Credit risk management with reference to Punjab national bank

Naupad, thane
Dissertat ion Submitted to the
Padmashree Dr. D.Y. Pat il Universit y
in part ial fulf illment of the requirements for the
award of the Degree of
MASTERS IN BUSINESS ADMINISTRATION
Submitted by:
KUNAL JOSHI
(Roll No. 01102)
Research Guide
MR. MANGESH JADHAV
Assistant Professor
Department of Business Management
Padmashree Dr. D.Y. Patil University
CBD Belapur, Navi Mumbai
APRIL 2013
Declaration
I hereby declare that the dissertation Credit risk management with
reference to Punjab national bank, naupada thane
submitted for the MBA Degree at Padmashree Dr. D.Y. Patil
Universitys
Department of Business Management is my original work and the
dissertation
has not formed the basis for the award of any degree, associate ship,
or any
other similar titles.
Place: Mumbai
Date:
KunalPratap J oshi
CERTIFICATE
This is to certify that the dissertation entitled Credit risk management
with reference to Punjab national bank, naupada thane is the bonafide
research work carried out by Mr. Kunal Joshi student of MBA, at
Padmashree Dr. D.Y. Patil University's Department of Business
Management during the year 2011 -2013, in partial fulfillment of the
requirements for the award of the Degree of Master in Business
Management and that the dissertation has not formed the basis for the
award previously of any degree, diploma, associate ship, fellowship or any
other similar title.
Dr. R. Gopal, Mr. Mangesh jadhav
Director Assistant Professor
Department of Business Mgt,
Padmashree Dr. D. Y. Patil
University)
Place : Navi Mumbai
Date :
Acknowledgement
In the first place, I thank MrMangeshjadhav, Lecturer,
Department of Business Management, Padmashree Dr. D.Y. Patil
University, Navi Mumbai for having given me her valuable guidance
for the project. Without her help it would have been impossible for
me to complete the project.
Success is the manifestation of diligence, perseverance,
inspiration, and motivation along with determination, discipline and
dedication. I take this opportunity to express my deep and sincere
gratitude to the persons who inspired and guided during my project
completion.
To all my faculty members of PadmashreeDr.D.Y.Patil,
Department of Business Management for co-operation during the
project. Also, I thank all the staff members of the DYPDBM and
friends in making this project successful.
Preface
While searching for a suitable topic for the MBA Dissertation, I
had gone through the various projects & books, ultimately settling
on the topic risk management A Study With Reference To
Punjab national bank
The topic inspired me, to go through the various books, articles,
reports etc. to know the process and also understand the real
issues plaguing the industry.
All these aspects then resulted in the development of the project
report titled risk management A Study With Reference To
Punjab national bank.
It is strongly hoped that this project covers not only the various
requirements of the Project Study but also of the Industry.
CHAPTERIZATION
Chapter
No
Title
A List of Tables
B List of Figures
C List of Abbreviations
1 Executive Summary
2 Objective of the Study
3 Research Methodology
4 REVIEW OF LITERATURE
5 LIMITATION OF THE STUDY
6 BANKING INDUSTRY IN INDIA A
PERSPECTIVE
6.1
Introduction
6.2
Government initiatives
6.3
Bank initiatives
6.4
Current Banking scenario
6.5 Growth of Banking Sector
6.6 Growth of Banks
7 CREDIT RISK MANAGEMENT AN
INTRODUCTION
8 INTRODUCTION
9 CREDIT RISK MANAGEMENT
9.1 CREDIT RISK
9.2 CREDIT RISK MANAGEMENT SYSTEM IN PNB
10 POST SANCTION FOLLOW UP OF LOANS
11 ANALYSIS & INTERPRETATION
11.1 PNBs LOAN POLICY
11.2 CREDIT APPRAISAL PROCESS AT PNB
12 CASE STUDY ABC PARTS PVT. LTD
13 CONCLUSION& RECOMMENDATIONS
14 QUESTIONNAIRE
1. EXECUTIVE SUMMARY
This project was undertaken at the Punjab National Bank Circle
Office Delhi, at the Credit Department. Financial requirements for
Project Finance and Working Capital purposes are taken care of at the
Credit Department. Companies that intend to seek credit facilities
approach the bank. Primarily, credit is required for following
purposes:
a. Working capital finance
b. Term loan for mega projects
c. Non Fund Based Limits like Letter of Guarantee, Letter of
Credit etc.
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 some project financing plans havesucceeded 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. Efficient management of credit portfolio is of utmost
importance as it has a tremendous impact on the Banks assets quality
& profitability. The ongoing financial reforms have no doubt
provided unparallel opportunities to banks for growth, but have
simultaneously exposed them to various risks, which need to be
effectively managed.
The concept of Credit Management is undergoing radical changes.
Credit Risk in all exposures calls for precise measuring and
monitoring for taking considered credit decisions with suitable risk
mitigants, risk premium, etc. Credit portfolio should be well
diversified in various promising sectors with a cautious approach to
be adopted in risky segments.
Also, lending continues to be a primary function in banking. In the
liberalized Indian economy, clientele have a wide choice. External
Commercial Borrowings and the domestic capital markets compete
with banks. In another dimension, retail lending- both personal
advances and SME advances- competes with corporate lending for
funds and for human resources. But lending by nature cannot be an
aggressive selling activity, disregarding the risks involved. Bank has
to be competitive without compromising on the basic integrity of
lending. The quality of the Banks credit portfolio has a direct and
deep impact on the Banks profitability.
The study has been conducted with the purpose of getting in-depth
knowledge about the credit appraisal and credit risk management
procedure in the organization for the above said first two purposes.
2. OBJECTIVES
To study broad contours of management of credit, the loan
policy, credit appraisal for business units i.e. for working capital
loan or Term Loan
To understand the basis of credit risk rating and its significance
To study the above learning and appraise the creditworthiness
organizations those approach PUNJ AB NATIONAL BANK for
credit. This would entail undertaking of the following
procedures:
i. Management Evaluation
ii. Business / Industry Evaluation
iii. Technical Evaluation
iv. Legal Evaluation
v. Financial Evaluation
vi. Credit Risk Rating
3. RESEARCH METHODOLOGY
The methodology being used involves two basic sources of
information primary sources and secondary source.
Primary sources of Information
Meetings and discussion with the Chief Manager and the
Senior Manager of both Credit and Credit Risk Management
Department
Meetings with the clients
Secondary sources of Information
Loan Policy and Internal Circulars of the bank
Research papers, power point presentations and PDF files
prepared by the bank and its related officials
Referring to information provided by CIBIL, Income Tax
files, Registrar of Companies (Ministry of Corporate Affairs),
and Auditor reports
4.REVIEW OF LITERATURE
4.1 WORKING CAPITAL AND ITS ASSESSMENT
The objective of running any industry is earning profits. An industry
will require funds to acquire fixed assets like land and building,
plant and machinery, equipments, vehicles etc and also to run the
business i.e. its day to day operations.
Working capital is defined, as the funds required for carrying the
required levels of current assets to enable the unit to carry on its
operations at the expected levels uninterruptedly. Thus working
capital required (WCR) is dependent on
i. The volume of activity (viz. level of operations i.e. Production
and Sales)
ii. The activity carried on viz. manufacturing process, product,
production programme, and the materials and marketing mix.
The purpose of assessing the WC requirement of the industry is to
determine how the total requirements of funds will be met. The two
sources for meeting these requirements are the units long-term
sources (like capital and long term borrowings) and the short-term
borrowings from banks. The long-term resources available to the unit
are called the liquid surplus or Net Working Capital (NWC).
It can be explained by visualizing the process of setting up of
industry. The units starts with a certain amount of capital, which will
not normally be sufficient, even to meet the cost of fixed assets. The
unit, therefore, arranges for a long-term loan from a financial
institution or a bank towards a part of the cost of fixed assets. From
these two sources after meeting the cost of fixed assets some funds
remain to be used for working capital. This amount is the Net
Working Capital or Liquid Surplus and will be one of the sources of
meeting the working capital requirements.
The remaining funds for working capital have to be raised from
banks; banks normally provide working capital finance by way of
advantage against stocks and sundry debtors. Banks, however, do not
finance the full amount of funds required for carrying inventories and
receivables: and normally insist on the stake of the enterprise at every
stage, by way of margins. Bank finance is normally restricted to the
amount of funds locked up less a certain percentage of margins.
Margins are imposed with a view to have adequate stake of the
promoter in the business both to ensure his adequate interest in the
business and to act as a protection against any shocks that the
business may sustain. The margins stipulated will depend on various
factors like salability, quality, durability, price fluctuations in the
market for the commodity etc. taking into account the total working
capital requirements as assessed earlier, the permissible limit, up to
which the bank finance cab be granted is arrived.
While granting working capital advances to a unit, it will be necessary
to ensure that a reasonable proportion of the working capital is met
from the long-term sources viz. liquid surplus. Normally, liquid
surplus or net working capital be at least 25% of the working capital
requirement (corresponding to the benchmark current ratio of 1.33),
though this may vary depending on the nature of industry/ trade and
business conditions.
Various methods for assessment of Working Capital are discussed in
detail:
1. Operating cycle method:
Any manufacturing activity is characterized by a cycle of operations
consisting of purchase of raw materials for cash, converting them into
finished goods and realizing cash by sale of these finished goods. The
time that lapses between cash outlay and cash realization by sale of
finished goods and realization of sundry debtors is known as length
of operating cycle. That is, the operating cycle consists of:
i. Time taken to acquire raw materials and average period for
which they are in store.
ii. Conversion process time
iii. Average period for which finished goods are in store and
iv. Average collection period of receivables (sundry debtors).
Operating Cycle is also called cash-to-cash and indicates how cash is
converted into raw materials, stocks in process, finished goods, bills
(receivables) and finally backs to cash. Working capital is the total
cash that is circulating in this cycle. Therefore, working capital can be
turned over or deployed after completing the cycle. Factors, which
influence working capital requirement, are Level of operating
expenses and Length of operating cycle.
Any reduction in either of the both will mean reduction in working
capital requirement or indicate an efficient working capital
management.
It can thus be concluded that by improving that by improving the
working capital turnover ratio (i.e. by reducing the length of operating
cycle) a better management (utilization) of working capital results. It
is obvious that any reduction in the length of the operating cycle can
be achieved only by better management only by better management of
one or more of the individual phases of the operating cycle period for
which raw materials are in store, conversion process time, period for
which finished goods are in store and collection period of receivables.
Looking at whole problem from another angle, we find that we can set
up extremely clear guidelines for working capital management viz.
examining the length of each of the phases of the operating cycle to
assess the scope for reduction in one or more of these phases.
The length of the operating cycle is different from industry to industry
and from one firm to another within the same industry. For instance,
the operating cycle of a pharmaceutical unit would be quite different
from one engaged in the manufacture of machine tools. The operating
cycle concept enables to assess working capital need of each
enterprise keeping in view the peculiarities of the industry it is
engaged in and its scale of operations. Operating cycle is an important
management tool in decision making.
2. Traditional method of assessment of working capital
requirement
The operating cycle concept serves to identify the areas requiring
improvement for the purpose of control and performance review. But,
as bankers, we require a more detailed analysis to assess the various
components of working capital requirement viz., finance for stocks,
bills etc.
Bankers provide working capital finance for holding an acceptable
level of current assets viz. raw materials, stock-in-process, finished
goods and sundry debtors for achieving a predetermined level of
production and sales. Quantification of these funds required to be
blocked in each of these items of current assets at any time will,
FUND
RM SIP RECEIVABLES FUND
therefore provide a measure of the working capital requirement of an
industry.
Raw material: Any industrial unit has to necessarily stock a
minimum quantum of materials used in its production to ensure
uninterrupted production. Factors, which affect or influence the funds
requirement for holding raw material, are:
i. Average consumption of raw materials.
ii. Their availability locally or form places outside, easy
availability / scarcity, number of sources of supply
iii. Time taken to procure raw materials (procurement time or
lead time)
iv. Imported or indigenous.
v. Minimum quantity supplied by the market (Minimum
Order Quantity (MOQ)).
vi. Cost of holding stocks (e.g. insurance, storage, interest)
vii. Criticality of the item.
viii. Transport and other charges (Economic Order Quantity
(EOQ)).
ix. Availability on credit or against advance payment in cash.
x. Seasonality of thematerials.
This raw material requirement is generally expressed as so many
months requirement (consumption).
Stock in process: Barring a few exceptional types of industries, when
the raw material get converted into finished products within few
hours, there is normally a time lag or delay or period of processing
only after which the raw materials get converted into finished product.
During this period of processing, the raw materials get converted into
finished goods and expenses are being incurred. The period of
processing may vary from a few hours to a number of months and unit
will be blocked working funds in the stock-in-process during this
period. Such funds blocked in SIP depend on:
i. The processing time
ii. Number of products handled at a time in the process
iii. Average quantities of each product, processed at each time
(batch quantity)
iv. The process technology
v. Number of shifts.
Finished goods: All products manufactured by an industry are not
sold immediately. It will be necessary to stock certain amount of
goods pending sale. This stock depends on:
i. Whether the manufacture is against firm order or against
anticipated order
ii. Supply terms
iii. Minimum quantity that can be dispatched
iv. Transport availability and transport cost
v. Pre-dispatch inspection
vi. Seasonality of goods
vii. Variation in demand
viii. Peak level/ low level of operations
ix. Marketing arrangement- e.g. direct sale to consumers or
through dealers/ wholesalers.
The requirement of funds against finished goods is expressed so many
months cost of production.
