1. A study on credit appraisal procedures at Karnataka State Financial
Corporation
In partial fulfilment of the Dissertation
In Semester - IV of the Master of Business Administration
Under the Guidance of Prof. Shivprasad G

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CONTENTS
CHAPTER
NO.
CHAPTER NAME PAGE NO.
1. INTRODUCTION 9
1.1 Industry profile 9-17
1.5 Objective of SFC’s 15-16
COMPANY PROFILE 18-29
2.2 Introduction to Co-operative Banks 29-31
2 LITERATURE REVIEW 32-40
3 RESEARCH METHODOLOGY 41
3.5 Sampling 41-42
3.7 Data Collection 42
3.9 Analysis 42-43
4 DATA Analysis 44-74
5 Findings 75
6 RECCOMENDATION 76-77
CONCLUSION 78
SCOPE OF FURTHER RESEARCH 79
BIBLOGRAPHY 80

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List of Table
SERIAL.
NO.
LIST OF Table PAGENO.
4.3.1.1 ABC COMPANY 57
4.3.1.2 59
4.3.7.1 Profitability Statement of M/s. ABC Network
Technologies Pvt. ltd., Bangalore
63
4.3.8.1 Working Capital Estimate of M/s. ABC Network
Technologies Pvt. ltd., Bangalore
63-64
4.3.9.1 Debt Service Coverage Ratio of M/s. ABC Network
Technologies Pvt. ltd., Bangalore
65
4.3.9.2
Disposition of Funds of M/s. ABC Network
Technologies Pvt. ltd., Bangalore
65
4.3.12.1 Internal Rate of Return of M/s. ABC Network
Technologies Pvt. ltd., Bangalore
67-68
4.3.13.1 Credit Risk Analysis of M/s. ABC Network
Technologies Pvt. ltd., Bangalore
68-69
4.3.13.2 Business Risks of M/s. ABC Network Technologies
Pvt. ltd., Bangalore
69-70
4.4.1(a) KSFC sanctioned more loans to flowing sectors
within the Bangalore
72-73
4.4.1(b) Opinion of the respondents about the interest rate of
KSFC’s term loan
74
4.4.1(c) Opinion of the respondent about the EG cell takes
care in identifying competent entrepreneurs.
74-75
4.4.1(d) Opinion about credit appraisal system at KSFC with
in Bangalore city
75
4.4.1(e) Opinion about rate KSFC services to customers in
Bangalore City.
75-76

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I. INTRODUCTION
1.1 INDUSTRY PROFILE
India, the largest democracy of the world, is all set to become a major economic
power. India faced its worst ever financial crisis in 1991, when its foreign exchange reserves
fell below one billion dollars, the inflation rate was as high as 16.7 percent and the economy
was suffering from a high fiscal deficit, a high unemployment rate and several other
economic weaknesses and odds. India has successfully launched and handled its economic
reforms process of privatization and liberalization to bring about macroeconomic stabilization
despite the US sanctions. Fiscal deficit is within tolerable limits, the rupee is going strength
despite RBI intervention, banking and financial institutions have improved, and sensex has
crossed over 8500 points. The overall outlook of the economy is encouraging.
Finance is major element, which stimulates the overall growth of economy. Finance is
oxygen of economic activity. Healthy system directly contributes to the growth of country
.An efficient financial system calls for effective performance of financial institution, financial
instruments and financial market.
This would enable the country to have supply of funds to the industries, Agriculture
continuously. Economic problems of the nation can be solved comfortably, through which
self- sufficiency can be achieved.
A financial system plays a significant role in hoisting up the economy. Every enterprise big
medium or small needs finance to carry on its operation to achieve its target. Hence finance is
so indispensable today, that it is said to be breathe of an enterprise, and without adequate
finance no enterprise can possibly accomplish its objective.
1.2 ORIGIN OF THE INDUSTRY
Before independence one major constraint for the development of industries was the absence
of institutional arrangements for providing industrial finance on any significant scale. It was
therefore, very natural that after independence government took steps to fill this vacuum and
create a number of national and state level financial institutions one after another. These
financial institutions are not banking institutions in conventional sense, but development

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banks which serve as development agencies not only currency on lending operation, but also
developmental activities including promoting projects, building and advising the clients in
their problems and difficulties.
Modern industrial enterprises require various types of capital, initial capital, fixed capital,
working capital, operational capital, maintenance capital, developmental capital etc.
Government of India understood importance of industrial development in generating
employment and also economic development of the country. Government passed Industrial
policy to clearly demarcate areas of production under public sector, private sector, co-
operative sector and small-scale sector as well as large scale, medium scale and small-scale
units.
By the end of 1945, World Bank, International bank for reconstruction and development was
officially known and was made into groups with affiliates International Finance Corporation
(1986), and International Development Association (1960). Subsequently World Bank,
regional multinational banks were established in order to compensate scarcity of capital in
member countries, in their economic development.
1.3 GROWTH AND DEVELOPMENT OF THE INDUSTRY
The Industrial policy resolution 1948, for the first time government accepted the importance
of small -scale industries in overall industrial development of the country. It was well
realized that small -scale industries are particularly suited for the utilization of local resources
and for creation of employment opportunities. Small scale industries were facing the actual
problems of raw materials, capital, skilled labour, marketing etc.
Since there was no capital market to provide long -term funds to industries in the country.
The government understood the importance of financial institutions to meet the requirement
of funds by industries and it started many financial institutions.
1.3.1 Reasons for the Substantial Growth of Indian Development Banks
 The economic crises of the thirties
 Atrocities of world war I and II
 Formation of World Bank in 1945.

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 Liberation movement of world economy.
 Worldwide campaign of development banking.
 Time bound demand of Business and Industry.
 Substantial support of liberated countries.
 Inflow and out flow of capital on account of development in capital markets.
1.3.2 Development Banking in India
Development banks are those banks engaged in the promotion, development of industries,
agriculture and other key sectors. These banks differ from commercial bank in one sense, that
they do not mobilize saving of the people. But invest the resources in a productive manner.
Additionally these banks provide add the development services so as to accelerate the growth
of economy.
In wake of exigency emerging out of First World War, industrial commission (1916-1918)
was set up to study the problem of industrial evaluation. The commission found scarcity of
finance as a big hurdle in the way of industrial development and recommended setting up of a
development bank, Similar to industrial bank of Japan (1902), through effective interventions
by the government in economic affairs. The montage Chelmsford report on constitution
reform (1915) also expressed similar vices; hence certain provisional government passed
state aid to industries in 1922.
The Industrial Finance Corporation of India was then established on 1st July 1948. Since then,
a number of development financial institutions were set up to cater to the needs of industries,
Agriculture and service Sector. All these institutions were aimed at accelerating the growth of
economic development of the country. The number of development institutions was increased
to 100. As at the end of June 1995, as many as 480 financial institutions are in operation in
India.
1.4 A BRIEF PROFILE OF SOME DEVELOPMENT BANKS IN INDIA
1.4.1 Industrial Development Bank of India (IDBI)

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The Industrial development bank of India is the leader in the Indian capital market. The IDBI
was established in July 1964, as a wholly subsidiary of Reserve Bank of India, but was
transferred to the ownership of central government since in 1975. Its assistance has helped in
the development of wide range of industries in India.
The IDBI is co-ordinates and monitors the credit facilities by all India and state level
financial institutions and development corporations like Industrial Finance Corporation of
India, State level Finance Corporation, Industrial credit and Investment Corporation of India
etc., and also provide long term finance to Industries. IDBI has given a boost to capital
formation and has brought about directional changes in the flow of industrial credit.
1.4.2 Industrial Finance Corporation of India Ltd. (IFCI LTD)
The Industrial Finance Corporation of India was established under IFC Act in 1948. Since
July 1st 1993, it has a pioneer development bank in India. Its main objective is to provide long
and medium term requirements of capital to industrial sector and IFC also under write the
shares, direct subscription of shares and debentures. IFC encourages loans for setting up new
industries, projects and loans for expansion of existing unit’s diversification and
modernization renovation and also after other financial services for equipment procurement,
equipment finance, buyer and suppliers credit, equipment leasing and finance to leasing and
hire purchase companies.
1.4.3 Small Industries Development Bank of India (SIDBI)
The small industries development bank of India, a wholly owned subsidiary of IDBI, is the
principal financial institution for promotion financing and development of industry in small,
tiny and cottage sectors and coordinating the functions of other institutions engaged in similar
activities. SIDBI, which become operational in April 2nd 1990 after taking over IDBIS
operations in respect of small sector, has been playing concentrated attention to the small
sector with special emphasis on village, cottage and tiny sectors.
1.4.4 Unit Trust Of India (UTI)
The unit trust of India (UTI) was set up in 1964 with a major contribution from the RBI under
the unit trust of India Act 1964 subsequently, with the passing of Ownership of UTI to
government in 1976. The IDBI become its shareholder along with the LIC, SBI and other

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financial institutions. Its main objectives are to mobilize savings. Particularly from the low
and middle-income groups, to canalize these savings into productive investment to provide
on assured income to savers. It can underwrite new issues, make direct subscription to public
issues or private placements, keep deposits with banks and companies and operate in the
money market by subscribing to Treasury bills, commercial bills etc., It can also partake in
the inter-bank market as a lender or borrower of short-term funds. It can borrow from the
RBI.
1.4.5 Life Insurance Corporation of India (LIC)
LIC was established under the LIC Act in 1956. The provision of life insurance in India is
monopoly of the LIC. It provides cover of risk of life, retirement disability etc., when it was
set up as a nationalized public body. It was acting, as a major financial institution in the
capital market for mobilizing savings through premium for life and endowment insurance and
using these funds for investment in government and corporate securities for economic
growth. The LIC operates in both the money and capital market although it is a long-term
financial institution.
1.4.6 Export Import Bank of India (EXIM)
The EXIM Bank of India, established in 1982 is the principal financial institution for
financing facilitating and promoting India’s foreign trade. The bank promotes India exports
through a variety of programs to meet the need of different customs groups, namely Indian
entities, overseas entities, and commercial banks. Some programs available to Indian
exporters are investment loans; export Product development loans for export marketing pre-
shipment credit, for exports of project and advisory services.
1.4.7 The Industrial Reconstruction Bank of India (IRBI)
The Industrial Reconstruction Bank of India was established in 1985 after reconstitution of
the erstwhile IRCI. It is the principal credit and reconstruction agency of rehabilitation of sick
and crossed concerns by granting loans, advances, underwriting shares, bonds, debentures
and guarantees for the loans deferred payments.
1.4.8 State Industrial Development Corporations (SIDC)

