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Credit appraisal in  sbi bank project6 report
Credit appraisal in  sbi bank project6 report
Credit appraisal in  sbi bank project6 report
Credit appraisal in  sbi bank project6 report
Credit appraisal in  sbi bank project6 report
Credit appraisal in  sbi bank project6 report
Credit appraisal in  sbi bank project6 report
Credit appraisal in  sbi bank project6 report
Credit appraisal in  sbi bank project6 report
Credit appraisal in  sbi bank project6 report
Credit appraisal in  sbi bank project6 report
Credit appraisal in  sbi bank project6 report
Credit appraisal in  sbi bank project6 report
Credit appraisal in  sbi bank project6 report
Credit appraisal in  sbi bank project6 report
Credit appraisal in  sbi bank project6 report
Credit appraisal in  sbi bank project6 report
Credit appraisal in  sbi bank project6 report
Credit appraisal in  sbi bank project6 report
Credit appraisal in  sbi bank project6 report
Credit appraisal in  sbi bank project6 report
Credit appraisal in  sbi bank project6 report
Credit appraisal in  sbi bank project6 report
Credit appraisal in  sbi bank project6 report
Credit appraisal in  sbi bank project6 report
Credit appraisal in  sbi bank project6 report
Credit appraisal in  sbi bank project6 report
Credit appraisal in  sbi bank project6 report
Credit appraisal in  sbi bank project6 report
Credit appraisal in  sbi bank project6 report
Credit appraisal in  sbi bank project6 report
Credit appraisal in  sbi bank project6 report
Credit appraisal in  sbi bank project6 report
Credit appraisal in  sbi bank project6 report
Credit appraisal in  sbi bank project6 report
Credit appraisal in  sbi bank project6 report
Credit appraisal in  sbi bank project6 report
Credit appraisal in  sbi bank project6 report
Credit appraisal in  sbi bank project6 report
Credit appraisal in  sbi bank project6 report
Credit appraisal in  sbi bank project6 report
Credit appraisal in  sbi bank project6 report
Credit appraisal in  sbi bank project6 report
Credit appraisal in  sbi bank project6 report
Credit appraisal in  sbi bank project6 report
Credit appraisal in  sbi bank project6 report
Credit appraisal in  sbi bank project6 report
Credit appraisal in  sbi bank project6 report
Credit appraisal in  sbi bank project6 report
Credit appraisal in  sbi bank project6 report
Credit appraisal in  sbi bank project6 report
Credit appraisal in  sbi bank project6 report
Credit appraisal in  sbi bank project6 report
Credit appraisal in  sbi bank project6 report
Credit appraisal in  sbi bank project6 report
Credit appraisal in  sbi bank project6 report
Credit appraisal in  sbi bank project6 report
Credit appraisal in  sbi bank project6 report
Credit appraisal in  sbi bank project6 report
Credit appraisal in  sbi bank project6 report
Credit appraisal in  sbi bank project6 report
Credit appraisal in  sbi bank project6 report
Credit appraisal in  sbi bank project6 report
Credit appraisal in  sbi bank project6 report
Credit appraisal in  sbi bank project6 report
Credit appraisal in  sbi bank project6 report
Credit appraisal in  sbi bank project6 report
Credit appraisal in  sbi bank project6 report
Credit appraisal in  sbi bank project6 report
Credit appraisal in  sbi bank project6 report
Credit appraisal in  sbi bank project6 report
Credit appraisal in  sbi bank project6 report
Credit appraisal in  sbi bank project6 report
Credit appraisal in  sbi bank project6 report
Credit appraisal in  sbi bank project6 report
Credit appraisal in  sbi bank project6 report
Credit appraisal in  sbi bank project6 report
Credit appraisal in  sbi bank project6 report
Credit appraisal in  sbi bank project6 report
Credit appraisal in  sbi bank project6 report
Credit appraisal in  sbi bank project6 report
Credit appraisal in  sbi bank project6 report
Credit appraisal in  sbi bank project6 report
Credit appraisal in  sbi bank project6 report
Credit appraisal in  sbi bank project6 report
Credit appraisal in  sbi bank project6 report
Credit appraisal in  sbi bank project6 report
Credit appraisal in  sbi bank project6 report
Credit appraisal in  sbi bank project6 report
Credit appraisal in  sbi bank project6 report
Credit appraisal in  sbi bank project6 report
Credit appraisal in  sbi bank project6 report
Credit appraisal in  sbi bank project6 report
Credit appraisal in  sbi bank project6 report
Credit appraisal in  sbi bank project6 report
Credit appraisal in  sbi bank project6 report
Credit appraisal in  sbi bank project6 report
Credit appraisal in  sbi bank project6 report
Credit appraisal in  sbi bank project6 report
Credit appraisal in  sbi bank project6 report
Credit appraisal in  sbi bank project6 report
Credit appraisal in  sbi bank project6 report
Credit appraisal in  sbi bank project6 report
Credit appraisal in  sbi bank project6 report
Credit appraisal in  sbi bank project6 report
Credit appraisal in  sbi bank project6 report
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Credit appraisal in sbi bank project6 report

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Credit appraisal in sbi bank project6 report

Credit appraisal in sbi bank project6 report

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  • 1. CREDIT APPRAISAL IN BANKING SECTOR INTRODUCTION TO BANKING SECTOR & SBIHISTORY OF BANKING INDUSTRY:The Reserve Bank of India (RBI), as the central bank of the country, closely monitorsdevelopments in the whole financial sector.The banking sector is dominated by Scheduled Commercial Banks (SBCs). As at end-March2002, there were 296 Commercial banks operating in India. This included 27 Public SectorBanks (PSBs), 31 Private, 42 Foreign and 196 Regional Rural Banks. Also, there were 67scheduled co-operative banks consisting of 51 scheduled urban co-operative banks and 16scheduled state co-operative banks.Scheduled commercial banks touched, on the deposit front, a growth of 14% as against 18%registered in the previous year. And on advances, the growth was 14.5% against 17.3% of theearlier year.State Bank of India is still the largest bank in India with the market share of 20% ICICI and itstwo subsidiaries merged with ICICI Bank, leading creating the second largest bank in India witha balance sheet size of Rs. 1040bn.Higher provisioning norms, tighter asset classification norms, dispensing with the concept of‘past due’ for recognition of NPAs, lowering of ceiling on exposure to a single borrower andgroup exposure etc., are among the measures in order to improve the banking sector.A minimum stipulated Capital Adequacy Ratio (CAR) was introduced to strengthen the ability ofbanks to absorb losses and the ratio has subsequently been raised from 8% to 9%. It is proposedto hike the CAR to 12% by 2004 based on the Basle Committee recommendations. BSPATIL
  • 2. CREDIT APPRAISAL IN BANKING SECTORRetail Banking is the new mantra in the banking sector. The home loans alone account for nearlytwo-third of the total retail portfolio of the bank. According to one estimate, the retail segment isexpected to grow at 30-40% in the coming years.Net banking, phone banking, mobile banking, ATMs and bill payments are the new buzz wordsthat banks are using to lure customers.With a view to provide an institutional mechanism for sharing of information on borrowers /potential borrowers by banks and Financial Institutions, the Credit Information Bureau (India)Ltd. (CIBIL) was set up in August 2000. The Bureau provides a framework for collecting,processing and sharing credit information on borrowers of credit institutions. SBI and HDFC arethe promoters of the CIBIL.The RBI is now planning to transfer of its stakes in the SBI, NHB and National bank forAgricultural and Rural Development to the private players. Also, the Government has sought tolower its holding in PSBs to a minimum of 33% of total capital by allowing them to raise capitalfrom the market.Banks are free to acquire shares, convertible debentures of corporate and units of equity-orientedmutual funds, subject to a ceiling of 5% of the total outstanding advances (including commercialpaper) as on March 31 of the previous year.The finance ministry spelt out structure of the government-sponsored ARC called the AssetReconstruction Company (India) Limited (ARCIL), this pilot project of the ministry would paveway for smoother functioning of the credit market in the country. The government will hold 49%stake and private players will hold the rest 51%- the majority being held by ICICI Bank (24.5%).REFORMS IN THE BANKING SECTOR:The first phase of financial reforms resulted in the nationalization of 14 major banks in 1969 and BSPATIL
  • 3. CREDIT APPRAISAL IN BANKING SECTORresulted in a shift from Class banking to Mass banking. This in turn resulted in a significantgrowth in the geographical coverage of banks. Every bank has to earmark a minimum percentageof their loan portfolio to sectors identified as “priority sectors”. The manufacturing sector alsogrew during the 1970s in protected environs and the banking sector was a critical source. Thenext wave of reforms saw the nationalization of 6 more commercial banks in 1980. Since thenthe number scheduled commercial banks increased four-fold and the number of banks branchesincreased eight-fold.After the second phase of financial sector reforms and liberalization of the sector in the earlynineties, the Public Sector Banks (PSB) s found it extremely difficult to complete with the newprivate sector banks and the foreign banks. The new private sector banks first made theirappearance after the guidelines permitting them were issued in January 1993. Eight new privatesector banks are presently in operation. These banks due to their late start have access to state-of-the-art technology, which in turn helps them to save on manpower costs and provide betterservices.During the year 2000, the State Bank of India (SBI) and its 7 associates accounted for a 25%share in deposits and 28.1% share in credit. The 20 nationalized banks accounted for 53.5% ofthe deposits and 47.5% of credit during the same period. The share of foreign banks ( numbering42 ), regional rural banks and other scheduled commercial banks accounted for 5.7%, 3.9% and12.2% respectively in deposits and 8.41%, 3.14% and 12.85% respectively in credit during theyear 2000.CLASSIFICATION OF BANKS:The Indian banking industry, which is governed by the Banking Regulation Act of India, 1949can be broadly classified into two major categories, non-scheduled banks and scheduled banks. BSPATIL
  • 4. CREDIT APPRAISAL IN BANKING SECTORScheduled banks comprise commercial banks and the co-operative banks. In terms ofownership, commercial banks can be further grouped into nationalized banks, the State Bank ofIndia and its group banks, regional rural banks and private sector banks (the old / new domesticand foreign). These banks have over 67,000 branches spread across the country. The Indianbanking industry is a mix of the public sector, private sector and foreign banks. The privatesector banks are again spilt into old banks and new banks. Banking System in India Reserve bank of India (Controlling Authority)Development Financial institutions BanksIFCI IDBI ICICI NABARD NHB IRBI EXIM Bank ISIDBI Commercial Regional Rural Land Development Co-operative Banks Banks Banks Banks Public Sector Banks Private Sector Banks SBI Groups Nationalized Banks Indian Banks Foreign BanksABOUT SBI: BSPATIL
  • 5. CREDIT APPRAISAL IN BANKING SECTORThe State Bank of India, the country’s oldest Bank and a premier in terms of balance sheet size,number of branches, market capitalization and profits is today going through a momentous phaseof Change and Transformation – the two hundred year old Public sector behemoth is todaystirring out of its Public Sector legacy and moving with an agility to give the Private and ForeignBanks a run for their money.The bank is entering into many new businesses with strategic tie ups – Pension Funds, GeneralInsurance, Custodial Services, Private Equity, Mobile Banking, Point of Sale MerchantAcquisition, Advisory Services, structured products etc – each one of these initiatives having ahuge potential for growth.The Bank is forging ahead with cutting edge technology and innovative new banking models, toexpand its Rural Banking base, looking at the vast untapped potential in the hinterland andproposes to cover 100,000 villages in the next two years.It is also focusing at the top end of the market, on whole sale banking capabilities to provideIndia’s growing mid / large Corporate with a complete array of products and services. It isconsolidating its global treasury operations and entering into structured products and derivativeinstruments. Today, the Bank is the largest provider of infrastructure debt and the largestarranger of external commercial borrowings in the country. It is the only Indian bank to featurein the Fortune 500 list.The Bank is changing outdated front and back end processes to modern customer friendlyprocesses to help improve the total customer experience. With about 8500 of its own 10000branches and another 5100 branches of its Associate Banks already networked, today it offers thelargest banking network to the Indian customer. The Bank is also in the process of providingcomplete payment solution to its clientele with its over 8500 ATMs, and other electronicchannels such as Internet banking, debit cards, mobile banking, etc. BSPATIL
  • 6. CREDIT APPRAISAL IN BANKING SECTORWith four national level Apex Training Colleges and 54 learning Centres spread all over thecountry the Bank is continuously engaged in skill enhancement of its employees. Some of thetraining programes are attended by bankers from banks in other countries.The bank is also looking at opportunities to grow in size in India as well as internationally. Itpresently has 82 foreign offices in 32 countries across the globe. It has also 7 Subsidiaries inIndia – SBI Capital Markets, SBICAP Securities, SBI DFHI, SBI Factors, SBI Life and SBICards - forming a formidable group in the Indian Banking scenario. It is in the process of raisingcapital for its growth and also consolidating its various holdings.Throughout all this change, the Bank is also attempting to change old mindsets, attitudes andtake all employees together on this exciting road to Transformation. In a recently concludedmass internal communication programme termed ‘Parivartan’ the Bank rolled out over 3300 twoday workshops across the country and covered over 130,000 employees in a period of 100 daysusing about 400 Trainers, to drive home the message of Change and inclusiveness. Theworkshops fired the imagination of the employees with some other banks in India as well asother Public Sector Organizations seeking to emulate the programme.The Bank is activelyinvolved since 1973 in non-profit activity called Community Services Banking. All theirbranches and administrative offices throughout the country sponsor and participate in largenumber of welfare activities and social causes.Their business is more than banking because they touch the lives of people anywhere in manyways. Their commitment to nation-building is complete & comprehensive.TRANSFORMATION JOURNEY IN STATE BANK OF INDIA:The State Bank of India, the country’s oldest Bank and a premier in terms of balance sheet size,number of branches, market capitalization and profits is today going through a momentous phaseof Change and Transformation – the two hundred year old Public sector behemoth is todaystirring out of its Public Sector legacy and moving with an agility to give the Private and ForeignBanks a run for their money. BSPATIL
  • 7. CREDIT APPRAISAL IN BANKING SECTORThe bank is entering into many new businesses with strategic tie ups – Pension Funds, GeneralInsurance, Custodial Services, Private Equity, Mobile Banking, Point of Sale MerchantAcquisition, Advisory Services, structured products etc – each one of these initiatives having ahuge potential for growth.It is also focusing at the top end of the market, on whole sale banking capabilities to provideIndia’s growing mid / large Corporate with a complete array of products and services. It isconsolidating its global treasury operations and entering into structured products and derivativeinstruments. Today, the Bank is the largest provider of infrastructure debt and the largestarranger of external commercial borrowings in the country. It is the only Indian bank to featurein the Fortune 500 list.The Bank is changing outdated front and back end processes to modern customer friendlyprocesses to help improve the total customer experience. With about 8500 of its own 10000branches and another 5100 branches of its Associate Banks already networked, today it offers thelargest banking network to the Indian customer. The Bank is also in the process of providingcomplete payment solution to its clientele with its over 8500 ATMs, and other electronicchannels such as Internet banking, debit cards, mobile banking, etc.With four national level Apex Training Colleges and 54 learning Centers spread all over thecountry the Bank is continuously engaged in skill enhancement of its employees. Some of thetraining programmes are attended by bankers from banks in other countries.The bank is also looking at opportunities to grow in size in India as well as internationally. Itpresently has 82 foreign offices in 32 countries across the globe. It has also 7 Subsidiaries inIndia – SBI Capital Markets, SBICAP Securities, SBI DFHI, SBI Factors, SBI Life and SBICards - forming a formidable group in the Indian Banking scenario. It is in the process of raisingcapital for its growth and also consolidating its various holdings.Throughout all this change, the Bank is also attempting to change old mindsets, attitudes andtake all employees together on this exciting road to Transformation. In a recently concludedmass internal communication programme termed ‘Parivartan’ the Bank rolled out over 3300 two BSPATIL
  • 8. CREDIT APPRAISAL IN BANKING SECTORday workshops across the country and covered over 130,000 employees in a period of 100 daysusing about 400 Trainers, to drive home the message of Change and inclusiveness. Theworkshops fired the imagination of the employees with some other banks in India as well asother Public Sector Organizations seeking to emulate the programme.The CNN IBN, Network 18 recognized this momentous transformation journey, the State Bankof India is undertaking, and has awarded the prestigious Indian of the Year – Business, to itsChairman, Mr. O. P. Bhatt in January 2008.State Bank of India (SBI) has history of more than 200 years of existence. SBI is the largestcommercial bank in India and accounts for approximately 18% of the total Indian bankingbusiness and the group account for 25% of the total Indian banking business.• The central bank, Reserve Bank of India (RBI) is the largest shareholder in the bank with59.7%stake followed by overseas investors including GDRs with 19.78% shareholdingas on September06. RBI’s stake in the bank is likely to be transferred to the Governmentof India (GOI).• SBI has the largest distribution network in India spread across every nook and corner of India.As on September 06, the bank has 14,061 branches which include 4,755 branches of itsassociated banks. The bank also has the largest network of 5,624 ATMs.Background:State Bank of India is the largest and one of the oldest commercial bank in India, in existence formore than 200 years. The bank provides a full range of corporate, commercial and retail bankingservices in India. Indian central bank namely Reserve Bank of India (RBI) is the major shareholder of the bank with 59.7% stake. The bank is capitalized to the extent of Rs.646bn with thepublic holding (other than promoters) at 40.3%. BSPATIL
  • 9. CREDIT APPRAISAL IN BANKING SECTORSBI has the largest branch and ATM network spread across every corner of India. Thebank has abranch network of over 14,000 branches (including subsidiaries). Apart fromIndian network italso has a network of 73 overseas offices in 30 countries in all time zones, correspondentrelationship with 520 International banks in 123 countries. In recent past, SBI has acquired banksin Mauritius, Kenya and Indonesia. The bank had total staff strength of 198,774 as on 31stMarch, 2006. Of this, 29.51% are officers, 45.19% clerical staff and the remaining 25.30% weresub-staff. The bank is listed on the Bombay Stock Exchange, National Stock Exchange, KolkataStock Exchange, Chennai Stock Exchange and Ahmedabad Stock Exchange while its GDRs arelisted on the London Stock Exchange.SBI group accounts for around 25% of the total business of the banking industry while itaccountsfor 35% of the total foreign exchange in India. With this type of strong base, SBI has displayed acontinued performance in the last few years in scaling up its efficiency levels. Net InterestIncome of the bank has witnessed a CAGR of 13.3% during the last five years. During the sameperiod, net interest margin (NIM) of the bank has gone up from as low as 2.9% in FY02 to3.40% in FY06 and currently is at 3.32%.EVOLUTION OF SBI:The origin of the State Bank of India goes back to the first decade of the nineteenth centurywith the establishment of the Bank of Calcutta in Calcutta on 2 June 1806. Three years later thebank received its charter and was re-designed as the Bank of Bengal (2 January 1809). A uniqueinstitution, it was the first joint-stock bank of British India sponsored by the Government ofBengal. The Bank of Bombay (15 April 1840) and the Bank of Madras (1 July 1843) followedthe Bank of Bengal. These three banks remained at the apex of modern banking in India till theiramalgamation as the Imperial Bank of India on 27 January 1921. BSPATIL
