Project Report

CREDIT APPRAISAL AND RISK MANAGEMENT IN BANKS
A PROJECT REPORT submitted by
KOMAL SHAH
Batch 2010-12
in partial fulfillment for the award of the degree of
MASTER OF MANAGEMENT STUDIES
under the guidance of Prof. Shweta Desai
THAKUR INSTITUTE OF MANAGEMENT STUDIES AND RESEARCH KANDIVILI (EAST), MUMBAI
Credit Appraisal and Risk Management in Banks CERTIFICATE BY THE GUIDE
This is to certify that the project report CREDIT APPRAISAL AND RISK MANAGEMENT IN BANKS is a bonafide work of KOMAL SHAH in part completion of the MASTER IN MANAGEMENT STUDIES course and has been done under my guidance.
The project is in the nature of original work that has not so far been submitted for any degree of this university. References of work and sources of information have been given at the end of the project.
Signature of the candidate
Komal Shah
Forwarded through the research guide
Signature of the guide
Shweta Desai
Credit Appraisal and Risk Management in Banks
ACKNOWLEDGEMENTS
At the outset, I KOMAL SHAH have great pleasure in submitting this report on CREDIT APPRAISAL AND RISK ANALYSIS IN BANKS. I take this opportunity to thank my institute, THAKUR INSTITUTE OF MANAGEMENT STUDIES AND REASEARCH for providing me with all the due help and encouragement in the form of resources like library, staff, web access, and discussion rooms. I express my profound thanks to PROF. SHWETA DESAI for her guidance, support, knowledge imparted and her immense patience. I am deeply indebted to them for their pain staking effort and the time that they have devoted to me. I would also like to thank the admin, for their motivation and constant reminders.
Credit Appraisal and Risk Management in Banks EXECUTIVE SUMMARY

The world economy has been affected by many a crisis. The root cause of the economic and financial crisis is credit default of big companies and individuals which has badly impacted the world economy. So, in the present scenario analyzing ones credit worthiness has become very important for any financial
institution before providing any form of credit facility so that such situation doesnt arise in near future again. Analysis of the credit worthiness of the borrowers is known as Credit Appraisal. Whenever an individual or a company use credit facility that means they are borrowing money that they promise to repay with in a pre-decided period. In order to assess the repaying capability i.e. to evaluate their credit worthiness banks use various techniques that differ with the different types of credit facilities provided by the bank. It is the incident of credit defaults that has given rise to the financial crisis of 2008-09. But in India the credit default is comparatively less than other countries such as US. One of the reasons leading to this may be good appraisal techniques used by banks and financial institutions in India. The project first of all gives an overview about the banking sector. It, then, makes a study about the commercial banks and its important functions. Then it highlights on the concept of Bank Credit & its recent trends. The project then proceeds towards the lending procedure of banks. The feasibility study of a project is an important step in credit appraisal. A project may be subject to a number of technical, environmental, economic and political risks, particularly in developing countries and emerging markets. Financial institutions and project sponsors may conclude that the risks inherent in project development and operation are unacceptable. The financing of these projects must also be distributed among multiple parties, so as to distribute the risk associated with the project while simultaneously ensuring profits for each party. After proper credit report and effective credit rating is given to a loan, it is vital to determine the interest rates to be charged. The interest rate is determined from the interest rate guidelines circular.

The credit appraisal for starts with understanding the need of loan to the borrower i.e. for which purpose the loan is required. After this next step is to analyse the financial statement of the company to whom the loan is to be sanctioned. The main things which are taken into consideration while analyzing the financial statement are type of statement, nature of activity, accounting policy, qualities of assets and liabilities , unit wise performance result of the company & directors report. After analyzing the financial statement the second step is to study the principle given by Basel committee on banking supervision which basically Indian banks have to follow as per the order by Reserve Bank of India. The third step is to analyze the key financial ratios of the company. The next step is to understand the methodology used to determine the credit rating. Since the credit rating methodology differ from bank to bank in term of the weight age given to the parameters but the parameter used by the banks to assess credit worthiness are almost same to all company. The banks mainly provide two types of credit facility known as term loan and working capital loan. The working capital loan is given by three methods namely- projected balance sheet method, MFBF method and cash budget method. Term loan is the loan given by the company for a long term generally more than one year and less than 10 years to company. The term loan is assessed by the break even analysis, cost benefit ratio, payback period. While appraising the term loan technical, managerial, financial feasibility is checked. The debt service coverage ratio is used for assessing the company capacity to pay back installment of loan and interest on term loan. Thus, this project has been conducted in order to understand the credit appraisal system followed by the banks. The project has analysed the credit appraisal
procedure with special reference to Union Bank which includes knowing about the different credit facilities provided by the banks to its customers, how a loan proposal is being made, what are the formalities that are to be satisfied and most importantly knowing about the various credit appraisal techniques which are different for each type of credit facility.
Credit Appraisal and Risk Management in Banks TABLE OF CONTENTS

SR. NO. 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. PARTICULARS RESEARCH METHODOLOGY INTRODUCTION AN OVERVIEW SARAL CIBIL TYPES OF LOAN PRODUCTS OF UBI RETAIL LOAN RISKS INVOLVED IN CREDIT APPRAISAL FINANCIAL RATIOS AND LOAN PROCESS FLOW TERM LOAN ASSESSMENT CREDIT REPORT AND CREDIT RATINGS ANALYSIS OF CREDIT PROPOSALS CONCLUSIONS APPENDICES REFERENCES PAGE NO. 9 10 13 19 22 24 27 35 37 44 52 62 75 76 77
Credit Appraisal and Risk Management in Banks LIST OF TABLES

TABLE NO. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 SUMMARISED BALANCE SHEET OF UBI MAR 10, MAR 11 COMPARISON OF UBI WITH OTHER PSBS OVERVIEW ON BANKS DEPOSITS AND ADVANCES UNION HEALTH UNION MILES UNION EDUCATION UNION MORTGAGE UNION COMFORT UNION HOME CLASSIFICATION OF RISKS FINANCIAL RATIOS AND THEIR IMPLICATIONS INVESTMENT GRADES NON -INVESTMENT GRADES PROJECTED BALANCE SHEET OF JKL LTD. PROJECTED PROFIT AND LOSS ACCOUNT OF JKL LTD SENSITIVITY ANALYSIS OF JKL LTD. TABLE NAME PAGE NO. 17 18 18 27 28 29 30 31 32 35 37 40 40 67 68 69
Credit Appraisal and Risk Management in Banks LIST OF FIGURES

FIGURE NO. 1 2 3 FIGURE NAME EXISTING BORROWER AND NEW BORROWER CLASSIFICATION OF CREDIT LOAN PROCESS FLOW IN UBI PAGE NO. 11 24 42
Credit Appraisal and Risk Management in Banks Chap 1: RESEARCH METHODOLOGY

a) Objective of the research: The overall objective of this project is to understand the current credit appraisal system used in banks that involves various techniques and processes. b) Scope of the research: The scope of the project is that it covers the various parameters to be taken care of while doing credit appraisal of a project. c) Type of research: The type of research undertaken is Basic Research. Basic research is experimental and theoretical work undertaken to acquire new knowledge without looking for long-term benefits other than the advancement of knowledge. d) Type of research data: The data collected for this project is Secondary Data. e) Means of obtaining information: Secondary sources Websites, Books, Journals etc. f) Limitation of research Unavailability of confidential data, lack of experience in this sector and less time was available to do the research.
Credit Appraisal and Risk Management in Banks Chap 2: INTRODUCTION

Credit Decision making is similar to match making. The idea is that while selecting a borrower, the same degree of care is taken as by the parents while finalizing an alliance for their daughter. In selecting the borrower, bankers should not only be satisfied that the project is viable but also that the borrower is one who can be entrusted with the banks money. Before entertaining any Credit application, bankers should ask the following questions: 1. Who is the borrower? 2. What is the Project? 3. How bank funds are going to be repaid?
Who is the borrower?
The most vital part of Credit analysis is identifying the right type of borrower.
It is advisable to interview the applicant, when any person requires credit. The applicant is expected to take his banker into confidence and share with him the strong points and pitfalls about his business.
Where bankers have belief that the borrower is holding back critical information that has vital bearing on the success of the project, it is better not to entertain credit appraisal. It is also very important to see the enthusiasm of client in maintaining relationship with the bank. The applicant is required to contribute margin towards the project out of his own resources towards the project. Quite often the capital is brought in the form of Quasi Equity i.e. by way of loans from friends and relatives. It is very important to ascertain this source of capital, who the donors are, their relationship with the borrower, terms of repayment etc. To make sure that there will be no sudden demand for refund of amount as this is going to cause liquidity problem for the promoter/borrower.
10

If the applicant has relationship with other banks then it is advisable to obtain a secret report from the other banks, about the track record of the borrower.
BORROWER
EXISTING Banker can formulate his opinion on the person based on his past records
NEW If the information about the persons past is missing, the banker has to make proper enquiries from all the parties related to borrower and also obtain report from the existing banker of the borrower. Here CIBIL report is of help.
FIGURE 1: Existing borrower and new borrower
What is the project?
The bankers are not technical people, so they prepare a project report prepared by a consultant to know about: Technical feasibility Financial Viability. But the same project report will not guarantee the success of the project should be understood.
11
Example: If a unit is manufacturing a particular product that is doing well in a particular area, this means that adequate infrastructure is available to support this activity and sanctioning of finance to one more unit will not entail risk provided that there is no oversupply. With integration of global economy with local economy, doors have opened up for international competition. It has become imperative for bankers to be well equipped with technology, and that full advantage of available resources is taken.
How the bank funds are going to be repaid?
It is very important to observe elements of business that are generally overlooked by financial statements to measure the credit worthiness of the applicant.
Analysis of the credit worthiness of the borrowers is known as Credit Appraisal. In order to understand the credit appraisal system followed by the banks this project has been conducted. The project has analysed the credit appraisal procedure with special reference to Union Bank of India which includes knowing about the different credit facilities provided by the banks to its customers, how a loan proposal is being made and what are the formalities that are to be satisfied.
12
Credit Appraisal and Risk Management in Banks Chap 3: AN OVERVIEW