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The SIDCs were incorporated under the companies Act 1956 as wholly owned state
government. Undertakings for promotions and development of medium and large industries,
there are 28 SIDCs in the country, 11 of them sanctioning also as SFCs to provide assistance
to small-scale sector.
1.4.9 National Small Industries Corporations Ltd. (NSIC)
The National small industries corporation Ltd., on enterprise under the union ministry of
industries was set up in 1955 to promote, aid and faster the growth of small-scale industries
in the country.
1.4.10 State Small Industries Development Corporation (SSIDC)
The state small industries development corporations, incorporated under the companies Act
1956 as state government undertaking, are vested with the responsibility of catering to the
needs of small industries in the state union testimonies under their jurisdiction. SSIDC enjoy
operation flexibility and undertake variety of activities of the benefit of small-scale sector.
Fig 1.1 shows the Development banks in India.
1.4.11 State Financial Corporation’s (SFCs)
Introduction of State Financial Corporation’s (SFCs)
At the time of industrial finance corporation was set up. It was recognized that, essential to
establish similar institutions with a view to assist small industries in different states because it
was not possible for a single institution to satisfy the capital needs of the small concerns
spread all over the country. Accordingly, the SFC Act was passed in 1951, which authorized
each state to establish a SFC. The Punjab Govt., looks the lead in organizing a financial
corporation (under the above registration in 1953 when Punjab Financial corporation) was set
up. Gradually financial corporations were established in different states, these are 18 SFCs
functioning in the country. These institutions extend financial assistance to small-scale
industries. The area of operation is confined to one state.
1.5 OBJECTIVES OF SFC’S

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The principal object of the SFCs is to provide medium and long term financial assistance to
small and medium enterprises. Particularly when normal ranking accommodation is not
available SFCs collectively sub serve broad national objective of economic growth with
accent on promotion of small enterprise, balanced regional growth and widening of the
entrepreneurial base through encouragement of new entrepreneurs.
Scope of Business
The SFCs have been established to help entrepreneurs to set up new industries and
undertake programs of modernization, renovation, expansion and diversification’s. The
definition of industrial concerns includes Public Ltd. Companies, Private Ltd. Companies,
Partnership and proprietary concerns.
According to section 2(1) of the SFCs Act 1951 as amended up to (1962) the SFCs can assist
industrial concern engaged or to be engaged in any of the following activities.
 Manufacture preservation of Processing of goods.
 Mining.
 Hotel Industries
 Road Transport.
 Generation or destruction of electricity or any other form of power.
 Development of any area of land as an industrial estate.
 Fishing or providing shore facilities for fishing of the manufacture they’re off.
 Providing special or technical knowledge or other services for the promotion of
industrial growth.
Function of SFCs
The function of SFCs is as follows
 Granting loans or advances or subscribing to the debentures of industrial concern
loans to be repayable within 20 years.
 Guaranteeing the loans raised by industrial concerns on such terms and conditions as
may be mutually agreed open and repayable within 20 years.

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 Guaranteeing deferred payments of any industrial concern, which purchase capital
goods with in India.
 Underwriting the issue of stocks, Bonds or Debentures of Industrial concerns subject
to their being disposed of in the market with in 7 years.
 Providing for discounting of bills of exchange beside the SFCs Act, as agent of the
central Govt, State Govt. and other national level development financial institutions.
1.6 PRESENT STATUS OF THE INDUSTRY
At present there are 18 SFC’s in the country, which were set up under the SFC’s Act 1951.
The SFC’s in different states are
 Andhra Pradesh State Financial Corporation.
 Assam Financial Corporation.
 Bihar State Financial Corporation.
 Gujarat State financial Corporation.
 Delhi Financial Corporation.
 Haryana Financial Corporation
 Himachal Pradesh Financial Corporation.
 Jammu and Kashmir SFC.
 Karnataka State Financial Corporation.
 Kerala State Financial Corporation.
 Madhya Pradesh Financial Corporation.
 Maharashtra State Financial Corporation.
 Orissa State Financial Corporation.
 Punjab Financial Corporation.
 Tamil Nadu Industrial Investment Corporation Ltd.,
 Rajasthan Financial Corporation.
 Uttar Pradesh Financial Corporation.
 West Bengal Financial Corporation.

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II. COMPANY PROFILE
Profile of Karnataka State Financial Corporation
This chapter will give insight about the company and bring out the important thing that
makes a company with the help of the Mckinsey 7-S model.
2.1 GENERAL INTRODUCTION
KSFC has been playing a pivotal role in the development of small and medium scale
enterprises (SMEs) in the state of Karnataka for the last 46 years of its existence. Since
inception, KSFC has assisted more than 1.55 lakh units with cumulative sanction of more
than Rs 7,427.65 cores out of which about 50% is towards SSIs.
Amendments to SFCs Act provide wide ranging scope in financial assistance and operational
flexibility keeping this in view, KSFC has re-engineered itself to ensure almost customer
satisfaction with new energy, thrust and speed. In line with this the corporation has put in
place comprehensive, client friendly, need – based policies in the areas of credits recoveries
and one – time settlement.
Apart from setting standards of performance, these policies would also achieve the objective
of transparent governance.
2.2 INTRODUCTION
Karnataka state financial corporation is a state level financial institution established by the
state government in the year 1959 under the state financial corporation’s Act 1951. To meet
mainly the long term financial needs of small and medium enterprises (SMEs) in the state of
Karnataka. In the 46 years of existence, KSFC has contributed most significantly for the
growth of SSIs; backward area development in these areas is unparalleled.

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KSFC, an ISO 9001-2000 certified organization is proud to have played a major role in the
industrial development of the state. It is also the proud privilege of KSFC to have assisted
many industries that are internationally recognized like the INFOSYS and BIOCON.
2.3 ORIGIN OF THE COMPANY
Karnataka state financial corporation (KSFC) was established on March 30, 1959 under the
state financial corporation’s Act 1951. The Main Objective of establishing KSFC was to
provide term loan assistance to tiny, small and medium enterprises mainly for the purpose of
acquisition of fixed assets. As the commercial banks were selective in providing working
capital facilities to newly set up units, the corporation took active role to provide working
capital term loan to curtail initial sickness for want of working capital.
The Karnataka State Financial Corporation, which prior to November 1, 1973, was known as
the Mysore State Financial Corporation. Then the Government of Mysore established the
KSFC by notification No. FD 28 BIS 59 dated 30th March 1959.The Mysore Government
fixed the Authority Share capital, at Rs 2 crores. As compared to this, today’s authorized
share capital is Rs. 500 crores with a provision that the state government of Karnataka, on the
recommendation of the small industries development bank of India increased the authorized
capital up to Rs. 1000 cores.
2.4 GROWTH AND DEVELOPMENT OF THE COMPANY
KSFC in order to improve its operational efficiency towards enhancing customer satisfaction
had standardized most of its operations and obtained ISO 9002:94 certification during May
1998. The ISO certification was renewed during May 2001 for a further period of 3 years,
which was to conclude during December 2003. In order to continue and up-grade the quality
management system conforming to ISO 9001-2000, on completion of all formalities, the
corporation is successful in up-grading the quality management system to the revised
standards of ISO 9001-2000. And is certified as an ISO 9001-2000 company with effect form
9-03-2004.
The corporation has been acting as regional development bank by focusing its attention for
development of first generation entrepreneurs, tiny and small-scale industries with more

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thrust on development in the hinterland of backward areas. Development of weaker section of
the society like SC/ST, Minority, Women entrepreneurs, physically handicapped, etc., was
among the prime objectives.
2.5 LEADING PLAYERS
 Small Industry Service Institution (SISI)
 Technical Constancy Organizations (TCOs)
 Karnataka State Small Industries Development Corporation limited (KSSIDC)
 Small Industrial Development Bank of India (SIDBI)
 Khadi and Village Industrial Board (KVIC)
 Commercial Banks
 Co-operative Banks etc.
 DICs
 Some foreign lending banks.
2.6 KSFC’s TURNAROUND
In line with the committed performance, the corporation accomplished a notable feat of
turnaround during the current fiscal. The corporation registered an operating profit of Rs.
14.11 crores and a net profit of Rs. 0.87 cores in the year under review. Thus, the not too
encouraging financial results witnessed by the corporation in the last six years were halted
during 2003-04 with this turnaround, the resilience displayed, by the corporation will go a
long way in further consolidating the corporations performance in the coming years.
2.7 COMPANY PROFILE WITH REFERENCE TO MCKINSEY 7-S
FRAMEWORK
The 7-S framework was developed by the consultant at the Mckinsey to a very well known
management constancy firm in United States towards the end at the 70s to diagnose the
causes of organizational problems and to formulate programs for improvement.

15. 15
2.7.1 Strategy
A set of decisions and actions aimed at gaining a sustainable competitive advantage. It
includes purposes, missions, objectives and major action plans.
Goals of the KSFC
Goals refers to “a set of values and aspirations that goes beyond the conventional formal
statement of corporation objectives goals are missions and fundamental ideas around which a
business is built”
Main Objectives of the KSFC
 To provide financial assistance mainly to meet the long term financial needs of small
and medium enterprises (SMEs)
 Contribution to the growth of small-scale industries, backward area development and
promotion of first generation entrepreneurs.
 To provide for wide ranging scope of assistance and operational flexibility.
 Setting standards of performance to achieve transparent governance.
 To diversify it’s business in equipment leasing, working capital assistance to select
unit and to support research and development activities.
 To identify new projects for investment and assist the local people to setup industrial
unit’s in backward area by offering them project feasibility reports, marketing
assistance and technical input required.
 Extend special concession to entrepreneurs belonging to SC/STs welcome
entrepreneurs and physically handicapped.
 Accord preference to local, tiny, ancillary entrepreneurs.
 To meet financial assistance for creation of fixed asset.
 To meet the urgent working capital requirement of existing units by way of corporate
loans.
Quality Policy

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Karnataka state financial corporation endeavours to create satisfied customer through
adequate and timely financial assistance and guidance. This shall be achieved through
professional management and teamwork.
Quality Objectives
 To effectively identify and assist the entrepreneurs in establishing successful business
enterprises.
 To provide quality financial and related services on a continuous basis.
 To continually up-grade our products and services.
 To motivate and involve employees to achieve the set organizational growth targets.
 To encourage the employees to upgrade and enhance the knowledge and skills
through effective training and development.
 To transform the organization to a customer centric institution.
Mission
“KSFC is committed to nurture, develop and service the SME sector through need
based product and services”.
Scope of KSFC
The scope of operation of Karnataka state financial corporation is confined essentially to
small and medium scale enterprises and it is constricted from granting loans to concern
whose paid up capital and reserves together exceed Rs. 12 Cores. Their aggregate
contingent liabilities arising from guarantee and underwriting arrangement should not
ordinarily exceed twice their paid up capital and reserves, which can extend up to Rs. 12
cores with the prior approval of the government. Moreover a KSFC holding company’s
share capital should not exceed 30% of the subscribed capital of their company or 10 %
of its own paid capital and reserves whichever is less. It is also prohibited from financing
a concern in which its directors have interest.
Karnataka state financial corporation is authorized to provide different types of
assistance such as
 Granting loans and advances for period not exceeding 20 years.
 Subscribing to debenture payable written 20 years.