  • 10. CREDIT APPRAISAL IN BANKING SECTORImperial BankThe Imperial Bank during the three and a half decades of its existence recorded an impressivegrowth in terms of offices, reserves, deposits, investments and advances, the increases in somecases amounting to more than six-fold. The financial status and security inherited from itsforerunners no doubt provided a firm and durable platform. But the lofty traditions of bankingwhich the Imperial Bank consistently maintained and the high standard of integrity it observed inits operations inspired confidence in its depositors that no other bank in India could perhaps thenequal. All these enabled the Imperial Bank to acquire a pre-eminent position in the Indianbanking industry and also secure a vital place in the countrys economic life.When India attained freedom, the Imperial Bank had a capital base (including reserves) ofRs.11.85 crores, deposits and advances of Rs.275.14 crores and Rs.72.94 crores respectively anda network of 172 branches and more than 200 sub offices extending all over the country.Key Areas of Operations:The business operations of SBI can be broadly classified into the key income generating areassuch as National Banking, International Banking, Corporate Banking, & Treasury operations.The functioning of some of the key divisions is enumerated below:a) CORPORATE BANKINGThe corporate banking segment of the bank has total business of around Rs1,193bn. SBI hascreated various Strategic Business Units (SBU) in order to streamline its operations.These SBUs are as follows: BSPATIL
  • 11. CREDIT APPRAISAL IN BANKING SECTOR1) Corporate AccountsThis SBU is important for the bank as its loan portfolio constituted about 27.05% of thebank’scommercial and institutional non-food credit and 12.85% of the total domestic credit portfolio ason 31st March 2006.Some of the products under corporate accounts SBU are as follows:• SBI-FAST, which is the cash management product offered by this SBU, had a turnover ofRs.4,705.75bn as of 31st March 2006. This product is now comprehensive cash managementsolution, offering payments in addition to collections.• Vendor financing activity is being integrated with core banking through the internet platform.This is identified as a focus area to capture the credit portfolio of vendors.• The foreign exchange business grew by around 55% y-o-y and reached Rs.1,747.70bn as of31st March 2006. This SBU now handles nearly 12% of the country’s visible trade and about43% of bank’s forex business.2) LeasingThis SBU is not writing any leases since the past few years as unfavorable business climate andavailability of alternative funding options at cheaper cost. As at the end March 2006, thedisbursements and capitalization were zero and profit amounted to Rs.245.9mn.3) Project FinanceThis SBU focuses on funding core projects like power, telecom, roads, ports, airports, specialeconomic zones and others. During FY06, total sanctions for 18 projects involving a total StateBank of India, Corporate Banking, National Banking, International Banking, Treasury BSPATIL
  • 12. CREDIT APPRAISAL IN BANKING SECTOROperations Associates & Subsidiaries amount of Rs.42.11bn were in place as against 13 projectsinvolving Rs.25.08bn in the previous year. It also handles non-infrastructure projects with certainceilings on minimum project costs. During FY06 sanctions for 29 projects involving a totalamount of Rs.55.80bn were in place as against 27 projects involving Rs.51.63bn in the previousyear. As a whole, this SBU achieved total sanctions of Rs.238.86bn (fund based and non fundbased) including syndication amount of Rs.140.95bn during the period ended March 2006.During FY06, this SBU entered into financing of aviation sector actively by sanctioning loansfor modernization of airports and acquisition of aircrafts.4) Mid Corporate GroupThe Mid Corporate Group (MCG) created in June 2004 has 7 MCG Regional Officescontrolling28 large branches with high concentration of Mid Corporate (MC) business.The entire Off-SiteMC business of all branches at 31 identified centres has been broughtunder the fold of MCG.The average processing time of credit proposals is about 15 daysand quicker decision making oncredit proposals of the Mid Corporate units has resulted in greater customer satisfaction. As ofMarch 2006, 21 MCG branches have been migrated to core banking platform. New technologyproducts like RTGS, CINB, Multi-City cheque facility and Core Power have been introduced inall these branches. These technology products coupled with quick Turn Around Time (TAT)have enabled Mid-Corporate Group to increase its business substantially and generate higherincome, both interest and fee based.5) Stressed Assets ManagementDuring FY06, the banking industry witnessed a major policy initiative by Reserve Bank of Indiawith the opening up of sale / purchase of non performing assets to banks, FIs and non-bankingfinance companies (NBFCs). During FY06, the bank sold NPAs to the tune of Rs.8.9bn againstsecurity receipts and Rs.11.41bn on cash basis to Asset Reconstruction Company (ARCIL). Theprogress in enforcing the security interest has somewhat slowed down due to the requirement ofwithdrawing suits pending before the tribunal prior to action being initiated against thedefaulting borrowers under the SARFAESI Act.b) NATIONAL BANKING BSPATIL
  • 13. CREDIT APPRAISAL IN BANKING SECTORThe national banking group has 14 administrative circles encompassing a vast network of 9,177branches, 4 sub-offices, 12 exchange bureaus, 104 satellite offices and 679 extension counters, toreach out to customers, even in the remotest corners of the country. Out of the total branches,809 are specialized branches. This group consists of four business group which are enumeratedbelow:1) Personal Banking SBUThis SBU is mainly responsible for retail business. During FY06, personal banking advancesincreased from Rs.464.51bn to Rs.610.67bn, showing a growth of Rs.146.16bn at the rate of31.47 % against a growth rate of 40.12% in the previous year.On the home loan front, several new products were introduced, tailored to fit the needs ofspecific customer segments, such as SBIMaxgain (minimize interest burden, earn on savings, atno extra cost), SBI NRI-Home Loans, SBI Freedom Home Loans (Loans given withoutmortgage of property, but against alternate securities, instead), SBI Tribal Plus Home Loans. Theauto loans portfolio has shown a growth of Rs.17.74bn in absolute terms and 65% which isconsiderably higher than last year’s growth, mainly due to implementation of well plannedstrategies.2) Small & Medium EnterprisesThe SME Business Unit implemented comprehensive strategies, revamped business processesand with its focus on market dynamics and customer preferences, achieved commendablebusiness growth. The initiative was implemented by focusing on specific industry segments, andconcentrating on various players in the value chain. Debt restructuring mechanism for units inSME sector has been devised to ensure restructuring of debt of all eligible Small and MediumEnterprises (SMEs) on favorable terms.Focused on the SME sector, projects under Uptech are taken up in location specific and activityspecific industry clusters. So far the bank has taken 28 projects for modernization under theProject Uptech covering industries like foundry, pumps, glass, auto components, and knitwear,etc. The bank has also covered agro based industries like rice mills, sago and starch andhorticulture activities like Apple Orchards and grape farming under the scheme. The deposits of BSPATIL
  • 14. CREDIT APPRAISAL IN BANKING SECTORthe SME SBU increased to Rs.1,042.70bn as at the end of March 2006 from Rs.890.60bn ofprevious year recording a growth of 17.08% during the year. SME advances increased toRs.456.53bn from Rs.328.30bn of previous year, recording a growth of 39.06 %. The criteria laiddown by the Government of India for growth in SME advances is 20%.3) Agricultural BankingThis SBU is accountable for agricultural credit both traditional and new thrust areas like contractfarming, farmers financed through Agri Export Zones (AEZs) and value chain financing.Increase in disbursements during FY06 was 83% against the Govt. of India target of 30%.Agricultural advances grew from a level of Rs.205.26bn in FY05 to Rs.305.16bn as at the end ofMarch 06. As on November 2006, agriculture loans contribute 11% of the total loan book.4) Government BankingWith the establishment of the government business unit and the consequent focus on marketing,business turnover of this segment has grown substantially over the years. Bank’s businessturnover from the government business segment during 2004-05 was Rs.8,843.81bn. Theturnover increased by 10.52 % to Rs.9,773.90bn during FY06.c) INTERNATIONAL BANKINGSBI has a network of 73 overseas offices in 30 countries in all time zones and correspondentrelationship with 520 international banks in 123 countries. The bank is keen to implement corebanking solution to its international branches also. During FY06, 25 foreign offices weresuccessfully switched over to Finacle software. SBI has installed ATMs at Male, Muscat andColombo Offices. In recent years, SBI acquired 76% shareholding in Giro Commercial BankLimited in Kenya and PT Indomonex Bank Ltd. in Indonesia. The bank incorporated a company BSPATIL
  • 15. CREDIT APPRAISAL IN BANKING SECTORSBI Botswana Ltd. at Gaborone.d) TREASURYThe bank manages an integrated treasury covering both domestic and foreign exchange markets.In recent years, the treasury operation of the bank has become more active amidst rising interestrate scenario, robust credit growth and liquidity constraints. The bank diversified its operationsmore actively into alternative assets classes with a view to diversify the portfolio and buildalternative revenue streams in order to offset the losses in fixed income portfolio. Reorganizationof the treasury processes at domestic and global levels is also being undertaken to leverage onthe operational synergy between business units and network. The reorganization seeks toenhance the efficiencies in use of manpower resources and increase maneuverability of banksoperations in the markets both domestic as well as internationale) ASSOCIATES & SUBSIDIARIESThe State Bank Group with a network of 14,061 branches including 4,755 branches of its sevenAssociate Banks dominates the banking industry in India. In addition to banking, the Group,through its various subsidiaries, provides a whole range of financial services which includes LifeInsurance, Merchant Banking, Mutual Funds, Credit Card, Factoring, Security trading andprimary dealership in the Money Market.1) Associates Banks:SBI has seven associate banks namely• State Bank of Indore BSPATIL
  • 16. CREDIT APPRAISAL IN BANKING SECTOR• State Bank of Travancore• State Bank of Bikaner and Jaipur• State Bank of Mysore• State Bank of Patiala• State Bank of Hyderabad• State Bank of SaurashtraAll associate banks have migrated to Core Banking (CBS) platform. Single window deliverysystem has been introduced in all associate banks. SBI’s seven associate banks are the firstamongst the public sector banks in India to get fully networked through CBS, providing anytime-anywhere banking to its customers to facilitate a bouquet of innovative customer offerings.2) Non-Banking Subsidiaries/Joint Venturesi) SBI Life:SBI Life is the third largest private insure with the market share of 10.21% among the privateplayers and number one in terms of number of lives insured amongst private players (no. of livesinsured and policies is 25mn). In H1FY07 gross premium was Rs.7.68bn.ii) SBI Capital Markets Limited (SBICAP)SBI Caps forged ahead in issue management, project advisory and structured finance, sales anddistribution. To capitalize on the emerging opportunities, SBI Caps has promoted four whollyowned subsidiaries viz. SBICAP Securities Ltd. for undertaking stock broking activities,SBICAPS Ventures Limited, SBICAP Trustee Company Limited for undertaking venture capitalbusiness and SBI CAP (UK) LTD., for carrying on the Financial Services Authority (FSA)regulated activities. On the international front, the expertise of SBI Caps in the infrastructure and BSPATIL
  • 17. CREDIT APPRAISAL IN BANKING SECTORproject advisory has received international acclaim. In addition, the company has been placed11th globally in the Mandated Project Advisor league tables by Thompson’s, and one of theprojects handled by the company has been selected as the Asia Pacific Infrastructure deal of theyear for FY06. SBI Caps booked gross income amounting to Rs.1.79bn in FY06 as againstRs.1.75bn in the previous year, while PAT of the company was at Rs.906.2mn in FY06 asagainst Rs.881.2mn in the last year.iii) SBI DFHI LTDSBI group holds 67.01% of the company’s paid up capital, while other nationalized banks hold22.46%. All India financial institutions and private sector banks hold 5.84% and the AsianDevelopment Bank holds 4.69% as on March 31, 2006. For the year ended 31st March, 2006, thecompany has earned a PAT of Rs.24.4mn. Total secondary market turnover of the company wasRs.285.39bn which amounted to a market share of 12.89% among all primary dealers.iv) SBI Cards & Payments Services Pvt. Ltd. (SBICSPL)SBICSPL is ranked 2nd in industry with cards in force over 3mn as on September 06. DuringFY06, the aggregate revenue generated by the SBICSPL was Rs.5.27bn while pre-tax profit wasRs.558.6mn.v) SBI Funds Management (P) Ltd. (SBIFMPL)SBI Mutual Fund is the mutual funds arm of the bank. SBIFMPL reported a total inflow ofRs.481.67bn in the various schemes during the year. The total assets under management areRs.132.49bn. The company reported a net profit of Rs.186.4mn as at the end of March, 2006.f) Human ResourcesThe bank had total staff strength of 198,774 on the 31st March, 2006. Of this, 29.51% areofficers, 45.19% clerical staff and the remaining 25.30% were sub-staff. SBI had launched VRS BSPATIL
  • 18. CREDIT APPRAISAL IN BANKING SECTORscheme for its employees in FY01 in which it has reduced it staff by approximately 5,000 andestimates natural retirement of another 5,000 employees in next 4-5 year.NON BANKING SUBSIDIARIES:The Bank has the following Non-Banking Subsidiaries in India :SBI Capital Markets LtdSBI Funds Management Pvt LtdSBI Factors & Commercial Services Pvt LtdSBI DFHI LtdState Bank of Travancore (SBT)INVESTOR RELATIONS:State Bank of India, the country’s largest commercial Bank in terms of profits, assets, deposits,branches and employees, welcomes you to its ‘Investors Relations’ Section. SBI, with itsheritage dating back to the year 1806, strives to continuously provide latest and upto dateinformation on its financial performance. It is our endeavor to walk on the path of transparencyand allow complete access to all the stakeholders enabling total awareness about the Bank. TheBank communicates with the stakeholders through a variety of channels, such as through e-mail,website, conference call, one-on-one meeting, analysts’ meet and attendance at InvestorConference throughout the world.Please find below Bank’s financial results, analysis of performance and other highlights whichwill be of interest to Investors, Fund Managers and Analysts. SBI has always been fundamentallystrong in its core business which is mirrored in its results – year after year. BSPATIL
  • 19. CREDIT APPRAISAL IN BANKING SECTORState Bank of India has an extensive administrative structure to oversee the large network ofbranches in India and abroad. The Corporate Centre is in Mumbai and 14 Local Head Officesand 57 Zonal Offices are located at important cities spread throughout the country. TheCorporate Centre has several other establishments in and outside Mumbai, designated to cater tovarious functions. Our Colleges/Institutes/Training Centres are the seats of learning and researchand development to spread the wings of knowledge not only to our employees but also otherbanks/establishments in India and abroad.The Corporate Accounts Group is a Strategic Business Unit of the Bank set up exclusively tofulfil the specialised banking needs of top corporates in the country.State Bank of India has 52 foreign offices in 34 countries across the globe.State Bank of India invites you to take a journey to understand the potential of not just a largebut truly global organisation. CHAPTER-2 BRIEF OVERVIEW OF CREDIT APPRAISALCredit appraisal means an investigation/assessment done by the bank prior before providing anyloans & advances/project finance & also checks the commercial, financial & technical viabilityof the project proposed its funding pattern & further checks the primary & collateral securitycover available for recovery of such funds.Brief overview of credit:Credit Appraisal is a process to ascertain the risks associated with the extension of the creditfacility. It is generally carried by the financial institutions which are involved in providing BSPATIL
  • 20. CREDIT APPRAISAL IN BANKING SECTORfinancial funding to its customers. Credit risk is a risk related to non repayment of the creditobtained by the customer of a bank. Thus it is necessary to appraise the credibility of thecustomer in order to mitigate the credit risk. Proper evaluation of the customer is performedwhich measures the financial condition and the ability of the customer to repay back the loan infuture. Generally the credit facilities are extended against the security know as collateral. Buteven though the loans are backed by the collateral, banks are normally interested in the actualloan amount to be repaid along with the interest. Thus, the customers cash flows are ascertainedto ensure the timely payment of principal and the interest.It is the process of appraising the credit worthiness of a loan applicant. Factors like age, income,number of dependents, nature of employment, continuity of employment, repayment capacity,previous loans, credit cards, etc. are taken into account while appraising the credit worthiness ofa person. Every bank or lending institution has its own panel of officials for this purpose.However the 3 ‘C’ of credit are crucial & relevant to all borrowers/ lending which must be keptin mind at all times. • Character • Capacity • CollateralIf any one of these are missing in the equation then the lending officer must question the viabilityof credit.There is no guarantee to ensure a loan does not run into problems; however if proper creditevaluation techniques and monitoring are implemented then naturally the loan loss probability /problems will be minimized, which should be the objective of every lending officer.Credit is the provision of resources (such as granting a loan) by one party to another party wherethat second party does not reimburse the first party immediately, thereby generating a debt, andinstead arranges either to repay or return those resources (or material(s) of equal value) at a laterdate. The first party is called a creditor, also known as a lender, while the second party is called adebtor, also known as a borrower. BSPATIL
