Credit appraisal at central bank of india


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Credit appraisal at central bank of india

  2. 2. DECLARATIONI, Mr. MAYANK TAILOR Student of M.B.A – Semester-II, GIDC RAJJU SHROFFINSTITUTE OF MANAGEMENT STUDIES VAPI. hereby declare that the Report onSummer Training & project work entitled CREDIT APPRAISAL SURAT, GUJARAT isbeen result of my own work and has been carried out under supervision of PROF. NUPURANGIRISH.I declare that this submitted work is done solely by me and to the best of my knowledge; nosuch work has been submitted by any other person for the award of post graduation degree ordiploma.I also declare that all the information collected from various secondary sources has been dulyacknowledged in this project report.PLACE: Mayank TailorDATE:
  3. 3. CERTIFICATEThis is to certify that Mr. MAYANK TAILOR has satisfactory completed the project workentitled, CREDIT APPRAISAL IN SURAT, GUJARAT. Based on the declaration made bythe candidate and me association as a guide for carrying out this project work, Irecommended this project for evaluation as a part of the MBA programme of GujaratTechnological University.Place: VAPIDate: PROF: NUPUR ANGIRISHPlace: VAPIDate: Dr D.S.Sarupria Director
  4. 4. ACKNOWLEDGEMENTMy debts are many and I acknowledge them with much pride and delight. This summerproject was undertaken as a part of MBA Programme pursuing at GIDC RAJJU SHROFFRofel Institute of Management Studies, Vapi. (GRIMS). I would like to thank my instituteand Central Bank of India which has provided me with the infrastructure and opportunity fordoing this project work.I am very great full to Mr. P.K.VESUNA (Loan/Advances), who has given me the permissionto carry out this project work at their esteemed organization.I am extremely great full to Dr. Dalpat Sarupria, Director of GIDC RAJJU SHROFF RofelInstitute of Management Studies, Vapi. (GRIMS), for his invaluable help and guidancethroughout my work. He kindly evinced keen interest in my work and furnished some usefulcomments, which could enrich the work substantially.I am very much thankful to my internal guide Prof. NUPUR ANGIRISH for her keenguidance and support.In fact it is very difficult to acknowledge all the names and nature of help and encouragementprovided by them. I would never forget the help and support extended directly or indirectlyto me by all.
  6. 6. EXECUTIVE SUMMARYI had a valuable experience doing my summer internship at Central Bank of India in Surat.The duration for my internship was 23 days, starting from 7th july 2011 to 29th july 2011 inSurat Main branch and, I was working on the “CREDIT APPRISAL”My Project Guide was Mr.P.K.VESUNA for SURAT branch, respectively of his department.This was my First exposure to the corporate world and had an experience of working in abanking. I was directly working under loan/advances : I was working on the credit appraisal,which I feel is the basic requirement of any bank. While working I observed the significanceof the loan/advances in a bank, its working. I also got to observe various functions of thebank department.The project, which was given to me in this period of my summer internship, project was toknow the credit appraisal. For that, I have to talk to manager and try to understand concept ofcredit in the bank.Thus during this internship-period working on project and simultaneously observing hasproved to be a great experience in all as I have got to see and understand various situations ofthe employees. I would like to conclude by saying that it is been a great learning for methrough this internship. I understand some realities of the bank , as, I was part of the everydayactivities of the organization. I also learned the fact that no department can work on its owneach department have to depend on other in one-way or the other.
  7. 7. RESEARCH METHODOLOGY  INTRODUCTION:Credit appraisal means investigation/assessment done by the bank before providing any loans andadvances/project finance and also checks the commercial, financial &industrial viability of theproject proposed its funding pattern and further checks the primary & collateral security coveravailable for recovery of such funds.  PROBLEM STATEMENT:To study the credit appraisal system in SME sector, at Central bank of India.  OBJECTIVES: To study the credit appraisal methods. To understand the commercial, financial & technical viability of the proposal proposed and it’s finding pattern.  DATA COLLECTION: Primary data: Informal interview with manager and other staff members at Central bank of India Secondary data:  Books  websites  database at Central bank of India  library research
  8. 8.  BENEFICIARIES: Researchers:This report will help researchers improving knowledge about the credit appraisal system and to havepractical exposure of the credit appraisal system at Central bank of India. Management Students:The project will help the management student to know the patterns of credit appraisal in Centralbank of India.
  9. 9. LIMITATION OF THE STUDY As the credit appraisal is one of the crucial areas for any bank, some of the technicalities are not revealed. Credit appraisal system includes various types of detail studies for different areas of analysis, but due to time constraint, our analysis was of limited areas only.
  10. 10. INTRODUCTION TO BANKING SECTORA SNAPSHOT OF THE BANKING INDUSTRYThe Reserve Bank of India (RBI), as the central bank of the country, closely monitors developments inthe whole financial sector.  DEFINITION/MEANING OF A BANKThe word bank has originated from English word Banco, Bancus or Banque. Its meaning is bench ortable. In Europe in the middle age, the money transactions were undertaken sitting on a bench.As per Indian Banking Act, “ A service to accept deposits from people with the intention to invest orlend with the condition of returning it immediately whenever demanded at any predetermined time.An institute this service is Bank”Banking is a service helpful to the business, its function is to borrow money from people and furtherlend the same.While analyzing definition of bank as per Indian Banking Act, below mentioned matters are clarified: (1) Bank accepts monetary deposits from people. (2) The intention behind accepting these deposits is to invest or lend the respective fund.