Sundry debtors (receivables): Sales may be affected under three
different methods:
i. Against advance payment
ii. Against cash
iii. On credit
A unit grants trade credit because it expects this investment to be
profitable. It would be in the form of sales expansion and fresh
customers or it could be in the form of retention of existing
customers. The extent of credit given by the industry normally
depends upon:
i. Trade practices
ii. Market conditions
iii. Whether it is bulky by the buyer
iv. Seasonality
v. Price advantage
Even in cases where no credit is extended to buyers, the transit time
for the goods to reach the buyer may take some time and till the cash
is received back, the unit will have to be cut out of funds. The period
from the time of sale to receipt of funds will have to be reckonedfor
the purpose of quantifying the funds blocked in sundry debtors. Even
though the amount of sundry debtors according to the units books
will be on the basis of Sale Price, the actual amount blocked will be
only the cost of production of the materials against which credit has
been extended- the difference being the units profit margin- (which
the unit does not obviously have to spend). The working capital
requirement against Sundry Debtors will therefore be computed on
the basis of cost of production (whereas the permissible bank finance
will be computed on basis of sale value since profit margin varies
from product to product and buyer to buyer and cannot be uniformly
segregated from the sale value).
The working capital requirement is expressed as so many months
cost of production.
Expenses: It is customary in assessing the working capital
requirement of industries, to provide for 1 months expenses also. A
question might be raised as to why expenses should be taken
separately, whereas at every stage the funds required to be blocked
had been taken into account. This amount is provided merely as a
cushion, to take care of temporary bottlenecks and to enable the unit
to meet expenses when they fall due. Normally 1-month total
expenses, direct and indirect, salaries etc. are taken into account.
While computing the working capital requirements of a unit, it will be
necessary to take into account 2 other factors,
i. Is the credit received on purchases- trade credit is a normal
practice in trading circles. The period of such credit
received varies from place to place, material to material
and person to person. The amount of credit received on
purchases reduces the working capital funds required by
the unit.
ii. Industries often receive advance against orders placed for
their products. The buyers, in certain cases, have to
necessarily give advance to producers e.g. custom made
machinery. Such funds are used for the working capital of
an industry. It can be thus summarized as follows:
Raw materials Months requirement Rs. A
Stock-in-process Months (cost of Production) Rs. B
Finished Goods
Months cost of Production required
to be stocked
Rs. C
Sundry Debtors
Months cost of Production (o/s
credits)
Rs. D
Expenses One month(normally) Rs. E
Total Current Assets
A+B+C+
D+E
Credit received on
Purchases (months
Purchase value)
Rs. F
Advance payment on
order received
Rs. G
WORKING CAPITAL REQUIRED (H) = (A+B+C+D+E)- (F+G)
3. Projected Annual Turnover Method for SME units (Nayak
Committee)
For SME units, which enjoy fund based working capital limits up to
Rs.5 core, the minimum working capital limit should be fixed on the
basis of projected annual turnover. 25% of the output or annual
turnover value should be computed as the quantum of working capital
required by such unit. The unit should be required to bring in 5% of
their annual turnover as margin money and the Bank shall provide
20% of the turnover as working capital finance. Nayak committee
guidelines correspond to working capital limits as per the operating
cycle method where the average production/ processing cycle is taken
to be 3 months.
Example:
Anticipated Annual Output (A) 120
Working Capital Requirement: 25% of A (B) 30
Margin : 5% of A (C) 6
Maximum Permissible Bank Finance (B-C) 24
In Rslacs
Important clarifications:
i. The assessment of WC limits should be done both as per
Projected Turnover Method and Traditional Method; the higher
of the two is to be sanctioned as credit limit. If the operating
cycle is more than 3 months, there is no restriction on extending
finance at more than 20% of the turnover provided that the
borrower should bring n proportionally higher stake in relation
to his requirements of bank finance.
ii. While the approach of extending need based credit will be kept
in mind, the financial strengths of the unit is also important, the
later aspect assumes greater significance so as to take care of
quality of banks assets. The margin requirement, as a general
rule, should not be diluted.
4.MPBF Method (Tandon and Chore Committee
Recommendations)
The Tendon Committee was appointed to suggest a method for
assessing the working capital requirements and the quantum of bank
finance. Since at that time, there was scarcity of banks resources, the
Committee was also asked to suggest norms for carrying current
assets in different industries so that bank finance was not drawn more
than the minimum required level. The Committee was also asked to
devise an information system that would provide, periodically,
operational data, business forecasts, production plan and resultant
credit needs of units. Chore Committee, which was appointed later,
further refined the approach to working capital assessment. The
MPBF method is the fall out of the recommendations made by
Tandon and Chore Committee.Regarding approach to lending: the
committee suggested three methods for assessment of working capital
requirements.
i. First Method of lending: According to this method, Banks
would finance up to a max. of 75% of the working capital gap
(WCG=the total current assets - current liabilities other than
bank borrowing) and the balance 25 % of the WCG considered
as margin is to come out of long term source i.e. owned funds
and term borrowings. This will give rise to a minimum current
ratio of 1.17:1. The difference of (1.17-1) represents the
borrowers margin which is popularly known as Net Working
Capital (NWC) of the unit
ii. Second Method of lending: As per the 2
nd
method Bank will
finance maximum up to 75% of total current assets (TCA) &
Borrowers has to provide a minimum of 25% of total current
assets as the margin out of long term sources. This will give a
minimum current ratio of 1.33:1
iii. Third Method of lending: Same as 2nd method, but excluding
core current assets from total assets and the core current assets is
financed out of long term funds. The term core current assets
refers to the absolute minimum level of investment in current
assets, which is required at all times to carry out minimum level
of business activity. The current ratio is further improved i.e.
1.79: 1
Example:
Current Liabilities Current assets
Creditors for
purchase
100 Raw material 200
Other current
liability
50 Stock in process 20
Bank borrowings 200 Finished goods 90
Receivables 50
Other current
assets
10
Total Current
Liabilities
350
Total Current
Assets
370
(In Rslacs)
Calculating NWC
First method of lending
Second method of
lending
Third method of
lending
Total CA 370 Total CA 370 Total CA 370
Less: CL Bank
Borrowing
150
Less: 25% of
CA
92
Less: core CA
from LT
95
275
Working Capital
Gap
220
Less: CL -
Bank
Borrowing
150
Less: 25%
from LTS
69
25% of WCG
from long term
sources
55
Less: CL
Bank
Borrowing
150
MPBF 165 MPBF 128 MPBF 56
Current ratio
1.17:
1
Current ratio
1.33:
1
Current ratio
1.79:
1
The above example shows that the contribution of margin by the
borrower increases when financing is shifted from First method to
Second method which is known to be stringent from borrower point
of view (Third method was not accepted by RBI).
5. Projected Balance Sheet Method (PBS)
The PBS method of assessment will be applicable to all borrowers
who are engaged in manufacturing, services and trading activities
who require fund based working capital finance of Rs. 25 lacs and
above. In case of SSI borrowers, who require working capital credit
limit up to Rs. 5 cr, the limit shall be computed on the basis of Nayak
Committee formula as well as that based on production and operating
cycle of the unit and the higher of the two may be sanctioned.. The
assessment will be based on the borrowers projected balance sheet,
the funds flow planned for current/ next year and examination of the
profitability, financial parameters etc. unlike the MPBF method, it
will not be necessary in this method to fix or compute the working
capital finance on the basis of a stipulated minimum level of liquidity
(Current Ratio). The working capital requirement worked out is based
on the following:
i. CMA assessment method is continued with certain
modifications.
ii. Analysis of the Profit and Loss account, Balance Sheet,
Funds flow etc. for the past periods is done to examine the
profitability, financial position, and financial management
etc of the business.
iii. Scrutiny and validation of the projected income and expenses
in the business and projected changes in the financial
position (sources and uses of funds). This is carried out to
examine whether these parameters are acceptable from the
angle of liquidity, overall gearing, efficiency of operations
etc.
In the PBS method, the borrowers total business operations, financial
position, management capabilities etc. are analysed in detail to assess
the working capital finance required and to evaluate the overall risk.
The assessment procedure is as follows:
i. Collection of financial information from the borrower
ii. Classification of current assets / current liabilities
iii. Verification of projected levels of inventory/ receivables/
sundry creditors
iv. Evaluation of liquidity in the business operation
v. Validation of bank finance sought
4.2 ASSESSMENT OF TERM LOANS
Term Loans are generally granted to finance capital expenditure, i.e.
for acquisition of land, building and plant and machinery, required for
setting up a new industrial undertaking or expansion/diversification of
an existing one and also for acquisition of movable fixed assets.
Term Loans are also given for modernization, renovation, etc. to
improve the product quality or increase the productivity and
profitability.
The basic difference between short-term facilities and term loans is
that short-term facilities are granted to meet the gap in the working
capital and are intended to be liquidated by realization of assets,
whereas term loans are given for acquisition of fixed assets and have
to be liquidated from the surplus cash generated out of earnings.
They are not intended to be paid out of the sale of the fixed assets
given as security for the loan. This makes it necessary to adopt a
different approach in examining the application of the borrowers for
term credits.
For the assessment to Term Loan Techno Economic Feasibility Study
is done. The success of a feasibility study is based on the careful
identification and assessment of all of the important issues for
business success. A detailed Project Report is submitted by an
entrepreneur, prepared by a approved agency or a consultancy
organization. Such report provides in-depth details of the project
requesting finance. It includes the technical aspects, Managerial
Aspect, 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.
The feasibility study is a part of Credit Appraisal process and the
same is discussed in the following chapter.
4.3 BASEL ACCORD & RISK MANAGEMENT
The Basel accord/accords refer to the banking supervision accords
namely Basel I and Basel II issued by the Basel Committee on
Banking Supervision (BCBS).
BASEL I ACCORD
The 1988 Basel Accord primarily addressed banking in the sense of
deposit taking and lending. The main focus was Credit Risk. It
described the strength of the Bank as measured by the Capital
employed. Accordingly it put a minimum level of capital adequacy
(Capital to Credit Risk Weighted Assets ratio) at 8%. Basel I
allocated 4 risk weights i.e. 0%, 20, 50% and 100% to different
exposure types, based on the risk perceived on the exposure types
under the credit portfolio. Basel I provided a set norm for capital
allocation which helped many banks to allocate capital to counter the
risks faced by them.
CRAR = Capital
Risk Weighted Assets (Credit Risk+ Market Risk
+Operational Risk)
CAPITAL
Tier I
Capital
Paid Up Equity Capital + Statutory Reserves +
Other disclosed free reserves +Capital Reserves
representing surplus arising out of sale proceeds
of Assets + Innovative Perpetual Debt
instruments
Tier II
Capital
Revaluation Reserves (at a discount of 55%) +
General Provisions and Loss Reserves +
Subordinated Debt + Hybrid Debt Capital
Instruments
Risk Weighted Assets
Basel I introduced the concept of Risk Weighted Assets (RWA). All
the assets of a bank (advances, investments, fixed assets etc.) carry
certain amount of risk. In proportion to the quantum of this risk, bank
must maintain capital. Quantifi cation of risk is done in percentage
(0%, 20%, 50% etc.). Exposure when multiplied with these
percentages gives risk based value of assets. These assets are also
called Risk Weighted Assets (RWA).
BASEL II ACCORD
Banking has changed dramatically since the Basel I document of
1988. Advances in risk management and the increasing complexity of
financial activities / instruments prompted international supervisors to
review the appropriateness of regulatory capital standards under Basel
I. To meet this requirement, the Basel I accord was amended and
refined which came out as the Basel II document. The Basel II
document is structured into three parts. Each part is called as a pillar.
Thus these three parts constitute three pillars of Basel II.
PILLAR I
This pillar is compatible with the credit risk, market
risk and operational risk. The regulatory capital will be
focused on these three risks
PILLAR II
This pillar gives the bank responsibility to exercise the
best ways to manage the risk specific to that bank. It
also casts responsibility on the supervisors to review
and validate banks risk measurement models.
PILLAR III
This pillar is on market discipline is used to leverage
the influence that other market players can bring
DIFFERENCE BETWEEN
BASEL I BASEL II
1
Limited role of collateral as risk
mitigant
1
Recognizes wide range of
Collateral & Guarantees as risk
mitigant
2
Not recognizing Operational
Risk
2
Recognizes Operational Risk and
prescribes explicit capital charge
for
3
Risk weights assignment on
transaction basis
3
Risk weight assignment on risk
rating basis
4
Not recognizing tenure or
remaining time to maturity of
exposures in risk assessment
4
Recognizes the tenure or
remaining time to maturity of
exposures in risk assessment
5
Provisions are through Asset
Classification. 5
Provisions are through Expected
Loss Estimation
Scope of the study
All the questions have been anal yzed by adding up the
responses against each alternative and answers from the
various respondents. The collected data has been subject to
statistical analysis to draw inferences and suitable
conclusions. Statistical tools like chi-square and percentage
are used. For calculating the table value for analysis with
chi-square, 5% significance level is used.
5. LIMITATION OF THE STUDY
1. The study is confined to the city of Panvel only.
2. The respondents were generall y co-operative, yet some of
them might have biased their reply for certain sensitive
questions.
3. The duration of the study is also in accordance with the
academic objective of the course curriculum. So in pursuit
of academic exercise, the restriction on time has also
brought into study some limitations.
6. BANKING INDUSTRY IN INDIA A PERSPECTIVE
6.1 Introduction
Banking in India originated in the last decades of the 18th
century. The oldest bank in existence in India is the State
Bank of India, a government-owned bank that traces its
origins back to J une 1806 and that is the largest commercial
bank in the country. Central banking is the responsibility of
the Reserve Bank of India, which in 1935 formally took over
these responsibilities from the then Imperial Bank of India,
relegating it to commercial banking functions. After India's
independence in 1947, the Reserve Bank was nationalized and
given broader powers. In 1969 the government nationalized
the 14 largest commercial banks; the government nationalized
the six next largest in 1980.
