating to its products. The customer may be an applicant for a letter of credit for his purchases while be the beneficiary under other letter of credit for his sale transaction. The complete mechanism of a letter of credit may be divided in three parts as under:

Issuing of Credit: Letter of credit is always issued by the buyer's bank (issuing bank) at the request and on behalf and in accordance with the instructions of the applicant. The letter of credit may either be advised directly or through some other bank. The advising bank is responsible for transmission of credit and verifying the authenticity of signature of issuing bank and is under no commitment to pay the seller.The advising bank may also be required to add confirmation and in that case will assume all the liabilities of issuing bank in relation to the beneficiary as stated already.

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Negotiation of Documents by beneficiary: On receipt of letter of credit, the beneficiary shall arrange t006F supply the goods as per the terms of L/C and draw necessary documents as required under L/C. The documents will then be presented to the negotiating bank for payment/acceptance as the case may be. The negotiating bank will make the payment to the beneficiary and obtain reimbursement from the opening bank in terms of credit.

Settlement of Bills Drawn under Letter of Credit by the opener: The last step involved in letter of credit mechanism is retirement of documents received under L/C by the opener. On receipt of documents drawn under L/C, the opening bank is required to closely examine the documents to ensure compliance of the terms and conditions of credit and present the same to the opener for his scrutiny. The opener should then make payment to the opening bank and take delivery of documents so that delivery of goods can be obtained by him.

Types of Letter of Credit: Letter of credit may be divided in two broad categories as under:

(i) Revocable letter of credit. This may be amended or cancelled without prior warning or notification to the beneficiary. Such letter of credit will not offer any protection and should not be accepted as beneficiary of credit.

(ii) Irrevocable letter of credit. This cannot be amended or cancelled without the agreement of all parties thereto. This type of letter of credit is mainly in use and offers complete protection to the seller against subsequent development against his interest.

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Documents required from the Borrower for Bank Credit

a. Copies of audited financial statement for the last 3 years/ Provisional Financial statement for the latest year, if accounts for that year are not audited, and the audited Financial Statements for the preceding 2 years.

b. Copy of last 2 years Income Tax Return for the firm.

c. Copies of insurance policies in respect of goods and premises insured

d. Documents evidencing constitution of the firm like Memorandum & Articles of Association, Certificate of Incorporation, and Partnership Deed etc.

e. Pan card of the firm/ company

f. Identity proof (passport copy, voter ID, driving license, PAN card) of proprietor/all partners/ all directors .

g. Signature verification of proprietor/ all partners/ all directors/ all authorized signatories from the existing Banker.

h. CA certified certificate of Net Worth or Personal Balance Sheets of proprietor/all partners/ all directors .

i. CA certified Declaration of borrowing from Banks/ Financial Institutions (FIs) as on the date of declaration .

j. Duly completed application form

k. CMA data for next year

l. Electricity bill/ telephone bill copy in the name of the firm

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Factors taken care of during the analysis

1. Credit ratingAn assessment of credit worthiness of corporations. It is based upon the history of borrowing and repayment, as well as the availability of assets and extent of liabilities.

Credit is important since individuals and corporations with poor credit will have difficulty finding financing, and will most likely have to pay more due to the risk of default.

a) Credit Rating by Bank of India Credit Rating Tool :It is software that is used by Bank of India for assessing the credit worthiness of the company. It helps the bank to give individual score to company on different parameters and according to which it scores keeping in view the past record and financial status of the company. If the score given by the software is acceptable then the appraisal can be taken beyond.

b) External Rating : There are several RBI approved Credit rating Agencies like CRISIL, ICRA, CARE Fitch etc. who do the rating of Mid-Corporate. CRISIL being most popular, it is considered here. CRISIL Rating indicates the enterprise performance capability and financial strength. CRISIL Ratings are entity-specific ratings, unlike credit ratings, which are debt-obligation-specific. CRISIL Rating reflects the level of

creditworthiness of the enterprise, adjudged in relation to other enterprises.

2. Defaulters list- RBI DEFAULTERS LIST / CIBIL check -

In 2004, RBI authorised CIBIL to publish a list of defaulters of Rs 1 crore and above and also give out details of wilful defaulters of Rs 25 lakh and above against whom suits have been filed.

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The measure that followed the 2002 scheme that defined wilful defaulters and terms like diversion of funds and siphoning of funds, was aimed at exerting moral pressure on the defaulter.

Under the securitisation ordinance, banks have the right to acquire assets of wilful defaulters. RBI later expanded the definition of wilful defaulters by including companies that try to dispose of mortgaged properties without the knowledge of the lenders. In July this year, RBI issued a master circular combining all its instructions and directions in this regard, with a view to making available credit information pertaining to willful defaulters to banks and blocking further bank finance to these firms.