  11. 11. (3) The function of accepting deposit or lending money is made under the condition that on demand or as predetermined otherwise the same amount has to be refunded immediately. (4) The institution doing this type of business is called bank.The banking sector is dominated by Scheduled Commercial Banks (SBCs). As at end March 2002,there were 296 Commercial banks operating in India. This included 27 Public Sector Banks (PSBs), 31Private, 42 Foreign and 196 Regional Rural Banks. Also, there were 67 scheduled co-operative banksconsisting of 51 scheduled urban cooperative banks and 16 scheduled state co-operative banks.Scheduled commercial banks touched, on the deposit front, a growth of 14% as against 18%registered in the previous year. And on advances, the growth was 14.5% against 17.3% of the earlieryear.State Bank of India is still the largest bank in India with the market share of 20% ICICI and its twosubsidiaries merged with ICICI Bank, leading creating the second largest bank in India with a balancesheet size of Rs. 1040bn.Higher provisioning norms, tighter asset classification norms, dispensing with the concept of ‘pastdue’ for recognition of NPAs, lowering of ceiling on exposure to a single borrower and groupexposure etc., are among the measures in order to improve the banking sector.A minimum stipulated Capital Adequacy Ratio (CAR) was introduced to strengthen the ability ofbanks to absorb losses and the ratio has subsequently been raised from 8% to 9%. It is proposed tohike the CAR to 12% by 2004 based on the Basle Committee recommendations.Retail Banking is the new mantra in the banking sector. The home Loans alone account for nearlytwo-third of the total retail portfolio of the bank. According to one estimate, the retail segment isexpected to grow at 30-40% in the coming years.
  12. 12. Net banking, phone banking, mobile banking, ATMs and bill payments are the new buzz words thatbanks are using to lure customers.With a view to provide an institutional mechanism for sharing of information on borrowers /potential borrowers by banks and Financial Institutions, the Credit Information Bureau (India) Ltd.(CIBIL) was set up in August 2000. The Bureau provides a framework for collecting, processing andsharing credit information on borrowers of credit institutions. SBI and HDFC are the promoters ofthe CIBIL.The RBI is now planning to transfer of its stakes in the SBI, NHB and National bank for Agriculturaland Rural Development to the private players. Also, the Government has sought to lower its holdingin PSBs to a minimum of 33% of total capital by allowing them to raise capital from the market.Banks are free to acquire shares, convertible debentures of corporate and units of equity orientedmutual funds, subject to a ceiling of 5% of the total outstanding advances (including commercialpaper) as on March 31 of the previous year.REFORMS IN THE BANKING SECTORThe first phase of financial reforms resulted in the nationalization of 14 major banks in 1969 andresulted in a shift from Class banking to Mass banking. This in turn resulted in a significant growth inthe geographical coverage of banks. Every bank has to earmark a minimum percentage of their Loanportfolio to sectors identified as “priority sectors”. The manufacturing sector also grew during the1970s in protected environs and the banking sector was a critical source. The next wave of reformssaw the nationalization of 6 more commercial banks in 1980. Since then the number scheduledcommercial banks increased four-fold and the number of banks branches increased eight-fold.After the second phase of financial sector reforms and liberalization of the sector in the earlynineties, the Public Sector Banks (PSB) s found it extremely difficult to complete with the new
  13. 13. private sector banks and the foreign banks. The new private sector banks first made theirappearance after the guidelines permitting them were issued in January 1993. Eight new privatesector banks are presently in operation. These banks due to their late start have access to state-of-the-art technology, which in turn helps them to save on manpower costs and provide betterservices.During the year 2000, the State Bank of India (SBI) and its 7 associates accounted for a 25% share indeposits and 28.1% share in credit. The 20 nationalized banks accounted for 53.5% of the depositsand 47.5% of credit during the same period. The share of foreign banks ( numbering 42 ), regionalrural banks and other scheduled commercial banks accounted for 5.7%, 3.9% and 12.2% respectivelyin deposits and 8.41%, 3.14% and 12.85% respectively in credit during the year 2000CLASSIFICATION OF BANKS:The Indian banking industry, which is governed by the Banking Regulation Act of India 1949 canbe broadly classified into two major categories, non-scheduled banks and scheduled banks.Scheduled banks comprise commercial banks and the co-operative banks. In Terms of ownership,commercial banks can be further grouped into nationalized banks, the State Bank of India and itsgroup banks, regional rural banks and private sector banks (the old / new domestic and foreign).These banks have over 67,000 branches spread across the country. The Indian banking industry isa mix of the public sector, private sector and foreign banks. The private sector banks are againspilt into old banks and new banks.