2.1 Banking Sector The Indian money market is classified into the organised sector, comprising private, public and foreign owned commercial banks and cooperative banks, together known as scheduled banks, and the unorganised sector, which includes individual or family owned indigenous bankers or money sector lenders and non-banking financial
companies. The
unorganised
and microcredit are
still preferred over
traditional banks in rural and sub-urban areas, especially for non-productive purposes, like ceremonies and short duration loans. Prime Minister Indira Gandhi nationalised 14 banks in 1969, followed by six others in 1980, and made it mandatory for banks to provide 40% of their net credit to priority sectors like agriculture, small-scale industry, retail trade, small businesses, etc. to ensure that the banks fulfill their social and developmental goals. The banking industry in India seems to be unaffected from the global financial crises which started from U.S in the last quarter of 2008. Despite the fallout and nationalization of banks across developed economies, banks in India seems to be on the strong fundamental base and seems to be well insulated from the financial turbulence emerging from the western economies. The Indian banking industry is well placed as compare to their banking industries western counterparts which are depending upon government bailout and stimulus packages.
The strong economic growth in the past, low defaulter ratio, absence of complex financial products, regular intervention by central bank, proactive adjustment of monetary policy and so called close banking culture has favored the banking industry in India in recent global financial turmoil.
Although there will no impact on the Indian banking system similar to that in west but the banks in India will adopt for more of defensive approach in credit disbursal in coming period. In order to safe guard their interest, banks will follow stringent
13

norms for credit disbursal. There will be more focus on analyzing borrower financial health rather than capability. There have been major structural changes in the financial sector since banking sector reforms were introduced in India in 1992. Since then Banks have been lending aggressively providing funds towards infrastructure sector. Major policy measures include phased reductions in statutory pre-emption like cash reserve and statutory liquidity requirements and deregulation of interest rates on deposits and lending, except for a select segment. The diversification of ownership of banking institutions is yet another feature which has enabled private shareholding in the public sector banks, through listing on the stock exchanges, arising from dilution of the Government ownership. Foreign direct investment in the private sector banks is now allowed up to 74 per cent.
2.2 An Overview on Union Bank of India

Union Bank of India was inaugurated by the father of the nation Mohandas Karamchand Gandhi. It commenced operations in the year 1920. Union Bank has offered vast and varied services to its entire valuable clientele taking care of their needs. Today, with its efficient customer service, consistent profitability & growth, adoption of new technologies and value added services, Union Bank truly lives up to the image of, Good People to bank with. Anticipative banking is an integral ingredient of value-based services. This ability to gauge the customer's needs long before he realizes, best reduces the gap between expectance and deliverance Union Bank is a Public Sector Unit with 55.43% Share Capital held by the Government of India. The Bank came out with its Initial Public Offer (IPO) in August 20, 2002 and Follow on Public Offer in February 2006. Presently 44.57 % of Share Capital is presently held by Institutions, Individuals and Others.
14

Over the years, the Bank has earned the reputation of being a techno-savvy and is a front runner among public sector banks in modern-day banking trends. It is one of the pioneer public sector banks, which launched Core Banking Solution in 2002. Under this solution umbrella, All Branches of the Bank have been 1135 networked ATMs, with online Tele-banking facility made available to all its Core Banking Customers - individual as well as corporate. In addition to this, the versatile Internet Banking provides extensive information pertaining to accounts and facets of banking. Regular banking services apart, the customer can also avail of a variety of other value-added services like Cash Management Service, Insurance, Mutual Funds and Demat.
Union Bank of India is the fifth largest nationalized bank, serving the varied needs of over 29.5 million customers through a pan-India network of over 3000 branches. At the end of March 2011, the Bank had a total business mix of Rs.3,55,483 crore, with deposits of Rs.2,02,461 crore and advances of Rs.1,53,022 crore. The capital adequacy ratio for the Bank stood at 12.59% at the end of March 2011. Union Bank of India is firmly committed to consolidating and maintaining its identity as a leading, innovative commercial Bank, with a proactive approach to the changing needs of the society. This has resulted in a wide gamut of products and services, made available to its valuable clientele in catering to their smallest needs. Vision: To become the Bank of first choice in our chosen areas by building beneficial and lasting relationship with customers through a process of Continuous improvement Corporate Mission: A logical extension of the Vision Statement is the Mission of the Bank, which is to gain market recognition in the chosen areas. To build sizeable markets share in each of the chosen areas of business through effective strategies in terms of pricing, product packaging and promoting the product in the market.
15

To facilitate a process of restructuring of branches to support a greater efficiency in the retail banking field. To sustain the mission objective through harnessing technology driven banking and delivery channels. To promote confidence and commitment among the staff members, to address the expectations of the customers efficiently and handle technology banking with ease. UBI began its international expansion in 2007 with the opening of representative offices in Abu Dhabi, United Arab Emirates, and Shanghai, Peoples Republic of China. The next year, UBI established a branch in Hong Kong, its first branch outside India. In 2009, UBI opened a representative office in Sydney, Australia. Sri M V Nair is the Chairman & Managing Director as on today.
16

Table 1: Summarised Balance Sheet of UBI Mar 10, Mar 11 UNION BANK OF INDIA SUMMARIZED BALANCE SHEET (Rs. In Lakhs) Particulars Capital Reserves & Surplus Deposits Borrowings Other Liabilities and Provisions TOTAL LIABILITIES Cash and Balances with Reserve Bank of India Balances with Banks and Money at Call and Short Notice Investments Advances Fixed Assets Other Assets TOTAL ASSETS Mar'10 50512 991866 17003974 921531 548301 19516184 1246824 330845 5440353 11931529 230544 336089 19516184 Mar'11 63533 1212919 20246129 1331597 744267 23598445 1761045 248799 5839914 15098608 229279 336089 23598445
17

Table 2: Comparison of UBI with other PSBs Sr. No. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 Interest Income 7365 5375 15092 16347 4292 17119 10455 6067 3448 6830 9641 8856 3247 19326 9580 8121 11889 4312 5238 Net NPA as % Net Advances 0.72 0.18 0.31 0.44 0.79 1.09 1.24 0.94 0.24 0.18 1.33 0.65 0.32 0.17 0.77 1.18 0.34 1.48 0.83
Nationalized Bank Allahabad Bank Andhra Bank Bank of Baroda Bank of India Bank of Maharashtra Canara Bank Central Bank of India Corporation Bank Dena Bank Indian Bank Indian Overseas Bank Oriental Bank of Commerce Punjab & Sind Bank Punjab National Bank Syndicate Bank UCO Bank Union Bank of India United Bank of India Vijaya Bank
Deposits 84972 59390 192397 189708 52255 186893 131272 73984 43051 72582 100116 98369 34676 209760 115885 100222 138703 54536 54535
Advances 58802 44139 143986 142909 34291 138219 85483 48512 28878 51465 74885 68500 24615 154703 81532 68804 96534 35394 35468
Table 3: Overview on banks deposits and advances (Rs. in crores) Items Deposits 2005-06 74094 2006-07 85180 28173 63658 2007-08 103859 34061 75878 2008-09 138703 43194 98265 2009-10 170040 54483 121249 2010-11 202461 58399 153022
Investments 26010 Advances 54644
18
Chap 4: SARAL (Central processing centres)

SARAL is a department at regional office which takes final decision on granting of loan, if the amount of loan is beyond the delegated authority of branch. The structure and workflow of SARAL has been communicated vide I.C no.8386 dated 29th July 2009.
The SARAL, i.e Central processing centres have been set up with the following objectives. 1) Enhanced customer service through improved Turn Around Time (TAT). 2) Better credit approval and developing expertise required for examining and processing approvals. 3) To reduce NPAs through efficient monitoring system. 4) Growth of MSME business through focused sales and marketing
The SARAL heads are required to ensure that data regarding TAT is captured for every proposal.
For new proposals an exhaustive document check list has been developed. The check list indicates the minimum documents to be collected and forwarded by branches to SARAL. But the branches should endeavor to collect all the necessary documents mentioned in the check list.
New proposal that are beyond the delegated authority of the branch has to be sent to SARAL for processing if all the documents has been collected. The remaining documents will be directly collected by SARAL from the applicants.
19

Credit disbursement at Union Bank of India Financial requirements for Project Finance and Working Capital purposes are taken care of at the Credit Department. Companies that intend to seek credit facilities approach the bank. Primarily, credit is required for following purposes:1. Working capital finance 2. Term loan for mega projects 3. Non fund based Limits Like Letter of Guarantee, Letter of Credit 4. Term loan for personal use
Companies present audited balance sheets of the current and previous years. These are used to determine the financial health, turnover trends and rise and fall of profitability. Then credit rating is done.
The financial health and credit rating are theoretical methods for determining the right interest rate. However, in practice, banks consider other factors such as history with client, market reputation and future benefits with clients. Thus, a difference exists between theory and practice.
Objectives of the project To assess the financial health of organizations that approach Union Bank of India for credit for import export purposes. This would entail undertaking of the following procedures:
Analysis of past and present financial statements Analysis of Balance Sheet Analysis of Cash Flow Statements Examination of Profitability statements Examination of projected financial statements Examination of CMA data
20