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 Karnataka state financial corporation is also authorized to act as the agent of
government both a central and state level, with any financial institution like IDBI,
IFCI etc., In matter connected with grant of loan or advises or subscription.
Achievements
 Sanctions of loans to small scale and tiny sector up to 31.03-2005, since its inception
aggregating 1,55,000 lakh units through its various lending schemes.
 Computerization of head office and branch offices for better customer service.
 Establishing of women entrepreneurs’ guidance cell for guidance and escort services
of women entrepreneurs.
 Introduction of loan assistance scheme for getting ISO (9000) certification.
 Premier position among all SFCs of the country with regard to sanctions
disbursements and recovery.
 Commendation from IDBI as one of the best financial institution.
Functions of KSFC
 Granting loans and advances or subscribing to debentures of industrial concerns,
 Subscribing to stocks / shares of industrial concerns,
 Under writing of issue of shares, bonds and debentures by industrial concerns,
 Guaranteeing the loans raised by industrial concerns,
 Providing hire purchase assistance for acquisition of industrial equipment / Machinery
and transport vehicles,
 Providing merchant banking facilities viz., portfolio management, broke-ship of issue
of shares, organization of bridge appraisal reports, syndication of loans etc.
 Providing bill discounting facility for industrial concerns, and
 Acting as agents of central / state government and financial institutions.
On the Fast Track to the Future
In the fast changing economic scenario of the emerging global village, a corporate has
to be on its toes. Karnataka state financial corporation is fully geared up to meet the

18. 18
challenges of global competition. It has embarked on a restructuring process that will see the
corporation turn into focused corporate ready to able on all challenges. For Karnataka state
financial corporation it has a clear vision of its future to diversify into new areas of operation
while maintaining its leadership position as the number one SFC in the country.
A beginning has been made in this direction the corporation has entered into an agreement
with IFFCO -TOKIO, a joint venture of IFFCO, to distribution of their general insurance
products in Karnataka.
2.7.2 Structure
The management of the KSFC is carried out by the board of directors consisted as per the
SFC Act 1951, assisted by managing director and executive committees. The state
government appoints the chairman and he will be chaining the board. The managing director
appointed by the state government. He is responsible to take stock of day to day operations
and the developmental work.
Composition of the Directors
The board has 12 directors. Out of them 4 directors are nominated by the state government. 1
by the RBI, 2 by the IDBI, and 4 by the SFC Act 1951. Apart from this, the state government
in consultation with SIDBI and its state government appoint the managing director.
KSFC has spread wings across provenance starting just one office in 1959-60. Today KSFC
has 30-branch office. 7 zones offices and 2 field office. The branch office has been
categorized as super ‘A’ grade and ‘B’ grade depending upon their authority to sanction the
loan. Zone office will look after 4 to 5-branch office. This structure has helped the
organization to provide customer service effective monitoring and business throughout the
state.
The corporation has effective system and practice of organization planning and control.
Adequate power has been delegated to branch managers. Branches have the authority to
sanction the loan up to Rs. 25 lakh. The zone manager is given sufficient freedom to take
decision regarding operation of branch and their client. The head office along with annual
business plan and resources forecast will prepare the 5-year plan.

19. 19
Special committee has been set up for project implementation review and default review in
all branches; policies making and management committees of top executives take strategic
planning decision.
2.7.3 Systems
System in the 7-s framework refers to all the rules regulation and procedure both formal and
informal that complements the organization structure. (Systems are more powerful than they
are given credit)
The corporation follows a systematic procedure at all the levels. The corporation has very
good performance appraisal system, training and development system, and resource
allocation system, distribution and recovery system. There is well laid down set of guidelines,
manuals, circulars are in KSFC.
Recruitment and Selection System
The Administration and Establishment department in KSFC follows the written roles for the
purpose of recruitment and selection. It follows the government obligation in case of
reservation to the backward class people, Women for the purpose of recruitment.
Advertisement will be given for newspapers as per the government guidelines. For higher
post minimum 60% (only graduates) required to eligibility for applying. Written test will be
conducting after the scrutinizing the application. Personnel department will be maintaining
the recruitment and selection systems. It takes the people as and when needed.
Training and Development Systems in KSF
The personnel joining the organization are given induction training by the heads of
department and are made aware of the quality policy etc., The skill set required for each
function is given in detailed C and R rules. The same is reviewed once in a year by the
personnel department and changes if any are made offer approval from competent authority.
The competencies of personnel are assessed continuously and any requirements for training
identified and provided either internally or externally.
2.7.4 Style

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The KSFC has good culture and leadership at each and every level in the organization. The
orders flow from top management to lower levels. The employees of KSFC are friendly and
customer oriented. KSFC follows management by fact style. The employees of KSFC have
high moral and ethical values.
Style of KSFC Involve
To Motivate and involve everyone for achieving organization growth through implementation
of the document quality of marketing system.
To encourage everyone in the organization to upgrade and enhance their skill and knowledge
with appropriated training for improving the quality of service to the entrepreneur.
The employees are well delegated each and everyone. They have discharged utmost interest
for the organization. They conduct periodical meeting, reviews i.e., in fortnightly monthly,
weekly, quarterly conduct zone meetings and entrepreneurs and board meetings once in 15
days they conduct the special meeting with General Manager and Managing Director –
formal as well as informal meetings. Every week screening committee for screening the loan
application received are held with customer in head office.
2.7.5 Staff
Staffing is the process of acquiring human resources for the organization and assuring that
they have the potential to contribute to the achievement of the organization goals.
Recruitment System in KSFC
Recruitment and selection will be done according to the guidelines issued by the government.
It follows the government Obligations in case of reservation to the backward community and
women’s also. Advertisement will be given to the newspapers, collecting the application from
the candidates. After scrutinizing the application test will be conducted. For the higher post
graduation must be required, 60% of standard is fixed by KSFC for eligible to apply.
Career Development Program in KSFC
Each and every employee will be trained twice in a year. Promotion will be given to the
eligible employee to the higher post. KSFC has a professional team of experts drawn from

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various disciplines led by illustrious leadership of senior Indian Administrative Service
Officers. The Personnel of KSFC are top rated managers, engineers, financial analysts,
market researchers, economists, statisticians and information technologists. It is this
professional team of wizards, which is the backbone of this mighty organization. Staffs are
important source of any organization. KSFC has 1309 employees at present. KSFC has
strong personnel department, which takes care of its employees and workers. The
corporation recruits employees directly from open market with required qualifications.
KSFC has good training and development department to give training to its employees on
regular basis depending on the changes in work environment.
2.7.6 Skill
In the Mckinsey 7- S framework, Watermen consider skills as one of the most crucial
attribute or capabilities of an organization. The term skill includes those characteristics,
which most people are to describe a company. In other words skill refers to dominant skills
or distinctive competence of an organization.
The Employees of KSFC have competent skills to serve people and the community. The
employees are innovative in nature and upgrade knowledge continuously to service the
people in better manner. As KSFC is an ISO 9001 – 2000 certified company; the employees
are continuously striving to upgrade their skills to satisfy customers’ needs.
The employees of KSFC are from different educational backgrounds like Charted
Accountants, MBA, Master of Commerce, BE, Bachelor of Law, etc.
2.7.7 Shared Values
On the Mc Kinsey 7-S framework shared values refers to commonly held beliefs mindsets
and assumptions that shape how an organization behaves its corporate culture.
Shared Values of KSFC
 Earning of profits and reviving of cases is the main aim.
 Team work and development of people
 Mutual respect and trust in working relationship
 Providing required services in the main motto.

22. 22
 Honest towards customers, vendors and employees
 Appreciation in all business relations and dealings.
 Expand equal opportunities and respect to all human beings.
 Financing of small and medium enterprises.
2.2 INTRODUCTION TO CO-OPERATIVE BANKS
The corporation in its fruitful existence of 46 years has extended assistance to more than
155000 units with cumulated sanction of over Rs.7427.65 cores. KSFC has been awarded for
excellence outstanding performance for selling general insurance products of M/s IFFCO-
TOKIYO general insurance co. ltd. for the year 2004-05.
KSFC an ISO-9001-2000 certified organization is proud to have played a major role in the
industrial development of the state.
Statement of Problem
KSFC being one of the various financial institutions lends its services to all the sectors of
business. Extending financial assistance to the small-scale sector, rural artisans, tiny
industries and disadvantaged groups of the society has been the area of focus of the
corporation.
However the financial assistance provided by KSFC is declining over the years because of
prevailing competition. Some important problem facing by KSFC.
Internal problems
 Problem of credit appraisal
 Problem of growth of NPAs
 Problem of effective fund management
 Problem of effective recovery
 Problem of effective training and development
 Problem of performance appraisal system
 Problem of effective promotional activities
External Problems
 High competition

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 Problem of restriction from the Government
One major problem identified was “problem of credit appraisal.” Hence the need to
study and examine the working of KSFC with regard to its management, policies and
regulations framed for project appraisal, financing various schemes and other functions to
improve its competitiveness. Therefore, the study deals with analyzing the problems faced by
the business organizations in approval of their projects and customer satisfaction with credit
appraisal procedure at KSFC and offer suitable suggestions wherever necessary.
Need for the Study
As the institutional lenders all over the world have realized from their experience that they
cannot expect to recover the loan on the basis of security alone. Hence there is a need and
importance of project appraisal. The credit financed by them has to be viable as well. A
wrong decision may lead to industrial sickness and wastage of scarce resources.
To overcome this problem there is a need to appraise the credit proposals and examine the
viability of project and securities available for the loan. This could be done through by
understanding the credit appraisal procedures of financial institutions like KSFC and also by
suggesting the remedies if any after conducting the research.
Scope of the Study
The study will help the researcher to analyze the credit appraisal system at KSFC. This study
will help to know the benefits and problems faced by the organizations with respect to credit
appraisal and financing in KSFC.
The main objective of any service-oriented organization is to provide excellent customer
service there by giving customer satisfaction. The study can provide a piece of information in
developing an effective project appraisal and financing system in KSFC.
The Study Covers the Operations of KSFC Head Office
 Different loan schemes of KSFC
 KSFC services towards customers
 Procedures followed to sanction loan