  14. 14. Banking System in India Reserve bank of India (Controlling Authority)Development Financial institutions BankIFCI IDBI ICICI NABARD NHB IRBI EXIM Bank SIDBICommercial Regional Rural Land Development Cooperative BanksBanks Banks Banks Public Sector Banks Private Sector BanksSBI Groups Nationalized Banks Indian Banks Foreign Bank
  15. 15. GLOBAL AND LOCAL SCENARIO OF BANKING SECTORINDIAN BANKING SYSTEM: THE CURRENT STATE & ROAD AHEADINTRODUCTION:Recent time has witnessed the world economy develop serious difficulties in terms of lapse ofbanking & financial institutions and plunging demand. Prospects became very uncertain causingrecession in major economies. However, amidst all this chaos India’s banking sector has beenamongst the few to maintain resilience.A progressively growing balance sheet, higher pace of credit expansion, expanding profitability andproductivity akin to banks in developed markets, lower incidence of nonperforming assets and focuson financial inclusion have contributed to making Indian banking vibrant and strong. Indian bankshave begun to revise their growth approach and re-evaluate the prospects on hand to keep theeconomy rolling. The way forward for the Indian banks is to innovate to take advantage of the newbusiness opportunities and at the same time ensure continuous assessment of risks.A rigorous evaluation of the health of commercial banks, recently undertaken by the Committee onFinancial Sector Assessment (CFSA) also shows that the commercial banks are robust and versatile.The single-factor stress tests undertaken by the CFSA divulge that the banking system can endureconsiderable shocks arising from large possible changes in credit quality, interest rate and liquidityconditions. These stress tests for credit, market and liquidity risk show that Indian banks are by andlarge resilient.Thus, it has become far more imperative to contemplate the role of the Banking Industry in fosteringthe long term growth of the economy. With the purview of economic stability and growth, greater
  16. 16. attention is required on both political and regulatory commitment to long term developmentprogrammed. FICCI conducted a survey on the Indian Banking Industry to assess the competitiveadvantage offered by the banking sector, as well as the policies and structures that are required tofurther the pace of growth. The results of our survey are given in the following sections.GENERAL BANKING SCENARIO:The pace of development for the Indian banking industry has been tremendous over the pastdecade. As the world reels from the global financial meltdown, India’s banking sector has been oneof the very few to actually maintain resilience while continuing to provide growth opportunities, afeat unlikely to be matched by other developed markets around the world. FICCI conducted a surveyon the Indian Banking Industry to assess the competitive advantage offered by the banking sector, aswell as the policies and structures required to further stimulate the pace of growth.The predicament of the banks in the developed countries owing to excessive leverage and laxregulatory system has time and again been compared with somewhat unscathed Indian BankingSector. An attempt has been made to understand the general sentiment with regards to theperformance, the challenges and the opportunities ahead for the Indian Banking Sector.A majority of the respondents, almost 69% of them, felt that the Indian banking Industry was in avery good to excellent shape, with a further 25% feeling it was in good shape and only 6% of therespondents feeling that the performance of the industry was just average. In fact, an overwhelmingmajority (93.33%) of the respondents felt that the banking industry compared with the best of thesectors of the economy, including pharmaceuticals, infrastructure, etc.Most of the respondents were positive with regard to the growth rate attainable by the Indianbanking industry for the year 2009-10 and 2014-15, with 53.33% of the view that growth would bebetween 15-20% for the year 2009-10 and greater than 20% for 2014-15.
  17. 17. On being asked what is the major strength of the Indian banking industry, which makes it resilient inthe current economic climate; 93.75% respondents feel the regulatory system to be the majorstrength, 75% economic growth, 68.75% relative insulation from external market, 56.25% creditquality, 25% technological advancement and 43.75% our risk assessment systems.Change is the only constant feature in this dynamic world and banking is not an exception. Thechanges staring in the face of bankers relates to the fundamental way of banking-which is goingthrough rapid transformation in the world of today. Adjust, adapt and change should be the keymantra. The major challenge faced by banks today is the ever rising customer expectation as well asrisk management and maintaining growth rate. Following are the results of the biggest challengefaced by the banking industry as declared by our respondents (on a mode scale of 1 to 7 with 1 beingthe biggest challenge):
  18. 18. They also asked their respondents to rate India on certain essential banking parameters (RegulatorySystems, Risk Assessment Systems, Technological System and Credit Quality) in comparison withother countries i.e. China, Japan, Brazil, Russia, Hong Kong, Singapore, UK and USA.The recent financial crisis has drawn attention to under-regulation of banks (mainly investmentbanks) in the US. Though, the Indian story is quite different. Regulatory systems of Indian bankswere rated better than China, Brazil, Russia, and UK; at par with Japan, Singapore and Hong Kongwhere as all our respondents feel that we are above par or at par with USA. On comparing theresults with their previous survey where the respondents had rated Indian Regulatory system belowpar the US and UK system, they see that post the financial crisis Indian Banks are more confident onthe Indian Regulatory Framework.