The I ndian Banking industry, which is governed by the
Banking Regulation Act of India, 1949 can be broadl y
classified into two major categories, non-scheduled banks and
scheduled banks. Scheduled banks comprise commercial
banks and the co-operative banks. In terms of ownership,
commercial banks can be further grouped into nationalized
banks, the State Bank of India and its group banks, regional
rural banks and private sector banks (the old/ new domestic
and foreign). These banks have over 67,000 branches spread
across the country.
The first phase of financial reforms resulted in the
nationalization of 14 major banks in 1969 and resulted in a
shift from Class banking to Mass banking. This in turn
resulted in a significant growth in the geographical coverage
of banks. Every bank had to earmark a minimum percentage
of their loan portfolio to sectors identified as priority
sectors. The manufacturing sector also grew during the
1970s in protected environs and the banking sector was a
critical source. The next wave of reforms saw the
nationalization of 6 more commercial banks in 1980. Since
then the number of scheduled commercial banks increased
four-fold and the number of bank branches increased eight-
fold.
After the second phase of financial sector reforms and
liberalization of the sector in the early nineties, the Public
Sector Banks (PSB) s found it extremel y difficult to compete
with the new private sector banks and the foreign banks. The
new private sector banks first made their appearance after the
guidelines permitting them were issued in J anuary 1993.
Eight new private sector banks are presently in operation.
These banks due to their late start have access to state-of-the-
art technology, which in turn helps them to save on manpower
costs and provide better services.
During the year 2000, the State Bank of India (SBI) and its 7
associates accounted for a 25 percent share in deposits and
28.1 percent share in credit. The 20 nationalized banks
accounted for 53.2 percent of the deposits and 47.5 percent of
credit during the same period. The share of foreign banks
(numbering 42), regional rural banks and other scheduled
commercial banks accounted for 5.7 percent, 3.9 percent and
12.2 percent respectively in deposits and 8.41 percent, 3.14
percent and 12.85 percent respectively in credit during the
year 2000.
6.2 Government initiatives
The Cabinet, on December 1, 2010 approved to provide an
additional amount of US$ 1.33 billion, in addition to the US$ 3.32
billion already provided in the Budget 2010-11, to ensure Tier I
CRAR (Capital to Risk Weighted Assets) of all Public Sector
Banks (PSBs) at 7 per cent and also to raise Government of India
holding in all PSBs to 58 per cent. It also approved that the exact
amount, mode of capitalization and other terms and conditions
would be decided in consultation with the banks at the time of
infusion.
The proposed capital infusion would enhance the lending capacity
of the PSBs to meet the credit requirement of the economy in
order to maintain and accelerate the economic growth momentum.
The RBI has allowed banks to make changes in the repayment
schedules or drawdown without prior approval from the central
bank. However, such a change could be made on the condition that
the average maturity of the loan should remain the same. The
move is expected to make external commercial borrowing (ECB)
transactions easier. Transactions both through automatic and
approval routes can take advantage of this change. Now, without
the prior approval of RBI, Indian companies may borrow up to
US$ 500 million in a year.
As part of further liberalization of the extant branch licensing
policy in respect of regional rural banks (RRBs), they have been
permitted to open branches in Tier 3 to Tier 6 centres (with
population up to 49,999 as per Census 2001) without the Reserve
Bank's prior authorization provided-
The capital to risk-weighted assets ratio (CRAR) is at least 9 per
cent;
The net non-performing assets (NPAs) are less than 5 per cent;
They have not defaulted in the maintenance of cash reserve ratio
(CRR)/statutory liquidity ratio (SLR) during the last year; and
They have earned a net profit in the last financial year.
On the lending side, the Base Rate system replaced the
Benchmark Prime Lending Rate (BPLR) system with effect
from J uly 1, 2010. Base Rates of scheduled commercial banks
(SCBs) were fixed in the range of 5.50-9.00 per cent.
Subsequently, several banks reviewed and increased their Base
Rates in the range of 1050 basis points by October 2010. Base
Rates of major banks, accounting for over 94 per cent in total
bank credit, are in the range of 7.50-8.50 per cent. Banks have
also raised their BPLRs in the range of 25-75 basis points for
their old loans.
As at end-J uly 2010, around 70,000 branches of 98 banks had
participated in the national electronic funds transfer (NEFT)
system and the volume of transactions processed increased to
9.5 million in J uly 2010.
The repo rate and the reverse repo rate under the liquidity
adjustment facility (LAF) have been increased since November
2, 2010 as under:
The repo rate has been raised by 25 basis points from 6.0 per
cent to 6.25 per cent with immediate effect.
The reverse repo rate has been raised by 25 basis points from
5.0 per cent to 5.25 per cent with immediate effect.
The cash reserve ratio (CRR) of scheduled banks has been
retained at 6.0 per cent of their net demand and time liabilities
(NDTL).
Meanwhile, outstanding bank credit in the 15 days up to
October 8, 2010 rose by US$ 10.56 billion to US$ 784.58
billion, according to scheduled banks' statement of position
released by the RBI.
On a year-on-year basis, credit has grown at more than 20 per
cent till date, the RBI datashowed.
6.3 Bank initiatives
Since December 2008, the government has announced series
of measures to augment flow of credits to around US$ 2,
66,274 to SMEs. To improve the flow of credit to industrial
clusters and facilitate their overall development, 15 banks
operating in Orissa including the public sector State Bank of
India (SBI) and the Small Industries Development Bank of
India (SIDBI) have adopted 48 clusters specially in sectors
like engineering tools, foundry, handloom, food processing,
weaving, rice mill, cashew processing, pharmaceuticals, bell
metals and carpentry etc.
PSBs are now cashing in the auto loan segment after the exit
of private players owing to the slowdown. Auto loans usually
have three components - car loans, two-wheeler loans and
commercial vehicle loans. PSBs are primarily focusing on car
and two-wheeler loans. Prevalent interest rates in the car loan
segment now range between 11 per cent and 12.5 per cent per
annum. For instance, according to the Union Bank of India
Chairman and Managing Director, MV Nair, his bank had
recently tied up with Maruti Suzuki India for financing the
latter's product and it has a US$ 163.84 million auto loan
portfolio.
The government has told public sector banks (PSBs) to extend
credit to fund-starved Indian industry, especiall y exporters
and small and medium sector enterprises to address their
credit needs. SIDBI would be lending US$ 1.33 billion out of
US$ 1.47 billion credit from RBI to public sector banks. This
is being provided to the PSBs at 6.5 per cent (SIDBI is
getting the credit at 5.5 per cent) under the condition that the
banks will have to lend this credit to the medium and small-
scale industry units at an interest rate of 10 per cent before
March 31, 2010.
According to SBI Chairman, O P Bhatt, contribution of small
and medium enterprises (SMEs) is nearly 40-50 per cent to
GDP growth of the nation, and this sector also accounts for 50
per cent of the industrial output. "Banks could accrue revenue
of over US$ 5.73 billion by encouraging the SMEs," Bhatt
said adding, "SME's sector is to grow fastest in the next five
years, with 14 per cent growth in terms of revenue and 13 per
cent in terms of profits." The bank in order to help units tide
over the current downturn, had introduced products like
SME Care specially in J harkhand, which provides units to
access 20 per cent additional funds over and above their
existing overdraft limit. Already, according to an official, the
MSME ministry has proposed to RBI that the sector be given
a mandatory 15 per cent share of the total priority sector
lending. The banking industry is thereby now lending both
strength and support in form of cash and policies majorly in
putting back the economy into track.
6.4 Current Banking scenario
The industry is currently in a transition phase. On the one hand, the
PSBs, which are the mainstay of the Indian Banking system, are in the
process of shedding their flab in terms of excessive manpower,
excessive non Performing Assets (NPAs) and excessive governmental
equity, while on the other hand the private sector banks are
consolidating themselves through mergers and acquisitions.
PSBs, which currently account for more than 78 % of total banking
industry assets are saddled with NPAs (a mind-boggling Rs 830
billion in 2000), falling revenues from traditional sources, lack of
modern technology and a massive workforce while the new private
sector banks are forging ahead and rewriting the traditional banking
business model by way of their sheer innovation and service. The
PSBs are of course currently working out challenging strategies even
as 20 percent of their massive employee strength has dwindled in the
wake of the successful Voluntary Retirement Schemes (VRS)
schemes.
The private players however cannot match the PSBs great reach,
great size and access to low cost deposits. Therefore one of the means
for them to combat the PSBs has been through the merger and
acquisition (M& A) route. Over the last two years, the industry has
witnessed several such instances. For instance, Hdfc Banks merger
with Times Bank, Icici Banks acquisition of ITC Classic, Anagram
Finance and Bank of Madura. Centurion Bank, Indusind Bank, Bank
of Punjab, Vysya Bank are said to be on the lookout. The UTI bank-
Global Trust Bank merger however opened a Pandoras box and
brought about the realization that all was not well in the functioning
of many of the private sector banks.
Private sector Banks have pioneered internet banking, phone banking,
anywhere banking, and mobile banking, debit cards, Automatic Teller
Machines (ATMs) and combined various other services and
integrated them into the mainstream banking arena, while the PSBs
are still grappling with disgruntled employees in the aftermath of
successful VRS schemes.
The Indian banking industry is currently termed as strong, having
weathered the global economic slowdown and showing good numbers
with strong support flowing in from the Reserve Bank of India (RBI)
measures. Furthermore, a report "Opportunities in Indian Banking
Sector", by market research company, RNCOS, forecasts that the
Indian banking sector will grow at a healthy compound annual growth
rate (CAGR) of around 23.3 per cent till 2011. Banking, financial
services and insurance (BFSI), together account for 38 per cent of
India's outsourcing industry (worth US$ 47.8 billion in 2007).
According to a report by McKinsey and NASSCOM, India has the
potential to process 30 per cent of the banking transactions in the US
by the year 2010. Outsourcing by the BFSI to India is expected to
grow at an annual rate of 3035 per cent.
According to a study by Dun & Bradstreet (an international research
body)"India's Top Banks 2008"there has been a significant
growth in the banking infrastructure. Taking into account all banks in
India, there are overall 56,640 branches or offices, 893,356 employees
and 27,088 ATMs. Public sector banks made up a large chunk of the
infrastructure, with 87.7 per cent of all offices, 82 per cent of staff and
60.3 per cent of all ATMs.
According to the RBI, Indian financial markets have generally
remained orderly during 2008-09. In view of the tight liquidity
conditions in the domestic money markets in September 2008, the
Reserve Bank announced a series of measures beginning September
16, 2008. Thus, the average call rate which was at 10.52 per cent
declined to 7.57 per cent in November 2008 under the impact of these
measures.
Measures aimed at expanding the rupee liquidity, included significant
reduction in the cash reserve ratio (CRR), reduction of the statutory
liquidity ratio (SLR), opening a special repo window under the
liquidity adjustment facility (LAF) for banks for on-lending to the
non-banking financial companies (NBFCs), housing finance
companies (HFCs) and mutual funds (MFs), and extending a special
refinance facility, which banks could access without any collateral.
The reserve money lying with the RBI as on November 21, 2008 as
per the J anuary 2009 bulletin, is a total amount of US$ 179.28 billion
and RBIs credit to the commercial sector stood at US$ 3.65 billion.
Further, banks in India put up strong growth and profit numbers in the
October-end-December 2008 period owing to high credit growth and
easing of yield on government bonds. Top Indian banks have
increased their earnings by almost 40 per cent year-on-year for the
same period. According to latest Reserve Bank of India (RBI) data,
bank credit grew by 24.6 per cent year-on-year as of December 19,
2008. The resulting credit growth was even better at 41 per cent
during the April-end-December 2008 period. Deposits grew by 20.6
per cent as of December 19, 2008.
The growth in advances reflects that the net interest income (NIM)
too would indicate higher growth rate. RBI has taken a number of
steps to lower the cost of credit in this quarter like cutting cash
reserve ratio (CRR), the amount of funds banks have to keep on
deposit with it, repo and reverse repo rate. The CRR rate, which had
been reduced in December 2008, to 5.50 per cent, repo rate to 6.50
and reverse repo rate to 5.00, were further reduced CRR to 5 per
cent, (its lending rate) repo rate to 5.5 per cent and reverse repo, at
which it absorbs cash from the banking system, to 4 per cent in
J anuary 2009.
6.5 Growth of Banking Sector
An analysis of Indian Banking sector include the Growth in advances
and deposits, Market share, NPAs, CAR, Exposure norms, Retail
Banking Initiatives and Major Players.
The Reserve Bank of India (RBI), as the central bank of the
country, closely monitors developments in the whole financial
sector.
The banking sector is dominated by Scheduled Commercial
Banks (SCBs). As at end-March 2002, there were 296
Commercial banks operating in India. This included 27 Public
Sector Banks (PSBs), 31 Private, 42 Foreign and 196 Regional
Rural Banks. Also, there were 67 scheduled co-operative banks
consisting of 51 scheduled urban co-operative banks and 16
scheduled state co-operative banks.
Scheduled commercial banks touched, on the deposit front, a
growth of 14% as against 18% registered in the previous year.
And on advances, the growth was 14.5%against 17.3 % of the
earlier year.
State Bank of India is still the largest bank in India with the
market share of 20%. Icici and its two subsidiaries merged with
Icici Bank, leading creating the second largest bank in India
with a balance sheet size of Rs1040bn.