To assess the suitability of the company for disbursement of credit. This would involve the following actions: Use of credit rating charts Evaluation of management risk Evaluation of financial risk Evaluation of market-industry risk Evaluation of the facility Evaluation of compliance of sanction terms Calculation of credit rating
Determination of interest rate: This would entail the following sequence of actions. Collect data regarding financial health evaluation Noting down of credit rating Referencing the banks interest rate guidelines circular Choosing the interest rate from the circular on the basis of financial health and credit rating
21
Credit Appraisal and Risk Management in Banks Chap 5: CIBIL A CREDIT INFORMATION BUREAU
Rapid industrialization, an expanding economy, growing aspirations, increased incomes, improved lifestyles, availability of high quality products and services, an expanding market are some of the factors that have created an atmosphere conducive to rapid credit off take. While the demand for credit has risen exponentially, there has been a parallel increase in competition, and credit delinquencies. In such an environment, risk assessment is of critical importance. Not only in deciding on what business to book and the speed at which a credit grantor does so, but also in determining the appropriate pricing.
Comprehensive credit information, which provides details pertaining to credit facilities already availed of by a borrower as well as his payment track record, has become the need of the hour.
CIBIL is India's first credit information bureau. It is a repository of information, which contains the credit history of commercial and consumer borrowers. CIBIL provides this information to its Members in the form of credit information reports.
The establishment of CIBIL is an effort made by the Government of India and the Reserve Bank of India to improve the functionality and stability of the Indian financial system by containing NPAs while improving credit grantors portfolio quality. CIBIL provides a vital service, which allows its Members to make informed, objective and faster credit decisions.
Banks, Financial Institutions, State Financial Corporations, Non-Banking Financial Companies, Housing Finance Companies and Credit Card Companies are the members of CIBIL. For credit grantors to gain a complete picture of the payment history of a credit applicant, they must be able to gain access to the applicant's complete credit record
22

that may be spread over different institutions. CIBIL collects commercial and consumer credit-related data and collates such data to create and distribute credit reports to Members. CIBIL primarily gets information from its Members only and at a subsequent stage will supplement it with public domain information in order to create a truly comprehensive snapshot of an entitys financial track record. CIBILs aim is to fulfill the need of credit granting institutions for comprehensive credit information by collecting, collating and disseminating credit information pertaining to both commercial and consumer borrowers, to a closed user group of members. Data sharing is based on the Principle of Reciprocity, which means that only members who have submitted all their credit data, may access Credit Information Reports (CIR) from CIBIL. The relationship between CIBIL and its Members is that of close interdependence. A Credit Information Report (CIR) is a factual record of a borrower's credit payment history compiled from information received from different credit grantors. Its purpose is to help credit grantors make informed lending decisions - quickly and objectively.
23
Credit Appraisal and Risk Management in Banks Chap 6: TYPES OF LOAN

Credit is classified into 2 categories as follows: FIGURE 2: Classification of credit
CREDIT
FUND BASED
NON FUND BASED
OVERDRAFT
TERM LOAN
CASH CREDIT
LETTER OF CREDIT
LETTER OF GUARANTEE
FUND BASED CREDIT:

OVERDRAFT
Overdraft facility is more or less similar to cash credit facility. Overdraft facility is the result of an agreement with the bank by which a current account holder is allowed to draw over and above the credit balance in his/her account. It is a shortperiod facility. This facility is made available to current account holders who operate their account through cheques. The customer is permitted to withdraw the amount of overdraft allowed as and when he/she needs it and to repay it through deposits in the account as and when it is convenient to him/her. Overdraft facility is generally granted by a bank on the basis of a written request by the customer. Sometimes the bank also insists on either a promissory note from the borrower or personal security of the borrower to ensure safety of amount withdrawn by the customer. The interest rate on overdraft is higher than is charged on loan. TERM LOANS 24

Medium and long term loans are generally known as term loans. These loans are granted for more than 15 months. In case of medium term loan, the period ranges from 15 months to less than 5 years. Medium term loans are generally granted for heavy Loans and Advances like repairs, expansion of existing units, modernisation/ renovation etc. Such loans are sanctioned against the security of immovable assets. The normal rate of interest ranges from 12% to 18% depending upon the period, purpose, nature and amount of the loan. Though banks may grant long term loans, they avoid granting loan for more than 5 years. Arrangement of Security for Loan The borrower will now arrange for security against the loan. These securities may be immovable properties, shares, debentures, fixed deposit receipts, and other documents, like, Kisan Vikas Patra, National Savings Certificate, as per agreement. When the borrower completes all the formalities, he is allowed to get the amount of loan/advance/ over draft as sanctioned by the bank. In case of discounting of bills, the bank credits the amount of bill to the customers account before the realization of the bill and thus, makes available the fund. In case, the bill is dishonored on due date, the amount due on the bill together with interest and other charges are payable by the party whose bill is discounted. CASH CREDIT
Cash credit is a flexible system of lending under which the borrower has the option to withdraw the funds as and when required and to the extent of his needs. Under this arrangement the banker specifies a limit of loan for the customer (known as cash credit limit) up to which the customer is allowed to draw. The cash credit limit is based on the borrowers need and as agreed with the bank. Against the limit of cash credit, the borrower is permitted to withdraw as and when he needs money subject to the limit sanctioned.
25

It is normally sanctioned for a period of one year and secured by the security of some tangible assets or personal guarantee. If the account is running satisfactorily, the limit of cash credit may be renewed by the bank at the end of year. The interest is calculated and charged to the customers account.
NON-FUND BASED CREDIT:

LETTER OF CREDIT
A letter from a bank guaranteeing that a buyer's payment to a seller will be received on time and for the correct amount is known as letter of credit. In the event that the buyer is unable to make payment on the purchase, the bank will be required to cover the full or remaining amount of the purchase.
Letters of credit are often used in international transactions to ensure that payment will be received. Due to the nature of international dealings including factors such as distance, differing laws in each country and difficulty in knowing each party personally, the use of letters of credit has become a very important aspect of international trade. The bank also acts on behalf of the buyer (holder of letter of credit) by ensuring that the supplier will not be paid until the bank receives a confirmation that the goods have been shipped.
LETTER OF GUARANTEE
A type of contract issued by a bank on behalf of a customer who has entered a contract to purchase goods from a supplier and promises to meet any financial obligations to the supplier in the event of default. A letter of guarantee often helps firms conduct business with parties they would never normally get the chance to deal with. Many suppliers will often choose to do business with customers that have a letter of guarantee because it eliminates the risk that they will not receive the appropriate payment for the goods that they are selling.
26
Credit Appraisal and Risk Management in Banks Chap 7: PRODUCTS OF UBI RETAIL LOANS
Union Health Table 4: Union Health Purpose For purchase of brand new electro medical & other sophisticated equipment including operation theatre equipment, air
conditioners, generators, personal computer and accessories with software for diagnosis and ups systems.
For purchase of equipments, machines and such other items to start clinics.
For acquiring premises in order to set up of clinic, and towards cost of furnishing and medical supplies. Margin Minimum 25% of cost of equipments and other assets to be financed. Rate interest Security of A fixed interest rate of 14% for all. Interest rate will not undergo any change till full repayment of the loan. Hypothecation of equipment / items purchased out of bank finance. Collateral security 50% of loan amount.
Em of premises in case the loan is for acquiring premises. Repayment Maximum 7 years including initial moratorium period of 3/6 months - by equated monthly installments.
27

UNION MILES Table 5: Union Miles Purpose For purchase of new two/four wheelers, for personal or professional use Second hand vehicles upto 3 years old also eligible. Margin 15% of on road price (ex-showroom +registration+ insurance+ road tax). 50% of cost of old vehicle. Rate interest of 4 wheeler - for period upto 3 years rate of interest: 12.00% p.a. Above 3 years rate of interest : 12.50% p.a. 2 wheelers - upto 3 years rate of interest: 14.75% p.a. Old cars (not older than 3 yrs.) Rate of interest :15.25% p.a. Security Hypothecation of vehicle financed by the bank. Bank's lien to be got noted with the transport authorities. Repayment Four wheelers - a maximum of 60 months in equated monthly installments (emis). Two wheelers - a maximum of 36 months in equated monthly installments(emis).
Under
tie-up
4 wheelers - max. 72 emis (maruti suzuki india ltd., tata motors ltd, hyundai motors india ltd.)
28

Table 6: Union Education
Purpose The scheme aims at providing financial assistance: To poor and needy students to undertake basic education To the meritorious students to pursue higher / professional / technical education. Margin No margin for loan upto rs.4 lacs. However, for loan of higher amts, the margin requirement is 5% for inland studies and 15% for studies abroad. Scholarship / assistance to be included in margin. Margin maybe brought in on year-to-year basis as and when disbursement is made on a pro-rata basis. of For
Rate interest
Male upto lakhs: Rs.7.50 lakhs:
Upto Rs.4 Above Rs.4 lakhs Above Rs.7.50 lakhs: 13.50% For Upto Rs.4 Above Rs.4 lakhs Above Rs.7.50 lakhs: 13.00%
Student 13.75% 14.25%
Female upto lakhs: Rs.7.50 lakhs:
Student 13.25% 13.75%
Simple interest will be calculated during Repayment holiday / Moratorium period. Fixed interest rate will not undergo any change till full Repayment of loan.
Security
Upto Rs. 4 lakh: No security Above Rs. 4 lakh & upto Rs. 7.5 lakh: A suitable third party / personal guarantee However, for loan above Rs.7.50 lakh, collateral security of suitable value, along with co-obligation of parents / guardian / 3rd party accompanied by an assignment of future income of the student for payment of installments is required. A LIC Policy / Life insurance policy for a sum not less than the loan amount is required to be taken out in the name of the student and got assigned in Banks favour.
Repayment holiday /moratorium: course period + 1 year or 6 months after getting job / starts earning, whichever is earlier. Loan to be repaid in 5-7 years after completion of course period/moratorium.
Repayment
29

UNION MORTGAGE Table 7: Union Mortgage Purpose To meet any personal expenditure of varied needs like marriage of children, higher education, medical expenses or any unforeseen expenses and also as liquidity finance. Margin 50% of the fair market value of the property mortgaged as per the latest valuation report not older than six months from an approved valuer of the bank.
Fresh valuation at the cost of the borrower(s) once in three years required during currency of advance. Rate of interest Fixed rate ---- 16.50% Floating rate ---- base rate + 5.75% i.e. 15.75% Security Equitable mortgage of non-encumbered residential house/flat, commercial or industrial property situated in metro, urban & semi-urban centres only in the name & possession of the borrower and/or his/her family member. Repayment Loan amount together with interest is to be repaid in maximum 84 equal monthly installments.
Post-dated cheques for the 84 emis will be collected up-front.
Subject to closure of the loan with full adjustment prior to the retirement in case of salaried class.
30

UNION COMFORT Table 8: Union Comfort Purpose To meet personal expenses, purchase of consumer durables. Margin Rate of interest Nil 16.75%. Concession in the rate of interest can be considered in the case of group of borrowers Security One guarantor having means equivalent to the loan amount, hypothecation of asset wherever applicable. Repayment 36 emis.
31