  • 21. CREDIT APPRAISAL IN BANKING SECTORCredit allows you to buy goods or commodities now, and pay for them later. We use credit to buy thingswith an agreement to repay the loans over a period of time. The most common way to avail credit is bythe use of credit cards. Other credit plans include personal loans, home loans, vehicle loans, student loans,small business loans, trade.A credit is a legal contract where one party receives resource or wealth from another party andpromises to repay him on a future date along with interest. In simple terms, a credit is anagreement of postponed payments of goods bought or loan. With the issuance of a credit, a debtis formed.BASIC TYPES OF CREDITThere are four basic types of credit. By understanding how each works, you will be able to getthe most for your money and avoid paying unnecessary charges.Service credit is monthly payments for utilities such as telephone, gas, electricity, and water.You often have to pay a deposit, and you may pay a late charge if your payment is not on time.Loans let you borrow cash. Loans can be for small or large amounts and for a few days orseveral years. Money can be repaid in one lump sum or in several regular payments until theamount you borrowed and the finance charges are paid in full. Loans can be secured orunsecured.Installment credit may be described as buying on time, financing through the store or the easypayment plan. The borrower takes the goods home in exchange for a promise to pay later. Cars,major appliances, and furniture are often purchased this way. You usually sign a contract, make adown payment, and agree to pay the balance with a specified number of equal payments calledinstallments. The finance charges are included in the payments. The item you purchase may beused as security for the loan.Credit cards are issued by individual retail stores, banks, or businesses. Using a credit card canbe the equivalent of an interest-free loan--if you pay for the use of it in full at the end of eachmonth. BSPATIL
  • 22. CREDIT APPRAISAL IN BANKING SECTORBRIEF OVERVIEW OF LOANSCredit can be of two types fund base & non-fund base:FUND BASED includes: • Working Capital • Term LoanNON-FUND BASED includes: • Letter of Credit • Bank GuaranteeFUND BASED:-WORKING CAPITAL:-1. GENERALThe objective of running any industry is earning profits. An industry will require funds to acquire“Fixed assets” like land, building, plant, machinery, equipments, vehicles, tools etc., & also torun the business i.e. its day to day operations. BSPATIL
  • 23. CREDIT APPRAISAL IN BANKING SECTORFunds required for day to-day working will be to finance production & sales. For production,funds are needed for purchase of raw materials/ stores/ fuel, for employment of labour, for powercharges etc., for storing finishing goods till they are sold out & for financing the sales by way ofsundry debtors/ receivables.Capital or funds required for an industry can therefore be bifurcated as fixed capital & workingcapital. Working capital in this context is the excess of current assets over current liabilities. Theexcess of current assets over current liabilities is treated as net working capital or liquid surplus& represents that portion of the working capital which has been provided from the long termsource.2. DefinitionWorking capital is defined as the funds required to carry the required levels of current assets toenable the unit to carry on its operations at the expected levels uninterruptedly.Thus Working Capital Required is dependent on (a) The volume of activity (viz. level of operations i.e. Production & sales) (b) The activity carried on viz. mfg process, product, production programme, the materials & marketing mix.3. METHODS & APPLICATION SEGMENT LIMITS METHODSSI Upto Rs 5 cr Traditional Method & Nayak Committee method Above Rs 5 cr Projected Balance Sheet MethodSBF All loans Traditional / Turnover MethodC&I Trade & Upto Rs 1 cr Traditional Method for Trade &Services Projected Turnover Method Above Rs 1 cr Projected Balance Sheet Method & & upto Rs 5 cr Projected Turnover Method Above Rs 5 cr Projected Balance Sheet MethodC&I Industrial Below Traditional MethodUnits Rs 25 lacs Rs 25 lacs & Projected Balance Sheet Method & Over but upto Projected Turnover Method Rs 5 cr BSPATIL
  • 24. CREDIT APPRAISAL IN BANKING SECTOR Above Rs 5 cr Projected Balance Sheet Method4. OPERATING CYCLE METHODa) Any manufacturing activity is characterized by a cycle of operations consisting of purchase of purchase of raw materials for cash, converting these into finished goods & realizing cash by sale of these finished goods.b) Diagrammatically, the OPERATING CYCLE is represented as under BSPATIL
  • 25. CREDIT APPRAISAL IN BANKING SECTOR Raw Stock in Materials Process Finished Cash Goods Billsc) The time that lapses between cash outlay & cash realization by sale of finished goods & realization of sundry debtors is known as the length of the operating cycle.d) That is, the operating cycle consists of: • Time taken to acquire raw materials & average period for which they are in store. • Conversion process time BSPATIL
  • 26. CREDIT APPRAISAL IN BANKING SECTOR • Average period for which finished goods are in store & • Average collection period of receivables (Sundry Debtors) Operating cycle is also called the cash-to-cash cycle & indicates how cash is converted into raw material, stocks in process, finished goods, bills (receivables) & finally back to cash. Working capital is the total cash that is circulating in this cycle. Therefore, working capital can be turned over or redeployed after completing the cycle.e) The length of the operating cycle = a+b+c+d (as in 4.4) If a = 60 days b = 10 days c = 20 days d = 30 days The operating cycle is 120 days (nearly 4 months). This means there are 365/120 = 3 cycles of operations in a year. Sales = Rs. 1,00,000 per annum Operating expenses = Rs. 72,000 per annum But the working capital requirement, as you know, is not Rs. 72,000. In these cases, there are 3 operating cycles in a year. That means each rupee of working deployed in the unit is turned over 3 times in a year. (This is also known as working capital turnover ratio). Therefore WCR = Operating Expenses = Rs. 72,000/- = Rs. 24,000/- No. of cycles per annum 3 WCR is therefore not Rs. 72,000/- but only Rs. 24,000/- Assessment of Working Capital Requirement & Permissible Bank Finance usingOperating Cycle Concept Let us consider a case of a unit where: Sales = Rs. 20,000 p.m. (A) Raw Materials = Rs. 14,000 p.m. BSPATIL
  • 27. CREDIT APPRAISAL IN BANKING SECTOR Wages = Rs. 2,000 p.m. Other manufacturing Expenses = Rs. 3,000 p.m. Total expenses = Rs. 19,000 p.m. (B) Profit = Rs. 1,000 P.m. (C) The operating cycle is Raw Materials = 15 days Stock in Process = 2 days FG = 3 days Sundry Debtors = 15 days The total length of Operating cycle = 35 days (D) WCR = B * D = 19,000 * 35 = Rs. 22,167/- (approx.) 30 30 Where B = Operating Expenses; & D = Length of Operating cycleTERM LOAN 1. A term loan is granted for a fixed term of not less than 3 years intended normally for financing fixed assets acquired with a repayment schedule normally not exceeding 8 years. 2. A term loan is a loan granted for the purpose of capital assets, such as purchase of land, construction of, buildings, purchase of machinery, modernization, renovation or rationalization of plant, & repayable from out of the future earning of the enterprise, in BSPATIL
  • 28. CREDIT APPRAISAL IN BANKING SECTOR installments, as per a prearranged schedule. From the above definition, the following differences between a term loan & the working capital credit afforded by the Bank are apparent: • The purpose of the term loan is for acquisition of capital assets. • The term loan is an advance not repayable on demand but only in installments ranging over a period of years. • The repayment of term loan is not out of sale proceeds of the goods & commodities per se, whether given as security or not. The repayment should come out of the future cash accruals from the activity of the unit. • The security is not the readily saleable goods & commodities but the fixed assets of the units.3. It may thus be observed that the scope & operation of the term loans are entirely different from those of the conventional working capital advances. The Bank’s commitment is for a long period & the risk involved is greater. An element of risk is inherent in any type of loan because of the uncertainty of the repayment. Longer the duration of the credit, greater is the attendant uncertainty of repayment & consequently the risk involved also becomes greater.4. However, it may be observed that term loans are not so lacking in liquidity as they appear to be. These loans are subject to a definite repayment programme unlike short term loans for working capital (especially the cash credits) which are being renewed year after year. Term loans would be repaid in a regular way from the anticipated income of the industry/ trade.5. These distinctive characteristics of term loans distinguish them from the short term credit granted by the banks & it becomes necessary therefore, to adopt a different approach in examining the applications of borrowers for such credit & for appraising such proposals.6. The repayment of a term loan depends on the future income of the borrowing unit. Hence, the primary task of the bank before granting term loans is to assure itself that the anticipated income from the unit would provide the necessary amount for the repayment of the loan. This will involve a detailed scrutiny of the scheme, its financial aspects, economic aspects, technical aspects, a projection of future trends of outputs & sales & estimates of cost, returns, flow of funds & profits.7. Appraisal of Term Loans BSPATIL
  • 29. CREDIT APPRAISAL IN BANKING SECTOR Appraisal of term loan for, say, an industrial unit is a process comprising several steps. There are four broad aspects of appraisal, namely • Technical Feasibility - To determine the suitability of the technology selected & the adequacy of the technical investigation & design; • Economic Feasibility - To ascertain the extent of profitability of the project & its sufficiency in relation to the repayment obligations pertaining to term assistance; • Financial Feasibility - To determine the accuracy of cost estimates, suitability of the envisaged pattern of financing & general soundness of the capital structure; & • Managerial Competency – To ascertain that competent men are behind the project to ensure its successful implementation & efficient management after commencement of commercial production.7.1 Technical FeasibilityThe examination of this item consists of an assessment of the various requirement of theactual production process. It is in short a study of the availability, costs, quality &accessibility of all the goods & services needed. a) The location of the project is highly relevant to its technical feasibility & hence special attention will have to be paid to this feature. Projects whose technical requirements could have been taken care of in one location sometimes fail because they are established in another place where conditions are less favorable. One project was located near a river to facilitate easy transportation by barge but lower water level in certain seasons made essential transportation almost impossible. Too many projects have become uneconomical because sufficient care has not been taken in the location of the project, e.g. a woolen scouring & spinning mill needed large quantities of good water but was located in a place which lacked ordinary supply of water & the limited water supply available also required efficient softening treatment. The accessibility to the various resources has meaning only with reference to location. Inadequate transport facilities or lack of sufficient power or water for instance, can adversely affect an otherwise sound industrial project. b) Size of the plant – One of the most important considerations affecting the feasibility of a new industrial enterprise is the right size of the plant. The size of the plant will be such that it will give an economic product which will be competitive when compared to the alternative product available in the market. A smaller plant than the optimum BSPATIL
  • 30. CREDIT APPRAISAL IN BANKING SECTOR size may result in increased production costs & may not be able to sell its products at competitive prices. c) Type of technology – An important feature of the feasibility relates to the type of technology to be adopted for a project. A new technology will have to be fully examined & tired before it is adopted. It is equally important to avoid adopting equipment or processes which are absolute or likely to become outdated soon. The principle underlying the technological selection is that “a developing country cannot afford to be the first to adopt the new nor yet the last to cast the old aside”. d) Labour – The labour requirements of a project, need to be assessed with special care. Though labour in terms of unemployed persons is abundant in the country, there is shortage of trained personnel. The quality of labour required & the training facilities made available to the unit will have to be taken into account e) Technical Report – A technical report using the Bank’s Consultancy Cell, external consultants, etc., should be obtained with specific comments on the feasibility of scheme, its profitability, whether machinery proposed to be acquired by the unit under the scheme will be sufficient for all stages of production, the extent of competition prevailing, marketability of the products etc., wherever necessary. 7.2 Economic FeasibilityAn economic feasibility appraisal has reference to the earning capacity of the project. Sinceearnings depend on the volume of sales, it is necessary to determine how much output or theadditional production from an established unit the market is likely to absorb at given prices. a) A thorough market analysis is one of the most essential parts of project investigation. This involves getting answers to three questions. a) How big is the market? b) How much it is likely to grow? c) How much of it can the project capture?The first step in this direction is to consider the current situation, taking account of the total BSPATIL
  • 31. CREDIT APPRAISAL IN BANKING SECTORoutput of the product concerned & the existing demand for it with a view to establishing whetherthere is unsatisfied demand for the product. Care should be taken to see that there is no idlecapacity in the existing industries.ii) Future – possible future changes in the volume & patterns of supply & demand will have tobe estimated in order to assess the long term prospects of the industry. Forecasting of demand isa complicated matter but one of the vital importance. It is complicated because a variety offactors affect the demand for product e.g. technological advances could bring substitutes intomarket while changes in tastes & consumer preference might cause sizable shifts in demand.iii) Intermediate product – The demand for “Intermediate product” will depend upon the demand& supply of the ultimate product (e.g. jute bags, paper for printing, parts for machines, tyres forautomobiles). The market analysis in this case should cover the market for the ultimate product. 7.3 Financial FeasibilityThe basis data required for the financial feasibility appraisal can be broadly grouped under thefollowing heads i) Cost of the project including working capital ii) Cost of production & estimates of profitability iii) Cash flow estimates & sources of finance.The cash flow estimates will help to decide the disbursal of the term loan. The estimate ofprofitability & the breakeven point will enable the banker to draw up the repayment programme,start-up time etc. The profitability estimates will also give the estimate of the Debt ServiceCoverage which is the most important single factor in all the term credit analysis.A study of the projected balance sheet of the concern is essential as it is necessary for theappraisal of a term loan to ensure that the implementation of the proposed scheme.Break-even point:In a manufacturing unit, if at a particular level of production, the total manufacturing cost equalsthe sales revenue, this point of no profit/ no loss is known as the break-even point. Break-evenpoint is expressed as a percentage of full capacity. A good project will have reasonably lowbreak-even point which not be encountered in the projections of future profitability of the unit. BSPATIL
  • 32. CREDIT APPRAISAL IN BANKING SECTORDebt/ Service Coverage:The debt service coverage ratio serves as a guide to determining the period of repayment of aloan. This is calculated by dividing cash accruals in a year by amount of annual obligationstowards term debt. The cash accruals for this purpose should comprise net profit after taxes withinterest, depreciation provision & other non cash expenses added back to it. Debt Service = Cash accruals Coverage Ratio Maturing annual obligationsThis ratio is valuable, in that it serves as a measure of the repayment capacity of the project/ unit& is, therefore, appropriately included in the cash flow statements. The ratio may vary fromindustry to industry but one has to view it with circumspection when it is lower than thebenchmark of 1.75. The repayment programme should be so stipulated that the ratio iscomfortable. 7.4 Managerial CompetenceIn a dynamic environment, the capacity of an enterprise to forge ahead of its competitorsdepends to a large extent, on the relative strength of its management. Hence, an appraisal ofmanagement is the touchstone of term credit analysis.If there is a change in the administration & managerial set up, the success of the project may beput to test. The integrity & credit worthiness of the personnel in charge of the management of theindustry as well as their experience in management of industrial concerns should be examined. Inhigh cost schemes, an idea of the unit’s key personnel may also be necessary.NON-FUND BASED:-LETTER OF CREDIT BSPATIL
  • 33. CREDIT APPRAISAL IN BANKING SECTORIntroductionThe expectation of the seller of any goods or services is that he should get the paymentimmediately on delivery of the same. This may not materialize if the seller & the buyer are atdifferent places (either within the same country or in different countries). The seller desires tohave an assurance for payment by the purchaser. At the same time the purchaser desires that theamount should be paid only when the goods are actually received. Here arises the need of Letterof Credit (LCs). The objective of LC is to provide a means of payment to the seller & thedelivery of goods & services to the buyer at the same time.DefinitionA Letter of Credit (LC) is an arrangement whereby a bank (the issuing bank) acting at therequest & on the instructions of the customer (the applicant) or on its own behalf, i. is to make a payment to or to the order of a third party (the beneficiary), or is to accept & pay bills of exchange (drafts drawn by the beneficiary); or ii. authorizes another bank to effect such payment, or to accept & pay such bills of exchanges (drafts); or iii. authorizes another bank to negotiate against stipulated document(s), provided that the terms & conditions of the credit are complied with.Basic Principle:The basic principle behind an LC is to facilitate orderly movement of trade; it is thereforenecessary that the evidence of movement of goods is present. Hence documentary LCs is thosewhich contains documents of title to goods as part of the LC documents. Clean bills which do nothave document of title to goods are not normally established by banks. Bankers and allconcerned deal only in documents & not in goods. If documents are in order issuing bank willpay irrespective of whether the goods are of expected quality or not. Banks are also notresponsible for the genuineness of the documents & quantity/quality of goods. If importer is yourborrower, the bank has to advice him to convert all his requirements in the form of documents toensure quantity & quality of goods.Parties to the LC 1) Applicant – The buyer who applies for opening LC 2) Beneficiary – The seller who supplies goods 3) Issuing Bank – The Bank which opens the LC BSPATIL
  • 34. CREDIT APPRAISAL IN BANKING SECTOR 4) Advising Bank – The Bank which advises the LC after confirming authenticity 5) Negotiating Bank – The Bank which negotiates the documents 6) Confirming Bank – The Bank which adds its confirmation to the LC 7) Reimbursing Bank – The Bank which reimburses the LC amount to negotiating bank 8) Second beneficiary – The additional beneficiary in case of transferable LCsConfirming bank may not be there in a transaction unless the beneficiary demand confirmationby his own bankers & such a request is made part of LC terms. A bank will confirm an LC forhis beneficiary if opening bank requests this as part of LC terms. Reimbursing bank is used in anLC transaction by an opening bank when the bank does not have a direct correspondent/branchthrough whom the negotiating bank can be reimbursed. Here, the opening bank will direct thereimbursing bank to reimburse the negotiating bank with the payment made to the beneficiary. Inthe case of transferable LC, the LC may be transferred to the second beneficiary & if provided inthe LC it can be transferred even more than once.Types of Letter of Credit:- a) Revocable & Irrevocable: As the name suggests, revocable LCs are those that can be revoked by the issuing bank & hence are not in commercial use. Irrevocable LCs cannot be revoked/ cancelled/ amended without the prior concern of all the parties to the LC. b) Confirmed LC: The seller may ask for the confirmation of the LC by a bank in his own country if he is not satisfied about the issuing bank’s credentials. c) Sight/ Usance LCs: In case of the sight LCs beneficiary gets immediate payment upon presentation of the documents while in the case of usance, the payment is made after a certain period as per the LC terms. Sight LCs have to be paid by the drawee (buyer) immediately whereas he gets credit as per LC terms under Usance LCs. d) LC with advance payment to the seller: BSPATIL