Retail Banking is the new mantra in the banking sector. The
home loans alone account for nearly two-third of the total retail
portfolio of the bank. According to one estimate, the retail
segment is expected to grow at 30-40% in the coming years.
Net banking, phone banking, mobile banking, ATMs and bill
payments are the new buzz words that banks are using to lure
customers.
With a view to provide an institutional mechanism for sharing of
information on borrowers/ potential borrowers by banks and
Financial Institutions, the Credit Information Bureau (India)
Ltd. (Cibil) was set up in August 2000. The Bureau provides a
framework for collecting, processing and sharing credit
information on borrowers of credit institutions. SBI and Hdfc
are the promoters of theCibil.
The RBI is now planning to transfer of its stakes in the SBI,
NHB and National Bank for Agricultural and Rural
Development to the private players. Also, the Government has
sought to lower its holding in PSBs to a minimum of 33 per cent
of total capital by allowing them to raise capital from the
market.
Banks are free to acquire shares, convertible debentures of
corporate and units of equity-oriented mutual funds, subject to a
ceiling of 5% of the total outstanding advances (including
Commercial Paper) as on March 31 of the previous year.
The finance ministry spelt out structure of the government-
sponsored ARC called the Asset Reconstruction Company
(India) Limited (Arcil), this pilot project of the ministry would
pave way for smoother functioning of the credit market in the
country. The Government will hold 49% stake and private
players will hold the rest 51% - the majority being held by ICICI
Bank (24.5%).
6.6 Growth of Banks
HDFC Bank and Axis Bank continue to remain as leaders of the
private sector banks. Both the banks have maintained the advances
growth and NIM. SBI, Punjab National Bank, Bank of India and
Union Bank are expected to lead among PSU Banks.
The State Bank of India is planning to open 1,000 new branches
across the country to cover 100,000 villages in the coming FY 2009-
10, according to the bank Chairman, Mr. O P Bhatt. The bank had
decided to rope in 300 new customers every year for each branch
using initiatives. According to Mr. Bhatt, the bank could get a record
US$ 5.54 billion during December 2008, the highest amount collected
by any bank in the country.
Further, public sector banks (PSBs) on J anuary 12, 2009 also decided
to lower interest rates on bulk deposits and to offer a maximum rate of
7.5 per cent for one-year maturity. Earlier, on J anuary 1, banks had
lowered the interest rates on bulk deposits from 9.5 per cent to 8.5 per
cent. According to the latest RBI data, growth in broad money (M3),
year-on-year (y-o-y), was 19.6 per cent (US$ 151.04 billion) on
J anuary 2, 2009 lower than 22.6 per cent (US$ 141.82 billion) a year
ago. Aggregate deposits of banks, year-on-year, expanded 20.2 per
cent (US$ 133.08 billion) on J anuary 2, 2009 as compared with 24.0
per cent (US$ 127.49 billion) a year ago.
The growth in bank credit continued to remain high. Non-food credit
by scheduled commercial banks (SCBs) was 23.9 per cent (US$
102.78 billion), year-on-year, as on J anuary 2, 2009 from 22.0 per
cent (US$ 77.79 billion) a year ago. Scheduled commercial banks
credit to the commercial sector expanded by 27.0 per cent (year-on-
year) as on November 21, 2008, as compared with 23.1 per cent a
year ago. Non-food credit of scheduled commercial banks expanded
by 26.9 per cent, year-on-year, as on November 21, 2008, higher than
23.7 per cent a year ago.
According to earlier RBI data, for the third quarter (September 26-
December 27, 2008), total bank credit was up US$ 21.91 billion
compared with a growth of US$ 22.91 billion in the same period a
year ago. In the preceding quarter, credit had risen by US$ 26.50
billion.
RBI data for deposits shows that for the Oct-end December 31, 2008
period, although deposit growth has slowed to US$ 25.99 billion
against US$ 33.18 billion in the April-end to September, 2008 period,
it was still stronger in the December 31 quarter period, 2008, as
compared to the year-ago quarter when absolute growth was US$
16.37 billion.
Net banking capital amounted to US$ 4.8 billion in April-September
2008 as compared with US$ 5.7 billion in April-September 2007.
Accounting for a part of banking capital, non-resident Indian (NRI)
deposits showed a net inflow of US $ 1.1 billion in April-September
2008, increasing from net outflow of US$ 78 million in April-
September 2007.
Lending by banks also rose more than 76 per cent to Rs 2,80,000
crore (US$ 57.26 billion) during April-November 2008-09 from
the same period a year ago, according to data available with the
Reserve Bank of India (RBI). The Reserve Bank of India on
J anuary 21, 2009 fixed the Reference rate for the US currency at
Rs 48.93 per dollar and the single European unit at Rs 63.70 per
euro from Rs 49.12 per dollar and Rs 63.61 per euro, respectively.
7. CREDIT RISK MANAGEMENT AN INTRODUCTION
Project / Credit RISK MANAGEMENTis a skill which has to be
acquired by study and supplemented by practice. Intuitive guess work
has little place in appraising the credit rating or credit needs of a
corporate unit. The credit managers of banks and Non-Banking
Finance Companies (NBFCs) are duty bound to accept or reject a
proposal on the basis of its viability or non - viability.
Project / Credit appraisal is done by banks or financial institutions by
obtaining credit information of the borrowing company.
Credit information of the borrowing company can be obtained by
the following sources:
1. Banks and Financial Institution
2. Bank References
3. Trade References
4. Credit Rating Agencies
5. Published Books: Basic information about a company may be
taken from printed sources like the Stock Exchange Year book,
Corporate Path finders data base, etc.
6. Company Financial Reports
7. Press Reports
8. Stock Market Opinion
9. Charges Registered: Charges created on the assets of a
company have to be registered with the Registrar of Companies.
10. Personal discussion
11. Factory Visit
12. Study of Financial Statements: Financial analysis
determines the significant operating and financial characteristics
of a firm form accounting data and financial statements.
Analysis can be done through:
a. Ratio Analysis
b. Trend analysis: Trend analysis can be through:
i. Intra firm comparison that is review of the trend of
the ratios over the years within the firm and
ii. Inter firm comparison.
c. Reading of notes to accounts and other information:
Careful reading and analysis of the notes on accounts, one
can gauge the policies of the management, performance of
the company, and its future planning.
Information required to be submitted by the Company
(Borrower) to the Bank
The company should make sure that the following information
required for processing credit requests are collected by the company
for submitting it to the bank or financial institution in order to obtain
the required credit facility:
1. Basic background information on the company:
2. Required facility
3. Key industry dynamics:
4. Management:
5. Management information system: Details of the planning,
controlling and monitoring systems which have been put in
place have to given.
6. Financials
7. Details of the Security to be pledged:
8. Present banking relationship: The bank requires full details of
the present credit facilities being enjoyed at the moment.
8.INTRODUCTION
Punjab National Bank (PNB) was set up in 1895 in Lahore - and has
the distinction of being the first Indian bank to have been started
solely with Indian capital. The bank was nationalized in J uly 1969
along with 13 other banks. Today, PNB is a professionally managed
bank with a successful track record of over 110 years. The bank has
the 2nd largest branch network in India, with 4525 branches including
432 extension counters spread throughout the country. PNB was
ranked as 248th biggest bank in the world by Bankers Almanac,
London. Punjab National Bank is not only the first bank to specialize
in credit rating models in India but also the first one to launch image
based cheque transaction system for collection of intra bank intercity
cheques thereby providing credits merely in 48 hrs in 13 cities.
CORPORATE
VISION
To be a Leading Global Bank with Pan India
footprints and become a household brand in the
Indo-Gangetic Plains providing entire range of
financial products and services under one roof
MISSION Banking for the unbanked
With over 56 million satisfied customers and 5002 offices, PNB has
continued to retain its leadership position amongst the nationalized
banks. From its modest beginning; the bank has grown in size and
stature to become a front-line banking institution in India at present.
Based on its sound and prudent banking experience and consistent
profit performance, PNB looks confidently to the futurethe
name you can bank upon
PNB has achieved significant growth in business which at the end of
March 2010 amounted to Rs 4,35,931crore. Today, with assets of
more than Rs 2,96,633crore, PNB is ranked as the 3rd largest bank in
the country (after SBI and ICICI Bank) and has the 2nd largest
network of branches (5002 offices including 5 overseas branches ).
During the FY 2009-10, with 40.85% share of CASA deposits, the
bank achieved a net profit of Rs 3905 crore. Bank has a strong capital
base with capital adequacy ratio of 14.16% as on Mar10 as per Basel
II with Tier I and Tier II capital ratio at 9.15% and 5.01%
respectively. As on March10, the Bank has the Gross and Net NPA
ratio of 1.71% and 0.53% respectively. During the FY 2009-10, its
ratio of Priority Sector Credit to Adjusted Net Bank Credit at 40.5%
& Agriculture Credit to Adjusted Net Bank Credit at 19.7% was also
higher than the stipulated requirement of 40% & 18%.
The performance highlights of the bank in terms of business and
profit are shown below:
Parameters Mar'08 Mar'09 Mar'10 CAGR(%)
Operating Profit 4006 5744 7326 22.29
Net Profit 2049 3091 3905 23.98
Deposit 166457 209760 249330 14.42
Advance 119502 154703 186601 16.01
Total Business 285959 364463 435931 15.09
(Rs in Crore)
ORGANIZATIONAL STRUCTURE
HEAD OFFICE
CIRCLE OFFICE
BRANCHOFFICE
9.CREDIT RISK MANAGEMENT
9.1 CREDIT RISK
Credit risk means the possibility of loss associated with diminution in
the credit quality of borrowers. In a banks portfolio, losses stem from
outright default due to inability or unwillingness of a customer or
counter party to meet, commitments in relation to lending, trading,
settlement and other financial transactions.
9.2 CREDIT RISK MANAGEMENT SYSTEM IN PNB
A comprehensive credit risk management system, which is in place in
the bank, encompasses the following processes:
Identification of Credit Risk
Measurement of Credit Risk
Grading of Credit Risk
Reporting and analysis of rating related data
Control of Credit Risk
CREDIT RISK IDENTIFICATION
In order to take informed credit decisions, it is necessary to identify
the areas of credit risk in each borrower as well as each industry. Risk
Management Division HO, in coordination with other HO divisions
involved in disbursal of credit and also the risk management
departments of various zonal offices identifies these risks areas and
develops necessary tools and processes to measure and monitor the
risk.
CREDIT RISK MEASUREMENT
In order to measure the credit risk in banks portfolio, the bank has
Rating
category
Description Score (%) obtained
Grade within
the rating
Category
PNB
AAA
Minimum Risk Above 80.00 PNB- AAA
PNB-AA
Marginal Risk
Above 77.50 up to
80.00
PNB- AA +
Above 72.50 up to
77.50
PNB- AA
Above 70.00 up to
72.50
PNB- AA -
PNB-A
Modest Risk
Above 67.50 up to
70.00
PNB- A +
Above 62.50 up to
67.50
PNB- A
Above 60.00 up to
62.50
PNB- A -
Rating
category
Description Score (%) obtained
Grade within
the rating
Category
PNB-BB
Average Risk
Above 57.50 up to
60.00
PNB- BB +
Above 52.50 up to
57.50
PNB- BB
Above 50.00 up to
52.50
PNB- BB -
PNB-B
Marginally
Acceptable Risk
Above 47.50 up to
50.00
PNB- B +
Above 42.50 up to
47.50
PNB- B
Above 40.00 up to
42.50
PNB- B -
PNB-C High Risk
Above 30.00 up to
40.00
PNB- C
PNB-D Caution Risk 30.00 and below PNB D
developed the following models:
SYSTEM FOR ASSIGNMENT & APPRAISAL OF RATING
The process of rating and vetting is as under:
Loan
Sanctioning
Authority
Credit Risk Rating
Authority
Vetting/Confirming
Authority
Head Office
i. Zonal CRMD in
consultation with
branches
ii. Large Corporate
Branches
GM (RMD), HO
Zonal / Circle
Office
i. In case of Large
Corporate Model,
ELB/VLB
ii. In case of other Models,
branches to rate the
accounts
Zonal CRMD
Branch Office
Officer/Manager, Credit
Section
An official designated
by the Incumbent not
Loan
Sanctioning
Authority
Credit Risk Rating
Authority
Vetting/Confirming
Authority
connected with
Processing/
recommending/rating
of the concerned loan
proposal
In order to adopt internal rating based approaches (IRB) for credit
risk, Basel II has placed certain minimum requirements which inter-
alia require, validation of rating system, process and estimation of all
relevant risk components. Banks must regularly compare realized
default rates with estimated probability of default (PD) of each grade
and able to demonstrate to its supervisor (RBI), that the internal
validation process enable it to assess the performance of internal
rating and risk estimation system consistently and meaningfully. In
view of above fact, not only rating but consistent practices in
evaluation of credit risk rating as well as evolving and updating
robust data on various risk components is must for adopting IRB
approaches.
CONTROLS
The Credit Risk Management process in the bank encompasses the
following management Control techniques which help in mitigating
the adverse impacts of credit risk in its credit portfolio.
i. Credit Approving Authority
a. Credit Committee
b. Linkage of loaning powers with risk rating categories
ii.Prudential Exposure limits
iii.Risk Based Pricing
iv.Portfolio Management
v.Loan Review Mechanism
vi.Legal documentation
vii.Preventive Monitoring System
viii.Others
a. Use of CIBIL data and RBI defaulters list
b. Diversification of Risks
10.POSTSANCTION FOLLOW UP OF LOANS
Supervision and Follow-up of bank credit has assumed considerable
significance particularly after introduction of new norms of assets
classification, provisioning and derecognition of interest income on
NPAs, affecting profitability. System of supervision and follow up
can be defined as the systematic evaluation of the performance of a
borrowal account to ensure that it operates at viable level and, if
problems arise, to suggest practical solutions. It helps in keeping a
watch on the conduct and operational/financial performance of the
borrowal accounts. Further, it also helps in detecting
signals/symptoms of sickness and deteriorations, if any, taking place
in the conduct of the account for initiating timely corrective actions to
check slippage of accounts to NPA category.