UNION HOME Table 9: Union Home Purpose Purchase/construction of independent house/fla
Repair/improvement/extension
Repayment of loan availed from another agency/bank/NBFC
For purchase/ construction of 2nd property (independent house/flat)
Plot sold by a government-recognized agency viz., huda, housefed and such others
Margin
For loan up to rs. 200 lacs, 20% of the cost of the property.
For loan above rs. 200 lacs, 35% of the cost of the property. Repayment Moratorium up to 18 months wherever loan is taken for under construction flat or building.
By equated monthly installments (emi).
The maximum repayment period should not exceed 25 years (including moratorium) for construction / purchase of house/ flat and 10 years for repair.
Option of flip/ step-up/ balloon methods of repayments for the convenience of the borrowers.
32
RATE OF INTEREST ( Base Rate 10.25% w.e.f 11.07.2011) Loan upto Rs. 30 Lacs Tenor Upto 5 years >5 Years to 10 >10 Years Fixed Floating 12.00% N.A. Years N.A. Years to 15 >15 Years N.A. Years to 25
Base Rate + Base Rate + Base Rate + 0.75% Base Rate + 1.00% 0.50% i.e . 10.75% 0.75% .e. 11.00% i i.e 11.00% i.e 11.25%
Loan above Rs 30 Lacs upto 50 Lacs >5 Years to 10 >10 Years to 15 >15 Years to 25 Years Years N.A. Rate + Years N.A. N.A.
Tenor Upto 5 years Fixed Floatin g 13.00%
Base Rate + Base 1.25% i.e . 11.50% 1.50%
Base Rate + 1.50% Base Rate + 1.75% i.e. i.e 11.75% 12.00%
i.e. 11.75%
Loan above Rs 50 Lacs and upto 200 Lacs >5 Years to 10 >10 Years to 15 >15 Years N.A. Rate Years N.A. Base Rate +1.50% i.e 11.75% 12.00% Years N.A. Base Rate +1.75% i.e. Years to 25
Tenor Upto 5 Years Fixed Floatin g 13.25%
Base Rate + Base 1.25% i.e . 11.50% + 1.50% I .e. 11.75%
33

Loan above Rs 200 to Rs 300 Lacs > 5 Years to 10 >10 Years to 15 >15 Years to 25 Years N.A. Rate Years N.A. Years N.A.
Tenor Upto 5 Years Fixed N.A.
Floatin Base g
+ Base Rate +1.75% Base Rate + 2.00% Base Rate + 2.00% i.e. 12.25% i.e. 12.25%
1.75% i.e. 12.00% i.e. 12.00%
34
Credit Appraisal and Risk Management in Banks Chap 8: RISKS INVOLVED IN THE CREDIT APPRAISAL
Effectiveness of Credit Management in the bank is highlighted by the quality of its loan portfolio. Every Bank is striving hard to ensure that its credit portfolio is healthy and that Non Performing Assets are kept at lowest possible level, as both of these factors have direct impact on its profitability. In the present scenario efficient project appraisal has assumed a great importance as it can check and prevent induction of weak accounts to our loan portfolio. All possible steps need to be taken to strengthen pre sanction appraisal as always Prevention is better than Cure. With the opening up of the economy rapid changes are taking place in the technology and financial sector exposing banks to greater risks, which can be broadly classified as under: Table 10: Classification of risks Government regulations and policies, availability of infrastructure Industry Risks facilities, Industry Rating, Industry Scenario & Outlook, Technology Upgradation, availability of inputs, product obsolescence, etc. Operating efficiency, competition faced from the units engaged in Business Risks similar products, demand and supply position, cost of labour, cost of raw material and other inputs, pricing of product, surplus available, marketing, etc. Background, integrity and market standing/ reputation of promoters, organizational Management Risks organization, set up and and management of hierarchy, authority, expertise/competence of persons holding key position in the delegation decentralization achievement of targets, track record in execution of project, debt repayment, industry relations etc. Financial strength/standing of the promoters, reliability and Financial Risks reasonableness of projections, past financial performance, reliability of operational data and financial ratios, adequacy of provisioning for bad debts, qualifying remarks of auditors/inspectors etc.
35

In light of the foregoing risks, the banks appraisal methodology should keep pace with ever changing economic environment. The appraisal system aims to determine the credit needs/ requirements of the borrower taking into account the financial resources of the client. The end objective of the appraisal system is to ensure that there is no under - financing or over - financing. Following are the aspects, which need to be scrutinized and analyzed while appraising: Fund-Flow Statement A fund-flow statement is often described as a Statement of Movement of Funds or where got: where gone statement. It is derived by comparing the successive balance sheets on two specified dates and finding out the net changes in the various items appearing in the balance sheets. A critical analysis of the statement shows the various changes in sources and applications (uses) of funds to ultimately give the position of net funds available with the business for repayment of the loans. A projected Fund Flow Statement helps in answering the under mentioned points. How much funds will be generated by internal operations/external sources? How the funds during the period are proposed to be deployed? Is the business likely to face liquidity problems?
Balance Sheet Projections The financial appraisal also includes study of projected balance sheet which gives the position of assets and liabilities of a unit at a particular future date. In other words, the statement helps to analyze as to what an enterprise owns and what it owes at a particular point of time. An appraisal of the projected balance sheet data of the unit would be concerned with whether the projections are realistic looking to various aspects relating to the same industry.
36
Credit Appraisal and Risk Management in Banks Chap 9: FINANCIAL RATIOS AND LOAN PROCESS FLOW
While analyzing the financial aspects of project, it would be advisable to analyze the important financial ratios over a period of time as it may tell us a lot about a unit's liquidity position, managements' stake in the business, capacity to service the debts etc. The financial ratios which are considered important are discussed as under: Table 11: Financial ratios and their implications Ratio Formula Remarks There cannot be a rigid rule to a satisfactory debt-equity ratio, lower the ratio higher is the degree of protection enjoyed by the creditors. These days the 1 Debt Liabilities) DebtEquity Ratio Equity (Term debt equity ratio of 1.5:1 is considered reasonable. It, however, is higher in respect of capital intensive projects. But it is always desirable that owners have a substantial stake in the project. Other
(Where, Equity = Share features like quality of management capital, free reserves, should be kept in view while agreeing to premium on shares, , a less favorable ratio. In financing etc. after adjusting loss balance) highly capital intensive projects like infrastructure, cement, etc. the ratio could be considered at a higher level.
Debt2 Service Coverage Ratio
Debt + Depreciation + This ratio of 1.5 to 2 is considered Net Taxes) Profit + (After reasonable. A very high ratio may Annual indicate the need for lower moratorium
interest on long term period/repayment of loan in a shorter debt schedule. This ratio provides a measure
37

Annual long interest debt on of the ability of an enterprise to service its + debts i.e. `interest' and `principal
term
Repayment of debt
repayment' besides indicating the margin of safety. The ratio may vary from
industry to industry but has to be viewed with circumspection when it is less than 1.5.
Tangible Net Worth (Paid up Capital + Reserves and Surplus 3 TOL / Assets) Total Liabilities outside (Total Intangible This ratio gives a view of borrower's capital structure. If the ratio shows a
decreasing trend, it indicates that the borrower is relying more on his own funds and less on outside funds and vice versa
TNW Ratio
Liability - Net Worth) Operating (Before 4 Profit-Sales excluding Ratio Profit Taxes Income This ratio gives the margin available after meeting cost of manufacturing. It
provides a yardstick to measure the efficiency of production and margin on sales price i.e. the pricing structure This ratio is of a primary importance to see how best the assets are used. A rising
from other Sources) Sales
Sales5 Tangible Assets Ratio Sales Total Assets -
trend of the ratio reveals that borrower has been making efficient utilization of his assets. However, caution needs to be exercised when fixed assets are old and depreciated, as in such cases the ratio tends to be high because the value of the
Intangible Assets
38

denominator of the ratio is very low.
Higher the ratio greater the short term liquidity. This ratio is indicative of short term financial position of a business enterprise. It provides margin as well as it is measure of the business enterprise to pay-off the current liabilities as they 6 Current Ratio Current Assets Current Liabilities mature and its capacity to withstand sudden reverses by the strength of its liquid position. Ratio analysis gives indications; to be made with reference to overall tendencies and parameters in relation to the project.
Sales Output 7 Investment Ratio Total capital employed (in fixed & current assets)
This ratio is indicative of the efficiency with which the total capital is turned over as compared to other units in similar lines.
39

Table 12: Investment Grades: RISK LOWEST RISK MINIMAL RISK MODERATE RISK SATISFACTORY RISK ACCEPTABLE RISK WATCH RISK RATING CR-1 CR-2 CR-3 CR-4 CR-5 CR-6 SCORE (%) > 90 81-90 76-80 71-75 66-70 61-65
Table 13: Non- Investment Grades: RISK RISK PRONE HIGH RISK SUB STANDARD DOUBTFUL LOSS RATING CR-7 CR-8 CR-9 CR-10 CR-11 SCORE (%) 56-60 60 AND BELOW -
40

SYSTEM FOR ASSIGNMENT & APPRAISAL OF RATING The process of rating and vetting is as under:
System for Assignment & Appraisal of Rating
Loan
sanctioning
Credit risk rating authority
Vetting/confirming authority
authority Head (Mantralaya) II. Zonal office street) / circle (Dalal II. I. office I. Zonal crmd in consultation with branches Large corporate branches In case of large corporate model, elb/vlb In case of other models, branches to rate the accounts Branch (Kalbadevi) office Officer/manager, credit section An official designated by the incumbent with not connected processing/ Zonal crmd Gm (rmd), ho
recommending/ rating of the concerned loan proposal
41

Figure 3: Loan process flow in Union Bank of India
STAGE 1 - PRE QUALIFYING Preliminary determination of borrowing capacity and credit history
STAGE 2 - APPLICATION Fill out loan application Gathering documents from applicants Consent letter from surety
STAGE 3 PROCESSING Credit check (CIBIL Report) Appraisal of property Title search Employment & residential history complied Verification of financial reserves Compiling industrial visit report
STAGE 4 UNDERWRITING Loan goes for approval. All conditions prescribed in credit policy are met. Loan is approved.
STAGE 5 CLOSING/ RENEWAL Sending signed documents to title company Buyers bring in money and sign documents Title company records deed Buyers get keys to property
42

Documents to be obtained 1) Title Deed 2) Valuation Report (Banks Architect Approved Valuer) 3) Industry Report (Industrial Consultant) 4) List of Machinery obtain 5) Insurance Cover of Property 6) Photograph of properties and industry with machinery 7) Balance Sheet of 3 years
8) Estimated and Projected Balance Sheet
9) Sales Tax Return data
10) Income Tax Return 11) Details of property: (Partners, Proprietor, Directors , firms etc) 10/Page 12) Technical feasibility report from consultant 13) CA Certificate 14) Property Search Report from (CA, Advocate, Industrial consultant) 15) Stock Statement and Book Debt Statement 16) List of Creditors and Debtors 17) Credit Report and Information of (Firm, Partners etc) 18) Stock Inspection done by Bank 19) Market Inquiry 20) Existing Bankers Report (Satisfactory)
43
Credit Appraisal and Risk Management in Banks Chap 10: TERM LOAN ASSESMENT
CONDUCTING FEASIBILITY STUDY
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 organisation. Such report provides indepth 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. Project Details: Definition of the project and alternative scenarios and models