3. Security Primary security- It is an investment for which the Bank Finance is being raised. Collateral security- Property or other assets that a borrower offers a lender to secure a loan. If the borrower stops making the promised loan payments, the lender can seize the collateral to recoup its losses. Because collateral offers additional security to the lender in case the borrower fails to pay back the loan. Loans that are secured by collateral typically have lower interest rates than unsecured loans. A lender's claim to a borrower's collateral is called a lien.

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1.3 OBJECTIVES OF STUDY:

The objectives of the study are as follows:

To study the concept of working capital and the means of management of working capital including cash, inventory and receivables. To understand the process of assessment of working capital requirement by boi.

Gathering information about the company and its operations. It involves studying the following:

a.) Stock maintained by the company. b.) Turnover of the Company and Customer & Industry / Market profile. c.) Further the general profile of the company is studied and also its past dealings with the bank are also considered.

Industry analysis is taken up after studying about the company and its operations. Under this the present conditions in the industry are studied, likely trends in the industry and its expectations about future.

Next the credit appraisal process is undertaken, it involves steps like studying the proposal, assessment of working capital requirement, proposed financing/sharing pattern and security details are studied. Then credit rating is done where the company is rated under different heads namely financial performance, market position, industry outlook etc. according to the guidelines given in the banks manual.

Bank officials give comments on the conduct of account if it is an existing one. Then risk assessment is undertaken and policy compliance is considered.

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Then the analysis of periodic monitoring system is done and lastly the recommendations are given.

The basic purpose of this whole process is assessing the viability of the project and minimization or management of the risk. It involves assessing the requirements of the borrower and studying its credentials, to decide upon acceptable level of exposure. Around 90% of commercial banking risks take the form of credit risk. Therefore the process of Credit Appraisal by Bank of India had a thorough feasibility reviews, followed by the credit rating so as to bring the risk exposure to bank within controllable limits.

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1.4 COMPANY PROFILE

Type Industry Founded Headquarters Key people Products

Public company (BSE: BOI) Financial services 7 September 1906 Mumbai, Maharashtra, India Vijayalakshmi R Iyer (CMD) Commercial Banking Retail Banking Private Banking Asset Management Mortgages Credit Cards

Revenue

243935.0 million(US$3.9 billion)

Operating income

53842.3 million(US$860 million)

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Net income

24887.1 million(US$400 million)

Website

www.bankofindia.co

Company Head Office / Quarters: Star House C-5 G Block, Bandra- Kurla Complex Bandra(E), Mumbai, Maharashtra-400051 Phone : 91-22-66684444 Fax : 91-22-66684491 E-mail : headoffice.share@bankofindia.co.in Web : http://www.bankofindia.co.in

Registrars: Sharepro Services India P Ltd Samhita Complex Plot No 13 AB Saki Naka Andheri(E) Mumbai-400072

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1.4.1 Overview of Bank of India Bank of India (BoI) is an Indian state-owned commercial bank with headquarters in Mumbai, Maharashtra. Government-owned since nationalisation in 1969, It is India's 4th largest PSU bank, after State Bank of India, Punjab National Bank and Bank of Baroda. It has 4322 branches as on 8 August,2013, including 54 branches outside India, and about ATMs. BoI is a founder member

of SWIFT (Society for Worldwide Inter Bank Financial Telecommunications), which facilitates provision of cost-effective financial processing and communication services. The Bank completed its first one hundred years of operations on 7 September 2006. Bank of India was founded on 7th September, 1906 by a group of eminent businessmen in Mumbai (previously known as Bombay), India. Prudence and high standard of customer service have been the corner stones of the Bank's growth. The Bank has 4322 Branches in India spread over all states/union territories including specialized Branches. There are 29 Branches/Offices (including 5 Representative Offices) and 3 Subsidiaries and 1 Joint Venture abroad. The Bank has a rich presence in South and South East Asian countries including China, Japan, Hongkong, Indonesia, Vietnam and Cambodia ,in addition to Singapore. Corporate credit, export finance, forex and care for customer have created a strong brand equity for Bank of India. Bank of India established its first foreign branch in London in 1946 followed by Osaka and Tokyo branches in 1950. Singapore Branch was established as the fourth foreign branch of the Bank in 1951. Over fifty years of experience in global banking has endowed the Bank with strong asset and correspondent relations with leading International Banks. Bank of India is a state-owned commercial bank with headquarters in Mumbai. The Bank provides a wide range of banking products and financial services to corporate and retail customers. The bank provides specialized services for businesses (dealing in foreign exchange), NRIs, merchant banking, etc. They also have specialized branches that deal in asset recovery, hi-tech agricultural finance, lease finance and treasury, and