The goals and objectives of monitoring may be classified into
fundamental and supplementary goals. Fundamental goals help a
bank to ensure safety of funds lent to an enterprise while,
supplementary goals are directed towards keeping abreast of problems
arising out of changes in both the internal and the external
environment for initiating timely corrective actions. Some of the
important goals of monitoring are listed as under:
i. To keep a watch on the project during implementation stage so
that there are no time & cost overruns.
ii. To ensure that the funds released are utilized for the purpose
for which these have been provided and there is no diversion of
such funds.
iii. To evaluate operational and financial results, such as
production, sales, profit/loss, flow of funds, etc. and comparing
these with the projections/estimates given by the borrower at
the time of sanction of credit facilities.
iv. To ensure that the terms and conditions as stipulated in the
sanction have been complied with.
v. To monitor operations in the account particularly cash credit
facilities which indicate health of the account.
vi. To obtain market report on the borrower, to gather information
like reputation/financial standing etc.
vii. To detect signals and symptoms of sickness or deterioration
taking place in conduct/performance of the account.
viii. To ensure that the unit's management and organizational set-up
is effective.
ix. To keep a check on aspects like accumulation of statutory
liabilities, creditors, debtors, raw-material, stocks-in-process,
finished goods, etc.
x. To ensure charging of applicable rate of interest/penal interest/
commitment charges as per bank's guidelines.
System of supervision & monitoring of credit as laid down by the
Bank needs to be meticulously followed by the branches/controlling
offices which, inter alia, covers the following:
i. Conveying the sanction
ii. Maintenance of Loan Document File
iii. Quarterly Review Sheet
iv. Preventive Monitoring System
v. Quarterly Monitoring System
vi. Inspection and Physical Verification of stocks Stock Audit
11.ANALYSIS& INTERPRETATION
11.1 PNBs LOAN POLICY
11.1.1OBJECTIVE
The Credit Management & Risk Policy of the bank at the macro level
is an embodiment of the Banks approach to understand, measure and
manage the credit risk and aims at ensuring sustained growth of
healthy loan portfolio while dispensing the credit and managing the
risk. This would entail reducing exposures in high risk areas,
emphasizing more on the promising industries / productive sectors/
segments of the economy, optimizing the return by striking balance
between the risk and the return on assets and striving towards
maintaining/improving market share.
11.1.2BASIC TENETS OF THE POLICY
All loan facilities considered only after obtaining loan
application from the borrower and compilation of Confidential
Report on them and the guarantor. The borrowers should have
the desired background, experience/expertise to run their
business successfully
Project for which the finance is granted should be technically
feasible and economically/commercially viable i.e. it should be
able to generate enough surplus so as to service the debts within
a reasonable period of time.
Cost of the project and means of financing the same should be
properly assessed and tied up. Both, under-financing and over-
financing can have an adverse impact on the successful
implementation of the project.
Borrowers should be financially sound, enjoy good market
reputation and must have their stake in the business i.e. they
should possess adequate liquid resources to contribute to the
margin requirements.
Loans should be sanctioned by the competent sanctioning
authority as per the delegated loaning powers and should be
disbursed only after execution of all the required documents.
Projects financed must be closely monitored during
implementation stage to avoid time and cost overruns and
thereafter till the adjustment of the bank's loan.
The policy sets out minimum or benchmark lending rate, BPLR
=11 %
The policy lays down norms for takeover of advances from
other banks/ financial institutions
As a matter of policy the bank does not take over any Non-
performing Asset (NPA) from other banks
11.1.3METHODS OF LENDING
1. For Working Capital
i. Simplified method linked with turnover
Simplified method based on turnover for assessing
working capital finance up to Rs.2 crore (uptoRs. 5 crore
in case of SSI units)
ii. MPBF System
Existing MPBF system with flexible approach shall be
followed for units requiring working capital finance
exceeding the above-mentioned amount
iii. Cash Budget System
Cash Budget System shall be followed in Sugar, Tea,
Service Sector and Film Production accounts. It will be our
endeavor to introduce the same selectively in other areas
also
2. Term Loan
In case of infrastructure/mega projects, proper appraisal will be
made by utilizing the services of specialized / Technical officers.
The term loans with remaining maturity period of above 5 years
shall not exceed 50% of the term deposits with remaining
maturity period of above 5 years after taking into account the
renewal of term deposits as per the past trend.
11.2 CREDIT APPRAISAL PROCESS AT PNB
11.2.1FLOWCHART:
Not feasible
No Queries
Queries
Feasible
Submission of Project Report along
with the Request Letter
Carrying out Due Diligence on the
Client
Submission of Proposal to designated
Authority (Circle office)
Re-verification and analysis of the
Proposal
Submission of Proposal to designated
Authority
Preparing Credit Report / Feasibility
Report and Risk Rating
Determining of Interest Rate and
Preparation of Proposal
Meeting with the client to clarify the
queries
Vetting of Credit Risk Rating Report Approval of request made by the client
like Reduction of Interest Rates etc
Sanction of Proposal on various Terms
& Conditions
Acknowledgement of Sanction Terms
&Conditionby the client
Applicationto comply with Sanction
T&C.ExecutionofLoan Documents
Disbursement of Sanctioned Amount
fromthe branch office
11.2.2BRIEF ON THE PROCESS
At Punjab National Bank, proposal for financing working capital
limits and term loans can relate to any of the following:
1. New proposal
2. Renewal of existing limits
3. Enhancement of existing limits
Once a proposal is received, financial statements, project report and
other important documents are used to evaluate:
1. Maximum permissible bank finance (in case of WC limit)
2. Techno Economic Feasibility Analysis of the project (includes
all the 5 evaluation)
3. Various risks associated, if any
4. Various approvals of issues the borrower seeks (reduction of
ROI, processing fee etc)
5. Risk rating of the borrower
6. Reasonableness of estimates/projection in regard to sales,
chargeable current assets, current liabilities (other than bank
borrowings) and net working capital
7. Classification of current assets and current liabilities in
conformity with the guidelines issued by the Reserve Bank/HO.
8. Maintenance of minimum current ratio of 1.33:1 (Except where
a relaxation is permitted as in the case of sick/weak units,
diamond exporters, etc.).
9. An undertaking by the borrower to submit his annual accounts
promptly. Further annual review is carried out regularly by the
bank even where enhancement in credit limits is not involved
10. Provisions of Foreign Exchange Management Act, 2000
(FEMA), wherever applicable are complied with
11. In respect of industries where norms relating to inventory
and receivables have been laid down by Reserve Bank/HO,
credit limits should be determined in accordance with such
norms and in other cases in tune with past trends.
12. In cases where deviations from norms/past trends are
warranted, it should be ensured that these are justified and
specific comments in this behalf are incorporated in the notes
placed before the competent authority for sanction.
13. Specific guidelines issued by RBI/HO for sanctioning
credit limits for financing certain specific activities such as
diamond exports, leasing and hire-purchase, tea, sugar and
computer software industries will continue to be in force.
11.2.3 RISK RATING OF THE BORROWER
Punjab National Bank uses a system of internal ratings for the
assessment of the credit quality and risk profile of its borrowers. An
internal rating refers to a summary indicator of the risk inherent in an
individual credit quality in an individual credit. Ratings typically
embody an assessment of the risk of loss due to failure by a given
borrower to pay as promised, based on consideration of relevant
counterparty and facility characteristics. A rating system includes the
conceptual methodology, management process, and systems that play
a role in the assignment of a rating.
Credit risk rating tools at Punjab national bank
With respect to Punjab National Bank, credit risk rating has been
developed with a view to provide a standard system for assigning a
credit rating to the borrowers of the bank according to their risk
profile. The management of credit risk at PNB includes a continuing
review of credit limits, policies and procedures; the approval of
specific exposures and workout situations; the constant re-evaluation
of the loan portfolio and the sufficiency of provisions thereof. PNB
was also one of the first banks to develop their own credit models to
ease up their way to risk management, PNB Trac -- for its entire
category of lending. The loans with exposure of above Rs 20 lacs
have been rated individually, while loans with exposure under Rs 20
lakh have been rated segment-wise on portfolio basis as per the terms
of Basel II accord. This means that the bank would be able to do
credit ratings on its own for its lendings.
Inputs (parameters) to PNB Trac
The rating tool is designed to cater all the industry. The difference
between ratings of two borrowers lie in the limits he/she is seeking
from the bank and the industry of the same. There are broad
categories defined in every model that require different parameters or
inputs (both quantitative and subjective) depending on the industry
the borrower serves.
To explain the above statement an example of the inputs is described
below.
Rating Model New Project
Model
Industry ABC Sector
Facilities
Required
Term Loan Limits Rs. 1200 lacs
Inputs to the Model for the above mentioned loan will be:
CATEGORY PARAMETERS / INPUTS
Management
Evaluation
Capital market perception
of the group
Management Setup
Risk bearing capacity
Integrity, commitment and
sincerity
Track record in debt
repayment
Financial flexibility
Business
Evaluation
Range of services
Level of customer
satisfaction
Quality of service offered
Advertising / promotional
strategies
Economies of operation Brand equity
Ambience of service outlet Expected market growth
Effectiveness of
distribution channels
Locational advantage
Quality of infrastructure
available
Technology adopted in the
process
Financial
Evaluation
Debt Equity Ratio Internal Rate of Return
Repayment Period (in yrs) TOL / TNW
Foreign exchange risk
Working capital cycle (in
months)
Project
Implementation
Risk
Evaluation
Project complexities Expected time overrun
Expected cost overrun
Status of obtaining
clearances
Funding risk Service period (in yrs)
How the Rating is done
1. The scores are assigned to each of the parameters of each of the
broad category in the different sections on a scale of 0 to 4 up to
two decimal points with 0 being very poor and 4 being excellent.
The scoring of some of these parameters is subjective while for
some others it is done on the basis of pre-defined objective criteria.
2. The scores given to the individual parameters multiply by allocated
weights are aggregated and a composite score for the company is
arrived at in percentage terms. Higher the score obtained by a
company, better is its credit rating. Weights have been assigned to
different parameters based on their importance.
Example:
Factor % score
obtained
Weight Weighted
Score
Financial Evaluation 55.00 40.00% 22.00
Business & Industry
Evaluation
50.00 25.00% 12.50
Management
Evaluation
80.00 20.00% 16.00
Conduct of Account 75.00 15.00% 11.25
AGGREGATE
SCORE
61.75
The Aggregate Score of 61.75 refers to PNB- A-
THIS MEANS THE RATING OF THE BORROWER IS PNB A-
11.2.4 DETERMINATION OF THE APPLICABLE RATE OF
INTEREST
Benchmark Prime Lending Rate (BPLR)
Bank has determined Benchmark PLR (BPLR) after taking into
account actual cost of funds, operating expenses and a minimum
margin to cover regulatory requirement of provisioning / capital
charge and profit margin. At present, BPLR has been fixed at 11%.
BPLR is the reference rate for determination of rate of interest for the
borrowers accounts.
Sub-BPLR Lending
In order to remain competitive in the market, sub-BPLR lending is
also permitted. The sub-BPLR lending lies in the vested powers of
CMD/ED/GMs (Head Office)/Circle Heads. These powers are
defined in the Internal Circular of the bank, which eventually depends
on the rank of the officer and the credit risk rating of the borrower.
For instance:
i. Sub-BPLR Lending permitted by CMD: up to 5.50%
below BPLR
ii. Sub-BPLR Lending permitted by ED: up to 3.00%
below BPLR
iii. Sub-BPLR Lending permitted by Circle Heads: up to 1.00%
below BPLR
Applicable Rate of Interest (ROI)
The BPLR attracts further a term premia of 0.50% for term loans
having a repayment reschedule over 3 years. Also the applicable ROI
depends upon the credit risk rating and the Industry of the borrower.
RBI also grants certain rebates or lower ROI for lending to few
sectors, like Agriculture, SME etc. to boost the sector and
encouraging more participation.
Example: for Advances to NBFCs above Rs. 20 lacs
CREDIT RISK
RATING
APPLICABLE ROI
AAA BPLR +1.50 %
A BPLR +3.00 %
BB BPLR +3.50 %
(The Base Rate system will replace the BPLR system with effect from
July 1, 2010)
11.2.5 POST SANCTION FOLLOW UP
If the proposal is considered viable and accepted by the bank then
proper account in name of the borrower is created. The account is
reviewed from time to time in order to know whether the company
has met with all the terms & conditions or not, whether the interest is
being paid on time or not, whether there is overdraft in accounts or
the funds are not utilized by the company at all, whether the banks
interest income is increasing or not. Two of the most used methods
for post sanction follow up are:
1.PREVENTIVE MONITORING SYSTEM (PMS)
Objectives of PMS
The objective of PMS is to track & evaluate the health of borrowers
account on a continuous basis and detect:
Unsatisfactory/adverse signals/indicators at an early stage in a
comprehensive manner.
Thorough probe into reasons behind observed signals and
analysis thereof.
Speedy corrective/remedial actions/steps to prevent the account
from becoming NPA as well as to minimize the loan losses.