  • 35. CREDIT APPRAISAL IN BANKING SECTOR The LC which authorizes the advising bank to advance a part of LC amount to the seller to meet pre-shipment expenses is known as Red Clause Letter of Credit. The seller gives the receipt & an undertaking to present the documents before the LC expires. Advance amount would be adjusted from the proceeds of the export documents. However, the risk is assumed by the buyer. When the Red Clause LC provides for the cost of shortage facilities at the port of shipment in addition to the pre-shipment advance to the beneficiary it is called Green Clause LC. The goods are stored in the name of the issuing bank.e) Revolving LC: Under this, the issuing bank undertakes to restore the credit to the original amount after it has been utilized. Number of such utilization & the period of time by which this should take place are stipulated in the LC. On receipt of bill payment advise the LC amount gets reinstated.f) Transferable LCs: Transferable LC are transferable in whole or in part to one or more beneficiaries depending on the terms of LC. As per UCPDC stipulated in the LC, all LC are not transferable.g) Back to back LCs: When the bank opens new LCs against the backing of an LC received by a beneficiary having the first LC as security for the new LCs opened, the transaction is referred to as Back to Back. For example let us assume a customer A, who exports marine products by buying them from a number of suppliers. If A receives an LC for USD 100000 for shipment of marine products & he approaches the Bank for opening LCs in favour of his suppliers of marine products within the original value & in keeping with the terms of the original LC these new LCs are opened against the backing of the original LC. This is the back to back transaction. However, it may be noted that this arrangement is not under the provisions of UCPDC though the individual LCs are governed by it. BSPATIL
  • 36. CREDIT APPRAISAL IN BANKING SECTOR Illustration for computation of LC limit M/S XYZ Co Ltd Letter of credit limit of Rs. 20 crore (Rs. in crores)Total purchase of raw material 172.64Purchase of raw materials under LC 69.41Average monthly purchase of raw material under LC (A) 5.78Average holding of imported raw materials (2.2 months’ consumption) 11.30Average usance period (B) 3 monthsLead time & transit period (C) 1 monthTotal of (B) & (C) (D) 4 monthsThe requirement of LC limit (A) * (D) 23.12Limit recommended say 23.00Explanatory notes: 1) While calculating the amount of raw materials purchases on LC basis, the following points need to be noted. (Amount in rupees) a) Raw material consumption BSPATIL
  • 37. CREDIT APPRAISAL IN BANKING SECTOR b) Add: Closing stock of raw material c) Less: Opening stock of raw material d) Total Purchases during the period e) Purchases on LC basis as % of total purchases f) Purchases on LC basis in rupees g) Import duty payable, if any h) Purchases on LC basis net on import duty (CIF value) (f-g) 2) Transit time should be treated as ‘nil’ if usance period starts from shipment date.BANK GUARANTEESA contract of guarantee is defined as ‘a contract to perform the promise or discharge the liabilityof the third person in case of the default’. The parties to the contract of guarantees are: a) Applicant: The principal debtor – person at whose request the guarantee is executed b) Beneficiary: Person to whom the guarantee is given & who can enforce it in case of default. c) Guarantee: The person who undertakes to discharge the obligations of the applicant in case of his default. Thus, guarantee is a collateral contract, consequential to a main contract between the applicant & the beneficiary.Purpose of Bank GuaranteesBank Guarantees are used to for both both preventive & remedial purposes. The guaranteesexecuted by banks comprises both performance guarantees & financial guarantees. Theguarantees are structured according to the terms of agreement, viz., security, maturity & purpose.Branches may issue guarantees generally for the following purposes: a) In lieu of security deposit/earnest money deposit for participating in tenders; b) Mobilization advance or advance money before commencement of the project by the BSPATIL
  • 38. CREDIT APPRAISAL IN BANKING SECTOR contractor & for money to be received in various stages like plant layout, design/drawings in project finance; c) In respect of raw materials supplies or for advances by the buyers; d) In respect of due performance of specific contracts by the borrowers & for obtaining full payment of the bills; e) Performance guarantee for warranty period on completion of contract which would enable the suppliers to realize the proceeds without waiting for warranty period to be over; f) To allow units to draw funds from time to time from the concerned indenters against part execution of contracts, etc. g) Bid bonds on behalf of exporters h) Export performance guarantees on behalf of exporters favouring the Customs Department under EPCG scheme.Guidelines on conduct of Bank Guarantee businessBranches, as a general rule, should limit themselves to the provision of financial guarantees &exercise due caution with regards to performance guarantee business. The subtle differencebetween the two types of guarantees is that under a financial guarantee, a bank guarantee’s acustomer financial worth, creditworthiness & his capacity to take up financial risks. In aperformance guarantee, the bank’s guarantee obligations relate to the performance relatedobligations of the applicant (customer).While issuing financial guarantees, it should be ensured that customers should be in a position toreimburse the Bank in case the Bank is required to make the payment under the guarantee. Incase of performance guarantee, branches should exercise due caution & have sufficientexperience with the customer to satisfy themselves that the customer has the necessaryexperience, capacity, expertise, & means to perform the obligations under the contract & anydefault is not likely to occur.Branches should not issue guarantees for a period more than 18 months without prior referenceto the controlling authority. Extant instructions stipulate an Administrative Clearance for issue ofBGs for a period in excess of 18 months. However, in cases where requests are received forextension of the period of BGs as long as the fresh period of extension is within 18 months. Nobank guarantee should normally have a maturity of more than 10 years. Bank guarantee beyondmaturity of 10 years may be considered against 100% cash margin with prior approval of thecontrolling authority.More than ordinary care is required to be executed while issuing guarantees on behalf ofcustomers who enjoy credit facilities with other banks. Unsecured guarantees, where furnished BSPATIL
  • 39. CREDIT APPRAISAL IN BANKING SECTORby exception, should be for a short period & for relatively small amounts. All deferred paymentguarantee should ordinarily be secured.Appraisal of Bank Guarantee LimitProposals for guarantees shall be appraised with the same diligence as in the case of fund-baselimits. Branches may obtain adequate cover by way of margin & security so as to prevent defaulton payments when guarantees are invoked. Whenever an application for the issue of bankguarantee is received, branches should examine & satisfy themselves about the followingaspects: a) The need of the bank guarantee & whether it is related to the applicant’s normal trade/business. b) Whether the requirement is one time or on the regular basis c) The nature of bank guarantee i.e., financial or performance d) Applicant’s financial strength/ capacity to meet the liability/ obligation under the bank guarantee in case of invocation. e) Past record of the applicant in respect of bank guarantees issued earlier; e.g., instances of invocation of bank guarantees, the reasons thereof, the customer’s response to the invocation, etc. f) Present o/s on account of bank guarantees already issued g) Margin h) Collateral security offeredFormat of Bank GuaranteesBank guarantees should normally be issued on the format standardized by Indian BanksAssociation (IBA). When it is required to be issued on a format different from the IBA format, as BSPATIL
  • 40. CREDIT APPRAISAL IN BANKING SECTORmay be demanded by some of the beneficiary Government departments, it should be ensured thatthe bank guarantee is a) for a definite period, b) for a definite objective enforceable on the happening of a definite event, c) for a specific amount d) in respect of bona fide trade/ commercial transactions, e) contains the Bank’s standard limitation clause f) not stipulating any onerous clause, & g) not containing any clause for automatic renewal of the bank guarantee on its expirySpecimen of the First Page of Bank Guarantee(To be stamped as an agreement in accordance with the Stamp Act in force) STATE BANK OF INDIA …………………….Branch (Stamp)Form No. ……….………………………………………………………….…………………………….…………………………….Dear Sir,Guarantee No.Amount of Guarantee Rs……………….Guarantee cover from 1.1.20*0 to 31.3.20*1Last date for lodgement of claim – 31.3.20*1This Deed of guarantee executed by the State Bank Of India constituted under the State Bank ofIndia Act, 1955 having its Central Office at Nariman Point, Mumbai & amongst other places, abranch at……………………………….(hereinafter referred to as ‘the Bank’) in favourof…………………………(hereinafter referred to as ‘the Beneficiary’) for an amount notexceeding Rs……………..(Rupees ……………………………………………………..only) atthe request of…………………….(hereinafter referred to as ‘the Contractor/(s)).This guarantee is issued subject to the condition that the liability of the bank under thisGuarantee is limited to a maximum of Rs. …………… (Rupees………………………..only) &the Guarantee shall remain in full force up to 31.3.20*1 (date of expiry) & cannot be invokedotherwise than by a written demand or claim under this Guarantee served on the Bank on or BSPATIL
  • 41. CREDIT APPRAISAL IN BANKING SECTORbefore the 31.3.20*1, last date of claim).SUBJECT TO AS AFORESAID(Main Guarantee matter may be typed hereafter) CREDIT APPRAISAL PROCESS Receipt of application from applicant | Receipt of documents (Balance sheet, KYC papers, Different govt. registration no., MOA, AOA, and Properties documents) | Pre-sanction visit by bank officers | Check for RBI defaulters list, willful defaulters list, CIBIL data, ECGC caution list, etc. |Title clearance reports of the properties to be obtained from empanelled advocates | Valuation reports of the properties to be obtained from empanelled valuer/engineers | Preparation of financial data | Proposal preparation | Assessment of proposal | Sanction/approval of proposal by appropriate sanctioning authority | Documentations, agreements, mortgages BSPATIL
  • 42. CREDIT APPRAISAL IN BANKING SECTOR | Disbursement of loan | Post sanction activities such as receiving stock statements, review of accounts, renew of accounts, etc (on regular basis) CHAPTER-3 RESEARCH METHODOLOGYINTRODUCTION TO CREDIT APPRAISAL:Credit appraisal means an investigation/assessment done by the bank prior before providing anyloans & advances/project finance & also checks the commercial, financial & technical viabilityof the project proposed its funding pattern & further checks the primary & collateral securitycover available for recovery of such funds.PROBLEM STATEMENT:To study the Credit Appraisal System in SME sector, at State Bank of India (SBI), Ahmedabad.OBJECTIVES • To study the Credit Risk Assessment Models. • To observe the movements to reduce various risk parameters which are broadly BSPATIL
  • 43. CREDIT APPRAISAL IN BANKING SECTOR categorized into financial risk, business risk, industrial risk & management risk. • To check the commercial, financial & technical viability of the project proposed & its funding pattern. • To check the primary & collateral security cover available for recovery of such funds.RESEARCH DESIGN - Analytical in natureCOVERAGEStudy of credit appraisal in banking sector at State Bank of India, AhmedabadDATA COLLECTION Secondary Data • Books & magazines • Database at SBI • Library research • Websites • E-circulars of SBILIMITATION OF STUDY • Due to the constraint limited study on the project has been done • Access to data ( Credit Appraisal data in detail is not available) BSPATIL
  • 44. CREDIT APPRAISAL IN BANKING SECTOREXPECTED CONTRIBUTION OF THE STUDY:This study will help in understanding the credit appraisal system in banks & to reduce variousrisk parameters, which are broadly categorized into financial risk, business risk, industrial risk &management risk associated in providing any loans or advances or project finance. CHAPTER-4 INTRODUCTION OF SMESME BSPATIL
  • 45. CREDIT APPRAISAL IN BANKING SECTOR4.1 Concept:The small-scale industries (SSI) produce about 8000 products, contribute 40% of the industrialoutput and offer the largest employment after agriculture. The sector, therefore, presents anopportunity to the nation to harness local competitive advantages for achieving globaldominance.4.2 From SSI to SME:Defining the New Paradigm2.1 Government policy as well as credit policy has so farconcentrated on manufacturing units in the small-scale sector. The lowering of trade barriersacross the globe has increased the minimum viable scale of enterprises. The size of the unit andtechnology employed for firms to be globally competitive is now of a higher order. Thedefinition of small-scale sector needs to be revisited and the policy should consider inclusion ofservices and trade sectors within its ambit. In keeping with global practice, there is also a need tobroaden the current concept of the sector and include the medium enterprises in a compositesector of Small and Medium Enterprises (SMEs). A comprehensive legislation, which wouldenable the paradigm shift from small-scale industry to small and medium enterprises underconsideration of Parliament. The Reserve Bank of India had meanwhile set up an Internal Groupwhich has recommended:” Current SSI/tiny industries definition may continue. Units withinvestment in plant and machinery in excess of SSI limit and up to Rs.10 crore may be treated asMedium Enterprises (ME). The definition may be reviewed after enactment of the Small andMedium Enterprises Development Bill.4.3 Definition of SMEs-“ At present, a small scale industrial unit is an undertaking in which investment in plant andmachinery, does not exceed Rs.1 crore, except in respect of certain specified items under hosiery, BSPATIL
  • 46. CREDIT APPRAISAL IN BANKING SECTORhand tools, drugs and pharmaceuticals, stationery items and sports goods, where this investmentlimit has been enhanced to Rs 5 crore. Units with investment in plant and machinery in excessof SSI limit and up to Rs. 10 crore may be treated as Medium Enterprises (ME). “The Government of India has enacted the Micro, Small and Medium Enterprises Development(MSMED) Act 2006 which was notified on October 2, 2006. The definition of the small andmedium enterprises as provided in the Act (Annex VII) will have immediate effect.4.4 Eligibility criteria(i) These guidelines would be applicable to the following entities, which are viable orpotentially viable:a) All non-corporate SMEs irrespective of the level of dues to banks.b) All corporate SMEs, which are enjoying banking facilities from a single bank, irrespective ofthe level of dues to the bank.c) All corporate SMEs, which have funded and non-funded outstanding up to Rs.10 crore undermultiple/ consortium banking arrangement.(ii) Accounts involving willful default, fraud and malfeasance will not be eligible forrestructuring under these guidelines.(iii) Accounts classified by banks as “Loss Assets” will not be eligible for restructuring.(iv) In respect of BIFR cases banks should ensure completion of all formalities in seekingapproval from BIFR before implementing the package.SME: At present, a small scale industrial unit is an industrial undertaking in which investment inplant and machinery, does not exceed Rs.1 crore except in respect of certain specified itemsunder hosiery, hand tools, drugs and pharmaceuticals, stationery items and sports goods wherethis investment limit has been enhanced to Rs.5 crore. A comprehensive legislation which wouldenable the paradigm shift from small scale industry to small and medium enterprises is underconsideration of Parliament. Pending enactment of the above legislation, current SSI/tinyindustries definition may continue. Units with investment in plant and machinery in excess ofSSI limit and up to Rs.10 crore may be treated as Medium Enterprises (ME). Only SSI financingwill be included in Priority Sector.All banks may fix self-targets for financing to SME sector so as to reflect a higher disbursement BSPATIL
  • 47. CREDIT APPRAISAL IN BANKING SECTORover the immediately preceding year, while the sub-targets for financing tiny units and smallerunits to the extent of 40% and 20% respectively may continue. Banks may arrange to compiledata on outstanding credit to SME sector as on March 31, 2005 as per new definition and alsoshowing the break up separately for tiny, small and medium enterprises.Banks may initiate necessary steps to rationalize the cost of loans to SME sector by adopting atransparent rating system with cost of credit being linked to the credit rating of enterprise.SIDBI has developed a Credit Appraisal & Rating Tool (CART) as well as a Risk AssessmentModel (RAM) and a comprehensive rating model for risk assessment of proposals for SMEs.The banks may consider to take advantage of these models as appropriate and reduce theirtransaction costs.In order to increase the outreach of formal credit to the SME sector, all banks, includingRegional Rural Banks may make concerted efforts to provide credit cover on an average to atleast 5 new small/medium enterprises at each of their semi urban/urban branches per year.A debt restructuring mechanism for nursing of sick units in SME sector and a One TimeSettlement (OTS) Scheme for small scale NPA accounts in the books of the banks as on March31, 2004 are being introduced.4.5 CHALLENGES FACED BY SME:The challenges being faced by the small and medium sector may be briefly set out as follows-a) Small and Medium Enterprises (SME), particularly the tiny segment of the small enterpriseshave inadequate access to finance due to lack of financial information and non-formal businesspractices. SMEs also lack access to private equity and venture capital and have a very limitedaccess to secondary market instruments.b) SMEs face fragmented markets in respect of their inputs as well as products and arevulnerable to market fluctuations.c) SMEs lack easy access to inter-state and international markets.d) The access of SMEs to technology and product innovations is also limited. There is lack ofawareness of global best practices.e) SMEs face considerable delays in the settlement of dues/payment of bills by the large scalebuyers. With the deregulation of the financial sector, the ability of the banks to service the creditrequirements of the SME sector depends on the underlying transaction costs, efficient recovery BSPATIL
  • 48. CREDIT APPRAISAL IN BANKING SECTORprocesses and available security. There is an immediate need for the banking sector to focus oncredit and SMEs. CHAPTER-5 CREDIT RISK ASSESSMENTFOR A BANK, WHAT IS RISK? • Risk is inability or unwillingness of borrower-customer or counter-party to meet their repayment obligations/ honor their commitments, as per the stipulated terms.LENDER’ TASK • Identify the risk factors, and • Mitigate the riskHOW DOES RISK ARISE IN CREDIT?In the business world, Risk arises out of • Deficiencies / lapses on the part of the management (Internal factor) • Uncertainties in the business environment (External factor) • Uncertainties in the industrial environment (External factor) • Weakness in the financial position (Internal factor)To put in another way, success factors behind a business are: - • Managerial ability • Favorable business environment • Favorable industrial environment BSPATIL