  19. 19. The global meltdown started as a banking crisis triggered by the credit quality. Indian banks seem tohave paced up in terms of Credit Quality. Credit quality of banks has been rated above par thanChina, Brazil, Russia, UK and USA but at par with Hong Kong and Singapore and 85.72% of therespondents feel that we are at least at par with Japan. Thus, they see that the resilience the IndianBanks showed at the time of financial crisis has led to an attitudinal shift of our respondents with thepast survey indicating Credit quality of Indian banks being below par than that of US and UK.
  20. 20. As technology ingrains itself in all aspects of a bank’s functioning, the challenge lies in exploiting thepotential for profiting from investments made in technology. A lot needs to be done on thetechnological front to keep in pace with the global economies, as is evident from the survey results.Technology systems of Indian banks have been rated more advanced than Brazil and Russia butbelow par with China, Japan, Hong Kong, Singapore, UK and USA. They find no change onintrospection of their past surveys which also highlighted the need for Indian banks to pace up inadoption of advanced technology.
  21. 21. GLOBAL EXPANSION OF INDIAN BANKINGThe idea of creating bigger banks to take on competition sounds attractive but one must realize eventhe biggest among Indian banks are small by global standards. The lack of global scale for Indianbanks came into sharp focus during the recent financial crisis which saw several international banksreneging on their funding commitments to Indian companies, but local banks could not step into thebreach because of balance sheet limitations.In this light, 93.75% of all respondents to their survey are considering expanding their operations inthe future. They further asked participants on the methods that they consider suitable to meet theirexpansion needs. They divide them into organic means of growth that comes out of an increase inthe bank’s own business activity, and inorganic means that includes mergers or takeovers.
  22. 22. We see from the above graph that amongst organic means of expansion, branch expansion findsfavor with banks while strategic alliances is the most popular inorganic method for banksconsidering scaling up their operations. On the other hand, new ventures and buyout portfolios arethe least popular methods for bank expansion.
  23. 23. SCOPE FOR NEW ENTRANTS:81.25% also felt that there was further scope for new entrants in the market, in spite of capitalmanagement and human resource constraints, as there continue to remain opportunities inunbanked areas. With only 30-35% of the population financially included, and the Indian bankingindustry unsaturated with CAGR of well above 20%, participants in their survey felt that the marketdefinitely has scope to accommodate new players.While there has been prior debate, they questioned banks on NBFCs and Industrial houses beingestablished as banking institutions and find opinion to be marginally against the notion, with 35.71%in favour while 42.86% were against them being established as banks.However, on further questioning, 57.14% of respondents feel that the above may be allowed butonly if it is along with specific regulatory limitations. Banks felt that limitations regarding trackrecord, ensuring adequate capitalization levels, a tiered license that enables new entrants to enterinto specific areas of the business only after satisfactorily achieving set milestones for the priorstages, cap on promoters holdings and wider public holding in addition to a common bankingregulator on a level playing field are essential before they may set themselves up as banks.BANKING ACTIVITIES:Over the last three decades, there has been a remarkable increase in the size, spread and scope ofactivities of banks in India. The business profile of banks has transformed dramatically to includenon-traditional activities like merchant banking, mutual funds, new financial services and productsand the human resource development.Their survey finds that within retail operations, banks rate product development and differentiation;innovation and customization; cost reduction; cross selling and technological up gradation as equally
  24. 24. important to the growth of their retail operations. Additionally a few respondents also find pro-active financial inclusion, credit discipline and income growth of individuals and customerorientation to be significant factors for their retail growth.There is, at the same time, an urgent need for Indian banks to move beyond retail banking, andfurther grow and expand their fee- based operations, which has globally remained one of the keydrivers of growth and profitability. In fact, over 80% of banks in their survey have only up to 15% oftheir total incomes constituted by fee- based income; and barely 13% have 20-30% of their totalincome constituted by fee-based income.Out of avenues for non-interest income, we see that Banc assurance (85.71%) and FOREXManagement (71.43%) remain most profitable for banks. Derivatives, understandably, remains theleast profitable business opportunity for banks as the market for derivatives is still in its nascentstage in India.There is nevertheless a visibly increased focus on fee based sources of income. 71% of banks in theirsurvey saw an increase in their fee based income as a percentage of their total income for the FY2008-09 as compared to FY 2007-08. Indian banks are fast realizing that fee-based sources of incomehave to be actively looked at as a basis for future growth, if the industry is to become a global forceto reckon with.