Preventive Monitoring System consists of two parts:
i. PMS Index and Rank
PMS Index is a numerical index consisting of 29 indicators
Parameters grouped into 6 sections. Penalty rates (weights) in
the form of numerical values have been assigned to each
indicator (parameter) depending upon their degree of impact on
health of an account. The score assigned to any parameter is
stored for last one year at any point of time, which is known as
Cumulative score. The section-wise maximum of cumulative
scores is to be summed up to arrive at PMS Index Score. Based
on PMS Index Scores a scale of 1 to 10 has been devised, which
is known as PMS Ranking Scale. The PMS Rank indicates the
state of health of an account. The lower the PMS Rank, better
the health of account and vice-versa.
ii. PMS Report
PMS Report, which has eight parts, describes brief profile of the
borrower, position of accounts, details of signals contributing to
PMS Index Score, reasons behind adverse signals and proposes
corrective/ remedial steps with time frame.
2.QUARTERLY MONITORING SYSTEM (QMS)
Bank has prescribed the QMS system for monitoring performance of
big borrower accounts enjoying working capital facilities of Rs.
1crore & above from the banking system. QMS includes the
submission of data on the prescribed formats depending upon the
economic activity of the borrower. Under this system financial and
operational information/ data is required to be submitted in two
different sets of formats
i. QMS I
This form is required to be submitted within six weeks from the
close of the quarter to which it relates. It gives information
about the operations of the unit and its performance for the
quarter, also giving reasons for non-achievement of
sales/production targets.
ii. QMS II
This form is required to be submitted within two months from
the close of the half-year to which it relates. In addition to
providing comparative position of the actuals vis-a-vis the
projections accepted at the time of sanction relating to the
operations of the unit, this form also indicates the `SOURCES'
and `USES' of the funds generated by the unit, during the half
year. Critical analysis of this form can reveal the diversion of
short-term funds for long term uses.
12.CASE STUDY ABC PARTS PVT. LTD
12.1BORROWERS PROFILE
Group Name ABC Parts Private Limited
Address of
Regd./Corporate Office
41, DLF, Industrial Area, New Delhi-
110015
Constitution Private Limited
Date of incorporation 18/08/1960
Dealing with PNB since
Maintaining current account with PNB,
New Delhi for the last 8 years.
Industry/Sector
Manufacturing of Auto & Tractor Parts
(Large Scale)
Business Activity
(Product)
Engaged in Designing, Engineering and
Manufacturing of Auto and Tractor
components.
BACKGROUND
The Company ABC Parts Pvt. Ltd. was incorporated in 1960. The
borrower has setup manufacturing units at 4 locations for
manufacturing of Automotive Parts. This company is an ISO-9001
2000 Certified Company and working speedily on achieving the TQ
14000. The Management of the company is experienced and working
in the line since long and the party is having the regular orders for
marketing of products and as well as contracts with corporate
manufacturing units of Vehicles/Auto Mobiles. Because of their
standing the company is getting repeated orders. The Company is
supplying its product to manufacture of Automobile/Vehicles
Manufacturer unit as Original Equipment Manufacturers. The
company has set up in- house R&D facility in their unit, sophisticated
instrumentation laboratory, testing laboratory etc., which reflects the
broad vision of the company to withstand the changing environment.
SHAREHOLDING
Major Share holders
No. of
shares
Amt. in Rs.
Lacs
%
Holding
Promoters Holding 100000 100.00 100%
FIs/ Mutual
Funds/UTI/Banks/FIIs
NIL NIL NIL
NRIs/OCBs NIL NIL NIL
Public NIL NIL NIL
Total 100000 100.00 100%
FACILITIES REQUIRED
Nature Proposed
Secured/Unsecured
(As per RBIs
guidelines)
Fund Based
CC(H) 900.00 Secured
Fund Based Ceiling 900.00
Non Fund Based
ILC/FLC NIL
ILG/ FLG NIL
Non Fund Based
Ceiling
NIL
Term Loan 1600.00 Secured
TOTAL
COMMITMENT
2500.00 Secured
Rs. In Lacs
12.2 CREDIT APPRAISAL FOR ABC PARTS PVT. LTD
I. MANAGERIAL EVALUATION
1. Market reputation on the promoter / management of the
company: Satisfactory
2. Brief Profile of Directors
ShriMahender Kumar Bhunsali, aged 80 years, promoted
the business of auto ancillaries after completing his
education. He has been founder of the company and is
presently the chairman of the company. Looking at his rich
experience along with his forward looking capabilities,
excellent work and ability to progress as per the changing
industry scenario, he was honored by UdyogPatra Award
ShriMunish Kumar Bhunsali, aged 46 years, son of
ShriMahendra Kumar Bhunsali joined his fathers business
after completing his Graduation. He has now been
associated with this business for twenty-four years and is
presently Managing Director of the company
Smt. MeenalBhunsali W/o of ShriMunish Kumar
Bhunsali aged 44 years, is also a graduate. She has also
been associated with the business for last eight years and
presently Director in the company
3. Quality of Management (Including Corporate Governance):
Management of the company is well experienced and have more
than 40 year experience in the auto parts line.
4. Succession Planning: Is been taken care of
5. Confidential Reports: Satisfactory
6. Marketing: The endless pursuit for quality excellence for over
four decades has earned ABC the unswerving confidence of
leading automotive and tractor manufactures, that's why its
components are used as Original Equipment in vehicles
manufactured. The company supplies its products to various
ORIGINAL VEHICLE MANUFACTURERS like:
Escorts Tractors Limited,
Tractors and Farm Equipment Limited (Massey
Ferguson U.K)
Carraro India Ltd., (Carraro Spa, Italy)
SameyDeutzFahr India Ltd.,(Samey, Italy)
Eicher Tractors (Valtra, Brazil)
Ford New Holland (CNH, Italy)
"Sonalika" International Tractors Ltd (Renault, France)
International Auto Ltd. etc.
On the other hand company have well experienced management,
good marketing team and vide market network of customers of
its products.
7. Borrowers' diversification, expansion, modernization
program: The company is setting up a new manufacturing
facility, as a part of companys overall expansion/integration
plant for its production activities. For the above purpose, a plot
of land measuring about 11,190 sq. meters has been allotted to
the company by New Okhala Industrial Development
Association, near New-Delhi. The Company Intend to set up
new machinery there for setting up a new plant to cater growing
demands of its customers, who have already placed orders to
increase supply.
II. BUSINESS EVALUATION
Comments on industry scenario and industry outlook:
The past few years have witnessed a continuous influx of global
auto majors in India. Many auto majors have established
facilities, which have also been aided by the liberal government
policy. India crossed million-mark last fiscal, which has set the
domestic auto ancillary industry on a roll. Auto MNCs are also
launching their latest models in India. The domestic auto
industry has also come up with new and quality models.
Consequently, the importance for precision auto components has
been growing. The increase in demand for auto components in
India has also resulted in an increase in revenues and exports.
Exports of auto components from India have witnessed a CAGR
of over 19% over the last six years.
The auto component sector is on a growth trajectory as is
evident by the fact that an auto component has been designated
as a Thrust Sector by the Government of India under the
EXIM Policy.
Also, the problems of high rejection rates which plagued the
domestic auto ancillary industry has been overcome which is
exhibited in number of overseas deals concluded by the
domestic industry amidst stiff competition from other Asian
countries. The Government has extended various fiscal
incentives and policy measures which have helped the industry.
Critically, outsourcing of automobile components that have
relatively high engineering and design content from suppliers in
low cost countries like India, is gaining momentum fast. It is
estimated that in the next 10 years the auto components industry
will reach USD 33-40 billion.
Going by the current trends in the domestic automotive industry
and as stated above, it is expected that the indigenous demand
for auto components will also reach USD 13-15 billion in the
next 10 years and about USD 20-25 billion would be exported.
To meet the combined demand from domestic and international
customers the industry will have to make significant incremental
investment Hence, the Indian auto component industry (and by
sequel the forging industry) is poised to achieve a position in the
top slot in the world and will be in all probability a major driver
of growth and employment in the domestic economy.
The fortunes of the auto ancillary sector are closely linked to
those of the auto sector. Demand swings in any of the segments
(cars, two-wheelers, commercial vehicles) have an impact on
auto ancillary demand. Demand is derived from original
equipment manufacturers (OEM) as well as the replacement
market. Replacement demand accounts for close to 57% of total
demand, while OEMs account for 27%, with exports accounting
for the balance 16%.
The Indian auto component industry had an estimated 480
companies operating in this area in FY05, employing more than
250,000 people and the industry exported goods worth estimated
at US$ 1.4 bn. Share of exports to output is estimated to have
increased from 15% in FY04 to 16% in FY05.
One area where domestic units compare favorably with their
international peers is it terms of costs. Lower labour costs give
Indian auto ancillary companies an absolute cost advantage.
India's strength in exports lies in forgings, castings and plastics
historically. But this is changing with more component
manufactures investing in upgradation of technology in recent
years
III. TECHNICAL EVALUATION
1. Land & Building - The Party has proposed to setup the
designing , engineering and manufacturing unit at Noida II
having the area of 11,190 sqMts The Party has already
constructed approx 45000 sq feet Industrial Shed. The building
area is sufficient for the installation of the plant and machinery
and for smooth working of the unit.
2. Plant and Machinery: It is reported by the party that they are
oneof the largest integrated plant of its kind for manufacturing
Auto and Tractor Component in North India spread over
sprawling area of 57,340 sq feet at different locations in Delhi,
Faridabad and Noida. There are different types of shops i.e
grinding shop, Turning centers, Machine Shops, ensuring high
productivity and better quality to keep pace with the ever rising
quality standards. The party is also having HEAT
TREATMENT SHOP with hardening, annealing, carbonizing,
tampering furnaces which make the component to withstand
strength in operating conditions of the parts.. The party has
submitted the quotations from the suppliers/manufacturers with
the term and conditions for supply. The credential of the
suppliers is verified for the supply of the machinery as per bank
guidelines.
3. Raw Materials: The basic raw material required for the unit is
forging of auto parts , stainless steel, welding rods and store
items etc. The material is available through local suppliers/ units
and most of the raw material is purchased from Delhi & NCR.
4. Manufacturing Process: The auto parts being manufactured
under strict quality control by using latest CNC Machines of
improved technology, modern process control devices
monitored by microprocessors and backed by a competent team
of technical personnel to ensure strict quality norms as laid
down by the OEM units/ Manufacturer of Tractors and other
Vehicles.
5. Production Capacity: The stated projections are accepted by
the bank as they both match and are in sync the installed
capacity and the market demand. The new plant will become
operational in the mid of the financial year 2010-11 and
production capacity of the company will increased.
6. Quality Control: The party has proposed to set up in- house
R&D facility comprising of pilot plant facility, sophisticated
instrumentation laboratory, testing laboratory etc. for Raw
Material and finished goods etc. Quality control test are being
undertaken for raw material and other products at stages of
production. The product shall meet all the specification
requirement of their client.
7. Staff and Labor: As the machines are semi automatic and the
unit is located at the Nodia, which is the approved industrial
area. So, there is no problem of skilled and unskilled labor and it
will be easily available as per the requirement of the party as
and when required for the proposed unit at Noida.
8. Power: The party has taken the temporary power load
connection of 20KW for completion of construction at Noida
unit.
9. Other Infrastructure: The unit of the party is situated at
Noida, it is a developed industrial area and is connected to other
parts of the country by roads and rails routes. All types of
facilities like postal, telecommunication, transportation etc. are
easily/already available.
IV. LEGAL EVALUATION
Status of various statutory approvals and clearances:
For the Noida Unit Company has already obtained the Various
approvals such as sanction of building plan, Electricity/Power Load
Connection, Water Connection, Pollution Control Clearance. The
other units of the Company are already working at different
locations in Faridabad and Delhi. The Director of the company has
reported that they have obtained the all approvals required for the
units for manufacturing of auto parts i.e, registration of the units
with the concerned departments i.e. SSI registration, Income tax,
Sales Tax, authorization from Pollution control board.
V. FINANCIAL EVALUATION
Financial Statements of the company are as follows
PROFIT AND LOSS ACCOUNT: ABC PARTS PVT. LTD
(In Rs. Lacs)
31.03.2007 31.03.2008 31.03.2009 31.03.2010 31.03.2011
Audited Audited Audited Provisional Projection
Sales
Turnover
1995.39 2047.12 2584.65 2379.88 4840.00
% rise or
fall in sales
2.59 26.26 -7.92 103.37
Cost of sales 1868.41 1954.42 2502.28 2270.66 4405.56
Operating
Profit
126.98 92.70 82.37 109.22 434.44
Other
Income
17.40 7.44 17.84 12.39 20.00
Profit
Before Tax
144.38 100.14 100.21 121.61 454.44
Provision
for taxes
40.00 40.00 69.74 3.67 113.59
Profit After
Tax
104.38 60.14 30.47 117.94 340.85
Depreciation 41.97 52.91 74.08 84.98 344.00
Cash Profit 146.35 113.05 104.55 202.92 684.85
BALANCE SHEET: ABC PARTS PVT. LTD
(In Rs. Lacs)
31.03.2007 31.03.2008 31.03.2009 31.03.2010 31.03.2011
Audited Audited Audited Provisional Projection
Share
capital
100.00 100.00 100.00 100.00 175.00
Reserves
and Surplus
482.55 542.69 573.16 691.10 1064.68
Share App.