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 Projects eligible for assistance from KSFC
 Customers opinion about loan procedure
 Terms and condition maintained by KSFC about credit appraisal procedure
Objective of the Study
 To study the credit appraisal procedures at KSFC
 To know the terms and conditions maintained by the KSFC about the credit appraisal
procedure.
 Case study to know the credit appraisal procedures followed by KSFC
 To know the customer opinion about credit appraisal procedure at KSFC in the
Bangalore City.
Chapter-2
LITERATURE REVIEW
The literature pertaining to the study on “credit appraisal procedures at KSFC” has
been presented in this chapter
2.1 WHAT IS FOLLOW – UP
The traditional concept of follow- up has been geared to ensuring the integrity of the
collateral security placed with the institutions in consonance with the volume of outstanding

25. 25
loan as also the repayment of outstanding as scheduled. Hence one has been accustomed to
come across terms such as assets evaluation, inspection, lack- and key arrangements, among
others. In the altered situation, development banks realise the importance of the project
appraisal. Follow up brings a bear to a deeper diversified and enduring interest and
involvement in assisted project. [C Shetty, 1998].
2.2 PROJECT ANALYSIS
There is an essential difference between the operating entity (enterprise) and the project
activity. Projects, as vehicles for change and growth of the enterprise, and measured in terms
of their incremental impact, or net additional contribution to the enterprise. The financial
analysis of projects then is focused on the anticipated incremental benefit from the project,
coupled with an analysis of the parent enterprise. Because for project all are concerned
almost exclusively with the future, the application of forecasting techniques and the process
of projecting the flow of resources (represented by funds) are analytic tools which are critical
for the decision- making process. As any investment project, will be measured from a variety
of perspectives in terms of credit worthiness, efficient use of resources and incentives. [Jack
Stockard, 1998]
2.3 THE WORKING OF THE CREDIT AUTHORIZATION SCHEME
Credit authorization scheme is to be locked up on as a more regulatory measure confined to
large borrowers. Its basic purpose is to ensure orderly credit management and to improve
quality of bank lending. So that all borrowings, whether large or small, are in conformity with
the policies and priorities laid down by the central banking authority. The continued
surveillance by RBI over the lending operations of banks through credit authorization scheme
has still an important role to play. The present credit authorization scheme may be redesigned
as “credit monitoring scheme”. So as to reflect the important change in broad approach and
emphasis. [Anon, 1998]
2.4 CAUSES FOR PROJECT FAILURES
The best way to appreciate the concerns of lenders to a project is to review causes for project
failures, which are:

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 Delays in completion with consequent delay lender contemplated revenue flow.
 Capital cost over run
 Financial failure of the contractor
 Technical failure
 Government interference
 Uninsured casually losses
 Increased price or shortages of raw materials
 Technical obsolescence of the plant.
 Loss of competitive position in the market place
 Expropriation
 Poor Management.
In order for a project financing to be viable, these risks must be properly addressed and
avoided. [Peter K Nevitt, 1998]
2.5 DEMAND AND MARKET ANALYSIS ON “PROJECT APPRAISAL”
Effective demand represents the total quantity of a specific product purchased at a given price
in a particular market over a given period. A market can be viewed in narrow terms as a set of
consumers, existing and potential, or in broad terms, as the consumers plus such influences as
the government policies obtaining in a particular country or region. For analyzing the new
product demand is more difficult task to the financial institutions. Demand and market
analysis is very important because of the financial institutions wants to know the future value
of that units, there position will be representing the future repayment of the term loans and
they want to invest in good way, make use of financial resources. Demand and market
analysis like size and composition of present effective demand, demand projection (domestic
and export). Forecasting techniques, market surveys, competition from domestic and foreign
suppliers, total demand, market penetration, sensitivity analysis, statistical analysis are done
by the financial institutions, while appearing a project of a unit. [Anon, 1999]
2.6 COST OF CAPITAL
The cost of capital represents the cost of total funds for a project. It should be defined and
treated as all other costs in capital budgeting decisions viz., as an opportunity cost. Resources
for project financing can be had from several sources as loans. These sources generally are:

27. 27
 Commercial Banks for working capital
 Specialized institutions- medium and long-term loans.
 For acquiring fixed assets
 General public fixed deposits of varying duration
 Capital market Bonds and debentures.
2.7 INFORMATION REQUIREMENTS FOR MONITORING MEDIUM
TERM FACILITIES TO INDUSTRIAL UNITS
Information Available for Monitoring
 Projects under implementation
 Enterprises under operation.
An Effective Follows – Up Tools
 Periodic reports to be submitted by the assisted units.
 Plant visits / Inspections
 Discussions with representatives of enterprises.
 Reviews- industry review and Inter - Company Studies
 Feed – back from other departments: from sister- institutions, industrial trade and
financial community.
 Institution’s nominees in the Board of Assisted enterprises. [C. Shetty, 1999]
2.8 INTEGRATION OF MONITORING, COUNSELLING AND RECOVERY
IN FINANCING SMALL ENTERPRISES
The most critical aspects of operation of institutions financing small and tiny enterprises are;
excessive financing risks and higher operational costs to which these are exposed. The later,
the operational costs, arise partly as a result of the write-offs for losses incurred in defaulted
payments, or loss of income on account of delayed payments and overdue; partly the staff in
collecting primary information, the additional effects needed to verify market opportunities,
assess Entrepreneurial capabilities and so on, so,. In the performance and operation of the
unit, the institution through its monitoring counselling activities, is closely informed and to a
certain extent perhaps. Indirectly has had a hand. Thus, the level of performance as also the

28. 28
ability or lack of it to repay dues is closely monitored, and hence, known to the institution
well in advance. [C Shetty, 1999]
2.9 FOLLOW-UP OF BANK CREDIT
In the light of the foregoing, time is now opportune to review the existing system and effect
changes in such a way that under the new system the borrower would plan his credit needs
and the banker also would be able to plan, having known the borrower’s business. Since the
introduction of the Credit Authorization Scheme and the qualitative improvement in the
lending skills of commercial banks. Each bank should conduct banker- borrower seminars to
create an understanding between the operating officials in the respective banks and their
customers. [Anon, 2000]
2.10 A TWO – STAGE APPRAISAL MODEL FOR PUBLIC FINANCIAL
INSTITUTIONS
A public financial institution, through the appraisal process, tries to select projects for
financing that are bankable and also meet certain development objectives. In real life most
decision situations do not have a clear- cut single objective that needs to be minimized or
maximized goals programming provides a simple and practical method of combining many
objectives in the decision framework. If needed although objectives like “encouraging
investment in backward areas” or “encouraging employment generating investments” can
help in channelling the flow of investment, the absence of a frame work can lead to biases in
the decision process. The two-stage model suggested here can provide such a framework
without compromising the viability of the investment proposal appraised in the first stage.
[P.K. Bhaumik, 2001]
2.11 PROJECT APPRAISAL
There are mainly 5 different types of appraisal can be done while in credit appraisal
procedure, they are:
 Technical appraisal: like manufacturing process/technology, size of plant, product
mix, plant layout etc.,
 Commercial Appraisal marketing: Like demand techniques of forecasting, supply
depth of competition, Brand name for the product etc.,

29. 29
 Financial Appraisal: like capital cost projects, sources of finance, ratio analysis,
Breakeven point etc.,
 Economic Appraisal/social cost Benefit Analysis: like ratios for economic appraisal,
economic rate of return. Etc.
 Management appraisal: Like qualities of an entrepreneur organizational set up,
management problems. [SPS Deol, 2001]
2.12 PREVENTION OF SICKNESS
Following are the few suggestions can be considered for avoiding the sickness
 Proper appraisal of the project
 Implementation of the project according to the time schedule
 Disbursement of funds should be done according to the requirements of the project.
 Modernization/Expansion/diversification when needed.
 Detection of sickness and taking corrective steps at the incipient stage.[Joseph, 2001]
2.13 COST OF PROJECT AND MEANS OF FINANCING
Project appraisal aims mainly at ensuring that scarce resources are put to most economic use.
This involves an examination of project to find out whether the project is technically feasible,
financially sound and economically viable. In a developing country like India, it is also
necessary to ensure that the project promotes the national economic and social development
objectives. The essential factor in the project evaluation is to arrive at an independent
assessment of the viability of the project and on this basis to arrive at an investment decision.
Such an independent assessment is called for right form the estimation of the cost of the
project. As per the amended securities contract Regulations Act., not less than 60% of the
issued capital should be offered to public for subscription central / state Government public
financial institutions, development agencies of government can together subscribe up to 11%
of public issue in which case only 49% need to be offered to public. In case where Indian
promoter’s subscription can go up to 66.67 %. [David A. Tallman, 2002]
2.14 TECHNICAL EVALUATION AND ITS ROLE IN PROJECT APPRAISAL

30. 30
The development of a project from project idea till the project goes into operation comprise
three distinct stages viz., pre-investment stage, investment stage and operational stage. The
technical feasibility of projects is examined from the angle of technology and engineering. In
reviewing the variety of aspects such as size, scope and nature of the projects, many other
aspects is required to be considered. As no formal education and training is yet available in
our colleges and universities in these fields one has to necessary learn this job by process of
exposure. But those mistakes in appraisal are likely to be costly and therefore, can’t be
afforded. Most important quality expected of an appraiser is his ability to ask the right
question and to recognize the right answer at the appropriate moment. [C. S. Pani, 2003]
2.15 CREDIT APPRAISAL FOR SICK UNITS
Before sanction the finance, the financial institutions have to consider some problems. In
those units, like
 Problem relating to project implementation
 Problem relating to production
 Problem relating to marketing
 Management problems
 Problems relating to finance
 Problem relating to Administration and personnel [Matthew S. Yoon, 2003]
2.16 POLICIES AND PROCEDURES RELATING TO GENERAL TERM LOAN AT
HSIDC
After a proposal is accepted for appraisal, the detailed appraisal is carried out by the officer
(s) of the Corporation to assess the technical feasibility and financial viability of the proposal.
Among other things, the appraising officer(s) focus on the following points. Background of
promoters relevant experience, their resource position; performance of the unit if existing;
performance of sister units; suitability and adequacy of land, location etc;. Adequacy of
proposed building; suitability and adequacy of proposed machinery’ Background and
reputation of the machinery suppliers; sources and availability of raw material, price data for
the last 1-2 years; Adequacy of utilities like water, skilled manpower etc. Technical/Financial
tie-ups; adequacy of Equipment’s for pollution control; opinion of the banker on the