  • 49. CREDIT APPRAISAL IN BANKING SECTOR • Adequate financial strengthAs such, these are the broad risk categories or risk factors built into our CRA models. CRA takesinto account the above types of risks associated with the borrowal unit. The eventual CRA ratingawarded to a unit (based on a score of 100) is a single-point risk indicator of an individual creditexposure, & is used to indentify, to measure & to monitor the credit risk of an individualproposal. At the corporate level, CRA is also used to track the quality of Bank’s credit portfolio.CREDIT & RISK • Go hand in hand. • They are like twin brothers. • They can be compared to two sides of the same coin. • All credit proposals have some inherent risks, excepting the almost negligible volume of lending against liquid collaterals with adequate margin.LENDING DESPITE RISKS: • So, risk should not deter a Banker from lending. • A banker’s task is to identify/ assess the risk factors/ parameters & manage / mitigate them on a continuous basis. • But it’s always prudent to have some idea about the degree of risk associated with any credit proposal. • The banker has to take a calculated risk, based on risk-absorption/ risk-hedging capacity & risk-mitigation techniques of the Bank. BSPATIL
  • 50. CREDIT APPRAISAL IN BANKING SECTORIMPORTANCE OF CREDIT RISK ASSESSMENTCredit is a core activity of banks & an important source of their earnings, which go to payinterest to depositors, salaries to employees & dividend to shareholdersIn credit, it is not enough that we have sizable growth in quantity/ volume, it is also necessary toensure that we have only good quality growth.To ensure asset quality, proper risk assessment right at the beginning, that is, at the time oftaking an exposure, is extremely important.Moreover, with the implementation of Basle-II accord4, capital has to be allocated for loan assetsdepending on the risk perception/ rating of respective assets. It is, therefore, extremely importantfor every bank to have a clear assessment of risks of the loan assets it creates, to become Basle-IIcompliant.That is why Credit Risk Assessment (CRA) system is an essential ingredient of the CreditAppraisal exercise.INDIAN SCENARIO: • In Indian banks, there was no systematic method of Credit Risk Assessment till late 1980’s/ early 1990’s. • Health Code System (1985) / IRAC norms (1993) are Asset (loan) classification systems, not CRA systems. • RBI came out with its guidelines on Risk Management Systems in Banks in 1999 & Guidance Note on Management of Credit in October, 2002.SBI SCENARIO:However, like in many other fields, in the field of Credit Risk Assessment too, our Bank played aproactive & pioneering role. We had our Credit Rating System (CRA) in 1988. Then, the CRAsystem was introduced in the Bank in 1996. The first CRA model was rolled out in 1996 to takecare of exposures to the C & I (Manufacturing) segment. Thereafter, separate models for SSI &AGL segments were introduced in 1998, when the C&I (Mfg) CRA model was developed forNon Banking Finance Companies (NBFCs). BSPATIL
  • 51. CREDIT APPRAISAL IN BANKING SECTORAs of now, in SBI, CRA is the most important component of the Credit Appraisal exercise for allexposures > 25 lacs & a very important tool in decision-making (a Decision Support System) aswell as in pricing. The review of the existing CRA Model for NBFCs is under process.CREDIT RISK ASSESSMENT (CRA) – MINIMUM SCORES / HURDLE RATES 1. The CRA models adopted by the Bank take into account all possible factors which go into appraising the risks associated with a loan. These have been categorized broadly into financial, business, industrial & management risks and are rated separately. To arrive at the overall risk rating, the factors duly weighted are aggregated & calibrated to arrive at a single point indicator of risk associated with the credit decision. 2. Financial parameters: The assessment of financial risk involves appraisal of the financial strength of the borrower based on performance & financial indicators. The overall financial risk is assessed in terms of static ratios, future prospects & risk mitigation (collateral security / financial standing). 3. Industry parameters: The following characteristics of an industry which pose varying degrees of risk are built into Bank’s CRA model: • Competition • Industry outlook • Regulatory risk • Contemporary issues like WTO etc. 4. Management parameters: The management of an enterprise / group is rated on the following parameters: • Integrity (corporate governance) • Track record • Managerial competence / commitment • Expertise • Structure & systems BSPATIL
  • 52. CREDIT APPRAISAL IN BANKING SECTOR • Experience in the industry • Credibility : ability to meet sales projections • Credibility : ability to meet profit (PAT) projections • Payment record • Strategic initiatives • Length of relationship with the Bank 5. The risk parameters as mentioned above are individually scored to arrive at an aggregate score of 100 (subject to qualitative factors – negative parameters). The overall score thus obtained (out of a max. of 100) is rated on a 8 point scale from SB1/SBTL1 to SB 8 /SBTL8.SALIENT FEATURES OF CRA MODELS:(a) Type of Models S. Exposure Level (FB + NFB Non – Trading Sector Trading SectorNo. Limits ) (C&I , SSI , AGL) ( Trade & Services)(i) Over Rs. 5.00 crore Regular Model Regular Model(ii) Rs 0.25 crore to Rs. 5.00 crore Simplified Model Simplified Model(b) Type of RatingsS. No. Model Type of Rating(i) Regular Model Borrower Rating Facility Rating(ii) Simplified Model Borrower Rating BSPATIL
  • 53. CREDIT APPRAISAL IN BANKING SECTORNew Rating Scales – Borrower Rating: 16 Rating Grades There are different rating given to the different banks. For exampleS. Borrower Range of Risk level Comfort LevelNo. Rating scores 1 SB1 94-100 Virtually Zero risk Virtually Absolute safety 2 SB2 90-93 Lowest Risk Highest safety 3 SB3 86-89 Lower Risk Higher safety 4 SB4 81-85 Low Risk High safety 5 SB5 76-80 Moderate Risk with Adequate safety Adequate Cushion 6 SB6 70-75 Moderate Risk Moderate Safety 7 SB7 64-69 8 SB8 57-63 Average risk Above Safety Threshold 9 SB9 50-56 10 SB10 45-49 Acceptable Risk Safety Threshold (Risk Tolerance Threshold) 11 SB11 40-44 Borderline risk Inadequate safety 12 SB12 35-39 High Risk Low safety 13 SB13 30-34 Higher risk Lower safety 14 SB14 25-29 Substantial risk Lowest safety 15 SB15 <24 Pre-Default Risk (extremely Nil Vulnerable to default) 16 SB16 - Default GradeBank has introduced New Rating Scales for borrower for giving loans. Rating is given on thebasis of scores out of 100. Bank gives loans to the borrower as per their rating like SBI givesloans to the borrower up to SB8 rating as it has average risk till SB8 rating. From SB9 rating therisk increases. So banks does not give loans after SB8 rating.New Rating Scales - Facility Rating : 16 Rating Grades BSPATIL
  • 54. CREDIT APPRAISAL IN BANKING SECTOR S FACILITY RANGE RISK LEVEL COMFORTNO GRADES OF LEVEL SCORES1 FR1 94-100 Virtually Zero Risk Virtually Absolute Safety2 FR2 87-93 Lowest Risk Highest Safety3 FR3 80-86 Lower Risk Higher Safety4 FR4 73-79 Low Risk High Safety5 FR5 66-72 Moderate Risk with Adequate Safety Adequate Cushion6 FR6 59-65 Moderate Moderate7 FR7 52-58 Risk Safety8 FR8 45-51 Average Risk Above Safety9 FR9 38-44 Threshold Acceptable Risk Safety Threshold10 FR10 31-37 (Risk Tolerance Threshold)11 FR11 24-30 High Risk Low Safety12 FR12 17-23 Higher Risk Lower Safety13 FR13 11-16 Substantial Risk Lowest Safety14 FR14 5-1015 FR15 1-4 Highest Risk16 FR16 0 NIL CHAPTER-6 SBI NORMS FOR CREDIT BSPATIL
  • 55. CREDIT APPRAISAL IN BANKING SECTOR APPRAISALCredit appraisal means an investigation/assessment done by the bank prior before providing anyloans & advances/project finance & also checks the commercial, financial & technical viabilityof the project proposed its funding pattern & further checks the primary & collateral securitycover available for recovery of such funds.LOAN POLICY – AN INTRODUCTION1.1 State Bank of India’s (SBI) Loan Policy is aimed at accomplishing its mission of retaining the bank’s position as a Premier Financial Services Group, with World class standards & significant global business, committed to excellence in customer, shareholder & employee satisfaction & to play a leading role in the expanding & diversifying financial services sector, while continuing emphasis on its Development Banking role.1.2 The Loan Policy of the any bank has successfully withstood the test of time and with in- built flexibilities, has been able to meet the challenges in the market place. The policy exits & operates at both formal & informal levels. The formal policy is well documented in the form of circular instructions, periodic guidelines & codified instructions, apart from the Book of Instructions, where procedural aspects are highlighted.1.3 The policy, at the holistic level, is an embodiment of the Bank’s approach to sanctioning, managing & monitoring credit risk & aims at making the systems & controls effective.1.4 The Loan Policy also aims at striking a balance between underwriting assets of high quality, and customer oriented selling. The objective is to maintain Bank’s undisputed leadership in the Indian Banking scene.1.5 The Policy aims at continued growth of assets while endeavoring to ensure that these remain performing & standard. To this end, as a matter of policy the Bank does not take BSPATIL
  • 56. CREDIT APPRAISAL IN BANKING SECTOR over any Non-Performing Asset (NPA) from other banks.1.6 The Central Board of the Bank is the apex authority in formulating all matters of policy in the bank. The Board has permitted setting up of the Credit Policy & Procedures Committee (CPPC) at the Corporate Centre of the Bank of which the Top Management are members, to deal with issues relating to credit policy & procedures on a Bank-wide basis. The CPPC sets broad policies for managing credit risk including industrial rehabilitation, sets parameters for credit portfolio in terms of exposure limits, reviews credit appraisal systems, approves policies for compromises, write offs, etc. & general management of NPAs besides dealing with the issues relating to Delegation of Powers. Based on the present indications, following exposure levels are prescribed: Individuals as borrowers Maximum aggregate credit facilities of Rs. 20 crores ( Fund based & non-fund based ) Non-corporates Maximum aggregate credit facilities of Rs. 80 crores ( e.g. Partnerships, JHF, Associations ) ( Fund based & non-fund based ) Corporates Maximum aggregate credit facilities as per prudential norms of RBI on exposuresCREDIT APPRAISAL STANDARDS1 (A) Qualitative:At the outset, the proposition is examined from the angle of viability & also from the Bank’sprudential levels of exposure to the borrower, Group & Industry. Thereafter, a view is takenabout our past experience with the promoters, if there is a track record to go by. Where it is anew connection for the bank but the entrepreneurs are already in business, opinion reports from BSPATIL
  • 57. CREDIT APPRAISAL IN BANKING SECTORexisting bankers & published data if available are carefully pursued. In case of a maiden venture,in addition to the drill mentioned heretofore, an element of subjectively has to be perforceintroduced as scant historical data weightage to be placed on impressions gained out of theserious dialogues with the promoter & his business contacts.1 (B) Quantitative: (a) Working capital: The basis quantitative parameters underpinning the Bank’s credit appraisal are as follows:- Sector/ Parameters Mfg Others Liquidity 1.33 1.20 Current Ratio (min.) (For FBWC limits above Rs. 5 cr.) 1.00 (For FBWC limits upto Rs. 5 cr.)) Financial Soundness 3.00 5.00 TOL/TNW (max.) DSCR Net (min.) 2:1 2:1 Gros (min.) 1.75:1 1.75:1 Gearing D/E (max.) 2:1 2:1 Promoters’ contribution 30% of equity 20% of equity (min.)(i) Liquidity:Current Ratio (CR) of 1.33 will generally be considered as a benchmark level of liquidity.However the approach has to be flexible. CR of 1.33 is only indicative & may not be deemedmandatory. In cases where the CR is projected at a lower than the benchmark or a slippage in theCR is proposed, it alone will not be a reason for rejection for the loan proposal or for the sanctionof the loan at a lower level. In such cases, the reason for low CR or slippage should be carefully BSPATIL
  • 58. CREDIT APPRAISAL IN BANKING SECTORexamined & in deserving cases the CR as projected may be accepted. In cases where projectedCR is found acceptable, working capital finance as requested may be sanctioned. In specificcases where warranted, such sanction can be with the condition that the borrower should bring inadditional long-term funds to a specific extent by a given future date. Where it is felt that theprojected CR is not acceptable but the borrower deserves assistance subject to certain conditions,suitable written commitment should be obtained from the borrower to the effect that he would bebringing in required amounts within a mutually agreed time frame(ii) Net Working Capital:Although this is a corollary of current ratio, the movements in NWC are watched to ascertainwhether there is a mismatch of long term sources vis-à-vis long term uses for purposes whichmay not be readily acceptable to the Bank so that corrective measures can be suggested.(iii) Financial Soundness:This will be dependent upon the owner’s stake or the leverage. Here again the benchmark will bedifferent for manufacturing, trading, hire-purchase & leasing concerns. For industrial ventures aTotal Outside Liability/ Tangible Net worth ratio of 3.0 is reasonable but deviations in selectivecases for understandable reasons may be accepted by the sanctioning authority.(iv) Turn-Over:The trend in turnover is carefully gone into both in terms of quantity & valve as also marketshare wherever such data are available. What is more important to establish a steady output if nota rising trend in quantitative terms because sales realization may be varying on account of pricefluctuations.(v) Profits:While net profit is ultimate yardstick, cash accruals, i.e., profit before depreciation & taxationconveys the more comparable picture in view of changes in rate of depreciation & taxation,which have taken place in the intervening years. However, for the sake of proper assessment, thenon-operating income is excluded, as these are usually one time or extraordinary income.Companies incurring net losses consistently over 2 or more years will be given special attention,their accounts closely monitored, and if necessary, exit options explored. BSPATIL
  • 59. CREDIT APPRAISAL IN BANKING SECTOR(vi) Credit Rating:Wherever the company has been rated by a Credit Rating Agency for any instrument such asCP / FD this will be taken into account while arriving at the final decision. However as the creditrating involves additional expenditure, we would not normally insist on this and only use thistool if such an agency had already looked into the company finances.(b) Term Loan (i) In case of term loan & deferred payment guarantees, the project report is obtained from the customer, which may be compiled either in-house or by a firm of consultants/ merchant bankers. The technical feasibility & economic viability is vetted by the bank & wherever it is felt necessary, the Credit Officer would seek the benefit of a second opinion either from the Bank’s Technical Consultancy cell or from the consultants of the Bank/ SBI Capital Markets Ltd. (ii) Promoter’s contribution of at least 20% in the total equity is what we normally expect. But promoters’ contribution may vary largely in mega projects. Therefore there cannot be a definite benchmark. The sanctioning authority will have the necessary discretion to permit deviations. (iii)The other basic parameter would be the net debt service coverage ratio i.e. exclusive of interest payable, which should normally not go below 2. On a gross basis DSCR should not be below 1.75. These ratios are indicative & the sanctioning authority may permit deviations selectively. (iv)As regards margin on security, this will depend on Debt: Equity gearing for the project, which should preferably be near about 1.5: 1 & should not in any case be above 2:1, i.e., Debt should not be more than 2 times the Equity contribution. The sanctioning authority in exceptional cases may permit deviations from the norm very selectively. (v) Other parameters governing working capital facilities would also govern Term Credit facilities to the extent applicable.(C) Lending to Non-Banking Financial Companies (NBFCs) BSPATIL
  • 60. CREDIT APPRAISAL IN BANKING SECTOR(D) Financing of infrastructure projects(E) Lease Finance(F) Letter of Credit, Guarantees & bills discounting(G) Fair Practices for lenders REQUIREMENT OF DOCUMENTS FOR PROCESS OF LOAN 1. Application for requirement of loan 2. Copy of Memorandum & Article of Association 3. Copy of incorporation of business 4. Copy of commencement of business 5. Copy of resolution regarding the requirement of credit facilities BSPATIL
  • 61. CREDIT APPRAISAL IN BANKING SECTOR 6. Brief history of company, its customers & supplies, previous track records, orders in hand. Also provide some information about the directors of the company 7. Financial statements of last 3 years including the provisional financial statement for the year 2007-08 8. Copy of PAN/TAN number of company 9. Copy of last Electricity bill of company 10. Copy of GST/CST number 11. Copy of Excise number 12. Photo I.D. of all the directors 13. Address proof of all the directors 14. Copies related to the property such as 7/12 & 8A utara, lease/ sales deed, 2R permission, Allotment letter, Possession 15. Bio-data form of all the directors duly filled & notarized 16. Financial statements of associate concern for the last 3 yearsPRICING (FACTORS DECIDING INT. RATES & OTHER CHARGES)1. Pricing in the Bank can be divided into interest pricing and non-interest pricing. Pricing ofloans up to Rs.2 lacs will be as prescribed by RBI. In line with RBI guidelines, he Bankannounces from time to time its single Benchmark Prime Lending Rate (BPLR), i.e., reference /indicative rates at which the Bank would lend to its best customers. The BPLR would be referredto as State Bank Advance Rate (SBAR) in our Bank. Interest rate without reference to SBARcould be charged in respect of certain categories of loan / credit like discounting of bills, lendingto intermediary agencies etc. Interest rates below SBAR could be offered to exporters or othercredit worthy borrowers including public enterprises on the lines of a transparent and objective BSPATIL
  • 62. CREDIT APPRAISAL IN BANKING SECTORpolicy approved by the Banks Board. All other loans are to be priced on the basis of BanksSBAR with the pricing being linked to grade of the risk in the exposure. The maximum spreadover SBAR which could be charged by the Bank will be decided by the Bank from time to time.Within such ceiling, the pricing for various credit facilities, schemes, products, credit relatedservices etc., including sub-SBAR pricing would be determined by ALCO or COCC, asconsidered appropriate. Bank may also price floating rate products by using market benchmarks(e.g. G-Sec rates, MIBOR etc.) in a transparent manner as per Board approved policies.2. An internal Credit Risk Rating system covering all advances of Rs.25 lacs and above in C&I,SSI and AGL segments has been put in place to facilitate structured assessment of credit risks.The system enables evaluation of the fundamental strength of the borrower so as to charge agraded rate of interest based on different ratings. However, taking into consideration the trends inmovement of interest rates and market competition, the Bank has also adopted an appropriateauthority structure to facilitate competitive pricing of loan products linked both to risk rating andoverall business considerations.3. Bank has introduced fixed interest rates in respect of certain categories of loans in personalsegment, e.g. housing term loans to individuals. Fixed interest rates are also extended forcommercial loans, albeit highly selectively.4. Market related charges and a discretionary structure that enables branches to effectively facecompetition are in place. These would be reviewed periodically based on feedback fromoperating units and the market.5. Pricing of Banks funds and services while being basically market driven is also determined bytwo important considerations, i.e., minimum desired profitability and risk inherent in thetransaction. At the corporate level, the applicable price for a particular advance or service isfixed taking into account the marginal cost of Banks funds and desired rate of return ascalculated from indices like profitability levels and return on capital employed. In case ofcorporate relationship where the value of connections and overall potential for profitability froma particular account are more important than a particular transaction, the price is fine tuned evento level of no-loss-no-profit in the transaction. For long term exposures, the factors that weighare the rate charged by the financial institutions, the period of exposure, the pattern of volatilityin the interest rates and the expected movement of the rates in the long term perspective. BSPATIL