Money
0.00 0.00 0.00 75.00 0.00
Quasi
Capital
17.45 32.79 45.84 60.88 75.00
Def. Tax
liability/
Loss
0.00 0.00 32.81 32.81 0.00
Revaluation
Reserves
0.00 0.00 0.00 0.00 0.00
Net Worth 600.00 675.48 751.81 959.79 1314.68
Secured
Loans
496.55 685.86 981.12 1119.01 1819.54
Unsecured 0.00 0.00 0.00 0.00 0.00
Loans
Term
Liabilities
496.55 685.86 981.12 1119.01 1819.54
Working
Capital
Advances
0.00 461.01 482.21 442.79 900.00
Sundry
Creditors
496.60 400.67 694.94 633.65 100.00
Statutory
Liabilities
0.00 0.00 0.00 0.00 0.00
Adv from
Customers
0.00 0.00 0.00 0.00 0.00
Other
current
Liabilities
707.92 187.91 105.32 85.00 138.59
Current
Liabilities
1204.52 1049.59 1282.47 1161.44 1138.59
Total
Outside
Liabilities
1701.07 1735.45 2263.59 2280.45 2958.13
Total
Liabilities
2301.07 2410.93 3015.40 3240.24 4272.81
Fixed Assets 1640.29 1830.50 2372.27 2590.20 3998.99
Depreciation 792.19 845.10 919.18 1004.16 1398.16
Lease Asset 0.00 0.00 0.00 0.00 0.00
Net Block 848.10 985.40 1453.09 1586.04 2600.83
Inventories 426.89 602.67 796.42 932.02 979.28
Sundry
Debtors
735.23 353.35 473.80 326.43 403.33
Cash &
bank
balance
13.38 68.33 3.72 37.19 19.30
Advances to
suppliers
0.00 64.57 38.14 44.23 0.00
Loans &
advances
0.00 0.00 0.00 0.00 0.00
Advance
Tax
0.00 0.00 0.00 0.00 113.59
Other
Current
Assets
277.47 330.22 243.75 307.85 150.00
Current
Assets
1452.97 1419.14 1555.83 1647.72 1665.50
Investments 0.00 6.39 6.48 6.48 6.48
Security
Deposits
0.00 0.00 0.00 0.00 0.00
Margin
Money
0.00 0.00 0.00 0.00 0.00
Exp. Not 0.00 0.00 0.00 0.00 0.00
WO
Non-
current
Assets
0.00 6.39 6.48 6.48 6.48
Total
Assets
2301.07 2410.93 3015.40 3240.24 4272.81
FINANCIAL INDICATORS: ABC PARTS PVT. LTD
(In Rs. Lacs)
31.03.2007 31.03.2008 31.03.2009 31.03.2010 31.03.2011
Audited Audited Audited Provisional Projection
Intangible
Assets
0.00 0.00 0.00 0.00 0.00
TNW 600.00 675.48 751.81 959.79 1314.68
Investments
in allied co.
0.00 0.00 0.00 0.00 0.00
Adjusted
TNW
600.00 675.48 751.81 959.79 1314.68
Current
Ratio
1.21 1.35 1.21 1.42 1.46
Debt/Equity 0.83 1.02 1.31 1.17 1.38
NWC 248.45 369.55 273.36 486.28 526.91
TOL/TNW 2.84 2.57 3.01 2.38 2.25
TOL/ 2.84 2.57 3.01 2.38 2.25
Adjusted
TNW
Operating
Profit /
Sales (%)
6.36 4.53 3.19 4.59 8.98
PAT / Sales
(%)
5.23 2.94 1.18 4.96 7.04
FACR 1.71 1.44 1.48 1.42 1.43
Brief discussion on Financial Indicators
1. Paid up capital / TNW
a. Authorized capital of the company is Rs.100 Lacs
comprising of 1 Lac-equity shares of Rs. 100/- each. Paid
up capital are Rs. 100 Lacs comprising of 1 Lac-equity
shares of Rs 100/- each. It has been projected at the level
of Rs 175.00 Lacs during current year. The company
already inducted Rs. 75.00 Lacs as Share application
money, which will be converted in to Paid up share Capital
before disbursement of limits by the bank. The Company
will increase the Authorized Capital Limit after the
Sanction of the Proposal but before the disbursement of
the loan.
b. TNW of the company is steadily increasing with full
retention of profits. It was Rs. 582.55 Lacs as on
31.03.2007 and increased to Rs. 675.48 Lacs as on
31.03.2008 and further increased to Rs. 751.81 Lacs as on
31.03.2009. It has been estimated / projected at Rs. 959.79
Lacs and Rs.1314.68 Lacs respectively as at 31.03.2010
and 31.03.2011 due to retention of estimated/projected
internal accruals and proposed induction of capital in the
business. Keeping in view of the past trend of profitability,
estimates/projections of TNW can be accepted.
2. Sales: Gross Sales of the company is showing increasing trend.
Sales have increased from Rs. 20.47 crores in 2007-08 to Rs.
25.85 crores in 2008-2009. Thus the company has registered a
growth of more than 26% over the last year. But sale during the
financial year 2009-10 did not register any growth, due to
fluctuation in the foreign market export sale of the company
decreased from the last financial year. The company has
achieved net sales of Rs 22.30 crore during the financial year
2009-10. The company is estimating the sale on the basis of
order in hand. In view of the recovery of economy since Oct.
2009, Company is expecting the good growth rate in sale in
coming financial years, Another reason of the healthy estimates
are good government policies for export out of India and
recovery of overall global market from the financial crunch. The
new plant of the company will become function in the mid of
the financial year 2010-11, which will increase the production
capacity of the company. The company has good demand of its
product in the market. Increase in the production capacity of the
company will increase the turnover of the company. Based on
its existing clientele and the demand in the market of the
products of the company, the company is estimating its Gross
turnover for the financial year 2010-11 at Rs.48.40 Crore.
Keeping in view the overall growth in the automobile and auto
part manufacturing market, the estimated turnover of the
company can be accepted.
3. Other income: The other income of the company includes
interest on FDR, Rebate and Discounts received, Foreign
Exchange Benefit etc. The other incomes for the year end
31.03.2008 were Rs. 7.44 Lacs and for the year ending
31.03.2009 were Rs. 17.84 Lacs. The other incomes of the
company as per the provisional balance sheet for the financial
year 2009-10 have Rs. 12.39 Lacs. The company is estimating
other income at Rs. 20.00 for the financial year 2010-11.The
Company estimated these income by taking care of interest
receivable on FDR and current discounts /rebate policies of the
suppliers. Keeping in view the past records of the company,
Estimates/Projections of Other Incomes can be accepted.
4. Profitability: PAT / Sale of the company for the financial year
2007-08 was 3% and for the financial year 2008-09 was 1% .
The PAT of the company for the financial year 2008-09 was
decreased because of increase in the depreciation and Interest
expenditure of the company. Due to expansion and installation
of new equipments during the financial year, depreciation and
financial expenses of the company increased disproportionately
as compared to the increase in gross sale of the company. These
expenses were 10.68% of turnover for the financial year 2008-
09 in comparison to 8.59% for the financial year 2007-08. As
per the provisional balance sheet for the financial year 2009-10
the company achieved profitability @ 4.96% (PAT/Sale) upto
31.03.2010. The company is estimating the profitability for the
financial year 2010-11 at 7.04%. Increase in the production
capacity of the company will reduce the operation cost of the
company and the profitability of the company will increase.
Keeping in view the industry scenario and past trends of the
company projections/estimates of the profitability of the
company can be accepted.
5. Investments: The Company has made investments in Fixed
Deposits. The value of Fixed Deposits at the end of the financial
year 2008-09 is Rs. 6.48 Lacs.
6. Current ratio: Current ratio of the company for the financial
year ending 31.03.2007 & 31.03.2008 was 1.21:1 & 1.35:1 .But
current ratio for the financial year 2008-09 was 1.22:1 which is
little lower than the bench mark of the bank i.e, 1.33:1 which
was due to expansion plan of the company and formation of
long term assets of the company during the financial year 2008-
09 to increase the overall profitability of the company. The
company used its internal accrual for purchase of capital assets
of the company. In spite of using its short term funds for the
purchase of the capital assets the NWC of the company is
positive. The expansion in the capital assets has increased the
size of the plant and profitability of the company which also
improve the short term liquidity of the company. As per the
provisional balance sheet for the financial year 2009-10 the
current ratio of the company is 1.42, which is above the bench
mark of the bank. Keeping in view the past records/trends of the
company estimated level current ratio canbe accepted.
7. Debt Equity Ratio: Debt Equity Ratio of the company for the
financial year 2007-08 was 1.02:1 and for the financial year
2008-09 was 1.31:1. As per provisional Balance sheet of the
company the debt equity ratio for the financial year 2009-10 is
1.17. The Company has estimated it debt equity ratio for current
financial year at 1.38:1. The debt equity ratio of the company is
below the acceptable bench mark of the bank i.e. 3:1 and proves
the long term solvency of the company. Hence keeping in view
the past trends of the company estimates/ projections of Debt
Equity ratio of the company can be accepted.
12.3 PRESENT PROPOSAL
The Borrower, ABC PARTS Pvt. Ltd. approached to the Bank for the
Sanction of following facilities:-
For Sanction of Working Capital Limit of Rs. 900.00 Lacs
And, for Sanction of Term Loan of Rs.1600.00 Lacs (by way of
takeover of Term Loan of Rs. 612.00 Lacs from SBBJ ,
Barakhamba Road, New Delhi and sanction of Fresh Term Loan
of Rs. 988.00 Lacs for New Plant & Machinery at Noida Unit)
1. JUSTIFICATION FOR WORKING CAPITAL SANCTION
MAXIMUM PERMISSIBLE BANK FINANCE: ABC PARTS PVT. LTD
(In Rs. Lacs)
31.03.2007 31.03.2008 31.03.2009 31.03.2010 31.03.2011
Audited Audited Audited Provisional Projection
Inventories 426.89 602.67 796.42 932.02 979.28
Sundry Debtors 735.23 353.35 473.80 326.43 403.33
Chargeable
Current Assets
1162.12 956.02 1270.22 1258.45 1382.61
Other Current
Assets
290.85 463.12 285.61 389.27 282.89
Total Current
Assets
1452.97 1419.14 1555.83 1647.72 1665.50
Other Current
Liabilities
1204.52 588.58 800.26 718.65 238.59
Working Capital
Gap (A)
248.45 830.56 755.57 929.07 1426.91
Minimum
Stipulated
Working Capital -
363.24 354.79 388.96 411.93 416.38
25% of TCA (B)
Actual / Projected
NWC (C)
248.45 369.55 273.36 486.28 526.91
PBF 1 ( A - B ) -114.79 475.78 366.61 517.14 1010.54
PBF 2 ( A - C ) 0.00 461.01 482.21 442.79 900.00
MPBF -114.79 461.01 366.61 442.79 900.00
2. JUSTIFICATION FOR TERM LOAN
a. Purpose: Sanction of Fresh Term Loan of Rs. 988.00 Lacs
for purchase of New Plant & Machinery at new unit at
New Okhla Industrial Area, Noida.
b. Summary of Cost of Project and Means of Finance
Cost of Project Amount
Cost of Machinery 1313.79
Electricity and Water
Connection
20.00
Total 1333.79
Means of Finance Amount
Term Loan 988.00
Unsecured Loans 75.00
Share Capital & internal
accruals
270.79
Total 1333.79
(In Rs. Lacs)
c. Sources of Promoters Contribution and the time
schedule as to when the funds will be brought.
Promoters of the company have already contributed Rs.
75.00 Lacs by way of share application money and Rs.
60.88 Lacs as unsecured loan up to 31.03.2010 as
unsecured loans. Promoters will introduce remaining
amount of unsecured loans Rs.14.12 Lacs during the
current financial year. The balance amount of promoters
contribution & internal accrual will be arranged by 100%
retention of profits for the financial year 2009-10 and
2010-11.
d. Projections for the profitability of the project
2010-
11
2011-
12
2012-
13
2013-
14
2014-
15
2015-
16
2016-
17
Net sales 4251.33 4677.46 5145.21 5648.73 6202.6 6811.86 7482.05
Profit after
Tax
256.83 316.38 350.91 385.66 414.55 489.72 551.54
Depriciation 224.81 266.09 226.17 207.25 176.16 164.74 140.03
Cash Profit 481.64 582.47 577.08 592.91 590.71 654.46 691.57
(In Rs. Lacs)
e. DSCR calculation
DEBT SERVICING COVERAGE RATIO - ABC PARTS PVT. LTD.
2010-
11
2011-
12
2012-
13
2013-
14
2014-
15
2015-
16
2016-
17
2017-
18
PAT 256.83 316.38 350.91 385.66 414.55 489.72 551.54 570.83
Depreciation 224.81 266.09 226.17 207.25 176.16 164.74 140.03 149.02
Interest 220.62 240.23 213.89 188.2 165.27 151.41 143.8 136.15
Sub Total 702.26 822.7 790.97 781.11 755.98 805.87 835.37 856
Loan
Instalment
228.29 207.94 197.44 197.7 155.02 58.34 58.66 58.98
Interest 220.62 240.23 213.89 188.2 165.27 151.41 143.8 136.15
Sub Total 448.91 448.17 411.33 385.9 320.29 209.75 202.46 195.13
DSCR 1.56 1.84 1.92 2.02 2.36 3.84 4.13 4.39
Average
DSCR
2.59
Imp: Detailed projected financial statements are not shown in the
report due to confidentiality of the data
f. Detailed Sensitivity Analysis on DSCR
Variation
Average
DSCR
Minimum
DSCR
Impact of Reduction of Selling price by
5%
1.95:1 1.21:1
Impact of Increase in Cost of Goods
sold by 5%
2.08:1 1.28:1
Impact of Increase in Rate of Interest by
1%
1.89:1 1.17:1
g. Present physical & financial status of project, if any
Basement of the factory building is already constructed.