List the type and quality of product(s) or service(s) to be marketed. Outline the general business model (ie. how the business will make money). Include the technical processes, size, location, kind of inputs Specify the time horizon from the time the project is initiated until it is up and running at capacity.
Relationship to the surrounding geographical area
Identifies economic and social impact on local communities. Identifies environmental impact on the surrounding area. 1. MARKET FEASIBILITY
Industry description
Describes the size and scope of the industry, market and/or market segment(s).
44
Estimates the future direction of the industry, market and/or market segment(s).
Describes the nature of the industry, market and/or market segment(s) (stable or going through rapid change and restructuring).
Identifies the life-cycle of the industry, market and/or market segment(s) (emerging, mature)
Industry Competitiveness
Investigates industry concentration (few large producers or many small producers).
Analyzes major competitors. Explores barriers/ease of entry of competitors into the market or industry. Determines concentration and competitiveness of input suppliers and product/service buyers.
Identifies price competitiveness of product/service.
Market Potential
Will the product be sold into a commodity or differentiated product/service market?
Identifies the demand and usage trends of the market or market segment in which the proposed product or service will participate.
Examines the potential for emerging, niche or segmented market opportunities. Explores the opportunity and potential for a "branded product". Assesses estimated market usage and potential share of the market or market segment.
Sales Projection
Estimates sales or usage.
45
Identifies and assess the accuracy of the underlying assumptions in the sales projection.
Projects sales under various assumptions (ie. selling prices, services provided).
Access to Market Outlets
Identifies the potential buyers of the product/service and the associated marketing costs.
Investigates the product/service distribution system and the costs involved.
46

2. ORGANIZATIONAL/MANAGERIAL FEASIBILITY Business structure

Outline alternative business model(s) (how the business will make money). Identify the proposed legal structure of the business. Identify any potential joint venture partners, alliances or other important stakeholders.
Identify availability of skilled and experienced business managers. Identify availability of consultants and service providers with the skills needed to realize the project, including legal, accounting, industry experts, etc.
Outline the governance, lines of authority and decision making structure.
Managerial Personnel Managerial Personnel play a key role in directing the working of the company. It is important for an organisation to have a pool of eficient personnel who bear the capacity to bail the company out from crisis situation and work towards optimum utlisation of organisational resources. Such capacity of the personnel can be determined by having complete details on following key aspects: Market reputation on the promoter / management of the company Hands on experience of the management personnel in the industry / Business managed by qualified personnel Ability of the promoters / management to bail out the company in case of crisis (for example, this could be derived from a strong group company) Decision making Is it concentrated? Organisation structure / Succession planning / Labour relations Is any group company in default / Any Directors on RBIs negative list / Borrowers track-record in honouring financial commitment
Length of relationship with the bank
47

3. TECHNICAL FEASIBILITY Technology plays an important role in maintaining a competitive position in this highly competitive market conditions. Investing in the proper technology is the key to success it irrespective of size of business thus for achieving its projected performance, it is important for it to have sound technological backgrou nd. Such technical competence of the project can be determined by having detailed study done on following key aspects: Determining Facility Needs.

Estimates the size and type of production facilities. Investigates the need for related buildings, equipment, rolling-stock
Suitability of Production Technology.

Investigates and compare technology providers. Determines reliability and competitiveness of technology (proven or unproven, state-of-the-art).
Identifies limitations or constraints of technology.
Availability and Suitability of Location.

Access to markets. Access to raw materials. Access to transportation. Access to a qualified labor pool. Access to production inputs (electricity, natural gas, water, etc.). Investigate emissions potential. Analyze environmental impact. Identifies regulatory requirements. Explores economic development incentives.
48
Explores community receptiveness to having the business located there.
Raw materials.

Estimates the amount of raw materials needed. Investigates the current and future availability and access to raw materials. Assesses the quality and cost of raw materials and markets of easily substituted inputs.
Other inputs.

Investigates the availability of labor including wage rates, skill level, etc. Assesses the potential to access and attract qualified management personnel. 4. FINANCIAL FEASIBILITY
Estimate the total capital requirements.
Assesses the capital needs of the business project and how these needs will be met.
Estimates capital requirements for facilities, equipment and inventories. Determines replacement capital requirements and timing for facilities and equipment.
Estimates working capital needs. Estimates start-up capital needs until revenues are realized at full capacity. Estimates contingency capital needs (construction delays, technology
malfunction, market access delays, etc.

Estimates other capital needs. Estimated equity and credit needs. Identifies alternative equity sources and capital availability -- producers, local investors, angel investors, venture capitalists, etc.
49
Identifies and assess alternative credit sources -- banks, government (ie. direct loans or loan guarantees), grants, local and state economic development incentives.
Assesses expected financing needs and alternative sources -- interest rates, terms, conditions, covenants, liens, etc.
Establishes debt-to-equity levels.
Budgets expected costs and returns of various alternatives.

Estimates expected costs and revenue. Estimates the profit margin and expected net profit. Estimates the sales or usage needed to break-even. Estimates the returns under various production, price and sales levels. This may involve identifying "best case", "typical", and "worst case" scenarios or more sophisticated analysis like a Monte Carlo simulation.
Assesses the reliability of the underlying assumptions of the financial analysis (prices, production, efficiencies, market access, market penetration, etc.)
Creates a benchmark against industry averages and/or competitors (cost, margin, profits, ROI, etc.).
Identifies limitations or constraints of the economic analysis. Determines project expected cash flow during the start-up period. Identifies project an expected income statement, balance sheet, etc. when reaching full operation. 5. Study Conclusions
The study conclusions contain the information you will use for deciding whether to proceed business. The major categories this section should include are:

Identify and describe alternative business scenarios and models. Compare and contrast the alternatives based on their business viability.
50
Compare and contrast the alternatives based on the goals of the producer group.
Outline criteria for decision making among alternatives. 6. Next Step
After the feasibility study has been completed and presented, a carefully study and analysis the conclusions and underlying assumptions. Next, you will be faced with deciding which course of action to pursue. Potential courses of action include:

Choosing the most viable business model, for investment Identifying additional scenarios for further study. Deciding that a viable business opportunity is not available and moving to end the business assessment process.
51
Credit Appraisal and Risk Management in Banks Chap 11: CREDIT REPORT AND CREDIT RATING
The credit report is an important determinant of an individual's financial credibility. They are used by lenders to judge a person's creditworthiness. They also help the person concerned to narrow down on the financial problem areas. Credit report is a document, which comprises detailed information about the credit payment history of an applicant. It is mostly used by the lenders to determine the credit worthiness of an applicant. The business credit reports provide information on the background of a company. This assists one to take crucial business related decisions. People can also assess the amount of business risk associated with a company and then decide whether they would be comfortable in providing them with credit facilities. The degree of interest that would be shown by investors in their company can also be gauged from the business credit reports as they can get an idea of the conception of their customers regarding themselves. Since these records are updated at regular intervals of time they enable people to identify the risk levels associated with a business as well as its future. These reports also allow businesses to get detailed information about the financial status of business partners and suppliers.
1) What Is A Corporate Credit Rating?

Ratings can be assigned to short-term and long-term debt obligations as well as securities, loans, preferred stock and insurance companies. Long-term credit ratings tend to be more indicative of a country's investment surroundings and/or a company's ability to honor its debt responsibilities. . The ratings therefore assess an entity's ability to pay debts. There are various organization who perform credit rating for various business organization. Union Bank of India follows a finely defined Credit Rating Model for assessing the creditworthiness of the applicant. The credit rating model assess various aspects of
52

the projects and assigns scores against them thereby determining the risk level involved with the project. It is divided in Four Sections: 1. Rating of the Borrower

Financial Risk Management Risk
2. Market Condition/ Demand Situation 3. Rating of the Facility 4. Business Consideration 5. Cash Flow related parameters
1) Rating of the Borrower: This part of credit rating model deals with assessing the financial and managerial ability of the borrower. The financial ability of the firm is derived by calculating ratios that determine the short term and long term financial position of the firm Short term ratios include Current Ratio, determines the liquidity position of the company over a period of one year. The current ratio is an indication of a firm's market liquidity and ability to meet creditor's demands. It is excess of current assets over current liability. If current liabilities exceed current assets (the current ratio is below 1), then the company may have problems meeting its short-term obligations. If the current ratio is too high, then the company may not be efficiently using its current assets. According to the guidelines given to UBI the ideal level is at 1.33:1 however the acceptable level is at 1.17:1. However at times current ratio may not be a true indicator, the current ratio for road projects is very high but this does not indicate that the company is not using its assets well but the ratio is high because the activity involves more in dealing with current assets. Hence it is important for the evaluator to understand the nature of the industry. Long term ratio include Debt Equity Ratio is a financial ratio indicating the relative proportion of equity and debt used to finance a company's assets. This ratio is also
53

known as Risk, Gearing or Leverage. A high debt equity ratio is not preferable by an investor as the company already has aquired high amount of funds from market thereby reducing the investor share over the securities available, increasing the risk. It is also important for the lender bank to assess the firms debt paying capacity over a period. Such capacity is derived by calculating ratio like Debt Service Coverage Ratio minimum acceptable level is 1.50. It is also necessary for the lender to determine the ability of the firm to achieve the projected growth by evaluating the projected sales with actual sales. However such parameter remains non applicable if the business is new.
Financial risk evaluation is only one of the parameter and not the only parameter for determining the risk level. It is important to evaluate the Management Risk also while evaluating the risk relating to borrower. It is the management of the company that acts as guiding force for the firm. The key managerial personnel should bear the capacity to bail out the company from crisis situation. In order to remain competitive it is essential to take initiatives. Such skills are developed over years of experience, thus for better performance it is required to have a team of well qualified and experienced personnel. 2) Market potential / Demand Situation A Company does not operate in isolation there are various market forces that acts in either favourable or unfavourable manner towards its performance. Thus the rating would not give true picture if does take market or demand situation in consideration. The demand supply situation / market Potential plays an important role in determining the growth level of the company like i) Level of competition: Monopoly , favourable , unfavourable ii) Seasonality in demand: affected by short term seasonality, long term seasonality or may not be affected by seasonality in demand. iii) Raw Material Availability
54

iv)Locational Issues like proximity to market, inputs, infrastructure: Favourable, neutral, unfavourable. v)Technology i.e., proven Technology- not to be changed in immediate future, technology undergo change, outdated technology. vi)Capacity utilisation 3) Rating of the Facility: The company can start functioning only after completing statutory obligations laid down by the governing authority. Such statutory obligation involves obtaining licenses, permits for ensuring smooth operations. Preparation and Submission of Financial Statements, Stock statements in the standard format within the given time schedule. 4)Business Consideration: The length of relationship with the bank enables the lender to assess the previous performance of the account holder. A good track record acts in the favour of the applicant, however an under performer make the lender more vigilant. Thus Credit Rating of the Business takes into consideration various aspects that directly or indirectly bears an effects the performance of the business. After evaluating the risk level involved the lender bank decided on lending Interest Rate. In UBI, a business receiving Credit Rating above level 6 are not considered good from point of investment and thus are avoided.
2) DETERMINATION OF INTEREST RATE