  • 63. CREDIT APPRAISAL IN BANKING SECTORREVIEW / RENEWAL OF ADVANCES1. Working capital facilities are granted by the Bank for a period of 1 year and thereafter they arerequired to be renewed each year, i.e., fresh sanction is accorded for the limits. Where, however,renewal is not possible for some reason, sanction for the continuance of the limits is obtained ineach case by reviewing the facilities.2. Term loans which are irregular will be reviewed once in six months.A separate authority structure, as given below, has been prescribed for above noted half-yearlyreview of term loans:3. In the case of all listed companies with credit rating of SB4/SBTL4 and below, a brief reviewis to be put up on the basis of half-yearly working results published by them duly incorporatingcomments such as extent of exposure, conduct of the account etc. Such review is to be submittedto the respective GE in respect of ECCB sanctions, to the CGM (Circle) / CGM (CAG-Cen.) inrespect of COCC-I&II sanctions and to the GM (Network) in all other cases.4. There will be no CRA rating review for term loans. However, in respect of term loans, thefollowing set of financial covenants is to be stipulated: (i) Current Ratio BSPATIL
  • 64. CREDIT APPRAISAL IN BANKING SECTOR (ii) TOL/TNW (iii) Interest Coverage Ratio (iv) Default in payment of interest / installment (v) Cross Default (default in payment of instalment/ interest to other institutions/ banks)Default of these covenants would attract penal interest of 1% as under: (a) Any adverse deviation by more than 20% from the stipulated levels in respect of any two of the items (i) to (iii) above - penal interest to be levied for the period of non-adherence subject to a minimum period of 1 year. (b) Default in payment of interest/installments to the Bank or to other FI/Banks-penal interest to be levied for the period of such defaults.TAKE OVER OF ADVANCES1. Bank needs to aggressively market for good quality advances. One of the strategies forincreasing good quality assets in the Banks loan portfolio, would be to take over advances fromother banks/FIs. Keeping this in view and with the prime objective of adding only good qualityassets, a common set of norms / guidelines for C&I, SSI and AGL segments has been laid downfor take over of advances.A. Advances under SSI / C&I Segments (i) The advance to be taken over should be rated SB3/SBTL3 or above. (ii) The unit should score the minimum scores as prescribed, under the various risk segments, in the Credit Risk Assessment. (iii) The account should have been a standard asset in the books of the other bank/FI during the preceding 3 years. (If this information is not forthcoming from the bank/FI, a certificate should be obtained from the borrower’s Auditor that the loan has been a standard asset during the preceding 3 years in the books of the bank/FI in terms of the BSPATIL
  • 65. CREDIT APPRAISAL IN BANKING SECTOR asset classification norms of RBI. The services of statutory auditors of our Bank may also be sought for this purpose). However, if a unit is not having a track record for 3 years, as it has been in existence for a shorter duration, takeover can be considered based on the track record for the available period, which should be at least one year. (iv) The unit should have earned net profits (post tax) in each of the immediately preceding 3 years. However, if the unit has been in existence for a lesser period, it should have earned net profit (post tax) in the preceding year of operation. (v) The Term Loan proposed to be taken-over should not have been rephased, generally, by the existing FI/Bank after commencement of commercial production. However, if a rephasement was necessitated due to external factors and viability of the unit is not in doubt, such proposals may also be considered for sanction on a case to case basis. (vi)The remaining period of scheduled repayment of the term loan should be at least 2 years, when only TLs are taken over.For takeover of existing TLs, while the original time frame for repayment will be generallyadhered to, flexibility may be allowed in the quantum of periodical repayments. If sanction offresh term loan is proposed along with the takeover, the schedule of repayment for the existingterm loans, if necessary, may be permitted to extend up to 8 years. [The norms at (v), (vi) and(vii) above are not applicable for take-over of working capital advances]Note 1 : In the case of take-over proposals involving advances up to Rs.25 lacs, the ratingshouldbe carried out, as per the scoring model prescribed under SME Smart Score (Refer page 170,Chapter 34, Part III, Volume III of Manual on Loans & Advances). Other factors that may bekept in view are: - • Continued viability • Track record • Standing in the market of the unit/ promoter.Note 2: Take-over of units from our Associate Banks is not permitted.Note 3 : In the cases of working capital finance through consortium or multiple banking, BSPATIL
  • 66. CREDIT APPRAISAL IN BANKING SECTORincreasing our share, and joining a consortium (or when a member bank exits consortium and wejoin the consortium in its place), are not reckoned as take-over of advances from other banks.B. Advances under Trade and Services Sector:i) The current ratio and TOL/TNW ratio should be at acceptable levels, as per audited balancesheet not older than 12 months. Current ratio of not below 1 is acceptable up to FBWC limit ofRs.5 cr. For FBWC limits of above Rs.5 Cr. the current ratio of 1.33 will be indicative. It may beconsidered acceptable up to 1.20, depending on the activity. TOL/TNW ratio higher than 3would be permissible depending on the type of activity.ii) The unit should have earned post-tax profits in each of the immediately preceding 3 years.However, if the unit has been in existence for a lesser period, it should have earned net profit(post-tax) in the preceding year of operation.C. Other Guidelines:(i) In all cases of take-over of advances from other banks, the credit information report in theformat prescribed by IBA should be obtained. The experience of the present banker (item 13 ofthe format) should show satisfactory dealings with the unit. Where, from the point ofcompetition, it is necessary not to alert the bank concerned, the report may be obtained after thesanction of facilities but before release of the facilities.(ii) In all cases of take-over, branches should ensure proper documentation and other formalitiesto protect the interest of our Bank. BSPATIL
  • 67. CREDIT APPRAISAL IN BANKING SECTOR(iii) In all cases of take-over, branches should assess the requirements of the borrower and obtainsanction for the proposed limits before actually taking over the outstanding liability of theborrower to their existing bank/ FI.(iv) The following aspects should invariably be examined in each case of take-over. • Reasons for take-over • Market perception including the existing bank’s/FI’s perception regarding the unit and its management. (For this, the appraising officials may record briefly on their enquiries with market sources/other bank/FI); • Potential ancillary business accruing to the Bank; • Terms and conditions stipulated by the existing bank and those proposed by our Bank, particularly to ensure against dilution of security cover. No takeover of advances from any Public Sector Bank will be resorted to by quoting finer rates(v) The credit rating should be done based on the audited balance sheet which is not older than12 months. However if the audited balance sheet is more than 12 months old and the proposalhas to be considered from the business angle, then a provisional balance sheet as on a recentdate may be obtained from the unit and the CRA exercise done based on these figures,additionally. Unit should clear the stipulated hurdle rate in both the exercises.D. Administrative Clearance (AC)In all the cases of take-over proposals, AC is required to be obtained. For this purpose, a briefproposal containing, inter alia, the comments on compliance with the norms and the otherguidelines as above should be submitted to the appropriate authority as under:(i) For take-over of units complying with all the norms prescribed: BSPATIL
  • 68. CREDIT APPRAISAL IN BANKING SECTOR(ii) For take-over of units not complying with any one or more of the norms prescribed:E. While take over of P segment advances is not generally encouraged, in consideration oflarger business interests / valuable connections, take over of housing loans is consideredselectively after due diligence and precautions, in cases where possession of the house / flat hasbeen taken, repayment of existing loan has already commenced and installments have been paidas per terms of sanction.CREDIT FACILITIES TO COMPANIES WHOSE DIRECTORS ARE IN THEDEFAULTERS LIST OF RBI:1. The Directors of any company may be classified as promoter / elected / professional/nominee / honorary directors. RBI has been collecting and circulating information on defaultingcompanies amongst banks / FIs, including names of directors of such companies. Though RBIsdefaulters list is given due cognizance in the appraisal process, a general policy on the issuesrelating to sanction / continuation of credit facilities to such companies whose directors are in theRBIs defaulters list needs to be put in place. BSPATIL
  • 69. CREDIT APPRAISAL IN BANKING SECTORAccordingly, it has been decided to adopt the following approach:The above policy on defaulters will be a broad framework for sanction / continuation of creditfacilities to companies whose directors are in the RBIs list of defaulting borrowers of banks / FIswith dues of Rs.1 Cr. and above. When the list of such defaulters is circulated by CIBIL insteadof RBI), the same Policy would continue to apply.2. Willful default & action there against - The penal measures would be made applicable to allborrowers identified as willful defaulters or the promoters involved in diversion / siphoning of BSPATIL
  • 70. CREDIT APPRAISAL IN BANKING SECTORfunds with outstanding balance of Rs.25 lacs or more without any exception. Similarly, the limitof Rs.25 lacs will also be applied for the purpose of taking cognizance of instances of siphoningand diversion of funds.3. Where a Letter of Comfort or guarantee furnished by the companies within a Group in favourof a willfully defaulting unit is not paid when invoked by the Bank, such Group companies alsomay be reckoned as willful defaulters.4. In cases of project financing, Bank would endeavour to ensure end-use of funds by, inter alia,obtaining certification from Chartered Accountants. In case of short term corporate/clean loans,such an approach would be supplemented by due diligence on the part of the Bank. It shall be theendeavor of the Bank to ensure that such loans are limited to borrowers whose integrity andreliability are above board. Bank will also retain the right to get investigative audit conductedwhenever it is prima facie satisfied that there is a case for such investigative audit to detectsiphoning/ diversion of funds or other malfeasance.5. No additional facilities shall be granted by the Bank to the listed willful defaulters. Further,entrepreneurs / promoters of companies where the Bank has identified siphoning /diversion offunds, mis-representation, falsification of accounts and fraudulent transactions shall be debarredfrom Bank finance for floating new ventures for a period of 5 years from the date the name of thewillful defaulter is published by RBI / CIBIL.6. The legal process, wherever warranted, against the borrowers / guarantors and foreclosure ofrecovery of dues should be initiated expeditiously. The Bank may also initiate criminal actionagainst willful defaulters, where necessary.7. Where possible, Bank shall adopt a proactive approach for a change of management of thewillfully defaulting borrowing unit.CREDIT MONITORING & SUPERVISION1. Broadly, the objectives of post-sanction follow up, supervision and monitoring are as under:(a) Follow up function: BSPATIL
  • 71. CREDIT APPRAISAL IN BANKING SECTOR • To ensure the end-use of funds • To relate the outstandings to the assets level on a continuous basis • To correlate the activity level to the projections made at the time of the sanction / renewal of the credit facilities • To detect deviation from terms of sanction. • To make periodic assessment of the health of the advances by noting some of the key indicators of performance like profitability, activity level, and management of the unit and ensure that the assets created are effectively utilized for productive purposes and are well maintained. • To ensure recovery of the installments of the principal in case of term loans as per the scheduled repayment programme and all interest. • To identify early warning signals, if any, and initiate remedial measures thereby averting the incidence of incipient sickness.(b) Supervision function: • To ensure that effective follow up of advances is in place and asset quality of good order is maintained. • To look for early warning signals, identify ‘incipient sickness’ and initiate proactive remedial measures.(c) Monitoring function : • To ensure that effective supervision is maintained on loans / advances and appropriate responses are initiated wherever early warning signals are seen. • To monitor on an ongoing basis the asset portfolio by tracking changes from time to time. • Chalking out and arranging for carrying out specific actions to ensure high percentage of ‘Standard Assets’.2. Detailed operative guidelines on the following aspects of effective credit monitoring are inplace: • Post-sanction responsibilities of different functionaries BSPATIL
  • 72. CREDIT APPRAISAL IN BANKING SECTOR • Reporting for control • Security documents, Statement of stocks and book debts • Computation of drawing power (DP) on eligible current assets and maintaining of DP register • Verification of assets • Inspection by branch functionaries – frequency, reporting, register etc. • Stock Audit • Follow up based on information systems • Follow up during project implementation stage • Follow up post-commercial production • Monitoring and control • Detection and prevention of diversion of working capital finance • Monitoring of large withdrawals • Allocation of limit • Handling of NPA accounts etc.LOAN ADMINISTRATION - PRE-SANCTION PROCESSAPPRAISAL, ASSESSMENT AND SANCTION FUNCTIONS1. APPRAISALA. Preliminary appraisal1.1 Sound credit appraisal involves analysis of the viability of operations of a business and thecapacity of the promoters to run it profitably and repay the bank the dues as and then they fall1.2. Towards this end the preliminary appraisal will examine the following aspects of a proposal.Bank’s lending policy and other relevant guidelines/RBI guidelines, • Prudential Exposure norms, • Industry Exposure restrictions, • Group Exposure restrictions, • Industry related risk factors, BSPATIL
  • 73. CREDIT APPRAISAL IN BANKING SECTOR • Credit risk rating, • Profile of the promoters/senior management personnel of the project, • List of defaulters, • Caution lists, • Acceptability of the promoters, • Compliance regarding transfer of borrower accounts from one bank to another, if applicable; • Government regulations/legislation impacting on the industry; e.g., ban on financing of industries producing/ consuming Ozone depleting substances; • Applicant’s status vis-à-vis other units in the industry, • Financial status in broad terms and whether it is acceptableThe company’s Memorandum and Articles of Association should be scrutinized carefully toensure (i) that there are no clauses prejudicial to the Bank’s interests, (ii) no limitations havebeen placed on the Company’s borrowing powers and operations and (iii) the scope of activity ofthe company.1.3. Further, if the proposal is to finance a project, the following aspects have to be examined:• Whether project cost is prima facie acceptable• Debt/equity gearing proposed and whether acceptable• Promoters’ ability to access capital market for debt/equity support• Whether critical aspects of project - demand, cost of production, profitability, etc. are primafacie in order1.4. After undertaking the above preliminary examination of the proposal, the branch will arriveat a decision whether to support the request or not. If the branch (a reference to the branchincludes a reference to SECC/CPC etc. as the case may be) finds the proposal acceptable, it willcall for from the applicant(s), a comprehensive application in the prescribed proforma, alongwith a copy of the proposal/project report, covering specific credit requirement of the companyand other essential data/ information. The information, among other things, should include:• Organizational set up with a list of Board of Directors and indicating the qualifications, BSPATIL
  • 74. CREDIT APPRAISAL IN BANKING SECTORexperience and competence of the key personnel in charge of the main functional areas e.g.,purchase, production, marketing and finance; in other words a brief on the managerial resourcesand whether these are compatible with the size and scope of the proposed activity.• Demand and supply projections based on the overall market prospects together with a copy ofthe market survey report. The report may comment on the geographic spread of the market wherethe unit proposes to operate, demand and supply gap, the competitors’ share, competitiveadvantage of the applicant, proposed marketing arrangement, etc.• Current practices for the particular product/service especially relating to terms of credit sales,probability of bad debts, etc.• Estimates of sales, cost of production and profitability.• Projected profit and loss account and balance sheet for the operating years during thecurrency of the Bank assistance.• If request includes financing of project(s), branch should obtain additionally(i)appraisal report from any other bank/financial institution in case appraisal has been done bythem, (ii) ‘No Objection Certificate’ from term lenders if already financed by them and(iii) Report from Merchant bankers in case the company plans to access capital market, wherevernecessary.1.5. In respect of existing concerns, in addition to the above, particulars regarding the history ofthe concern, its past performance, present financial position, etc. should also be called for. Thisdata/information should be supplemented by the supporting statements such as:a) Audited profit loss account and balance sheet for the past three years (if the latest auditedbalance sheet is more than 6 months old, a pro-forma balance sheet as on a recent date should beobtained and analysed). For non-corporate borrowers, irrespective of market segment, enjoyingcredit limits of Rs.10 lacs and above from the banking system, audited balance sheet in the IBAapproved formats should be submitted by the borrowers. BSPATIL
  • 75. CREDIT APPRAISAL IN BANKING SECTORb) Details of existing borrowing arrangements, if any,c) Credit information reports from the existing bankers on the applicant Company, andd) Financial statements and borrowing relationship of Associate firms/Group Companies.B. Detailed Appraisal1.6 The viability of a project is examined to ascertain that the company would have the ability toservice its loan and interest obligations out of cash accruals from the business. While appraisinga project or a loan proposal, all the data/information furnished by the borrower should be counterchecked and, wherever possible, inter-firm and inter-industry comparisons should be made toestablish their veracity.1.7 The financial analysis carried out on the basis of the company’s audited balance sheets andprofit and loss accounts for the last three years should help to establish the current viability.1.8 In addition to the financials, the following aspects should also be examined:• The method of depreciation followed by the company-whether the company is followingstraight line method or written down value method and whether the company has changed themethod of depreciation in the past and, if so, the reason therefore;• Whether the company has revalued any of its fixed assets any time in the past and the presentstatus of the revaluation reserve, if any created for the purpose; BSPATIL