Present Financial Status of the project is
PARTICULARS
Cost
Incurred
Cost to be
Incurred
Total Cost
Cost of Construction NIL 1313.79 1313.79
Cost of Electricity and
Water Connection
1.65 18.35 20.00
Total 1.65 1332.14 1333.79
(In Rslacs)
h. Implementation Schedule
Activity Start Date Completion Date
Land Acquisition Already Done
Building and Civil
Construction
Already
J une 2010 ( Shed Measuring
45000 Sq Ft is already
Constructed)
Delivery of Equipment
at site
March ,2010 J une,10
Installation of
Equipments
J une, 2010 J uly,10
Commissioning of plant August,2010 Sept,10
i. Proposed Repayment Schedule
Scheduled date of Completion of
Project
Sept 2010
Commercial Operations Date (COD Oct 2010
Implementation period (in months) 6 Months
Moratorium (in months) 12 Months
Repayment period in months/quarters/
Half year
84 Months
No. of installment 84
Starting Date Oct 2011
End Date (Last installment) Sept 2018
Door to door tenor 102 months
12.4SECURITY
1. Primary
i) For working capital limits: Hypothecation of Companys
present and future raw material, Stock in process, finished
goods, stores and spares and other current assets and Book
Debts
ii) For Term Loan:
First charges on plant and machinery purchased from
fresh term loan of Rs. 988.00 Lacs. Security Cover
Available
Description of Security Book Value
Market
Value
Land Situated at, Nodia,
U.P.
365.68 1100.00
Building and Sheds 519.55 519.55
Plant & Machinery* 1671.87 1671.87
Other Fixed Assets** 56.21 56.21
Total 2613.31 3347.63
(In Rslacs)
iii) Personal /Corporate Guarantee:
Name of Guarantor
Positio
n
Net Worth
As on
31.03.10
Immovable
property As on
31.03.10
Mr. M K Bhunsali
Chairm
an
394.95 261.00
Mr. Munish Kumar
Bhunsali
MD 389.45 261.00
Mrs. KumadBhunsali
Directo
r
124.56 40.50
(In Rslacs)
12.5CREDIT RISK RATING ABC PARTS PVT LTD.
The account was rated under the Large Corporate Model. The
following rating have been obtained by both: branch office and zone
office
1. FINANCIAL EVALUATION
i. Past Financials
Category Parameter
CO
Value
Benchmark
Values
Rate
0 1 2 3 4
Past
Financials
Absolute
Comparison
TOL/TNW 2.38 >5.00
5.00-
4.00
4.00-
2.50
2.50-
1.00
<1.00 3.08
Current
Ratio
1.42 <1.00
1.00-
1.25
1.25-
1.50
1.50-
2.00
>2.00 2.68
DSCR 1.56 <1.00
1.00-
1.25
1.25-
1.75
1.75-
2.50
>2.50 2.62
ROCE 12.29 <8%
8-
12%
12-
15%
15-
25%
>25% 2.10
(Inv +
Rec) / Net
sales
0.53 >6.00
6.00-
5.00
5.00-
4.00
4.00-
3.00
<3.00 4.00
ii. Future risk and subjective assessment
Category Parameter Comments Rate
Future risk
Impact of
contingent
liability
There is no other contingent liability 4.00
Impact of
Expansion
It will lead to more sales. 3.00
Subjective
Assessment
of
Financials
Transparency in
accounting
The financial statements are
prepared in accordance with
generally accepted accounting
principles
2.00
Quality of
inventory
The expected variance in the value
may be less than 5%
3.00
Reliability of
Debtors
There is no disclosure of debtors 2.00
2. BUSINESS EVALUATION
A. Market position evaluation
Parameter Comments Rate
Competitive position 3.00
Expected sales
growth
The firm has achieved a sales growth
of around 48% during the years 2007
08. It is expected that company
will be in a position to achieve a
sales growth of around 10 25% in
the current year
3.00
Input related risk 3.00
Availability of raw
material and other
critical inputs
Raw material is easily available from
nearby states
3.00
Proximity to skilled
Labor
The firm is located in industrial in
NOIDA inputs are available easily
3.00
Production related
risk
4.00
State of technology
used
The firm has adopted proven
technology better than its peers
4.00
Product related risk 3.00
Product range Firm is mainly engaged in the
processing of OEM
3.00
Product quality Quality of product is reported to be
better than the peers
3.00
Marketing 3.00
Distribution network Firm has a well developed
distribution network
3.00
Geographical
diversity of the
market
Firm is selling its product directly to
the vehicle manufacturers
3.00
B. Industry risk evaluation
Industry risk evaluation for auto ancillary industry 75%
3. MANAGEMENT EVALUATION
A. Objective
Parameter
Co
Value
0 1 2 3 4 Rate
Actual gross
sales
2379.88
<75%
75% -
79%
80% -
89%
90% -
95%
>95% 4.00 Targeted
sales
2208.91
Actual PBT 144.38
<75%
75% -
79%
80% -
89%
90% -
95%
>95% 4.00
Targeted
PBT
137.57
(inRslacs)
B. Subjective
S.
No.
Parameter Comments Rate
1 Management set up
The firm is in operation since
1960
3.00
2
Commitment and
sincerity
The management is reported to be
reliable and sincere
3.00
3
Track record in debt
payment
The account is running
satisfactorily with us
2.00
4
Financial strength/
flexibility
Management is capable of
arranging funds but with a time
lag
2.00
4. CONDUCT OF ACCOUNT EVALUATION
Parameter Comments Rate
Status of account No irregularity is observed with our
bank in last 2 yrs
3.00
Operations in account Operations in account are healthy 3.00
Submission of
financial data
Timely submission of data 3.00
TOTAL SCORE
Factor % score
obtained
Weight Weighted
Score
Financial Evaluation 75.00 40.00% 30.00
Business & Industry
Evaluation
60.00 25.00% 15.00
Management
Evaluation
75.00 20.00% 15.00
Conduct of Account 75.00 15.00% 11.25
AGGREGATE
SCORE
71.25
(The Aggregate Score of 71.25 refers to PNB- AA-)
THIS MEANS THE RATING OF THE BORROWER IS PNB AA-
DETERMINATION OF ROI
From the internal circular of the bank on ROI the corresponding ROI
for auto ancillary firm having a credit risk rating of AA- are:
BPLR +1.50% for Working Capital limit, and
BPLR +1.50% +0.50% for Term loan
Imp: The rating as shown in the above section is not a replication of the original
model in any form,
12.6 RECOMMENDATIONS:
On examining the request of the Company, the following were
observed:
The Management of the company is well experienced.
The Company has been in operation for past 40 years and
has been earning profits continuously.
The company has good track record in dealing with Banks.
The overall financial position of the company is
satisfactory.
Keeping in view the increasing profitability and financial
position of the company, the following are recommended
i For Sanction Term Loan of Rs. 1600.00 Lacs ( including Takeover of
Term Loan of Rs. 612 Lacs from State Bank of Bikaner and J aipur)
for purchase of new plant and machinery .
ii For Sanction Working Capital limit of Rs. 900.00 Lacs
The facilities desired by the borrowers are subject to the given ROI
and Terms and Conditions.
Nature Applicable ROI
Limits
Sanctioned
Fund Based BPLR +1.50% 900.00
Term Loan
BPLR + 1.50% +
0.50%
1600.00
TOTAL COMMITMENT 2500.00
(In Rslacs)
13.CONCLUSION& RECOMMENDATIONS
The study at PNB gave a vast learning experience to me and has
helped to enhance my knowledge. During the study I learnt how the
theoretical financial analysis aspects are used in practice during the
working capital finance and term loan assessment. I 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 business loans has been devised in a
systematic way. It is a process of appraising the credit worthiness of
loan applicants. 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. 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 6 phases:
1. Financial statement analysis
2. Working capital and its assessment techniques
3. Techno Economic Feasibility Analysis
4. Credit risk assessment
5. Documentation
6. Loan administration
Punjab National Banks adoptions of the Projected Balance Sheet
method (CMA) of assessment procedures are based on sound
principles of lending. This method of assessment has certain
flexibility required to avoid any rigid approach to fixing quantum of
finance. The PBS method have been rationalized and simplified to
facilitate complete flexibility in decision-making.
To ensure asset quality, proper risk assessment right at the beginning,
is extremely important. That is why Credit Risk Management system
is an essential ingredient of the Credit Appraisal exercise. PNB has
formulated a Credit Risk Rating model, PNB Trac. It considers
important parameters like profitability, repayment capacity, efficiency
of the unit, historical / industry comparisons etc depending on the
industry. PNB Trac is one of the best rating models present till date.
FINDINGS
After completing the entire project at Punjab National Bank the
following key findings as mentioned below were observed.
1. At PNB naupada branch thane the priority to appraise a proposal
was given to new or fresh clients over the existing clients
presenting proposals for renewal
2. Ratings, as being performed at PNB, are done once a year.
Therefore, the ratings do not take into account short term drastic
changes like price level changes (which are an issue with any
method based on accounting statements, since annual reports are
based on historical cost basis of accounting and other changes
like sudden mishap/ of the counterparty are not readily
accounted for by the rating system due to long lag between
repeat ratings on the same account.
3. Some of the parameters in Business and industry evaluation are
based on the information provided by company, which in some
cases may not be sufficient. No specific guidelines are followed
in such cases. Also, some of the parameters here may be
rendered redundant in some cases and may push up/ push down
the rating needlessly in these cases.
4. The present risk rating model does not have any mechanism to
prioritize certain sectors of the economy. There are certain
sector in the economy where risk spread is low and certain
sectors where spread of risk is high like real estate. Also, there
are certain infrastructural projects which need to be prioritized.
The risk rating model is not flexible to incorporate all these
issues.
5. The BPLR system will soon be replaced by Base Rate system.
Banks may choose any benchmark to arrive at the Base Rate for
a specific tenor that may be disclosed transparently.
6. With the deregulation of the financial sector, the ability of the
banks to service the credit requirements of the SME sector
depends on the underlying transaction costs, efficient recovery
processes and available security. There is an immediate need for
the banking sector to focus on credit and finance requirements
of SMEs.
RECOMMENDATIONS
The Credit Department at PNB naupadabranch thane, works at its full
potential and the staff is highly experienced and has a very strong
intuitive sense. So, there is no such recommendation on the entire
process. However to make the process more flexible and efficient, an
electronic databaseshould be designed carrying all the available and
important information related to the proposals accepted, and it should
be easily accessible to the Credit Department. This will help reduce
paperwork and loss of information.
LIMITATIONS
Like any other study this study too is not free from limitations. The
major limitations of the study are listed below:
1. The major limitation of this study shall be data availability as
the data is proprietary and not readily shared for dissemination.
2. Also the geographical scope of the project was limited to PNB
Circle Office and the loans studied were of solely of businesses
established majorly in NCR
3. The credit appraisal decision are more of intuition and
experience and since the time period was limited, hence best
efforts were made to grasp the process as much as possible
4. Due to ever changing environment, many risks are unexpected
and the remedial measures available are based on general
experience from the past. Therefore risks can only be minimized
cannot be erased completely. Hence, out of the various ways in
which risks can be managed, none of the methods is perfect and
may be very diverse even for the work in a similar situation in
the future
REFERNCES
Mckinsey& Company. India Banking 2010 - Towards a High-
performing Sector
Ben McClure. Working Capital Works.Investopedia. From
http://www.investopedia.com/articles/fundamental/03/061803.asp
Richard Loth.The Working Capital Position.Investopedia. From
http://www.investopedia.com/articles/basics/06/workingcapital.asp
NailaIqbal.Paradigms of Working Capital Management. From
http://ezinearticles.com/?Paradigms-of-Working-Capital-
Management&id=1251489
J agdishCapoor. Risk Management in Financial Institutions. From
http://www.coolavenues.com/know/fin/jagdish_capoor_a.php3
Principles for the Management of Credit
Risk,fromhttp://www.bis.org/publ/bcbsc125.pdf
M.Y.Khan&P.K.J ain, Financial Management, Seventh Edition
PNB Journals (For internal circulation only)
Credit Management & Risk Policy for the year 2008-09
Book of Instructions on Loans, March 2005
Loans & Advances Circulars on
BPLR
Project Finance
Industry Rating
Loaning Powers and Guidelines for exercising such
powers
RBI Circulars and Guidelines
Guidelines on Credit Appraisal
Basel II Accord
Base Rate
List of Questionnaire
1. On what parameters you would allow the credit risk to the
investors.?
a) Type of project b) Investment amount c) Both.
2. Upto what amount you would allow the credit riks to the
investor?
a) 50 lakhs c) 5 crore- 10 crore
b) 5o lakhs- 5 crore d) 10 crore
3. Do you provide credit risk to the company other than
individuals?
a. Yes b. no
4. Is the credit risk benefited to the bank?
a. Yes b. no
5. Providing credit risk will increase your profitability?
a. Yes b. no
6. If the party defaults and doesnt refund the money then will you
extend the credit period?
a. Yes b. no
7. Did you apply the credit risk concept on money only?
a. Yes b. no
8. Did you check all the documents before allowing the credit riks?
a. Yes b. no
9. How much time you take to verify the documents?
a. 1-3 days c. 4-5days
b. 3-4 days d. 1 week
10. Are the credit risks secured in nature?
a. Yes b. no
11. Do you follow the concept of credit risk transfer in your
bank?
a. Yes b. no
12. Do you provide the credit risk ______________?
a. Internationally b. nationally c. both
13. Can you transfer the credit to some other parties institute
irrespective of the amount?
a. Yes b. no