The interest rate is determined from the interest rate guidelines circular. This circular is regularly updated to reflect the banks latest credit policies. The rupee credit is based on BPLR and the foreign exchange loans are based on LIBOR.
55

The guidelines define how much interest rate is to be assigned for a particular credit rating and credit duration. However, credit rating and its use in determining interest rate is a theoretical concept and the bank may allow a reduction in interest rate under the following conditions:
Good Client
The organization is a long term client and brings good business to the bank. The organizations actions show that it intends to become a long term customer of the bank Banking Consortium The organization is seeking credit from a consortium of banks. In some cases like this, the lead bank might decide the interest rate and all the member banks of the consortium follow this interest rate.
3) TERM SHEET
Following a favourable feasibility check, credit rating the next step is preparing term sheet. A Term Sheet is brief document that provides details on aspects like:

Account Details Financial highlights for immediate previous two audited years and projection for proceeding year
Nature of Project Cost of Project Means of finance 1. Nature of Facility 2. Purpose 3. Tenure of Term Loan 4. Interest rate Reset 5. Margin 6. Interest Rate, Commission
Door to Door Tenor i.e. the period within which the entire amount is to be disbursed.
56

o Repayment Terms o Prime Security o Collateral Security o Upfront fees i.e. the charges levied by the bank for processing the documents.
4) PROPOSAL
An approved term sheet leads to preparation proposal. A proposal is prepared in standard format; this enables the bank to keep a proper track record and also facilitates proper comparison. A proposal is a full fledged document providing details on project submitted and requesting finance from bank. A proposal contains information on following aspects:
* Details of Account: It includes name of the Account Holder, Date of

incorporation, Line of Activity, Internal Credit Rating level, Address of the Registered Office, Name of Directors, Share Holding Pattern, Asset Classification, and Purpose of the Loan.
* Securities: Lenders often feel more confident about a loan if they are given a
security interest in the assets of a business. Then, if the borrower does not repay the loan as promised, the lender can take the property the borrower pledged, sell it and use the proceeds to repay (or partially repay) the borrowed amount.it provides detailed information on nature of securities given in lieu of the Loan.they are of two types Prime securities, Collateral Securities Prime Securities: Pari Passu is a term used in banking transactions which means that the charge to be created is in continuation of an earlier charge which might be held by the same institution or by another institution. Collateral Securities: In lending agreements, collateral is a borrower's asset that is forfeited to the lender if the borrower is insolvent --- that is, unable to pay back the
57

principal and interest on the loan. When insolvent, the borrower is said to default on the loan, in which case the lender becomes the owner of the collateral. It includes details on Nature / Description of collateral security indicating area & location of property Value in Rupees. Date of valuation along with name of Valuer Insurance Amount & Date of Expiry
Personal guarantee / Corporate Guarantee if any, includes Name of the guarantor, Value of Guarantee. * Financial Highlights: It provides details of important financial elements over a period of years. It includes Details on Paid capital, Tangible Networth, Net working Capital, Current Assets, Current Liabilities, Net Profit, Net Sales, Reserves and Surplus, Intangible Assets, Long Term Liabilities, Fixed Assets, Investments, Non current Assets like guarantees , Cash Accruals, Capital employed. It also includes ratios like Debt Equity Ratio, Current Ratio, Debt Service Coverage Ratio and so. The interpretation of the financial data presented provides information on the performance trend of the company also of the Projections made. Such financial highlight plays an important role in assessing the financial strengths and weakness of the business. * Status of the project: A brief of Project In this part of proposal a brief about the project is explained, it includes information on nature, type of project, purpose of the project, commencement details, the promoters and related details of the project. If it is a on-going project it also gives details on progress and status of progress
58
* Evaluation of Industry :
This Section gives brief details on the 1. Scope of the industry 2. Growth level and overall performance of the industry 3. Recent Developments and Trend Evaluation
* Conduct of the Account:

This section provides details on : Regularity in Submission of Stock Statements / Book Debt Statement QPR Statements / Half Yearly Statement Financial Statements CMA Data
* Compliance to Terms of Sanction

It furnishes information on following aspect: Completion of Mortgage formalities Registration of Charges with RoC Whether documents valid and in force Compliance of RBI guidelines Whether consortium meetings held at prescribed periodic intervals where the Bank is the leader.
* Exposure details from banking system (existing) (Incl. Our Bank) The sharing pattern of the banks is mentioned in this section of proposal. It includes Name of the bank Percentage of share for the fund based and non Fund based Limits Amount in Rs.
59

Non Fund based credit is in the form of guarantees like Letter of Credit (L/c), Letter of guarantee (L/g)
Assessment of Non Fund Based Limit

1. Non Fund Based Limits are normally to be sanctioned for existing customer only who already enjoy fund based limits 2. If new borrower full processing as applicable to Fund Based Limits to be carried. 3. Borrowers background and experience of meeting commitments to be examined in details. 4. L/c limit to be considered as per terms of Purchase or contract, lead period and minimum economical quantity of supply of stocks 5. Non Fund based Limits are to be supported by necessary fund based limits. 6. Past experience of payment of bills under L/c to be verified before considering new request. 7. While Assessing the L/g Limit contract or agreement which is the base for L/g, should be examined in details for any ambigious clauses. 8. Any request for financial Guarantee to be critically examined before taking decision.
* Details of Sister/ Allied Concerns:

This section provides information about the Sister/ Allied Concerns aspects like the performance, promoters, share holding pattern, operation exposure and experience from various banks.
* Terms and Condition:

It is important both for the bank and the applicant to safeguard its interest, this could be achieved by settling at mutually acceptable terms and condition in order to ensure that both the parties the lender and borrower perform their part of obligation thereby not putting other party at loss. All loans are subject to regulations and conditions. The legal information relating to these regulations and conditions can be
60

viewed in this section. It is advisable for both the parties to read this information carefully before approval.
5) DISBURSEMENT:
After submission of Proposal to Designated/ Sanctioning Authortiy for sanctioning the Term Loan, the authorities may raise queries, if any relating to projects and thereby convey it to the processing officer the processing officer in turn addresses them to the borrower for necessary step to be taken. Such queries are required to be solved to the earliest by the applicant for further processing of the proposal. If the authorities are satisfied and have no further queries with respect to proposal, the Loan gets sanctioned and the disbursement would be released in as per the terms decided.
6) FOLLOW-UP:
This is most crucial stage in process of term loan assessment. Since amount of credit required is usually high, such amounts are disbursed in one installment, they are paid in installments. This helps the lender bank to understand and assess the utilisation of funds disbursed by the lender Bank. Such evaluation is done by obtaining Lenders Engineer Report, it is report that provides complete details of the status of the project. It is prepared on monthly basis. It also provides CA Report, it verifies the Financial details furnished to bank for further disbursement. This is known as renewal of account.
61
Credit Appraisal and Risk Management in Banks Chap 12: ANALYSIS OF CREDIT PROPOSALS
Proposal of JKL Ltd.
BACKGROUND:
The company was incorporated on January 5, 2001, however later the name was changed and the current name is effective from March 23, 2006 with the objective of generation of power based on coal. The proposed manufacturing facilities are located at Angul district, Orissa.. The group is already engaged in the business of manufacturing Photographic goods, Polyester film, BOPP films, Metallized films, Cold rolled steel strips and Galvanized sheets. The details of associate concerns are as under :-
JPL - Photographic films & equipment.
JPFL - Polyester chips, Polyester film, PVDC film, BOPP film & Metallized film. The companys manufacturing plant at Nasik, Maharashtra is one of the worlds largest single location plant for the manufacture of BOPET and BOPP films.
JIL - Steel pipes, cold rolled strips & GP/GC sheets. Established in 1952, ranks among the major manufacturers of ERW / HFIW and galvanized steel pipes and tubes in the country. The company commenced business operations through establishment of a manufacturing facility in Howrah, West Bengal for manufacture of pipe fittings, bends and sockets. At present, the company has a manufacturing capacity of 160,000 TPA of steel pipes & tubes, 300,000 TPA of GP/GC sheets and 350,000 TPA of CR coil / sheets.
62