31. 31
promoters and conduct with them; and marketing tie-ups, market overview. [http:// www. fin-
ser.hsidc.com]
2.17 CREDIT APPRAISAL AND MANAGEMENT
The software solution enables a bank to standardize the proceedings across banks and enables
installing certain financial uniformity amongst the borrowers.
Appraisal Tools
Sensitivity analysis and projections for working capital and term loans. Comparison of
previous, Credit Management Appraisal’s. Industry and peer group comparisons, linkage to
financial database of service providers such as CRISIL, CMIE and C – on line Credit Risk
Rating Incorporation. Term Loans, Interest Workouts, Moratoriums, Repayment Schedules,
Sensitivity, Computation of MPBF, Facility wise Maximum Limits, and Proposal
Preparation.
Post – Appraisal Stage
Ensures the sanctions are adequately covered by the policy guided terms and conditions,
Accepted securities and documents linked to various facilities, sanctions and follow – up
methodologies, compliance of terms and conditions of charging of securities completed and
sanctioning facilities as per set authority, Auto generation of sanction letter with facility wise
limits, terms and conditions.
2.18 FINANCIAL ASSISTANCE FOR PROMOTION OF ENERGY EFFICIENCY
INVESTMENTS IN THE REPUBLIC OF KOREA
The KEMCO pre-investment appraisal determines the eligibility of the project; and the
amount of funds to be loaned-KEMCO sends the applicant a copy of recommendation letter
with an application form attached. And at the same time KEMCO sends the original letter of
recommendation to the financial institution. For the projects with long implementation and
repayment periods, KEMCO provides the loan only for the initial 3-year project period. The
banks assess the size of loan required to carry out the investment plan through a field survey.
Loans are approved within 30 days following the receipt of the loan application. Loans for
non- electric cooling systems or insulation retrofit for housing are supposed to be handled by
the financial institutions without KEMCO’s recommendation. The loans may be approved
within 45 days. Lending conditions of the respective financial institutions apply.

32. 32
Chapter-3
RESEARCH METHODOLOGY
In this chapter the details regarding the methodology used to conduct the study and the
location in which study has been conducted and its design are briefly explained.
3.1 RESEARCH DESIGN

33. 33
The topic credit appraisal procedure has been taken and studies how credit appraisal
procedure will be maintained in KSFC. A census survey has been conducted to find out the
problems relating to credit appraisal.
3.2 LOCATION OF THE STUDY
The study was conducted in Bangalore in the state of Karnataka.
3.3 DURATION OF THE STUDY
The study has been conducted for a period of 6 weeks.
3.4 STATISTICAL TOOLS
The different statistical tools used here are percentage, tables, and bar charts, they have been
used to make the data as clear as possible.
3.5 SAMPLING
3.5.1 Sampling Technique
Due to time constraint random sampling technique was used. The entrepreneur who seeks
financial assistance from KSFC was surveyed.
3.5.2 Sampling Size
For conducting research the sample size of 20 entrepreneurs who availed loan for various
purposes are selected.
3.5.3 Tools for Data Collection
The study dwells on primary and secondary data for attaining the specified.
3.5.4 Sampling Design
Non–probabilistic method of sampling is adopted. A case study was undertaken to understand
credit appraisal procedures at KSFC.
3.6 FIELD WORK

34. 34
For conducting research, fieldwork has been undertaken in and around Bangalore and
questionnaire has been filled.
3.7 DATA COLLECTION
SECONDARY DATA
Secondary data are those which have been already collected by some one else and which
have already been passed through statistical process for the purpose of the study the
secondary data was collected form
 Operational statistics
 Annual report of the KSFC
 Product and service profile (Brochures)
 Project appraisal manual of KSFC
 Various books maintained by KSFC
 Monthly magazine called KSFC news.
PRIMARY DATA
Primary data are first hand information collected a fresh and for the first time. For the
purpose of the study, primary data was collected through questionnaire.
3.9 ANALYSIS
Data for the study was collected both from primary and secondary sources. Data Collected
through questionnaire within the Bangalore City was analysed properly to get the required
information, table, and graphs are used to depict the data more clearly.
LIMITATONS OF THE STUDY
 The sample size selected is too small to generalize the findings of survey
 The results of the study are based on the assumption that all the information provided
by the respondents was correct.
 In depth analysis could not be done due to time constraint
 Survey is mainly focused on KSFC customers
 Survey is limited to Bangalore City only.

35. 35
Chapter-4
DATA ANALYSIS
A long-standing experience has enabled KSFC to have its own methods and standards
for appraising a project. The appraisal department has been divided into two groups. Each
group has been further divided in to two groups. Each group has been allotted certain
industries, which enables them to have in depth knowledge and specialization in those
industries. The efficiency with projects of different industries has been appraised by the result
of this arrangement. KSFC mainly focus on small-scale industries, to develop the SSI.
4.1 OBJECTIVE 1

36. 36
To study the credit appraisal procedure at KSFC
4.1.1 Method of Appraisal in KSFC
The process of appraisal carried out in phased manner as explained in following paragraphs.
Entrepreneur Approaches the Entrepreneur Guidance Cell
Entrepreneur guidance (EG) cell is the link between KSFC and entrepreneurs. It guides the
entrepreneur who approaches it. Entrepreneur comes to know about different schemes and
clauses that are suitable for him or entrepreneur may have an idea about the project already in
his mind. In either case EG Cell issue form, which should be filled up by the entrepreneurs
and returned back to EG cell, this form contains the basic details of the project like the
product, the amount applied for the organization and like. The EG cell than checks the EG
form. If found correct and complete with all the enclosures, it will forward the same to the
Screening committee.
Approval of the Project by Screening Committee
Screening committee consists of top officers including Executive Directors. The screening
committee also will give their opinion about the project in the meeting, which should be
attended by the entrepreneur; all these conditions are conveyed to the entrepreneur in the
meeting. Once the project clearance committee is convinced that entrepreneur have a viable
project plan, entrepreneur will be asked to submit a formal loan application in the prescribed
loan application form, which will be given to entrepreneur at the end of the meeting. This
means entrepreneur proposal is likely to be considered favourably subject to a detailed
appraisal by the credits department.
Appraising the Project by ADM Department
The project Appraisal provides an all-round assessment that a successful project requires. In
the process, weak links in entrepreneur project plan can be rectified. The credit department at
head office has its own team of experts - a financial officer, a technical officer, marketing
Officer, and a Legal officer. A copy of entrepreneur application form and project report will
be given to each member of the appraisal team who is handling entrepreneur case, for
detailed scrutiny and further processing.

37. 37
The concerned team of ADM Department will appraise the project, As already mentioned,
the project is appraised on following factors.
 Background of Entrepreneur
 Technical Appraisal
 Commercial appraisal /Marketing appraisal
 Financial Appraisal
 Legal Appraisal
 Management appraisal
 Economic appraisal / Social cost benefit analysis.
4.1.2 Background of Entrepreneur
If the entrepreneur has a sound experience in the field, preference is given by KSFC, but first
generation entrepreneur is also given preference if they have sound technical knowledge or
when the product has got high demand. The following particulars of the entrepreneur are
examined in details name, age, educational qualification, experience, net wroth, stake in other
firms by the entrepreneur, special and technical qualifications of the entrepreneur etc.,
4.1.3 Technical Appraisal
Technical appraisal of a project is essential to ensure that necessary physical facilities for
production will be available and the best possible alternative is selected to procure them, it
includes the study of following items.
 Manufacturing Process / Technology
 Arrangements for Technical Know-how
 Size of plant
 Product mix / Product range
 Selection of plant and machinery
 Procurement of plant and machinery
 Plant layout
 Location of the project
 Schedule of project Implementation The Project Evaluation and Review Technique
(PERT) of Critical Path Method (CMP) help the promoter in proper planning

38. 38
scheduling and controlling various activities essential for the execution of project all
possible activities from the project identification to commencement of production
should be listed. The appraising officer should verify whether all the activities have
been included and the time scheduling given by the promoter is reasonable.
 The team of technical expert will visit the unit for inspection of building if it already
exists. It will also examine the area and location of the unit, type of building, facilities
like water, power, road, etc.
 KSFC has got a list of registered suppliers of machinery. It insists the unit to purchase
required machinery’s form these suppliers. If the supplier chosen buy the entrepreneur
is reputed one then there is no problem. This is to make sure that the estimated
producing with this machinery will materialize.
 The entrepreneur should get permission from municipality or any other concerned
legal authority for constructing the building.
 The KPTCL letter for power supply should be obtained.
 The technical team will also verify other factors to make sure that the project is
technically perfect.
4.1.4 Financial Appraisal
The financial appraisal helps to find out the risk associated with financing the project. The
team visits the unit and collects the information about financial aspects. The entrepreneur will
be asked to give details about profit expected along with probable sales, the cost of raw
materials, cost of Labour, and such other aspects. Department upon the information given by
the entrepreneur and information collected on their own, financial experts will prepare
several financial statements to be included in the project report.

39. 39
Estimation of the Cost of Project
Estimation of the cost of project includes Land and development expenses, Building and
civil works, Plant and machinery, Miscellaneous assets, Margin for contingencies,
Preliminary and per operative expenses, Interest during implementation, Start-up expenses,
Deposits, Working capital margin, Technical know-how and engineering of expenses paid to
foreign technicians
Financing Pattern with Reference to
 Capital structure
 Promoter’s contribution
 Seed capital
 Soft capital
 Soft loan
 Subsidy development loan
 Deferred payment guarantee and
 Unsecured loan etc.
Examination of Profitability Statement
Examination of Cash Flow Statements
Examination of Financial Ratios, such as
Debt Equity Ratio
It is the relationship between loan capital and the capital raised by way of equity. The
requirement of debt equity ratio for amount less than Rs. 10 lakhs is 3:1 and above is 2:1 (as
per IDBI/SIDBI)
Debt Service Coverage Ratio
This ratio indicates the capacity of the unit to repay term loan and interest thereon. It is
calculated during the entire repayment period, separately for each year and also as an average
for the entire repayment period. This ratio should generally in the range of 1.5 to 2. The
repayment period of loan is fixed by the Corporation with due regard to the cash generation
and profitability of the project.
Return on Capital Employed

40. 40
It indicates how the management has used the funds supplied by creditors and owners. The
higher the ratio, the more efficient is the firm in using the funds entrusted.
Breakeven Point
It is calculated to know the level of production at which the industrial concern breakeven,
identification, neither make profits nor incurs losses.
Examination of Production Capacity
Internal rate of return, payback period, net present value and profitability index or benefit
cost ratio etc.
SensitivityAnalysis It is
impossible to have the actual results exactly according to projections. Although actual results
will be different than the figures shown in projections, proper verification of various
assumptions will ensure that variation between actual results and projections is minimum and
a project which is considered viable may not become unviable. Projected profit may change
owing to changes in the cost of project, cost of production, volume of production or selling
price.
4.1.5 Commercial / Marketing Appraisal
Generally the appraising team has the knowledge about demand, supply, competition, project
margin etc, of particular industry. Hence it can easily judge the market potential for the
proposed product. If the product to be manufactured is new or unique, then special market
survey is carried out. The report of the same is included in project report.
Demand Forecasting Techniques
Many entrepreneurs come to the banks and financial institutions with a proposal to
produce whatever they can without giving due consideration to the marketability of the
proposed product. Even if they provide the information, it may not be sufficient and reliable.
In order to have proper appraisal of the demand forecast made by borrowers, the term lending
institutions would require information regarding demand, supply distribution, pricing and
external forces like government policies, import, exports, foreign collaborations etc.