  25. 25. FINANCIAL INCLUSION AND EXPANSION OF BANKING SERVICES:Transition from class banking to mass banking and increased customer focus is drastically changingthe landscape of Indian banking. Expansion of retail banking has a lot of potential as retail assets arejust 22% of the total banking assets and contribution of retail loans to GDP stands merely at 6% inIndia vis-à-vis 15% in China and 24% in Thailand. All banks in their survey weigh Cost effective creditdelivery mechanisms (100%) as most important to the promotion of financial inclusion. This wasfollowed by factors such as identifying needs and developing relevant financial products (75%),demographic knowledge and strong local relations (62.5%) and ensuring productive use andadequate returns on credit employed (43.75%) in decreasing levels of importance. In fact, India hasan expanding middle class of 250 to 300 million people in need of varied banking services. While60% of our population has access to banks, only 15% of them have loan accounts and anoverwhelming 70% of farmers have no access to formal sources of credit, reflective of immensepotential for the banking system This is mirrored in the fact that while our survey finds nodiscernible shift in the lending pattern of banks across Tier 1, Tier 2 and Tier 3 cities over the last twoyears, 93% Indian Banking System: The Current State & Road Ahead Page | 20 participants still findrural markets to be to be a profitable avenue, with 53% of respondents finding it lucrative in spite ofit being a difficult market. Cost of accessing markets has been the only sour note in the overallexperience of our respondents in rural markets At the same time, more than 81.25% of our
  26. 26. respondents have a strategy in place to tap rural markets, with the remainder as yet undecided ontheir plan of action. Tie ups with micro finance institutions (MFIs)/SHG and introduction ofinnovative and customized products are considered most important to approaching rural marketsaccording to respondents, more so as compared to internet kiosks, post offices and supply chainmanagement techniquesAdditionally, 81.25% of respondents found branchless banking to be an effective and secure way ofreaching out to rural markets, with mobile, biometric and handheld devices, equally popularamongst banks. Some respondents also found the Business Correspondents model to be anuntapped model for financial inclusion.As Indian financial markets mature over time, there is also a need for innovative instruments todeepen the market further. Suggestions ranged from micro saving and micro insurance initiatives,Cash deposit machines, warehouse receipts, to prepaid cash cards, derivatives, interest rate futuresand credit default swaps as a means to further the financial inclusion and expansionary process.
  27. 27. CREDIT FLOW AND INDUSTRY:India Inc is completely dependent on the Banking System for meeting its funding requirement. Oneof the major complaints from the industry has in fact been high lending rates in spite of massive cutsin policy rates by the RBI. We asked the banks what they felt were major factors responsible for rigidprime lending rates.None of the banks in their survey considered the cap on bank deposit rates to be one of the causesof inflexible lending rates. Due to long-term maturity, the trend seems to be changing. However,there are other factors which have led to the stickiness of lending rates such as wariness ofcorporate credit risk (33.33%), competition from government small savings schemes (26.67%).Benchmarking of SME and export loans against PLR (20.00%) on the other hand, do not seem tohave as significant an influence over lending rates according to banksThe great Indian industrial engine has nevertheless continued to hum its way through most of theyear long crisis. We asked banks about the sectors that they consider to be most profitable in thecoming years (Fig. 12). All respondents were confident in the infrastructure sector leading theprofitability for the industry, followed by retail loans (73.33%) and others(Source: Annual survey, February 2010)
  29. 29. INDUSTRY ANALYSISCompetitive Forces Model:(Porter’s Five Force Model): (2) Potential Entrants is high as development financial institutions as well as private and Foreign Banks have entered in a big way (5) (1) (4) Organizing power of the Rivalry among existing firms has Bargaining power of supplier is high. With the increased with liberalization. buyers is high as new financial instruments New products and improved corporate can raise funds they are asking higher return customer services is the focus. easily due to high on the investments Competition. (3) The threat of substitute product is very high like credit unions and investment houses. There are other substitutes as well banks like mutual funds, stocks, government securities, debentures, gold, real estate etc. ubstitute is high due to competition from NBFCs and insurance companies as they
  30. 30. 1. Rivalry among existing firmsWith the process of liberalization, competition among the existing banks has increased. Eachbank is coming up with new products to attract the customers and tailor made Loans are provided.The quality of services provided by banks has improved drastically.2. Potential EntrantsPreviously the development financial Institutions mainly provided project finance anddevelopment activities. But they now entered into retail banking which has resulted into stiffcompetition among the exiting players.3. Threats from SubstitutesCompetition from the non-banking financial sector is increasing rapidly. The threat of substituteproduct is very high like credit unions and in investment houses. There are other substitutes as wellbanks like mutual funds, stocks, government securities, debentures, gold, real estate etc.4. Bargaining Power of BuyersCorporate can raise their funds through primary market or by issue of GDRs, FCCBs. As a resultthey have a higher bargaining power. Even in the case of personal finance, the buyers have ahigh bargaining power. This is mainly because of competition.5. Bargaining Power of SuppliersWith the advent of new financial instruments providing a higher rate of returns to the investors,the investments in deposits is not growing in a phased manner. The suppliers demand a higher