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small scale industries. The Bank offers products such as mutual funds, venture capital, depository services, bullion trading and credit cards. The Bank operates in three business segments, namely Treasury Operations, Wholesale Banking Operations and Retail Banking Operations. Treasury Operations includes the entire investment portfolio, which include dealing in government and other securities, money market operations and foreign exchange (Forex) operations. Wholesale Banking includes all advances, which are not included under Retail Banking. Retail Banking includes exposures which fulfill two criteria, the maximum aggregate exposure up to rupees five crore and the total annual turnover is less than rupees 50 crore. The Bank is having their presence at 29 locations in 18 countries across four continents. They are having 3101 branches in India spread over all states/ union territories including 141 specialized branches. These branches are controlled through 48 zonal offices. The Bank is having one Joint Venture Bank in Zambia and a subsidiary each in Tanzania and Indonesia. In the last decade, the Bank diversified into related areas like merchant banking, mutual fund, management of stock exchange clearing house, venture capital, depository services, bullion trading and credit card. Diversification has been brought about by establishing subsidiaries and joint ventures and also by acquiring strategic stakes in well run companies. Bank of India's growth in recent years has been driven by technology absorption, integration of treasury, capitalising on emerging income streams and strong monitoring and control systems. At Singapore, Bank of India specializes in trade finance, loan syndications, forex dealing, derivative products, remittance and India related business. The Bank commands the trust of local depositors who have been supporting the Bank since inception. Our Bank's corporate personality and philosophy are fully reflected in our emblem, which is a five pronged star- a harmonious blend of the traditional and the functional. The elongated prong pointing upwards conveys the Bank's drive to achieve ascending goals. The Star is a beacon and guide to those in need of direction. We are fully

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committed to deliver superior results.. to your competitive advantage. Contribution of foreign branches in the global business of the Bank as at 31.03.2013 is as under: Deposits Advances Business Mix 22.98% 30.36% 26.19%

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1.4.2 Mission and vision Our Vision "To Become The Bank of choice for Corporates, Medium Business And Upmarket Retail Customers And Developmental Banking For Small Business, Mass Market And Rural Markets."

Our Mission "To provide superior, proactive banking service to niche markets globally, while providing cost effective, respective, responsive service to others in our role as a development bank, and in doing so, meet the requirement of our stakeholders."

Quality Policy "We, at Bank of India, are committed to become the bank of choice by providing SUPERIOR, PRO-ACTIVE, STATE-OF-THE-ART Banking services with an attitude of care and concern for the customers and patrons."

1.4.3 Organization structure

Smt. V. R. Iyer ( Chairperson & Managing Director ) Shri B.P.Sharma (Executive Director) Shri Arun Shrivastava (Executive Director) Shri R. Koteeswaran (Executive Director) Shri P.R. Ravi Mohan (RBI Nominee Director) Shri Anup Wadhawan (Govt. Nominee Director ) Shri Neeraj Bhatia (Part-time Non-Official Director) Shri Kuttappan K. Nair (Part-time Non-official Director) Shri Rajeev Lochan Bishnoi (Part-time Non-Official Director) Shri Harvinder Singh (Officer Employee Director ) Shri Antonio Maximiano Pereira (Workmen Employee Director) Shri P.M. Sirajuddin (Shareholder Director) Shri Pramod Bhasin (Shareholder Director) Shri Umesh Kumar Khaitan (Shareholder Director)

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CHAPTER-2 REVIEW OF LITERATURE

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CHAPTER-3 RESEARCH METHODOLOGY

2.1 Research: Research is the systematic process of collecting and analysing information to increase our understanding of the phenomenon under study. It is the function of the researcher to contribute to the understanding of the phenomenon and to communicate that understanding to others. Research Methodology: The data is collected through primary and secondary sources. During the project I had taken the guidance of Wealth managers and staff members to collect the data and also made use use of companys various reports .the data collected were then compiled ,tabulated and analysed.

2.2.1 Type Of Research The data collected in the report is both qualitative and quantitative in nature. These data is interpreted by the researcher as per his knowledge. Project report does not involve any specific research techniques, package and tools.

2.2.2 Research Design The study is descriptive in nature as it describes the CREDIT APPRAISAL SYSTEM OF BANK OF INDIA FOR WORKING CAPITAL REQUIREMENT.

2.2.3 Sources Of Data In order to learn and observe the practical applicability and feasibility of various theories and concepts, the following sources were followed and referred:

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Primary Sources of Information:

Meetings with the project guide and staff members of Bank of India. Meetings and discussions with clients at Bank of India. Meetings with various other department head.

Secondary Sources of Information:

RBI guidelines regulating the activities of the banks. Banks Credit and investment policy. Research papers, power point presentations and PDF files prepared by the bank and its related officials. Study of proposals and manuals. Mid-corporate Loan Policy at Bank of India. Referring to various national and international books and authors to study the strategies/models for measurement available in the market.