41. 41
The following techniques may be used for demand forecasting
 Import substitution
 Past trend method
 End use method
 Correlation and Regression
- Export use method
- Supply depth of competition
- Pricing policy
- Life Cycle of product
- Brand name for the product
- Packaging and Transportation
- Distribution Channels
- Sales promotion
- Servicing for consumer durable and industrial goods.
4.1.6 Management Appraisal
Every business has different requirement form the management. Business, which are complex
require significant experience on part of top management to run it management expertise is
not only technical know-how, but also in understanding market dynamics ability to distribute
product effectively, manage manpower and environment.
Qualities of an Entrepreneur
Man behind the project is very important. The entrepreneur should have the qualities like,
honesty and integrity, involvement in the project, competence, risk taking, initiation,
intelligence, drive and energy, self confidence, frankness, patience etc,
Management Problems
The following are the few management problems found during management appraisal
 Conflict among the promoters
 Conflict among executives
 Autocratic style of management
 Misuse of financial resource

42. 42
 Lack of expertise etc.,
The appraisal team should thoroughly study the management before sanctioning the
loan. A close watch should be kept on the performance of the management and also should
provide necessary help and guidance at the appropriate time.
4.1.7 Economic Appraisal / Social Cost Benefit Analysis
Scarcities of capital and foreign exchange are the most serious constraints for the planners in
developing consulted. They wish to constraints for the planners in developing countries. They
wish to utilize the limited stocks of capital and foreign exchange according to the best
possible use, simultaneously maximizing the growth of the employment. Redistribution of
project income in favor of economically weaker sections and backward areas is also one of
the important objective. The Social cost benefit analysis is done using following methods.
 Ratios for economic appraisal
- Organization for Economic Co-operation and development (OECD) method.
- United Nations Industrial development Organization (UNIDO) method.
 Exchange rate of the project or domestic resources cost.
 Comparative study of financial rate of return and economic rate of return.
4.1.8 Legal Appraisal
KSFC works to make sure that the loan is secured and the documents are authenticate. For
this, it needs various legal documents form the entrepreneur. The entrepreneur gives a list of
documents of at the time of submitting the application form. In legal appraisal the documents
pertaining to the constitution, the properties offered as security are scrutinized to ascertain if
it meet the requirements of various provisions of law applicable in entrepreneur case.
Thus the appraisal is carried out in a detailed manner. The stringent procedure is to make sure
that entrepreneur has real interest in the project and the loan is given to the good purpose. The
primary objective of industrial development is always kept in focus while appraising the
project.

43. 43
The methods of project appraisal at KSFC is evolved out of its experience over the years and
it is always be scrutinized for improvement.
4.2 OBJECTIVE 2
To know the terms and conditions maintained by the KSFC about the credit appraisal
procedure
Terms and Conditions
 The borrower should given an undertaking that any shortfall in finance in
implementing the project will be made good out of their his own source to the
satisfaction of the corporation.
 Not with standing any other conditions the borrower shall pay to the corporation,
interest at such other rates as may be fixed by the corporation form time to time and
intimated to the borrower. On such intimation the rate of interest payable by the
borrower shall be that rate of interest. So communicated provided that in the event of
an increase in the rate of interest the borrower shall have the option to prepay to the
corporation forthwith on receipt of such intimation, the entire outstanding of the loan
together with outstanding interest thereon.
 Not withstanding the period of repayment allowed stipulated here in the, corporation
is a liberty either at its absolute discretion or at the instance of the SID. IDI/IDBI, to
revise vary postpone advance or refix the repayment of the said loan and of balance
outstanding for the time being. If any instalment of repayment of the said term loan
and / of interest or any part thereof, as the case may be such reification shall
conclusively binging on the borrower on written intimation of the same by the
corporation.
 The properties offered as security should be insured for their full value by you in the
join names of yourself and the corporation against the risks for fire, riot and strike at
your cost.
 The borrower shall keep the corporation informed of the legal action if any instituted
against the proprietor/partners/firm/directors/company guarantors in any court of law
under criminal/civil/winding up proceeding once in every quarter during the currency
of the term loan.

44. 44
 The borrower shall furnish to the corporation annual statements of accounts duly
audited by a chartered accounting regularly during the currency of the loan (including
the audit’s Report, Director’s Report copy of the Meeting Notice and agenda for the
Annual General Meeting in her case of a company)
 The borrower shall agree for the additional terms and conditions/modifications, if any
suggested by SIDBI/IDBI at the time of sanction of refinance.
 The company shall not declare dividend so long as the company is in default payment
of interest or principal instalments of the loan, in case the company is regular in
repayment of loan prior approval of the corporation shall be obtained for declaring
dividend in excess of 10%
 The borrower shall not undertake any further expansion or any new project during the
currency of the loan without the prior approval of the corporation
 The borrower shall undertake not to transfer/divert the funds of this unit in however
manner to any other concerns, business, etc., without the prior approval of the
corporation.
 The borrower shall affix aboard in a prominent place indicating the building and /
or plant and machinery, which are mortgaged/hypothecated to the corporation.
 The borrower shall also affix the nameplate on each item of plant and machinery
stating that it is hypothecated to the corporation.
 The borrower shall not allot shares to any individual or body corporate for
consideration other than cash (applicable to companies only) without the prior
permission of the corporation.
 The corporation reserves the right to release part or full amount earmarked towards
contingency depending upon the security created and after inspection valuation and
verification of proofs thereof.
 The borrower shall take prior approval of the corporation before placing orders for
jigs/fixture/moulds/dies etc., if any the releases towards these items will he made only
after inspection and valuation by the officials of the corporation.
 The corporation reserves the right to nominate directors on the board of the company
(applicable to companies only).

45. 45
 No personnel on a remuneration exceeding Rs. 50,000/- per month shall be appointed
without the prior approval of the corporation.
 Prior approval of the corporation shall be obtained to the terms and conditions of
appointment / reappointment or the key personnel.
 The corporation shall have lien over title deeds documents and other papers submitted
by the borrower until any charges/liabilities/instalments remaining unpaid are cleared
in full.
 The repayment of interest and principal instalments stipulate here in is subject of the
power of the corporation to recall and demand the loan at once prematurely. If there is
any default in payment of any instalments or any breach of the terms and conditions
of the loan or otherwise to safeguard the interest of the corporation.
 The corporation reserves the right to limit the loan amount any time to the extent of
the loan amount disbursed and to cancel the balance loan amount, if there is any
undue delay in availing the loan and / or implementing the project.
 The borrower shall not allow any of the directors on the board of the corporation
(KSFC) to have any beneficiary interest in their industrial concern without prior
permission of the corporation in writing. The corporation is entitled to enforce its
right to recall the loan (and any other accommodations provided) in the event of
breach of this condition.
 All payments exceeding Rs. 20,000/- to the building contractors or suppliers of plant
and machinery shall be made through crossed account, payee cheque, pay order or
DD only.
 The loan amount earmarked towards self-fabricated items of second hand machinery
if any shall be released only after inspection, valuation and performance of such items
to the satisfaction of the corporation. The borrower shall also submit chartered
engineers certificate as to the valuation in respect of self fabricated machinery and
further life valuation, condition, etc. in respect of second hand machinery.
 If there is any shortfall in the availability (or non availability) of subsidy/soft loan
/seed capital which form part of the means of finance and if applicable the same
should be made good by way of additional capital/unsecured loans to the satisfaction
of the corporation.

46. 46
 The building construction shall be as approved by the corporation. If there is any
deviation, prior approval of the corporation shall be taken. The amount earmarked for
the construction of building shall be released in suitable instalments depending on the
progress achieved, security created and margin brought in by the borrower towards
building.
 The plant and machinery should acquired as per the list approved by the corporation.
The amount earmarked for the purchase of machinery shall be paid directly to the
supplier on receipt of dispatch documents in case they are registered with corporation.
In case of unregistered supplier, the amount will be released only after inspection of
the machinery at site and performance seen if necessary.
 The borrower shall strictly adhere to the provisions of the child labour (prohibition
and regulation) Act 1986 in the matter of employment. Any violation of this Act shall
result in the corporation recalling the loan.
 The unsecured loan if any shall not be with/draw during the currency of the loan and
they shall not bear interest in excess of 15 % p.a. Payment of the interest towards
unsecured loan shall be subordinate to the payment of instalments of both principal
and interest in respect of term loan(s) of the corporation.
 Foreign letter of credit for imported machinery if any shall be opened through HP and
FS department of the corporation.
 The corporation will not be responsible for the original documents submitted by the
borrower for availing the loan if the same are not taken back within a period of three
months from the date of closing the accounts i.e., date on which the loan(s) is/ are
repaid in full.
 The borrower if its is a company shall undertake to amend its Articles of Association
to provide for nominee directors clause to the satisfaction of the corporation if no
provision is made already.
4.3 OBJECTIVE 3
Case study to know the credit appraisal procedures at FSFC.
ABC Company
4.3.1 Executive Summary

47. 47
“M/S ABC Pvt. Ltd.,” has approached the corporation for a term loan of RS. 232.00 lakhs for
expansion of their software development and network solutions business at M.G Road,
Bangalore. The company has started its business from May 2002. The company is involved
mainly in network solutions and customised software development. The performance of the
company during last 3 years as below
(RS. In lakhs)
31-03-2003 31-03-2004 31-03-2005(Prov)
Turnover 30.64 122.93 190.87
Net Profit/Loss -0.20 2.02 31.99
Depreciation 0.42 2.01 3.07
Cash generated 0.22 4.03 35.06
Table: 4.3.1.1
The company is projecting Rs.360.00 lakhs turnover during 2005-06 and Rs.600.00 lakhs
during FY 2007. At present, the company is having orders from various customers.
Project at Glance
 a. Unit Code: XXXXX
b. Unit Name: M/s. ABC Pvt. Ltd.,
 a. Office address: M.G. Road, Bangalore1
b. Factory Address: M.G Road Bangalore.2
 Constitution: Private Sector private company
 Promoters/Directors
 a. Type of Industry: Computer and computer services
b . Size of Industry: Non-SSI

48. 48
 Existing: I.T Service
 Proposed: I.T. Services
 Capacity:-
Installed: Rs.1200 Lakhs
Maximum operating
Capacity envisaged: 80%
 Main Raw Material: -
 End use of finished product: Software and Network Solutions
 Sales Turnover in Normal year: RS. 960 lakhs
 Financial and Profitability of M/s. ABC Network Technologies Pvt. ltd., Bangalore.
Indicators
Minimum
Prescribed
Actually
Provided
a) Promoter’s contribution: 22.50 41.91
b)Debt equity ratio project 2.00:1.00 1.39:1.00
c) Debt equity ratio overall 2.00:1.00 1.7:1.00
d) Debt service coverage ratio 1.50:1.00 2.35:1.00
e) Overall security margin retained 25.00 39.00
g) Return on capital after taxation in normal year of
maximum operating capacity
28.56
Table2: 4.3.1.2
 Repayment period: 4 year excluding a moratorium period of 18 months.