  • 76. CREDIT APPRAISAL IN BANKING SECTOR• Record of major defaults, if any, in repayment in the past and history of past sickness, if any;• The position regarding the company’s tax assessment - whether the provisions made in thebalance sheets are adequate to take care of the company’s tax liabilities;• The nature and purpose of the contingent liabilities, together with comments thereon;• Pending suits by or against the company and their financial implications (e.g. cases relating tocustoms and excise, sales tax, etc.);• Qualifications/adverse remarks, if any, made by the statutory auditors on the company’saccounts;• Dividend policy;• Apart from financial ratios, other ratios relevant to the project;• Trends in sales and profitability, past deviations in sales and profit projections, andestimates/projections of sales values• Production capacity & use: past and projected;• Estimated requirement of working capital finance with reference to acceptable build up ofinventory/ receivables/ other current assets;• Projected levels: whether acceptable; and• Compliance with lending norms and other mandatory guidelines as applicable1.9. Project financing:If the proposal involves financing a new project, the commercial, economic and Financialviability and other aspects are to be examined as indicated below:• Statutory clearances from various Government Depts./ Agencies• Licenses/permits/approvals/clearances/NOCs/Collaboration agreements, as applicable• Details of sourcing of energy requirements, power, fuel etc.• Pollution control clearance• Cost of project and source of finance BSPATIL
  • 77. CREDIT APPRAISAL IN BANKING SECTOR• Build-up of fixed assets (requirement of funds for investments in fixed assets to be criticallyexamined with regard to production factors, improvement in quality of products, economies ofscale etc.)• Arrangements proposed for raising debt and equity• Capital structure (position of Authorised, Issued/ Paid-up Capital, Redeemable PreferenceShares, etc.)• Debt component i.e., debentures, term Loans, deferred payment facilities, unsecured loans/deposits. All unsecured loans/ deposits raised by the company for financing a project should besubordinate to the term loans of the banks/ financial institutions and should be permitted to berepaid only with the prior approval of all the banks and the financial institutions concerned.Where central or state sales tax loan or developmental loan is taken as source of financing theproject, furnish details of the terms and conditions governing the loan like the rate of interest (ifapplicable), the manner of repayment, etc.• Feasibility of arrangements to access capital market• Feasibility of the projections/ estimates of sales, cost of production and profits covering theperiod of repayment• Break Even Point in terms of sales value and percentage of installed capacity under a normalproduction year• Cash flows and fund flows• Proposed amortisation schedule• Whether profitability is adequate to meet stipulated repayments with reference to Debt ServiceCoverage Ratio, Return on Investment• Industry profile & prospects• Critical factors of the industry and whether the assessment of these and management plans inthis regard are acceptable• Technical feasibility with reference to report of technical consultants, if available• Management quality, competence, track record• Company’s structure & systems• Applicant’s strength on inter-firm comparisons BSPATIL
  • 78. CREDIT APPRAISAL IN BANKING SECTORFor the purpose of inter-firm comparison and other information, where necessary, source datafrom Stock Exchange Directory, financial journals/ publications, professional entities like CRIS-INFAC, CMIE, etc. with emphasis on following aspects:• Market share of the units under comparison• Unique features• Profitability factors• Financing pattern of the business• Inventory/Receivable levels• Capacity utilisation• Production efficiency and costs• Bank borrowings patterns• Financial ratios & other relevant ratios• Capital Market Perceptions• Current price• 52week high and low of the share price• P/E ratio or P/E Multiple• Yield (%)- half yearly and yearlyAlso examine and comment on the status of approvals from other term lenders, market view (ifanything adverse), and project implementation schedule. A pre-sanction inspection of the projectsite or the factory should be carried out in the case of existing units. To ensure a higher degree ofcommitment from the promoters, the portion of the equity / loans which is proposed to bebrought in by the promoters, their family members, friends and relatives will have to be broughtupfront. However, relaxation in this regard may be considered on a case to case basis for genuineand acceptable reasons. Under such circumstances, the promoter should furnish a definite planindicating clearly the sources for meeting his contribution. The balance amount proposed to beraised from other sources, viz., debentures, public equity etc., should also be fully tied up.C. Present relationship with Bank: BSPATIL
  • 79. CREDIT APPRAISAL IN BANKING SECTORCompile for existing customers, profile of present exposures:• Credit facilities now granted• Conduct of the existing account• Utilisation of limits - FB & NFB• Occurrence of irregularities, if any• Frequency of irregularity i.e., number of times and total number of days the account wasirregular during the last twelve months• Repayment of term commitments• Compliance with requirements regarding submission of stock statements, Financial Follow-upReports, renewal data, etc.• Stock turnover, realisation of book debts• Value of account with break-up of income earned• Pro-rata share of non-fund and foreign exchange business• Concessions extended and value thereof• Compliance with other terms and conditions• Action taken on Comments/observations contained in RBI Inspection Reports: CO Inspection & Audit Reports Verification Audit Reports Concurrent Audit Reports Stock Audit Reports Spot Audit Reports Long Form Audit Report (statutory audit)D. Credit risk rating: Draw up rating for (i) Working Capital and (ii) Term Finance.E. Opinion Reports: Compile opinion reports on the company, partners/ promoters and the BSPATIL
  • 80. CREDIT APPRAISAL IN BANKING SECTORproposed guarantors.F. Existing charges on assets of the unit: If a company, report on search of charges with ROC.G. Structure of facilities and Terms of Sanction:Fix terms and conditions for exposures proposed - facility wise and overall:o Limit for each facility – sub-limitso Security - Primary & Collateral, Guaranteeo Margins - For each facility as applicableo Rate of interesto Rate of commission/exchange/other feeso Concessional facilities and value thereofo Repayment terms, where applicableo ECGC cover where applicableo Other standard covenantsH. Review of the proposal: Review of the proposal should be done covering(i) strengths and weaknesses of the exposure proposed(ii) risk factors and steps proposed to mitigate them(iii) deviations, if any, proposed from usual norms of the Bank and the reasons therefore.I. Proposal for sanction: Prepare a draft proposal in prescribed format with required backupdetails and with recommendations for sanction. BSPATIL
  • 81. CREDIT APPRAISAL IN BANKING SECTORJ. Assistance to Assessment: Interact with the assessor, provide additional inputs arisingfrom the assessment, incorporate these and required modifications in the draft proposal andgenerate an integrated final proposal for sanction.2. ASSESSMENT: Indicative List of Activities Involved in Assessment Function is givenbelow:• Review the draft proposal together with the back-up details/notes, and the borrower’sapplication, financial statements and other reports/documents examined by the appraiser.• Interact with the borrower and the appraiser.• Carry out pre-sanction visit to the applicant company and their project/factory site.• Peruse the financial analysis (Balance Sheet/ Operating Statement/ Ratio Analysis/ Fund FlowStatement/ Working Capital assessment/Project cost & sources/ Break Even analysis/DebtService/Security Cover, etc.) to see if this is prima facie in order. If any deficiencies are seen,arrange with the appraiser for the analysis on the correct lines.• Examine critically the following aspects of the proposed exposure.o Bank’s lending policy and other guidelines issued by the Bank from time to timeo RBI guidelineso Background of promoters/ senior managemento Inter-firm comparisono Technology in use in the companyo Market conditionso Projected performance of the borrower vis-à-vis past estimates and performanceo Viability of the projecto Strengths and Weaknesses of the borrower entity.o Proposed structure of facilities.o Adequacy/ correctness of limits/ sub limits, margins, moratorium and repayment scheduleo Adequacy of proposed security cover BSPATIL
  • 82. CREDIT APPRAISAL IN BANKING SECTORo Credit risk ratingo Pricing and other charges and concessions, if any, proposed for the facilitieso Risk factors of the proposal and steps proposed to mitigate the risko Deviations proposed from the norms of the Bank and justifications therefore• To the extent the inputs/comments are inadequate or require modification, arrange foradditional inputs/ modifications to be incorporated in the proposal, with any requiredmodification to the initial recommendation by the Appraiser• Arrange with the Appraiser to draw up the proposal in the final form.• Recommendation for sanction: Recapitulate briefly the conclusions of the appraisal and statewhether the proposal is economically viable. Recount briefly the value of the company’s (and theGroup’s) connections. State whether, all considered, the proposal is a fair banking risk. Finally,give recommendations for grant of the requisite fund-based and non-fund based credit facilities.3. SANCTION: Indicative list of activities involved in the sanction function is given below:• Peruse the proposal to see if the report prima facie presents the proposal in a comprehensivemanner as required. If any critical information is not provided in the proposal, remit it back tothe Assessor for supply of the required data/clarifications.• Examine critically the following aspects of the proposed exposure in the light ofcorresponding instructions in force:o Bank’s lending policy and other relevant guidelineso RBI guidelineso Borrower’s status in the industryo Industry prospectso Experience of the Bank with other units in similar industryo Overall strength of the borrowero Projected level of operationso Risk factors critical to the exposure and adequacy of safeguards proposed there againsto Value of the existing connection with the borrowero Credit risk rating BSPATIL
  • 83. CREDIT APPRAISAL IN BANKING SECTORo Security, pricing, charges and concessions proposed for the exposure and covenantsstipulated vis-à-vis the risk perception.• Accord sanction of the proposal on the terms proposed or by stipulating modified or additionalconditions/ safeguards, or Defer decision on the proposal and return it for additionaldata/clarifications, or Reject the proposal, if it is not acceptable, setting out the reasons.LOAN ADMINISTRATION - POST SANCTION CREDIT PROCESSGENERAL1. NEEDLending decisions are made on sound appraisal and assessment of credit worthiness. Past recordof satisfactory performance and integrity are no guarantee for future though they serve as auseful guide to project the trend in performance. Credit assessment is made based on promisesand projections. A loan granted on the basis of sound appraisal may go bad because the borrowerdid not carry out his promises regarding performance. It is for this reason that proper follow upand supervision is essential. A banker cannot take solace in sufficiency of security for his loans.He has to -a) make a proper selection of borrowerb) Ensure compliance with terms and conditionsc) Monitor performance to check continued viability of operationsd) Ensure end use of funds.e) Ultimately ensure safety of funds lent.2. Stages of post sanction processThe post-sanction credit process can be broadly classified into three stages viz., follow-up,supervision and monitoring, which together facilitate efficient and effective credit managementand maintaining high level of standard assets. The objectives of the three stages of post sanctionprocess are detailed below. BSPATIL
  • 84. CREDIT APPRAISAL IN BANKING SECTORTYPES OF LENDING ARRANEMENTSINTRODUCTIONBusiness entities can have various types of borrowing arrangements. They are • One Borrower – One Bank • One Borrower – Several Banks (with consortium arrangement) • One Borrower – Several Banks (without consortium arrangements – Multiple Banking • One Borrower – Several Banks (Loan Syndication) A. ONE BANKThe most familiar amongst the above for smaller loans is the One Borrower-One Bankarrangement where the borrower confines all his financial dealings with only one bank.Sometimes, units would prefer to have banking arrangements with more than one bank onaccount of the large financial requirement or the resource constraint of his own banker or due tovarying terms & conditions offered by different banks or for sheer administrative convenience.The advantages to the bank in a multiple banking arrangement/ consortium arrangement are thatthe exposure to an individual customer is limited & risk is proportionate. The bank is also able tospread its portfolio. In the case of borrowing business entity, it is able to meet its fundsrequirement without being constrained by the limited resource of its own banker. Besides this,consortium arrangement enables participating banks to save man power & resources throughcommon appraisal & inspection & sharing credit information.The various arrangements under borrowings from more than one bank will differ on account ofterms & conditions, method of appraisal, coordination, documentation & supervision & control. B. CONSORTIUM LENDINGWhen one borrower avails loans from several banks under an arrangement among all the lendingbankers, this leads to a consortium lending arrangements. In consortium lending, several bankspool banking resourses & expertise in credit management together & finance a single borrowerwith a common appraisal, common documentation & joint supervision & follow up. Theborrower enjoys the advantage similar to single window availing of credit facalities from several BSPATIL
  • 85. CREDIT APPRAISAL IN BANKING SECTORbanks. The arrangement continues until any one of the bank moves out of the consortium. Thebank taking the highest share of the credit will usually be the leader of consortium. There is noceiling on the number of banks in a consortium. C. MULTIPLE BANKING ARRANGEMENTMultiple Banking Arrangement is one where the rules of consortium do not apply & no inter seagreement among banks exists. The borrower avails credit facility from various banks providingseparate securities on different terms & conditions. There is no such arrangement called‘Multiple Banking Arrangement’ & the term is used only to donote the existence of bankingarrangement with more than one bank.Multiple Banking Arrangement has come to stay as it has some advantages for the borrower &the banks have the freedom to price their credit products & non-fund based facility according totheir commercial judgment. Consortium arrangement occasioned delays in credit decisions & theborrower has found his way around this difficulty by the multiple banking arrangement.Additionally, when units were not doing well, consensus was rarely prevalent among theconsortium members. If one bank wanted to call up the advance & protect the security, anotherbank was interested in continuing the facility on account of group considerations.Points to be noted in case of multiple banking arrangements • Though no formal arrangement exists among the financing banks, it is preferable to have informal exchange of information to ensure financial discipline • Charges on the security given to the bank should be created with utmost care to guard against dilution in our security offered & to avoid double financing • Certificates on the outstandings with the other banks should be obtained on the periodical basis & also verified from the Balance sheet of the unit to avoid excess financing D. CREDIT SYNDICATIONA syndicated credit is an agreement between two or more lending institutions to provide aborrower a credit facility using common loan documentation. It is a convenient mode of raisinglong-term funds.The borrower mandates a lead manager of his choice to arrange a loan for him. The mandatespells out the terms of the loan & the mandated bank’s rights & responsibilities. The mandatedbanker – the lead manger – prepares an information memorandum & circulates amongprospective lender banks soliciting their participation in the loan. On the basis of the BSPATIL
  • 86. CREDIT APPRAISAL IN BANKING SECTORmemorandum & on their own independent economic & financial evolution the leading bankstake a view on the proposal. The mandated bank convenes the meeting to discuss the syndicationstrategy relating to coordination, communication & control within the syndication process &finalises deal timing, management fees, cost of credit etc. The loan agreement is signed by all theparticipating banks. The borrower is required to give prior notice to the lead manger about loandrawal to enable him to tie up disbursements with the other lending banks.Features of syndicated loans • Arranger brings together group of banks • Borrower is not required to have interface with participating banks, thus easy & hassle fee • Large loans can be raised through syndication by accessing global markets • For the borrower, the competition among the lenders leads to finer terms • Risk is shared • Small banks can also have access to large ticket loans & top class credit appraisal & managementAdvantages • Strict, time-bound delivery schedule & drawals • Streamlined process of documentation with clearly laid down roles & responsibilities • Market driven pricing linked to the risk perception • Competitive pricing but scope for fee-based income is also available • Syndicated portions can be sold to another bank, if required • Fixed repayment schedule & strict monitoring of default by markets which punish indiscipline BSPATIL
  • 87. CREDIT APPRAISAL IN BANKING SECTOR CHAPTER-7 CASE STUDY OF SBI(1). Details of case studyCompany:- Janak Transport Co.Firm:- Partnership * Shri Harisinghbhai Lavjibhai Chaudhari; * Shri Jesangbhai Lavjibhai Chaudhari; * Shri Vinodkumar Lavjibhai Chaudhari; * Shri Pratapbhai Lavjibhai Chaudhari;& * Shri Janakkumar Jesangbhai ChaudhariIndustry:- Transport ActivitySegment:- C& IDate of Incorporation:- 03.09.82Banking with SBI since:- 16 years as a current A/C holderBanking arrangement:- Multiple Banking ArrangementRegd. & Admin. Office:- Opp. Simandhar Flat, Nr. Pashabhai Petrol Pump, Highway, Mehsana. BSPATIL
  • 88. CREDIT APPRAISAL IN BANKING SECTORJanak Transport Co. is a partnership firm established in 1982 for carrying a transport business.As the company is in this business since incorporation & the unit has good contracts with ONGCsince last 26 years so it has a good repo with ONGC.As the company has a good repo with ONGC, the ONGC outlook of the business is consideredpositive.The firm has approached for term loan of Rs. 295 lacs to finance the purchase of Mahindra-Bolero. The total project cost is estimated to be Rs. 363.44 lacs.Brief of Contract:(1). Fixed hire charges/ taxi/ month: Rs. 29150 (with fixed 3000 Km run/ month & 12 hours duty/ day)(2). Additional/ km charges beyond 3000 km. Rs. 3.57(3). Duration of contract = 3 YearsProposed Credit Requirement: Fund Based = Rs. 295 lacs BSPATIL
  • 89. CREDIT APPRAISAL IN BANKING SECTORPerformance Details a) PERFORMANCE AND FINANCIAL INDICATORS: (Rs. in lacs) Aud. Aud. Esti. Proj. Proj. Proj. Proj.31st March 2007 2008 2009 2010 2011 2012 2013Net Sales 501.78 546.65 713.82 898.65 898.65 898.65 898.65Operating Profit (afterinterest) 149.64 182.92 234.24 326.69 374.32 404.08 425.06PBT 1.20 2.90 22.48 92.62 125.47 143.51 151.96PBT/Sales (%) 0.24 0.53 3.15 10.31 13.96 15.97 16.91PAT 1.20 2.90 22.48 92.62 125.47 143.51 151.96Cash Accruals 39.05 40.51 129.25 233.74 224.25 212.66 200.36PBDIT 54.44 52.41 150.01 266.99 247.21 226.20 203.72Paid up Capital 21.04 22.56 91.00 113.48 181.10 256.57 340.08TNW 21.04 22.56 113.48 181.10 256.57 340.08 427.04Adjusted TNW 21.04 22.56 113.48 181.10 256.57 340.08 427.04TOL/TNW 12.22 12.80 5.04 2.15 1.01 0.47 0.27TOL/Adjusted TNW 12.22 12.80 5.04 2.15 1.01 0.47 0.27Current Ratio 1.57 1.42 2.22 2.53 2.71 3.80 6.47Current Ratio (Excl. TL 2.34 1.97 3.93 4.49 5.66 5.83 6.47instalments)NWC 100.20 103.87 386.14 349.18 323.80 361.29 438.25 BSPATIL
  • 90. CREDIT APPRAISAL IN BANKING SECTORb) Synopsis of Balance Sheet : Sources of funds 31.03.2007 31.03.2008 Share Capital 21.04 22.56 Reserves and Surplus Secured Loans : short term 2.57 14.66 : long term 102.87 100.10 Unsecured Loans 39.92 36.21 Deferred Tax Liability Total 166.40 173.53 Application of Funds Fixed Assets (Gross Block) Less Depreciation Net Block Capital Work in Progress Investments 52.48 39.3 Inventories (Movable Assets) 110.59 134.66 Sundry debtors 92.61 78.70 Cash & bank balances 11.93 48.15 Loans & advances to subsidiaries and group companies Loans & advances to others 10.58 10.49 ( Less : Current liabilities ) 109.22 136.74 (Less : Provisions ) 2.57 1.03 Net Current Assets 113.92 134.23 Misc. Expenditure (To the extent not written off or adjusted ) Total 166.40 173.53 BSPATIL