  31. 31. return for the investments.6. Overall AnalysisThe key issue is how banks can leverage their strengths to have a better future. Since theavailability of funds is more and deployment of funds is less, banks should evolve new productsand services to the customers. There should be a rational thinking in sanctioning Loans, which willbring down the NPAs. As there is a expected revival in the Indian economy Banks have a major roleto play.SWOT ANALYSIS:The banking sector is also taken as a proxy for the economy as a whole. The performance of bankshould therefore, reflect “Trends in the Indian Economy”. Due to the reforms in the financial sector,banking industry has changed drastically with the opportunities to the work with, new accountingstandards new entrants and information technology. The deregulation of the interest rate,participation of banks in project financing has changed in the environment of banks.The performance of banking industry is done through SWOT Analysis. It mainly helps to know thestrengths and Weakness of the industry and to improve will be known through converting theopportunities into strengths. It also helps for the competitive environment among the banks. a) STRENGTHS 1. Greater securities of Funds
  32. 32. Compared to other investment options banks since its inception has been a better avenue in termsof securities. Due to satisfactory implementation of RBI’s prudential norms banks have won publicconfidence over several years. 2. Banking networkAfter nationalization, banks have expanded their branches in the country, which has helped banksbuild large networks in the rural and urban areas. Private banks allowed to operate but they mainlyconcentrate in metropolis. 3. Large Customer BaseThis is mainly attributed to the large network of the banking sector. Depositors in rural areas preferbanks because of the failure of the NBFCs. 4. Low Cost of CapitalCorporate prefers borrowing money from banks because of low cost of capital. Middle incomepeople who want money for personal financing can look to banks as they offer at very low rates ofinterests. Consumer credit forms the major source of financing by banks. b) WEAKNESS 1. Basel Committee
  33. 33. The banks need to comply with the norms of Basel committee but before that it is challenge forbanks to implement the Basel committee standard, which are of international standard. 2. Powerful UnionsNationalization of banks had a positive outcome in helping the Indian Economy as a whole. But thishad also proved detrimental in the form of strong unions, which have a major influence in decision-making. They are against automation. 3. Priority Sector LendingTo uplift the society, priority sector lending was brought in during nationalization. This is good forthe economy but banks have failed to manage the asset quality and their intensions were moretowards fulfilling government norms. As a result lending was done for non-productive purposes. 4. High Non-Performing AssetsNon-Performing Assets (NPAs) have become a matter of concern in the banking industry. This isbecause reduced to meet the international standards of change in the total outstanding advances,which has to be reduced to meet the international standards. c) OPPORTUNITIES 1. Universal Banking
  34. 34. Banks have moved along the value chain to provide their customers more products and services. likehome finance, Capital Markets, Bonds etc. Every Indian bank has an opportunity to becomeuniversal bank, which provides every financial service under one roof. 2. Differential Interest RatesAs RBI control over bank reduces, they will have greater flexibility to fix their own interest rateswhich depends on the profitability of the banks. 3. High Household SavingsHousehold savings has been increasing drastically. Investment in financial assets has also increased.Banks should use this opportunity for raising funds. 4. Untapped Foreign MarketsMany Indian banks have not sufficiently penetrated in foreign markets to generate satisfactorybusiness therefore, it can be concluded clear opportunity exists in such markets. 5. Interest BankingThe advance in information technology has made banking easier. Business can Effectively carried outthrough internet banking. d) THREATS
  35. 35. 1. NBFCs, Capital Markets and Mutual fundsThere is a huge investment of household savings. The investments in NBFCs deposits, Capital MarketInstruments and Mutual Funds are increasing. Normally these instruments offer better return toinvestors. 2. Changes in the Government PolicyThe change in the government policy has proved to be a threat to the banking sector. Due to somemajor changes in policies related to deposits mobilization credit deployment, interest rates- thewhole scenario of banking industry may change. 3. InflationThe interest rates go down with a fall in inflation. Thus, the investors will shift his investments to theother profitable sectors. 4. RecessionDue to the recession in the business cycle the economy functions poorly and this has proved to be athreat to the banking sector. The market oriented economy and globalization has resulted intocompetition for market share. The spread in the banking sector is very narrow. To meet thecompetition the banks has to grow at a faster rates and reduce the overheads. They can introducethe new products and develop the existing services.
  36. 36. INTRODUCTION TO CENTRAL BANK OF INDIA. Build a better life around us.Establish in 1911, Central Bank of India was the first Indian commercial bank which was whollyowned and managed by Indians. The establishment of the Bank was the ultimate realization of thedream of Sir Sorabji Pochkhanawala, founder of the Bank. Sir Pherozesha Mehta was the firstChairman of a truly Swadeshi Bank. In fact, such was the extent of pride felt by Sir SorabjiPochkhanawala that he proclaimed Central Bank of India as the property of the nation and thecountrys asset. He also added that Central Bank of India lives on peoples faith and regards itselfas the peoples own bank.During the past 99 years of history the Bank has weathered many storms and faced manychallenges. The Bank could successfully transform every threat into business opportunity andexcelled over its peers in the Banking industry.A number of innovative and unique banking activities have been launched by Central Bank of Indiaand a brief mention of some of its pioneering services are as under:1921 Introduction to the Home Savings Safe Deposit Scheme to build saving/thrift habits in all sections of the society.