Limitations of the study I have to search for the relevant data for fulfilling my target. The time available to complete the study was less . No tools for cross checking of the figures

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CHAPTER-4 FINDINGS AND ANALYSIS

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CHAPTER-5 SUMMARY & CONCLUSIONS

5.1 CONCLUSION
It is boom time for those working in the financial sector. There are opportunities galore in finance and more will come in the next few years so finance is exciting is exciting both as a subject and a career option with the greater expansion of the global economy. Finance management is the backbone of any organizations and hence yields a number of job options ranging from strategic financial planning to sales. BoI load policy contains various norms for sanction of different types of loans. There all norms does not apply to each & every case. BoI norms for providing loans are flexible & it may differ from case to case. The CRA models adopted by the bank take into account all possible factors, which go into appraising the risk associated with a loan, these have been categorized broadly into financial, business, industrial, and management risks & are rated separately. Usually, it is seen that credit appraisal is basically done on the basis of fundamental soundness. But, after different types of case studies, our conclusion was such that, in BoI, credit appraisal system is not only looking for financial wealth. Other strong parameters also play an important role in analyzing creditworthiness of the firm. Moreover, The study at BoI gave a vast learning experience to us and has helped to enhance our knowledge. During the study We learnt how the theoretical financial analysis aspects are used in practice during the working capital finance assessment. We have realized during my project that a credit analyst must own multi-disciplinary talents like financial, technical as well as legal know-how. The credit appraisal for working capital finance system has been devised in a systematic way. There are clear guidelines on how the credit analyst or lending officer has to analyze a loan proposal. It includes phase-wise analysis which consists of 5 phases:

1. Financial statement analysis 2. Working capital and its assessment techniques

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3. Credit risk assessment 4. Documentation 5. Loan administration

To ensure asset quality, proper risk assessment right at the beginning, is extremely important. That is why Credit Risk Assessment system is an essential ingredient of the Credit Appraisal exercise. The BoI was the first to formulate a Credit Risk Assessment model. It considers important parameters like profitability, repayment capacity, efficiency of the unit, historical / industry comparisons etc which were not factored in other models. It is equally efficient as the SIDBIs CART (Credit Assessment and Rating Tool) model. In all, the viability of the project from every aspect is analyzed, as well as type of business, industry, promoters, past records, experience, projected data and estimates, goals, long term plans also plays crucial role in increasing chances of getting project approved for loan.

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5.2 LIMITATIONS OF THE STUDY:

The detail data availability is proprietary, not readily shared for dissemination and is highly confidential. Assumptions and projections are based on current market conditions and have not taken into account the price volatility. The time available to complete the study was less. The staff although are very helpful but are not able to give much of their time due to their own work constraints. The study is being done keeping in mind the policies of the Head Office. Due to the ongoing process of globalization and increasing competition, no single model or method will suffice over a long period of time and constant up gradation will be required.

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5.3 SUGGESTIONS/RECOMMENDATIONS After studying and evaluating the various aspects of the credit decisions taken up by Bank of India through the interviews with manager and the banks circulars, it is clear that the bank is following a sound process but i would like to give some suggestions which are as follows: 1. The study presents an example of a project related to trading industry. It was found that the bank relies mainly on its internal credit rating, DSCR & Debt equity ratio to appraise the project financially. But most of the banks have started checking the Internal Rate of Return of the project before doing its pricing. So, to be in accordance with the banking industry BANK OF INDIA should also modify its appraisal process to include the same. 2. After analyzing the process, I have realized that most of the delay in the process is due to the delay in collection of documents from the customer end. Therefore initially at the point of contact with the customers, there should be a checklist form provided to the customers for the various loans that the customers have applied for. And the customer should be aware of all the papers that would be required for the project appraisal. For example : If any organization is applying for the Working Capital enhancement or renewal or for the term loan, then the financial of the company i.e. Audited CMA data for the last 3 years, Provisional documents upto the last quarter, Projected data should be submitted. 3. Credit Analysts works on mainly two applications i.e. Microsoft excel and Microsoft word. I observed that they spend a significant portion of their working hours on just formatting of a document and sometime they also stuck into technicalities of these applications which waste a lot of time. Credit analysts have basic knowledge of working on these applications but an advanced level knowledge of these applications can save lots of their valuable time. Work on these applications is generally repetitive in nature. So a 1-2 days training related to their requirements is much more sufficient to improve the efficiency of analysts. 4. There is one more suggestion about the industry data. Every proposal has one clause related to industry perception in memorandum. I have seen that this data is generally taken from internet. I also realized that this clause is not
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fulfilling its objective properly. For compliance of objective I would suggest that it should not be limited to some specific information like: Industry growth rate, future growth, cycle time, industry phase, etc. I also recommend that material on this clause should be provided by the R&D department every year because industry perception is generally same for the country and R&D department can provide a better bird eye view on the industry.

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