  • 91. CREDIT APPRAISAL IN BANKING SECTORc) Movement in TNW (Rs. in lacs) 2007 2008 2009 2010 2011 2012 2013Opening TNW 17.63 21.04 22.56 113.48 181.10 256.57 340.08Add PAT 1.20 2.90 22.48 92.62 125.47 143.51 151.96Add. Increase in equity 8.42 10.17 68.44/ premiumAdd./Subtract changein intangible assetsAdjust prior yearexpensesDeduct Dividend 6.21 11.55 25.00 50.00 60.00 65.00Payment /WithdrawalsClosing TNW 21.04 22.56 113.48 181.10 256.57 340.08 427.04 Appraisal Memorandum for term loan: BSPATIL
  • 92. CREDIT APPRAISAL IN BANKING SECTORCircle: AhmedabadBranch: MehsanaCompany: Janak Transport Company(JTC)Term Loan :a) Proposal: Term Loan of Rs.295.00 lacs under the Transport Plus Scheme.b) Project / Purpose: To purchase 59 new Mahindra Bolero under tie-up arrangement withONGC.c) Appraised by: Inhouse examined by the Branch and found to be economically viabled) Cost of Project & Means of finance: Cost Means MAHINDRA Bolero DI-2WD 328.63 Equity : 68.44 Insurance 15.34 RTO Tax 19.47 WC Margin Debt: 295.00 Total 363.44 Total 363.44e) Remarks on Cost of project & Means of finance (in brief): Each vehicle shall cost Rs. 6.16 lacs as per details given below: Basic Price: Rs. 5.57 lacs RTO : Rs. 0.33 lacs Insurance : Rs. 0.26 lacs The cost mentioned above is as per the quotation submitted by Shrijee Motors, Mehsana. The firm is required to purchase 59 Mahindra Bolero for this purpose. Total cost of vehicle including the insurance and R.T.O. is Rs.363.44 lacs. The project is proposed to be financed by way of medium term loan of Rs.295.00 lacs and firm shall raise capital of Rs. 68.44 lacs as a margin.Break-even and sensitivity analysis and whether acceptable: BSPATIL
  • 93. CREDIT APPRAISAL IN BANKING SECTOR Break even analysis 31/03/09 31/03/10 31/03/11 31/03/12 31/03/13 Net Sales (A) 713.82 898.65 898.65 898.65 898.65 Variable costs Power and Fuel 223.76 253.68 253.68 253.68 253.68 Other operating Exp. 44.89 47.39 48.89 50.89 55.98 Total Variable Cost(B) 268.65 301.07 302.57 304.57 309.66 Fixed Costs Direct Labour 72.40 85.52 87.52 90.72 94.07 Selling, Admin. & General Expenses 8.50 9.50 10.50 11.50 12.50 Interest Expenses 20.76 33.25 22.96 13.54 3.36 Depreciation 106.77 141.12 98.78 69.15 48.40 Total Fixed Cost ( C) 208.43 269.39 219.76 184.91 158.33 Contribution (D=A-B) 445.17 597.58 596.08 594.08 588.99 Contribution ratio (E=D/A) 0.62 0.66 0.66 0.66 0.66 BE sales (F=C/E) 336.18 408.17 332.97 280.17 239.89 BE sales as % of Net Sales 47.10 45.42 37.05 31.18 26.69 Fixed cost with out depriciation G 101.66 128.27 120.98 115.76 109.93 Contribution (H=A-B) 445.17 597.58 596.08 594.08 588.99 Contribution ratio (I=D/A) 0.62 0.66 0.66 0.66 0.66 Cash BE sales (J=G/I) 163.97 194.35 183.30 175.39 166.56 CASHBE sales as % of Net Sales 22.97 21.63 20.40 19.52 18.53Commercial viability:Year ending 31st March 2009 2010 2011 2012 2013 TotalCapacity utilisation % 100% 100% 100% 100% 100% BSPATIL
  • 94. CREDIT APPRAISAL IN BANKING SECTORSales 713.82 898.65 898.65 898.65 898.65Net Profit 22.48 92.62 125.47 143.51 151.96 536.04Depreciation 106.77 141.12 98.78 69.15 48.40 464.22Cash Accruals 129.25 233.74 224.25 212.66 200.36 1000.26Interest 20.76 33.25 22.96 13.54 3.36 93.87TOTAL 150.01 266.99 247.21 226.20 203.72 1094.13TL / DPG repayments 83.75 132.92 94.58 93.85 43.02 448.12Interest 20.76 33.25 22.96 13.54 3.36 93.87TOTAL 104.51 166.17 117.54 107.39 46.38 541.99Gross DSCR 1.44 1.61 2.10 2.11 4.39Net DSCR 1.54 1.76 2.37 2.27 4.66Average Gross DSCR 2.02Average Net DSCR 2.23Deviations in Loan Policy/ Scheme: Parameters Indicative Companys level as on Min/Max level as per 31/03/2008 Scheme Liquidity Min. 1.33 1.42 TOL/TNW Max. 3.00 12.80* Average gross DSCR (TL) Min. 2.00 2.002 Promoters contribution (under tie- Min. 10 % 18.86% up) profits in the last two Min. Rs.3.00 lacs with Actual profit Rs. 1.20 lacs rising trend for year 2006-07 and Rs.2.90 lacs for year 2007-08* Others Nil NilRATE OF INTEREST:As applicable to “Transport Plus Scheme”. At present 14.00 % (0.25% above SBAR-presently13.75% wef 12/08/2008) with monthly rests. This is subject to change as per Bank’s Instruction.Analysis:- • Janak Transport Company is an existing profit making unit • The main chunk behind giving loan is that Janak Transport Company is doing contract BSPATIL
  • 95. CREDIT APPRAISAL IN BANKING SECTOR with ONGC since incorporation • The promoters are having considerable experience as transport contractor with ONGC • The unit has got confirm order/ tie-up with ONGC • A letter of authority from ONGC was received, that if Janak Transport Company will not make the payment than ONGC will directly make the payment to the bank • The promoters contribution to the project is 18.86% which is above the margin requirement • The current ratio is 1.42 that is satisfactory • Profits in the last two years:- Min. Rs. 3 lacs with rising trend Actual profit Rs. 1.20 lacs for year 2006-07 & Rs. 2.90 lacs for the 2007-08 If the partners remuneration & interest is included, the profit for the year ended 31.03.07 & 31.03.08 is Rs. 4.81 lacs & Rs. 6.21 lacs • TOL/TNW should be max. 3 which is 12.80 here, as the co. has done multiple banking arrangement it has o/s loans with other banks also but the co. is regularly making the payment of loans of principal amount along with the interest so the loan is given. • Also the contract awarded is backed by guarantee from ONGC regarding direct payment of monthly bills to SBI. Hence, surety of repayment is assured. • The bank also checks commercial viability of the company & found that the DSCR for term loan is 2.02 which is considered satisfactory • Despite that the bank has also done B.E. analysis & found that the B.E. sales was 47.10% of net sales for this current year • The net sales & PAT of the company is increasing year after year so overall profitability is good • The overall projected performance & financial of the unit are considered satisfactory(2). Details of case studyCompany:- Akshat Polymers BSPATIL
  • 96. CREDIT APPRAISAL IN BANKING SECTORFirm:- Partnership Firm (M/S Umiya Polymers) * Shri Amrutbhai Laljibhai Desai * Shri Gunvantbhai Ambaramdas Patel * Shri Natvarlal Mohanlal Patel * Shri Dharamsinhbhai Lallubhai Desai * Shri Kanjibhai Maljibhai DesaiIndustry:- ManufacturingActivity:- Maufacturing of HDPP woven sacksSegment:- SSIDate of Incorporation:- 19.11.07Banking arrangement:- Sole BankingRegd. & Admin. Office:- RS No. 840, Kadi Thol Road, Tal-Kadi, Dist-MehsanaThe unit will have installed capacity of 2520 MT. The unit is expected to start commercialproduction from first week of September, 2008. The capacity utilization for the year 2008-09 hasbeen projected at 70% of installed capacity in terms of the utilization of the machines.Accordingly the unit is projected to achieve a sale of Rs.9.26 crores for the year 2008-09 in thefirst six months of operations.Further, the unit is projected to achieve capacity utilization of 80% during the year 2009-10 (thefirst full year of operations) and accordingly the sale for the year is projected at Rs.19.77 crores.The projections are considered acceptable in view of the following factors: i) The unit plans to initially market its product in Gujarat, Maharastra, Rajasthan and sale to Central Govt. who purchases the HDPP woven sacks for grains through open tenders. The unit has started negotiating for booking of the orders for the proposed plant and results are promising as advised. BSPATIL
  • 97. CREDIT APPRAISAL IN BANKING SECTOR ii) HDPP woven sacks are widely used as packaging material in Cement, Fertiliser, storage of the AGL commodities. All these segments are reported to have good demand for the HDPP/PE woven sacks in the Indian market. iii) As per ICRA report, grading and research services (2006) Flexible packaging sector is expected to grow at the rate of 12.40%. iv) The promoters have sufficient experience in the line of activity. The promoters had already made negotiations of the some of the industries as detailed under for selling the HDPP woven sacks: • Indian Farmers Fertilizers Company Limited • Gujaco masol • Birala cement • Sanghi Cement • Ambuja cement • Various grain & Food Export units of Gujarat, etc. v) The firm has also started marketing activity for their products by making personnel contacts & writing introductory letters to potential customers & as the promoters are in the same line of business activity for the last 15 years they are having very good market contacts for the sales of the Finished Goods. vi) The orders worth Rs.2.50 crores is expected to be finalized by end of Agust, 2008 and before commissioning of the plant as advised.Proposal:Sanction for;i) FBWC limits of Rs.2.25 croresii) Fresh Term Loan of Rs.2.00 croresApproval for:i) CRA rating of SB- 6 (71 marks) based on projected financials as on 31.03.2010.ii) Pricing for WC facilities @1.00% above SBAR as applicable for SB-5 minimum @13.75and for BSPATIL
  • 98. CREDIT APPRAISAL IN BANKING SECTOR TL 1.50% above SBAR minimum @14.25% Performance & Financial Indicators: (Rs. in Crores) Year 2009 2010 2011 2012 2013 2014 Installed cap Qty. 2520 2520 2520 2520 2520 2520 (MT/pa.) Net Sales Qty. (approx) (MT) 1029 2016 2091 2142 2217 2268 Net Sales (Value) 9.26 19.77 20.58 21.09 21.82 22.34 (Export) 0.00 0.00 0.00 0.00 0.00 0.00 Operating profit 0.44 1.18 1.19 1.23 1.31 1.33 Profit before tax 0.43 1.17 1.18 1.22 1.30 1.32 PBT/Net sales (%) 4.64 5.92 5.73 5.78 5.96 5.91 Profit after tax 0.29 0.78 0.79 0.82 0.87 0.88 Cash accruals 0.66 1.10 1.09 1.15 1.24 1.32 PBDIT 1.20 2.04 1.96 1.97 2.02 2.05 Paid up capital 0.95 0.95 0.95 0.95 0.95 0.95 Tangible net worth 1.23 2.01 2.80 3.62 4.49 5.38 Adjusted TNW 1.73 2.51 3.30 4.12 4.99 5.88 TOL/TNW 4.11 2.50 1.67 1.19 0.88 0.66 TOL/Adjusted TNW 2.64 1.80 1.27 0.92 0.81 0.62 Current ratio 1.34 1.52 1.53 1.53 1.57 1.81 NWC 1.01 1.71 2.40 2.57 2.74 3.28 Balance Sheet: (Rs. In crores)Sources of funds 31.03.2009 31.03.2010 Share Capital 0.95 0.95 Reserves and Surplus 0.29 1.07 Secured Loans : short term CC 2.25 2.25 : long term TL 2.00 1.60 Unsecured Loans 0.50 0.50 BSPATIL
  • 99. CREDIT APPRAISAL IN BANKING SECTOR Deferred Tax Liability Total 5.99 6.37Application of Funds Fixed Assets (Gross Block) 2.67 2.67 Less Depreciation 0.37 0.69 Net Block 2.30 1.98 Capital Work in Progress Investments Inventories 1.73 2.13 Sundry debtors 1.85 2.40 Cash & bank balances 0.15 0.15 Loans & advances to suppliers of 0.14 0.12 Raw material / sparesAdvance tax 0.10 0.23 ( Less : Current liabilities ) 0.31 0.67 (Less : Provisions ) Net Current Assets 3.66 4.36Misc. Expenditure(To the extent not written off or adjusted )Non-Current Assets/ Deposits 0.03 0.03 Total 5.99 6.37 Movement in TNW:-Movement in TNW Projected 31.03.2009 31.03.2010 31.03.2011Opening TNW 0.00 1.23 2.01+ PAT 0.29 0.78 0.79+ Inc. in Equity / Premium 0.95+/- Change in Int. Assets -0.01+/- Adj. of prior year exp.- Dividend paymentClosing in TNW 1.23 2.01 2.80 Bank Income Analysis (Rs. in crores) From Projection Projection 31.03.2009 31.03.2010 WC Int. 0.16 0.27 TL Int. 0.14 0.29 LC - - BG - - Bill - - BSPATIL
  • 100. CREDIT APPRAISAL IN BANKING SECTOROthers loan processing 0.03 0.01Total 0.33 0.57Deviations in Loan Policy: Parameters Indicative Min/Max level Companys Companys level as as per loan policy level as on on 31.03.2010 31.03.2009 @Liquidity 1.33 1.34 1.52TOL/TNW 3.00 4.11 2.50TOL/Adj. TNW 2.64 1.80Average gross DSCR (TL) 1.75 2.54 2.54Debt / equity 2:1 2.01:1 1.03:1Debt/Quasi equity 1.15:1 0.64:1Any others - - -Defaulters List:-Whether names of promoters, directors, company, group concerns figure in :RBI defaulters’ list dated 30.09.2007 NoWilful defaulters’ list dated 31.12.2007 NoECGC caution list NoWarning signals / Major irregularities inCredit audit:inspection report : Not applicable new unitOther audit reports :Adverse observations in Balance sheet Not applicable new unitAdverse observations in Auditors report Nil.Any NPAs among associate concerns NoneAbout unit and the promoters:AKSHAT POLYMERS (AP) has been established as a partnership firm on 19th November, 2007at Kadi. The partnership was constituted for manufacturing and selling of HDPP woven sacks tobe manufactured from HDPP granules.The firm consists of total six partners. The brief background of the partners is as follows :Name Age Brief Background BSPATIL
  • 101. CREDIT APPRAISAL IN BANKING SECTOR M/s Umiya Polymers 46 Sri Prahaladbhai Hargovandas Patel is the main partner in M/s Umiya Polymers with 30 share. Sri Prahaladbhai is SSC and have 10 years of experience as Production Manager in Asia Woven Sacks Ltd., Kadi who are engaged in similar activity. M/s Umiya Polymers are engaged in plastic waste recycling at Kadi. Sri Amrutbhai Laljibhai Desai 43 Sri Desai is SSC and have 15 years of experience as Production Manager in reputed Gopala Polyplast Ltd., Santej. He had good contacts in the market and will look after production department & raw material purchases. Shri Dharamsingbhai Lallubhai Desai 35 Sri Dharamsinhbhai is a partner in the local unit M/s Ajay Ginning Industries, Kadi Shri Kanjibhai Malibhai Desai 44 Sri Kanjibhai is a farmer by profession and sleeping partner. Shri Gunvantbhai Ambaramdas Patel 42 Sri Gunvantbhai also is a partner in M/s Ajay ginning Industires, Kadi and has been inducted in the partnership as a investment partner. Shri Natvarlal Mohanlal Patel 48 Shri Natvarlal Patel is a B.Com. and has 10 years of experience in accounting. He is also partner in M/s Shiv Shakti Steel, Kadi. He will be looking after general administration and accounts of the firm. The overall quality of the management is considered satisfactory. Commercial viability : (Rs.in crores)Year ending 2008-09 2009-10 2010-11 2011-12 2012-13 2013-14 Total31st MarchNet Sales 9.26 19.77 20.58 21.09 21.82 22.34Net Profit 0.29 0.78 0.79 0.82 0.87 0.88Cash Accruals 0.66 1.10 1.09 1.15 1.24 1.32 6.56Interest on TLs 0.16 0.27 0.22 0.16 0.11 0.05 0.97Sub Total (A) 0.82 1.37 1.31 1.31 1.35 1.37 7.53Total repayment 0.00 0.40 0.40 0.40 0.40 0.40 2.00Interest on TL 0.16 0.27 0.22 0.16 0.11 0.05 0.97 BSPATIL
  • 102. CREDIT APPRAISAL IN BANKING SECTORSub Total (B) 0.16 0.67 0.62 0.56 0.51 0.45 2.97DSCR (Gross) 5.13 2.04 2.11 2.34 2.65 3.04Net DSCR - 2.75 2.73 2.88 3.10 3.30Average Gross 2.54DSCRAverage Net 3.28DSCR Break-even and sensitivity analysis and whether acceptable:(Rs. in crores) Break even analysis 31/03/09 31-Mar-10 31-Mar-11 30-Mar-12 31-Mar-13 31-Mar-14 Capacity Utilization 70% 80% 83% 85% 88% 90% Net Sales (A) 9.26 19.77 20.58 21.09 21.82 22.34 Variable costs Raw material 8.74 17.13 17.77 18.20 18.84 19.27 Consumable spares 0.00 0.00 0.00 0.00 0.00 0.00 Power and Fuel 0.26 0.47 0.50 0.53 0.56 0.59 Other operating Exp. 0.09 0.13 0.15 0.16 0.17 0.18 Stock Changes 0.73 0.39 0.06 0.03 0.04 0.04 Total Variable Cost(B) 8.36 17.34 18.36 18.86 19.53 20.00 Fixed Costs Direct Labour 0.08 0.13 0.14 0.15 0.16 0.17 Selling, Admin. & General Expenses 0.06 0.10 0.11 0.12 0.13 0.14 Interest Expenses 0.40 0.55 0.48 0.42 0.35 0.29 Depreciation 0.37 0.32 0.30 0.33 0.37 0.44 Total Fixed Cost ( C) 0.91 1.10 1.03 1.02 1.01 1.04 Contribution (D=A-B) 0.90 2.43 2.22 2.23 2.29 2.34 Contribution ratio (E=D/A) 0.10 0.12 0.11 0.11 0.10 0.10 BE sales (F=C/E) 9.10 9.17 9.36 9.27 10.10 10.40 BE sales as % of Net Sales 98.27 46.38 45.48 43.95 46.29 46.55 Interfirm Comparison: (To be given only where data from comparable units is available.) (Amt in Cr) Name of Company FBL NFBL Year Sales PBT / TOL / CR Sales TNW % Ahmedabad Packaging 3.30 1.20 2007 23.11 2.16 1.47 1.16 Industries Ltd. BSPATIL
  • 103. CREDIT APPRAISAL IN BANKING SECTORSinghal Industries Pvt. Ltd 6.70 -- 2010 15.19 6.52 2.90 1.90Asia Woven Sacks Pvt. 7.44 1.00 2008 22.98 4.53 3.14Ltd. 1.08Akshat Polymers 4.25 -- 2010 19.77 5.92 2.50 1.52Raw material – The major raw material for this plant is HDPP in the form of granules. This rawmaterial is available locally by sales & distribution network of the major suppliers as under: • Reliance Industries Limited • Nand Agencies • Labdhi International • Hadlia petrochemicals Ltd. • Sharada Polymers • IPCLThe raw materials are purchased from the suppliers against the advance payment only and cashdiscounts are offered resulting in the increase n profitability. Any variation in the cost of rawmaterial is proposed to be passed on to the finished products and will not affect the profitability.Analysis:- • The firm is into manufacturing of HDPP woven sacks which are widely used as packaging material in cement, fertilizer, etc. • As per ICRA report, grading and research services (2006) Flexible packaging sector is expected to grow at the rate of 12.40%. • The promoters have sufficient experience in the line of activity. The promoters had already made negotiations of the some of the industries as detailed under for selling the HDPP woven sacks: • Indian Farmers Fertilizer Co. Ltd • Birala cement BSPATIL
  • 104. CREDIT APPRAISAL IN BANKING SECTOR • Sanghi cement • Ambuja cement • Various grain & Food Export Unit of Gujarat• The orders worth Rs.2.50 crores is expected to be finalized by end of Agust, 2008 and before commissioning of the plant as advised.• The company’s borrower rating is SB-6 based on projected financials as on 31.03.2010 (the first full year of operations).• Projected financials are in line with the financials of the some of the unit in similar line of activity and production level.• The promoters are having experience of more than 15 years in the line of the activity.• The affairs of the firm are expected to be managed on professional lines based on their past experience.• The conduct of accounts of associate with the existing bankers has been satisfactory.• The short and medium term outlook for the industry is stable• Availability of collateral security reflected in collateral coverage of 50.566%.• Gross average DSCR of 2.54.• Average security margin of 48%.• The company has adequate management skills and production/marketing infrastructure in place to achieve the projected trajectory. There is steady demand for the product. Chapter-9 Findings• Credit appraisal is done to check the commercial, financial & technical viability of the project proposed its funding pattern & further checks the primary or collateral security cover available for the recovery of such funds• SBI loan policy contains various norms for sanction of different types of loans• These all norms does not apply to each & every case• SBI norms for providing loans are flexible & it may differ from case to case BSPATIL
  • 105. CREDIT APPRAISAL IN BANKING SECTOR• The CRA models adopted by the bank take into account all possible factors which go into appraising the risk associated with a loan• These have been categorized broadly into financial, business, industrial, management risks & are rated separately• The assessment of financial risk involves appraisal of the financial strength of the borrower based on performance & financial indicators• After case study we found that in some cases, loan is sanctioned due to strong financial parameters• From the case study analysis it was also found that in some cases, financial performance of the firm was poor, even though loan was sanctioned due to some other strong parameters such as the the unit has got confirm order, the unit was an existing profit making unit & letter of authority was received for direct payment to the bank from ONGC which is public sector• Different appraisal scheme has been introduced by the bank to cater different industries such as:- Doctor plus scheme for doctors Transport plus scheme for transport School, collages & educational institutions Trader’s easy loan Warehouse receipt financing for commodity traders (agriculture related stock, cotton ginning, etc.)• In the business world risk arises out of:- Deficiencies / lapses on the part of the management Uncertainties in the business environment Uncertainties in the industrial environment Weakness in the financial position• Credit is the core activity of the banks & important source of their earnings which go to pay interest to depositors, salaries to employees & dividend to shareholders• Credit & risk go hand in hand• Bank’s main function is to lend funds/ provide finance but it appears that norms are taken BSPATIL
  • 106. CREDIT APPRAISAL IN BANKING SECTOR as guidelines not as a decision making• A banker’s task is to indentify/assess the risk factors/parameters & manage/mitigate them on continuous basis BSPATIL

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