  37. 37. 1924 An Exclusive Ladies Department to cater to the Banks women clientele.1926 Safe Deposit Locker facility and Rupee Travellers Cheques.1929 Setting up of the Executor and Trustee Department.1932 Deposit Insurance Benefit Scheme.1962 Recurring Deposit Scheme.Subsequently, even after the nationalisation of the Bank in the year 1969, Central Bank continuedto introduce a number of innovative banking services as under:1976 The Merchant Banking Cell was established.1980 Centralcard, the credit card of the Bank was introduced.1986 Platinum Jubilee Money Back Deposit Scheme was launched.1989 The housing subsidiary Cent Bank Home Finance Ltd. was started with its headquarters at Bhopal in Madhya Pradesh.1994 Quick Cheque Collection Service (QCC) & Express Service was set up to enable speedy collection of outstation cheques.Further in line with the guidelines from Reserve Bank of India as also the Government of India,Central Bank has been playing an increasingly active role in promoting the key thrust areas ofagriculture, small scale industries as also medium and large industries. The Bank also introduced anumber of Self Employment Schemes to promote employment among the educated youth.Among the Public Sector Banks, Central Bank of India can be truly described as an All India Bank,due to distribution of its large network in 27 out of 29 States as also in 3 out of 7 Union Territoriesin India. Central Bank of India holds a very prominent place among the Public Sector Banks on
  38. 38. account of its network of 3656 branches and 178 extension counters at various centresthroughout the length and breadth of the country.Customers confidence in Central Bank of Indias wide ranging services can very well be judgedfrom the list of major corporate clients such as ICICI, IDBI, UTI, LIC, HDFC as also almost all majorcorporate houses in the country.In surat central bank have total 11 branches are works. INTRODUCTION TO SMEIn the Indian context, the small and medium enterprises (SME) sector is broadly a Term used forsmall scale industrial (SSI) units and medium-scale industrial units. Any industrial unit with a totalinvestment in its fixed assets or leased assets or hire-purchase asset of up to Rs 10 million, can beconsidered as an SSI unit and any investment of up to Rs 100 million can be Termed as a mediumunit. An SSI unit should neither be a subsidiary of any other industrial unit nor be owned orcontrolled by any other industrial unit.An SME is known by different ways across the world. In India, a standard definition surfaced only inOctober 2, 2006, when the Ministry of Micro, Small and Medium Enterprises, Government of India,imposed the Micro, Small and Medium enterprises Development (MSMED) Act,2006.This definition, however was changed according to the changing economic scenario and thus hasseparate definitions to it. For instance, an SME definition for manufacturing enterprises is differentfrom what an SME definition for service enterprises has to say.HISTORY:Small and Medium Enterprises or SMEs are vital for the growth and well being of the country. Thissector was recognized and given importance right from independence and is being encouraged eversince then.Though, it commenced on a small scale, it gradually gained significance, because it employed aconsiderable number of people.
  39. 39. When it started gaining momentum, this sector was defined as an enterprise with investment inplant and machinery of up to Rs 1 lakh and situated in towns and villages with strength of less than50,000 people. The policy statement put in place special legislation to recognize and protect selfemployed people in cottage and home industries. District industries canters (DICs) were set up andmade the focal point of SSI development, bypassing large cities and state capitals. Also, thegovernment started providing special services akin to product standardization, quality control andmarketing surveys in order to assist the SSIs in enabling them to market their products in anunderdeveloped market.The scenario for the small-scale sector changed with the Industrial Policy of July 1991, which, for thefirst time in India’s development history spoke of liberalization. What this meant was that mediumand large enterprises would no longer need licenses to run. Export-oriented enterprises could bewholly foreign owned and foreign equity participation was selectively allowed. Industries couldimport capital goods with much fewer restrictions.1996 saw the government involved in the setting up of a higher level committee, known as the AbidHussain Committee, to review policies for small industries and recommend measures to helpformulate a strong and innovative policy package for the rapid development of SMEs. Withliberalization, rapid changes were seen in the Indian economy. Indian companies were no longerinsulated from the global economy. In fact, there was an urgent need to make them, especiallySMEs, more competitive and resilient.In 1991, the growth rate of SSIs was almost three times that of the total industrial sector at 3.1percent. From 1991 to 1995, the growth rate of SSIs exceeded that of the total industrial sector. Yet,in 1995-96, the growth rate of SSIs was slightly lower than the total industrial sector, however itincreased again in 1996 and continued to be higher than the total industrial growth rate till 1999. till2006, the SME segment saw a lot more development and support from the government.DESCRIPTION OF SME IN THE MANUFACTURING SECTOR:The Term enterprise in the manufacturing context stands for an industrial undertaking or a businessconcern involved in the production, processing or preservation of goods for the list of eligibleindustries in the First Schedule to the Industries (Development and Regulation Act), 1951.For the Manufacturing Sector, the MSMED Act 2006 defines micro, small and medium enterprises(MSMEs) as mentioned below:
  40. 40. A micro enterprise is an enterprise where investment in plant and machinery does not exceed Rs 25 lakh. The investment in plant and machinery in a small enterprise is more than Rs 25 lakh, but does not exceed Rs 5 crore. A medium enterprise is one where the investment in plant and machinery is more than Rs 5 crore, but does not exceed Rs 10 crore.In all these, the cost excludes that of land, building and the items specified by the Ministry of SmallScale Industries with its notification No SO 1722 (E) dated October 5, 2006.SME DEFINITION FOR SERVICE ENTERPRISES:A service sector enterprise is defined as one involved in providing services. The following points willexplain how. Small road and water transport operators that can now own a fleet of vehicles not exceeding ten in number. Small business, whose original cost price of equipment used for business, does not exceed Rs 20 lakh. Professional and self-employed persons, whose borrowing limits do not exceed Rs 10 lakh of which not more than Rs 2 lakh should be for working capital requirements Professionally qualified medical practitioners setting up a practice in semi urban and rural areas, whose borrowing limits should not be less than Rs 15 lakh with a sub- ceiling of Rs 3 lakh for working capital requirements.CHALLENGES FACED BY SME:The challenges being faced by the small and medium sector may be briefly set out asFollows- Small and Medium Enterprises (SME), particularly the tiny segment of the small enterprises have inadequate access to finance due to lack of financial information and non-formal business practices. SMEs also lack access to private equity and venture capital and have a very limited access to secondary market instruments.