Promoter JPL JPFL Group include: Consolidated Photo & Finvest Ltd Rishi Trading Co. Ltd. Soyuz Trading Co. Ltd. Non-Group Companies Budhiya Marketing Pvt. Ltd. (BMPL) Edward Supply Pvt. Ltd. (ESPL) TOTAL 100% 25% Investment Shareholding (%) 26 % 4% Companies 45%
EVALUATION OF MANAGEMENT
1) Market reputation on the promoter / management of the company: Satisfactory
2) Hands on experience of the management personnel in the industry / Business managed by qualified personnel: The qualified professionals & experienced persons are proposed to be appointed for managing the overall operation of the company. details of key management personnel of JKL Pvt. Ltd. Are as under:
Mr Punit Gupta Mr. Punit Gupta, aged about 41 years, is a B.Sc. and M.B.A. He has work experience of about 18 years in the field of Project Management and Marketing with the group. He is presently heading the Project team for setting up of the proposed power project and is involved in budgeting, costing, financial analysis, sensitivity analysis, project planning, tendering, bid evaluation, award of contracts, post award activities, coordination with contractors, finalisation of MOUs, JV Agreements, and various
63

types of studies required for Power Projects etc. Mr Umesh Chand Jain Mr. Umesh Chand Jain is a graduate with work experience of about 33 years in the areas of Trading, Liaisoning, Business management and implementation of new Projects. He has been working with the Group for the last seven years. He is on the Board of various group companies including Consolidated Finvest & Holdings Limited.
Mr S. R. Yadav Mr. S.R.Yadav is an ex-Executive Director, NCR region, NTPC. He is also a Director on the board for NTPC-SAIL Power Company (P) Ltd. He will be heading the Engineering team in JKL Pvt. Ltd. He is a Mechanical engineer from RIT, Jamshedpur and has work experience of over 35 years in the areas of project planning, erection, commissioning, operation and maintenance. He has been involved in many green field projects of NTPC and was posted in Korba, Bokaro, Singrauli etc.
Mr A. K. Sehdev Mr AK Sehdev is an engineering graduate from Delhi College of Engineering. He has over 36 years of experience of Navaratna Companies like IOC and NTPC. He is involved in preparation of action plan, project formulation, project scheduling, FRs and DPRs, cost estimation and cost control, financial analysis, tariff calculations, budget preparation, project engineering and finalization of technical specifications of various packages. Mr P. Girish Mr P Girish is Vice President, (Corporate affairs) in charge of govt liaisoning for Delhi. He has 21 years of experience in corporate affairs, administration in various Companies. Mr. Girish has started his career with Rolls Royce Industrial Power Ltd in the Commercial department. He has been associated with the Malaxmi Infra
64

Ventures Pvt Ltd as General Manager with the major responsibilities of Navabharat Power Pvt Ltd. and Simhapuri Energy Pvt Ltd Nellore based on Imported Coal. He has also worked for Lanco Power Pvt Ltd as a Manager Administration.
3) Ability of the promoters / management to bail out the company in case of crisis (for example, this could be derived from a strong group company) The experienced directors bear the capacity to bail out the company in case of crisis.
4) Decision making Is it concentrated? A committee of directors comprising of qualified & experienced personnel will professionally manage the company.
5) Organisation structure / Succession planning / Labour relations The company will be a professionally managed company hence, any threat of succession planning is not perceived.
6) Is any group company in default / Any Directors on RBIs negative list / Borrowers track-record in honouring financial commitment? The company has confirmed that none of the Directors of JKL Pvt. Ltd are on RBIs defaulters list in respect of JKL Pvt. Ltd. or any other company in which they are a Director.
7) Length of relationship with the bank The Group is new to us.
EVALUATION OF INDUSTRY
Thermal power stations constituting over 66% of the aggregate installed generation capacity and despite being relatively less environment-friendly as compared to hydro-electric projects (HEPs), thermal power plants offer certain advantages over HEPs as mentioned below: Lesser implementation time-frame: 2.5-3.5 years as compared to 5-6 years for HEPs;
65

Ability to function as base load power plants as compared to HEPs which serve as peak-load power plants; Standardized generation technology: independent of project site; Absence of seasonal variations in power generation; Location flexibility: Can be located either close to load-centre or at fuel pit-head while HEPs are site-specific and often located in challenging geographical terrain.
Demand-Supply Scenario Power supply position in the country has worsened over the last few years with growth in power demand outstripping new capacity addition with peak power deficit being worst having peak deficit of 13.5% in 2006-07. The energy deficit at the national level has increased from 7.5% in 2003-04 to 9.9% in 2006-07
Projected Power Requirement beyond 2011-12 till 2021-22 With rapid growth of the economy, power requirement is projected to increase significantly over the next decade with per capita power consumption expected to increase from ~612 kWh at present to about 1000 kWh by 2012 (GoIs target for 100% electrification).
Given the prevalent demand supply deficit scenario and projected growth in power requirement, huge addition in generation capacity is required in the country over the coming decade. Consequently, there exists an attractive business and market opportunity for establishment of power generation plants in the country, especially in the northern & western regions of the country.
Target States for Power Sale In view of the adverse power deficit scenario in western and northern region as mentioned in the previous sections, both these regions have been identified as target markets for ultimate sale of JKL Pvt. Ltd power.
66

Analysis
Table 14: Projected Balance Sheet
As On Assets Gross Block Additions Less:Accu mulated Depreciati on Closing Block Net Current Assets Cash Bank Balances DSRA (Debt service reserve A/c) TOTAL ASSETS Liabilities Sharehold ers' Equity Reserves & Surplus Net Worth Rupee Term Loan Sub-Debt 139 9 608 41 1666 111 2148 143 1987 140 1772 125 1558 111 1343 97 1128 82 913 68 698 54 483 39 0 201 0 201 0 444 70 643 276 849 492 1065 718 1291 954 1526 1132 1705 1319 1892 1515 2088 1719 2291 201 201 444 573 573 573 573 573 573 573 573 573 349 849 2221 3075 3125 3145 3174 3213 3186 3176 3176 3184 0 0 0 65 209 229 216 203 190 177 164 151 0 0 0 54 106 252 441 639 783 934 1092 1259 & 0 0 0 187 188 189 190 190 178 179 180 181 349 849 2221 2769 2622 2475 2328 2181 2034 1887 1740 1593 0 0 0 49 196 343 490 637 784 931 1078 1225 33 316 33 816 33 2188 2818 0 2818 0 2818 0 2818 0 2818 0 2818 0 2818 0 2818 0 2818 0 Mar09 Mar -10 Mar11 Mar12 Mar13 Mar14 Mar -15 Mar -16 17
Rs. in Crores
MarMar -18 Mar -19 Mar20
67

As On Working Capital Loan Deferred AAD TOTAL LIABILITI ES 349 849 2221 3075 3125 3145 3174 3213 3186 3176 3176 3184 0 0 0 0 8 40 72 104 137 169 201 233 0 0 0 140 141 142 142 143 134 135 135 136 Mar09 Mar -10 Mar11 Mar12 Mar13 Mar14 Mar -15 Mar -16 Mar17 Mar -18 Mar -19 Mar20
Table 15: Projected Profit and Loss Account

FY Ending` Revenues Primary energy sale to GoO Power sale PTC Less AAD Gross Revenues Operating Expense O& M exp. Travel and Fuel Exp. Secondary Fuel Exp. Environment Cess 24 55 8 6 92 221 49 172 80 6 6 79 9 70 74 171 24 18 287 651 147 504 235 19 18 233 26 206 77 178 25 18 298 638 147 491 211 18 18 244 28 216 80 185 26 18 309 623 147 476 187 16 18 255 29 226 83 192 28 18 321 607 147 460 163 14 18 265 30 235 86 200 29 18 333 516 147 369 139 12 17 201 23 178 60 253 0 313 188 758 8 938 209 758 32 935 206 758 32 932 202 758 32 928 198 683 32 849 Mar12 Mar13 Mar14 Mar15 Mar16 Mar17
Rs. in Crores
Mar18 Mar19 Mar20
195 683 32 845
192 683 32 842
189 683 32 839
90 208 30 18 345 500 147 353 115 10 17 211 24 187
94 217 31 18 359 484 147 337 91 8 17 221 25 196
97 225 32 18 372 467 147 320 66 6 17 230 26 204
Total Operating Exp. PBDIT Depreciation PBIT Int. on RTL Int. Sub. Debt Int. on WC Loan PBT Tax PAT
68
Table 16: Sensitivity Analysis Scenario Avg. DSCR (Debt Service coverage ratio) Base Case Increase in Project Cost by 5% 1.60 1.54 Min. DSCR 1.38 1.34 1.33 Project IRR* 15.6 % 14.9 % 14.9 %
Decrease in Power Sale Tariff 1.56 through PTC by 5% during Year 1-5 Increase in Primary Fuel price by 1.58 5% Decrease in PLF by 5% 1.49
1.37
15.3 %
1.29 1.34
14.2 % 15.6 %
Increase in Interest rate by 1% for 1.54 both Senior debt & Subordinated debt
Interpretation Project is able to withstand the operations at a lower tariff and its debt servicing capacity (Average DSCR: 1.56, Min DSCR: 1.33) is satisfactory.
Increase in Primary Fuel price by 5% Sensitivity has also been carried out for increase in the fuel prices by 5% over the base case numbers. The Project is able to sustain the increased fuel cost and its debt servicing capacity remains satisfactory with an average DSCR of 1.58 and minimum DSCR of 1.37. The impact of any fuel price escalation on the projected financials is partly mitigated on account of the pass-through effect in the power sale tariff applicable to Gridco. It may however be noted that since most of the coal requirement for the Project will be met from the captive coal block allotted to the company, the company will be able to have a better control over the coal price
69

thereby reducing it exposure to any escalations in coal price.
Decrease in Plant PLF by 5% Under the base case projections, the operations of the project have been projected at a PLF of 80%. Sensitivity has been carried out for the scenario of the Project running at a lower PLF i.e. 75%. It has been observed that the Project is able to withstand the operations at a lower PLF and its debt servicing capacity (Average DSCR: 1.49, Min DSCR: 1.29) is satisfactory. Considering the better operational performance of existing IPPs in the country vis a vis state sector projects, the situation of a PLF lower than 80% seems unlikely.
Increase in RTL Interest Rate by 1% Sensitivity has also been carried out for increase in the RTL interest rate by 1% over the base case interest rate of 11.5% for Senior debt and 13.5% for Subordinated Debt. It is observed that the Project is able to sustain the increased interest costs comfortably and its debt servicing capacity (Average DSCR: 1.54, Min DSCR: 1.34) remains satisfactory.
As can be seen above, the debt serviceability of the project is comfortable adverse sensitivities considered. Hence, it can be concluded that the proposed power project will be able to withstand adverse circumstances and the debt serviceability is satisfactory, even under adverse circumstances. Decrease in Power Sale Tariff through PTC by 5% during Year 1-5 Under the base case projections, tariff for power sale to PTC has been maintained at Rs. 2.60 per kWh for Year 1-5 and Rs 2.34 per kWh for subsequent years. Sensitivity has been carried out for the scenario of the power being sold at 5% lower than the base case tariff i.e. Rs. 2.47 per kWh. As seen above, the Project is able to withstand the operations at a lower tariff and its debt servicing capacity (Average DSCR: 1.56, Min DSCR: 1.33) is satisfactory.
70