49. 49
 Implementation period: 18 months
 Loan amount applied: Rs.2, 55,00,000
 Loan amount Recommended for sanction: RS. 2,55,00,000
4.3.2 Swot Analysis
Strengths
 The company is headed by experienced technocrats with wide contracts in India and
abroad.
 The company is already in the international and national business in the development of
software products.
 The company is professionally managed and has unemployed friendly professional
atmosphere including strong technical base and environment.
 The company has already taken steps for expansion project including investment in the
land at prestigious zone.
 The company has focus on international customers besides domestic. The company is
typing to have a mix of market like domestic and international customers, which will help
in taking care of business fluctuations in suture.
Weaknesses
 The company is having two technocrat directors and it needs a person who looks into
marketing.
 The company is having development centre at Bangalore and it does not have its
branches in other parts of India and abroad to enhance its capability in multifold.
Opportunities
 The software industry is booming and lots of business opportunities are available
worldwide.
 The Bangalore being it destination in India, the company can leverage this opportunity.
 The remote infrastructure management business is poised for a major thrust. There are
lots of business opportunities to manage networks in advance countries where manpower
cost is very high. Highly skilled manpower available at Bangalore.

50. 50
Threats
 As software business is knowledge based industry, there may be people turnover, which
may affect the company.
 Competition from other software development organizations.
4.3.3 Recommendations
In light of the all, it is recommended that M/s ABC Pvt., Ltd., may sanctioned a Term Loan or
Rs.255.00 lakhs (Two Core Fifty Five Lakh only) for the expansion of their existing service
engaged in the IT SERVICES at M.G. Road, Bangalore. Subject to the terms and conditions
stipulated in the sanction order in addition to the other usual terms and conditions.
4.3.4 Technical Report
 The proposed location of the unit is at MG Road Bangalore. The plot measures 4067
sq.mtr allotted by KIADB during December 2004. In the vicinity most of the MNCs
/reputed software companies are located and the location is ideally suited for software
development units.
 The building measuring area 2800 sq.mtr at basement for vehicle parking, ground, first,
second and third for office block and software requirements of software development
centres. The company has applied for approval of building plan with KIADB Authorities
and expects getting the approved building plan before legal documentation. The building
and civil works is estimated at Rs.223.00 lakhs. The proposed building is as per the
requirement to software units.
 The plant and machinery and furniture’s proposed are from reputed suppliers and
essential to the software development activity. The rates quoted are comparable and
satisfactory for the software development activities. The plant and machinery and
furniture and fixtures are estimated at Rs. 102.00 lakhs and Rs. 22.00 lakhs respectively.
There will be high obsolescence in plant and machinery and to cover the risk the 100%
collateral security towards plant and machinery and furniture/fixture loan component is
insisted i.e. industrial land and FD of Rs. 15.00 lakhs.

51. 51
 The installed capacity of the unit has been arrived at Rs. 1200.00 lakhs by taking revenue
from the various projects based on existing software projects on hand and future business
plans. The company is expected to utilize 50% of its capacity during first year, 70%
during second year and 80% from third year onwards. Based on the present business and
future business, the company can generate good profits and service the liabilities. The
DSCR works out at 2.35:1.00. Based on the above satisfactory parameters, the project is
technically viable.
4.3.5 Financial Appraisal
 The project DER is at 1.44: 1.00 and overall DER is at 1.73:1.00 as against the
requirement of 2:1.
 The security margin retained on primary assets works out at 25.07% as against minimum
requirement of 25% and overall security margin retained works out to 36.94% which is
satisfactory.
 The DSCR works out at 2.35:1.00, return on capital after taxation in normal year of
maximum operating capacity works out at 43.86%, margin on profit on sales before
taxation in normal year of maximum operating capacity works out at 28.81%. IRR at
55.65% and breakeven point at 46.09%, which are considered satisfactory.
 The SWOT and credit risk analysis has been carried out. As per the analysis the project is
at Moderate Risk category. The detailed credit risk analysis and SWOT analysis are
available in the memorandum. The 100% security is insisted towards the loan component
towards plant and machinery and furniture/fixtures to take care of obsolescence of plant
and machinery.
Based on the above satisfactory parameters, the project is considered financially viable.
4.3.7 Profitability Statement of M/s. ABC Network Technologies Pvt. ltd., Bangalore.
(Rs. In Lakhs)

52. 52
YEARS I II III IV
CAP UTILISATION % 50 70 80 80
SALES 600.00 840.00 960.00 960.00
CONSUMABLES 24.00 33.60 38.40 38.40
POWER , FUEL 10.10 13.42 15.08 15.08
SALARY and WAGES 200.00 260.00 338.00 439.40
ADMIN and MISC. EXP 80.00 96.00 115.20 138.24
DEPRECIATION 74.03 51.11 36.69 27.43
REPAIRS 15.00 16.50 18.15 19.97
INT. ON T.L 34.43 29.03 20.93 11.21
SELLING EXPENSES 60.00 84.00 96.00 96.00
INT. ON W.C. 4.74 6.11 7.34 7.34
COST OF PROD 502.30 589.77 685.79 793.07
PROFIT BEF. TAX 97.70 250.23 274.21 166.93
TAX 31.75 81.32 89.09 112.68
PROFIT AFT TAX 65.95 168.91 185.09 112.68
Table 3:4.3.7.1
4.3.8 Working Capital Estimate of M/s. ABC Network Technologies Pvt. ltd., Bangalore,
YEARS I II III

53. 53
RAW MATERIALS .25 0.50 0.70 0.80
WORK IN PROGRESS .25 9.20 10.52 12.26
WORKING EXPENSES 1.00 30.43 39.16 48.54
BILLS RECEIVABLES .25 12.50 17.50 20.00
TOTAL CURRENT ASSETS 52.63 67.88 81.60
W.C. MARGIN 13.16 16.97 20.40
BALANCE CURRENT ASSETS 39.47 50.91 61.20
LESS CREDITORS .50 0.00 0.00 0.00
W.C. FACILITY FROM BANK 39.47 50.91 61.20
Table 4:4.3.8.1
The company is enjoying working capital limits from M/s bank of Baroda, Palace
orchards Branch, Bangalore to the extent of Rs. 7.00 lakhs. Now the bank is processing the
working capital to the company to the extent of Rs. 25.00 lakhs.
4.3.9 Debt Service Coverage Ratio of M/s. ABC Network Technologies Pvt. ltd., Bangalore.
(Rs in lakhs)
Years I II III IV
Depreciation 74.03 51.11 36.69 27.43
Int. On T.L 34.43 29.03 20.93 11.21
Profit aft Tax 65.95 168.91 185.09 112.68
Loans repaid 174.41 249.05 242.71 151.32
Term loan 40.00 60.00 72.00 83.00

54. 54
Int. on T.L 34.43 29.03 20.93 11.21
Total 74.43 89.03 92.93 94.21
DSCR 2.34 2.80 2.61 1.61
Table5:4.3.9.1
Combined DSCR 2.35
Disposition of Funds of M/s. ABC Network Technologies Pvt. ltd., Bangalore
Prel, Pre-op 29.00
Exp. Int
During imp
Capital Exp. 397.00
Current assets 39.47 11.44 10.29
Loans repaid term loan 40.00 60.00 72.00 83.00
Taxation 31.75 31.32 89.12 54.25
Div/Drawings 0.00 0.00 0.00 0.00
Total 426.00 111.22 152.76 171.41 137.25
Op. Balance 0.00 13.00 112.98 273.00 422.78
Net surplus 13.00 99.98 160.02 149.73 57.11
OL. Balance 13.00 112.98 273.00 422.78 479.89
Table 6: 4.3.9.2

55. 55
4.3.10 Assumptions to Profitability of M/s. ABC Network Technologies Pvt. ltd.,
Bangalore
The company is already in the line of telecom software development and IT infrastructure
management services and systems integration. The company is expecting to achieve Rs. 1200.00
lakhs turnover at installed capacity. The turnover of the company has been estimated at Rs.
1200.00 lakhs as below.
(Rs in lakhs)
a. Wireless project : 200.00
b. Software services : 400.00
c. Consultancy services : 200.00
d. Projects and Consultancy : 400.00
(Including BW sales and allied services)
Total : 1200.00
The company is expected to utilise 50% of capacity in the year and 70% in the second year
and about 80% in the III year and onwards based on the present projections and contracts.
 The consumables are estimated at 4% on sale turnover.
 Salary and wages are estimated at Rs. 200.00 lakhs and are increased by 30% p.a.
 Power, fuel and water charges are calculated at Rs. 10.10 lakhs during I year and Rs.
13.42 lakhs during II year and Rs. 15.08 lakhs from third year onwards.
 Administrative expenses is estimated at Rs. 80.00 lakhs and increased by 20% p.a.
 Expenses on repairs and maintenance have been provided at Rs. 15.00 lakhs during the I
year and increased by 10% during every subsequent year.
 Interest on term loan has been calculated at 13.50% p.a.
 Marketing expenses is estimated to cost 10% p.a. on sale turnover.