Increase in Project cost by 5% A sensitivity has been carried out for 5% increase in the works cost which have estimated at Rs. 2294 crore in the base case. The Project is able to sustain a 5% escalation in capital cost comfortably and its debt servicing capacity (Average DSCR: 1.54, Min DSCR: 1.34) remains satisfactory.
71

KEY POINTS: 1. Sensitivity analysis was done. The results of which are as follows: When the power sale tariff to PTC (PTC India Ltd) are decreased by 5% the Average DSCR: 1.56, Min DSCR: 1.33 . This is above the benchmark level. When project cost is increased by 5% Average DSCR: 1.54, Min DSCR: 1.34. This is above benchmark levels and is considered favourable. In case of increase in RTL Interest Rate by 1% the Average DSCR: 1.54, Min DSCR: 1.34) remains satisfactory When the primary fuel prices increase by 5% the Average DSCR of 1.58 and Minimum DSCR of 1.37 remains satisfactory.
As can be seen above, the debt serviceability of the project is comfortable when adverse sensitivities considered. Hence, it can be concluded that the proposed power project will be able to withstand adverse circumstances. 2. The profitability estimates are sensitive to fluctuation in sales. 3. The projected Debt Equity ratio and Current Ratio are at satisfactory level. As the project implementation is yet to commence, offering any comments on
financial indicators would not be relevant at this juncture as the same would go on changing. 4. According to internal credit rating, the company has been rated as CR-3. 5. Primary fuel requirements for the Project will be met with from the Coal linkage from Mahanadi Coalfields Ltd (MCL) and Captive Mandakini coal block in Talcher coalfields, Orissa .JKL Pvt. Ltd. will enter into separate longterm Fuel Supply Agreements with the Mining JVC and MCL for supply of coal from the captive block and coal linkage respectively, taken together would be adequate for requirement of proposed 600 MW for its entire project life. 6. The company has already into Power Purchase Agreements (PPA) with Gridco for sale of 25% of the power.
72

Company has also entered into HOA(Heads of Agreement) with PTC for sale of balance 75% power at reasonably attractive tariff. 7. Both Gridco and PTC would open LC in favor of JKL Pvt. Ltd for timely payment of invoices. 8. Even with an increase of 1% in the interest rate, average & minimum DSCR are comfortable.
Recommendations
JKL Pvt. Ltd. is being promoted by BCJ Group, implementing a 600 MW pit-head coal-based power project in Angul district of Orissa. The project capacity is proposed to be enhanced to 1200 MW through implementation of a second unit of 600 MW at a later stage. Salient features of the proposed project, are as under:
1. Proven track record of promoters [JPL along with other group / investment companies of BCJ group] - in running profitable business operations and adequate financial strength to meet the equity requirements for the project;
2. Assured fuel at reasonable cost fuel from allocated captive coal block adjacent to project site along with additional long-term coal linkage from MCL. Captive coal source will protect JKL Pvt.Ltd from fuel price fluctuations and make the power cost competitive;
3. Significant progress in project development activities as under. State support for land acquisition, water allocation and other developmental aspects of the project secured through MoU; Section (4) notification for acquisition of land issued; In-principle allocation of water sufficient to meet project requirements; Grant of various project clearances / approvals, including TOR for EIA study from MoEF, GoI;
73

4. Power off-take arrangement- Execution of PPA with Gridco for sale of 25% project capacity and execution of HOA for sale of balance power through PTC. Analysis of the project development structure and projected financial performance of the Project, based on the information pertaining to the project cost, financing plan, and prevalent market conditions while a sensitivity analysis has also been carried out to test the robustness of project financial in respect of key business and performance parameters. The projected financials of the project are reasonably comfortable under different sensitivity scenarios as required to service the project debt over proposed tenor. 5. Based on the projected financials, sensitivity analysis and risks factors, UBI has viewed the proposed project of JITPL, as financially viable. UBI has further stated that keeping in view the proven credentials of the project promoters, progress achieved in project development and projected financial performance of the project, the project appears to be bankable and accordingly, the proposal may be considered favorably for final sanction of RTL and Subordinated debt. In view of the above mentioned observations, recommended the following. (Rs. in Crores) Nature of Limit Existing Term loan Nil 300.00 Amount Proposed Margi n 25%
Interest shall be 11.50% p.a. floating for senior debt and 13.50% p.a for subordinate debt payable monthly.
74
Credit Appraisal and Risk Management in Banks Chap 13: CONCLUSION

Credit Appraisal is a process of appraising the credit worthiness of loan applicants. The funds of depositors i.e general public are mobilized by means of such advance / investment. Thus it extremely important for the lender bank to assess the risk associated with credit, thereby ensure the security for the funds deposited by the depositors. In UBI the credit appraisal is done by thorough study of the project which involves following. 1) Evaluation of Management: A detailed study about the promoters is carried out in order to ensure promoters are experienced in the line of business and are capable to implement and run the project 2) Technical Feasibility: A detailed study about the technical aspects is done to determine the technical soundness of the project 3) Financial Viability: A detailed study relating to financial viability of the project is done; thereby ensuring that project will generate sufficient surplus to repay the lan installment and interest 4) Risk analysis: it determines the risk associated with the project this is done by performing a Sensitivity analysis and Credit Rating. With Sensitivity Analysis the projects capacity to service debts under worsened conditions is determined. Credit rating, provides rating for various parameters like
management, financial, market and so, thereby determine the credit worthiness of the borrower 5) It is on the basis of the credit risk level, collateral securities to be given by the borrower are determined. This shows Union Bank of India has sound system for credit appraisal.
75
Credit Appraisal and Risk Management in Banks APPENDICES

Union Bank of India is well positioned to expand its customer base and grow business at healthy margins. The two initiatives that they started in the year 2010-11 are likely to help the business in coming years. The first is objective of becoming the No.1 Retail Bank in Customer Service Excellence. In this, we are building a new model, called Branch of the Future that will enhance our customer service capabilities to leverage higher wallet share of customers. This strategy will help in building our retail asset and liabilities profile. Along with plans for expanding alternative channels, this project will help in differentiating Union Bank of India from others. Secondly, revamping the system of Human Resource Management in the Bank, with primary focus on building specialized skills and developing leadership chain. These initiatives will not only start showing results in the current year but also prepare Union Bank for a higher trajectory of growth. They are focused on developing capabilities for becoming the preferred banker to the NextGen customers and new Bankable class. They believe that the current fiscal, FY12 would be a better year for the Bank compared to FY11.
76
Credit Appraisal and Risk Management in Banks REFERENCES
http://www.indianmoney.com/articledisplay.php?cat_id=1&sub_id=16&aid=825&ahead=What%20is%20Credit%20Appraisal....?
http://www.rupeetimes.com/article/home_loans/this_is_how_a_bank_lends_money_1552.ht ml
http://www.unionbankofindia.co.in/msme_credit.aspx
http://www.rbi.org.in/scripts/NotificationUser.aspx?Id=2456&Mode=0
http://www.investopedia.com/
http://www.investorwords.com/
http://www.unionbankofindia.co.in/
http://www.iba.org.in/sme.asp
http://www.oppapers.com/subjects/credit-appraisal-process-in-india-page1.html
77

Project Report

Uploaded by

Copyright:

Available Formats

Project Report

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Project Report

Uploaded by

Copyright:

Available Formats

CREDIT APPRAISAL AND RISK MANAGEMENT IN BANKS

A PROJECT REPORT submitted by

in partial fulfillment for the award of the degree of

MASTER OF MANAGEMENT STUDIES

under the guidance of Prof. Shweta Desai

THAKUR INSTITUTE OF MANAGEMENT STUDIES AND RESEARCH KANDIVILI (EAST), MUMBAI

Credit Appraisal and Risk Management in Banks CERTIFICATE BY THE GUIDE

Signature of the candidate

Forwarded through the research guide

Signature of the guide

Credit Appraisal and Risk Management in Banks

Credit Appraisal and Risk Management in Banks EXECUTIVE SUMMARY

Credit Appraisal and Risk Management in Banks

Credit Appraisal and Risk Management in Banks TABLE OF CONTENTS

Credit Appraisal and Risk Management in Banks LIST OF TABLES

Credit Appraisal and Risk Management in Banks LIST OF FIGURES

Credit Appraisal and Risk Management in Banks Chap 1: RESEARCH METHODOLOGY

Credit Appraisal and Risk Management in Banks Chap 2: INTRODUCTION

Who is the borrower?

Credit Appraisal and Risk Management in Banks

FIGURE 1: Existing borrower and new borrower

What is the project?

Credit Appraisal and Risk Management in Banks

How the bank funds are going to be repaid?

Credit Appraisal and Risk Management in Banks Chap 3: AN OVERVIEW

and microcredit are

still preferred over

Credit Appraisal and Risk Management in Banks

2.2 An Overview on Union Bank of India

Credit Appraisal and Risk Management in Banks

Credit Appraisal and Risk Management in Banks

Credit Appraisal and Risk Management in Banks

Credit Appraisal and Risk Management in Banks

Investments 26010 Advances 54644

Credit Appraisal and Risk Management in Banks

Chap 4: SARAL (Central processing centres)

Credit Appraisal and Risk Management in Banks

Credit Appraisal and Risk Management in Banks

Credit Appraisal and Risk Management in Banks

Credit Appraisal and Risk Management in Banks Chap 6: TYPES OF LOAN

NON FUND BASED

FUND BASED CREDIT:

Credit Appraisal and Risk Management in Banks

Credit Appraisal and Risk Management in Banks

NON-FUND BASED CREDIT:

Credit Appraisal and Risk Management in Banks

Credit Appraisal and Risk Management in Banks

Male upto lakhs: Rs.7.50 lakhs:

Student 13.75% 14.25%

Female upto lakhs: Rs.7.50 lakhs:

Student 13.25% 13.75%

Credit Appraisal and Risk Management in Banks

Post-dated cheques for the 84 emis will be collected up-front.

Credit Appraisal and Risk Management in Banks

Credit Appraisal and Risk Management in Banks

Repayment of loan availed from another agency/bank/NBFC

For purchase/ construction of 2nd property (independent house/flat)

By equated monthly installments (emi).

Credit Appraisal and Risk Management in Banks

Tenor Upto 5 years Fixed Floatin g 13.00%