56. 56
 Income tax is calculated as applicable.
4.3.12 Internal Rate of Return of M/s. ABC Network Technologies Pvt. ltd., Bangalore
YRS
Gross
fixed
assets
Inventori
es
Total
Profit
before
tax
Interes
t on
T.L,
U.S.L
&
W.C
Depre
ciation
Total
Net
cash
flow
0 430.0 430.00 -
430.00
1 39.47 39.47 97.70 39.17 74.03 210.90 171.43
2 11.44 11.44 250.23 35.14 51.11 336.48 325.04
3 10.29 10.29 274.21 28.27 36.69 339.17 328.88
4 0.00 166.93 18.55 27.43 212.91 212.91
5 0.00 166.93 7.34 21.34 195.61 195.61
6 0.00 166.93 7.34 17.19 191.46 191.46
7 0.00 166.93 7.34 14.26 188.53 188.53
8 0.00 166.93 7.34 12.11 186.38 186.38
9 0.00 166.93 7.34 10.47 184.74 184.74
10 0.00 166.93 7.34 9.16 183.43 183.43
11 0.00 166.93 7.34 8.09 182.36 182.36
12 0.00 166.93 7.34 7.19 181.46 181.46

57. 57
13 0.00 166.93 7.34 6.41 180.68 180.68
14 0.00 166.93 7.34 5.74 180.01 180.01
15 0.00 166.93 7.34 5.14 179.41 179.41
Table7: 4.3.12.1
Internal rate of return 55.09%
4.3.13 Credit Risk Analysis of M/s. ABC Network Technologies Pvt. ltd., Bangalore
Financial Risks
Sl. No Particulars Range Score
1 Current ratio 1.37:1 >1.25 1
2 Profit after tax/ Net sales (15.91%) >7.5 5
3 Profit before interest, depreciation and tax/
interest 4.21%
>4% 3
4 Return on capital employed 71.45% >12.5% 3
5 All 3 years positive net worth and no
accounting loss
1 5
6 Debt equity ratio – scheme 1.44:1 <2 2
7 Debt equity ratio- overall 1.73:1 <2 2
8 Repayment period 4 years < 5 years 2
9 Average DSCR ( unit as a whole) 2.35:1 >1.75:1.00 3
10 Security margin on primary security-
33.51%
>30% 3
11 Ratio of overall security to overall > 1.50% 2

58. 58
outstanding 1.58 times
12 Worth of guarantee < 100% i.e. Rs 44.00
lakhs
<100% 0
Total 31
Table8: 4.3.13.1
Business Risks of M/s. ABC Network Technologies Pvt. ltd., Bangalore
SI. No Particulars Range Score
1 Technology Latest technology already
prevailing in the market
2
2 Location Unit is located in well developed
industrial area (EPIPzone)
3
3 Class of machinery Special purpose machinery with
limited prospects of reselling
1
4 Product
obsolescence
Product not prone to obsolescence
in next 5-7 years
2
5 Machinery
obsolescence
machineries not prone to
obsolescence in next 3-5 years
1
6 Competition Competition exist and but there is
still gap between demand and
supply
1
7 Sector based on
lending policy
Thrust sector 3
8 Customer profile More than 5 customers with
concentration of nor more than
3

59. 59
40% to a single customer
9 Seasonality Working days > = 300 days 3
10 Product profile Product enjoying distinctive
advantages like high quality, and
no substitutes
1
11 Patent rights Others 0
Total 20
Table9: 4.3.13.2
Management Risks of M/s. ABC Network Technologies Pvt. ltd., Bangalore
Sl. No Particulars Range Score
1 Background Experienced entrepreneurs/existing
unit working
profitably/expansion/modernization
5
2 Track Record Timely repayment with no single
default (the company has availed
working capital facilities from bank
of Baroda and the transactions are
satisfactory and account is standard)
5
3 Length of
relationship
New customer to KSFC 0
4 Qualification
and experience
Technically qualified and business
experience more than 5 years
2
5 Systems, Very good 3

60. 60
procedures etc
6 Certifications The company is in competition with
international customers and is having
setup/ procedures of international
acceptable standards to do the
software business
2
Total 17
Legal risks of M/s. ABC Network Technologies Pvt. ltd., Bangalore
Sl. No Particulars Range Score
1 Legal risks Building and machinery financed
and furniture’s are financed with
land, building, machinery and
furniture’s as security with a
additional security to make 100%
security towards plant and
machinery
6
2 Ownership of
collateral security
Owned by borrowers/promoters 2
Total 8
Score Risk perception
80 and
above
Least risk
60-80 Moderate

61. 61
40-60 High risk
Below 40 Most risky, not worth financing
Based on the marks secured at 76, which is less than 80%, the unit comes under moderate risk
category.
4.4 OBJECTIVE -04
To Know the Customer Opinion About credit Appraisal Procedure With in the Bangalore
City
Analysis and Interpretation of Questionnaire
Purpose for which term loan is sanctioned by KSFC at Bangalore
From the survey, it is clear that 75% of entrepreneurs obtained loans from KSFC to start new
projects, 25% of expansion and another for modernization of the existing units. It is clear that
KSFC will be encouraging the new entrepreneurs to start new projects other than expansion and
modernization of the existing units.
Constitution of the firm who taken loan from KSFC with in Bangalore city
It is clear that the 45% of firms are partnership firms, 20% are proprietary firms, 35% private
limited and no public limited and co-operative firms taken loan. It is clear that KSFC had given
more loans to partnership firms and private limited companies. But the loans obtained by co-
operative and joint Hindu family constitutions are limited in number.
KSFC sanctioned more loans to flowing sectors within the Bangalore city.
Size of Firm No. of respondents %
Large Scale - -
Medium Scale 4 20
Small Scale 10 50

62. 62
Tiny Sector / Non SSI 6 30
Total 20 100%
Table10: 4.4.1(a)
From the Table 4.1, it is clear that KSFC sanctioned 20 % of loans to medium scale sector, 50%
to the small scale sector and 30% to the tiny sector/ Non SSI. So its shows that KSFC sanctioned
more loans to small-scale sectors.
Opinion of the respondents about the interest rate of KSFC’s term loan at Bangalore City
Opinion No of respondents %
High 6 30
Reasonable 14 70
Low - -
Total 20 100%
Table10: 4.4.1(b)
From the table it is clear that 70% of the respondents are feeling that the interest rate of KSFC’s
term loan is reasonable and 30% feel that the interest rate high compared to other term loan
lending organization and nobody feels that interest rate is low in KSFC. So, the interest rates
charged are high compared to other term loan lending organizations.
Opinion of the respondent about the EG cell takes care in identifying competent
entrepreneurs.
Opinion No of respondents %
Yes 11 55
No 4 20

63. 63
Sometimes 5 25
Total 20 100%
Table10: 4.4.1(c)
From the table it is clear that majority of respondent feels that EG Cell at head office takes care
in identifying competent entrepreneurs. EG Cell is doing good job in identifying competent
entrepreneurs to grant loans.
Opinion about credit appraisal system at KSFC with in Bangalore city
Opinion No of respondents %
Excellent 3 15
Good 5 25
Satisfactory 8 40
Needs change 4 20
Total 20 100%
Table10: 4.4.1(d)
Form the above table it is clear that 15% of respondents agree that project appraisal system at
KSFC is excellent, 25% of respondents feel good, 40% respondents feel satisfactory and 20% of
respondents feel that project appraisal system at KSFC needs change. So its shows, many
respondents feel satisfactory, but there is a need to change and adopt new methods and
techniques to appraise the projects in changing marketing conditions.
Opinion about rate KSFC services to customers in Bangalore City.
Opinion No of respondents %
Excellent 2 10

64. 64
Good 10 50
Satisfactory 8 40
Not satisfactory - -
Total 20 100%
Table10: 4.4.1(e)
It is clear that 10% of respondents agree that KSFC service to customers is excellent, 50% of
respondents feel good and 40% of respondents feel satisfactory and no one feel that not
satisfactory. It is clear that majority of respondents feel that KSFC service to customers are good
and some feel excellent and satisfactory. So its shows those customers are getting good service
from KSFC employees and management.

65. 65
Chapter-5
FINDINGS
Karnataka State Financial Corporation (KSFC) is one among the 18 state financial corporations
(SFCs) in India. KSFC was established by government of Karnataka in March 1959 under the
SFCs Act 1951 for extending the financial assistance for setting up of tiny, small, medium and
large scale industrial units in the state.
By the study it is clear that the KSFC appraises projects to test the viability from the marketing,
financial, technical, economic and managerial angles, KSFC conducting good credit appraisal
system. But after the survey it is clear that although good credit appraisal procedure, there is a
need to change in the appraisal procedure. KSFC maintaining good terms and conditions about
the credit appraisal procedure. Every business needs adequate liquid resources in order to
maintain day-to-day cash flow. It needs enough cash to pay wages and salaries as they fall due
and to pay creditors if it is to keep its work force and ensure its supplies. Maintaining adequate
working capital is not just important in the short-term but sufficient liquidity must be maintained
in order to ensure the survival of the business in the long-term as well.

66. 66
Chapter-6
RECOMMENDATION
 KSFC has a very large organizational structure having nearly 13 departments. Since there are
many departments the working becomes more complicated. So the corporation can merge
some departments whose natures of jobs are similar and cut down the cost and can increase
the efficiency of work.
 In KSFC management appraisal is done purely on the basis of bio-data furnished by the
entrepreneurs and it having formal discussions and the conciliation are drown. It is necessary
that effective assessment can be done to know and the think over it.
 The interest rates of KSFC compared to the prevailing rates of the other financial institutions
and banks are much higher. So, there is a possibility that the industrialists or firms may shift
to the competitor. KSFC already taken steps to reduce interest but still it is more. So, KSFC
have to take some steps towards lowering the prevailing interest rates and much and flexible
in order to stay tuned with the competitors.
 They have to improve their competitiveness by reviewing their management policy
regulations framed for project appraisal procedures and financing various schemes.
 The documentation procedure have to be made as simple and shorter as possible.
 KSFC have to conduct entrepreneurs program at least once in a month, it will help to attract
more new customers.
 Quarterly interest have to be changed and monthly interest has to be introduced because
repayment of interest every quarterly is huge burden.
 KSFC has to maintain quality clients so that it can maintain quality portfolio. The
corporation has to take measures to sanction financial assistance by taking less processing
time to give better services and to retain good clientele base.
 Targets have to be set to the recovery officers and special incentives should be provided to
those officers who achieve their objective.
 The activities of KSFC though manifold, are not Known to the large number of people
willing to establish industrial units. So to overcome this, it is suggested that regular
awareness programmes about the functions and different schemes of the KSFC to be