  41. 41. SMEs face fragmented markets in respect of their inputs as well as products and arevulnerable to market fluctuations.SMEs lack easy access to inter-state and international markets.The access of SMEs to technology and product innovations is also limited. There islack of awareness of global best practices.SMEs face considerable delays in the settlement of dues/payment of bills by the largescale buyers. With the deregulation of the financial sector, the ability of the banks toservice the credit requirements of the SME sector depends on the underlyingtransaction costs, efficient recovery processes and available security. There is animmediate need for the banking sector to focus on credit and SMEs
  42. 42. OVERVIEW OF CREDIT APPRAISALCredit appraisal means an investigation/assessment done by the banks before providing any Loans &advances/project finance & also checks the commercial, financial & technical viability of the projectproposed, its funding pattern & further checks the primary & collateral security cover available forrecovery of such funds.BRIEF OVERVIEW OF CREDIT:Credit Appraisal is a process to ascertain the risks associated with the extension of the credit facility.It is generally carried by the financial institutions, which are involved in providing financial funding toits customers. Credit risk is a risk related to non-repayment of the credit obtained by the customerof a bank. Thus it is necessary to appraise the credibility of the customer in order to mitigate thecredit risk. Proper evaluation of the customer is performed this measures the financial condition andthe ability of the customer to repay back the Loan in future. Generally the credits facilities areextended against the security know as collateral. But even though the Loans are backed by thecollateral, banks are normally interested in the actual Loan amount to be repaid along with theinterest. Thus, the customers cash flows are ascertained to ensure the timely payment of principaland the interest.It is the process of appraising the credit worthiness of a Loan applicant. Factors like age, income,number of dependents, nature of employment, continuity of employment, repayment capacity,previous Loans, credit cards, etc. are taken into account while appraising the credit worthiness of aperson. Every bank or lending institution has its own panel of officials for this purpose.However the 3 ‘C’ of credit are crucial & relevant to all borrowers/ lending, which must be kept inmind, at all times. Character
  43. 43. Capacity CollateralIf any one of these is missing in the equation then the lending officer must question the viability ofcredit. There is no guarantee to ensure a Loan does not run into problems; however if proper creditevaluation techniques and monitoring are implemented then naturally the Loan loss probability /problems will be minimized, which should be the objective of every lending Officer.Credit is the provision of resources (such as granting a Loan) by one party to another party wherethat second party does not reimburse the first party immediately, thereby generating a debt, andinstead arranges either to repay or return those resources (or material(s) of equal value) at a laterdate. The first party is called a creditor, also known as a lender, while the second party is called adebtor, also known as a borrower.Credit allows you to buy goods or commodities now, and pay for them later. We use credit to buythings with an agreement to repay the Loans over a period of time. The most common way to availcredit is by the use of credit cards. Other credit plans include personal Loans, home Loans, vehicleLoans, student Loans, small business Loans, trade. A credit is a legal contract where one partyreceives resource or wealth from another party and promises to repay him on a future date alongwith interest. In simple Terms, a credit is an agreement of postponed payments of goods bought orLoan. With the issuance of a credit, a debt is formed.BASIC TYPES OF CREDIT:There are four basic types of credit. By understanding how each works, you will be able to get themost for your money and avoid paying unnecessary charges.Service credit is monthly payments for utilities such as telephone, gas, electricity, and water. Youoften have to pay a deposit, and you may pay a late charge if your payment is not on time.
  44. 44. Loans let you borrow cash. Loans can be for small or large amounts and for a few days or severalyears. Money can be repaid in one lump sum or in several regular payments until the amount youborrowed and the finance charges are paid in full. Loans can be secured or unsecured.Installment credit may be described as buying on time, financing through the store or the easypayment plan. The borrower takes the goods home in exchange for a promise to pay later. Cars,major appliances, and furniture are often purchased this way. You usually sign a contract, make adown payment, and agree to pay the balance with a specified number of equal payments calledinstallments. The finance charges are included in the payments. The item you purchase may be usedas security for the Loan.Credit cards are issued by individual retail stores, banks, or businesses. Using a credit card can bethe equivalent of an interest-free Loan- end of each month.-if you pay for the use.BRIEF OVERVIEW OF LOANS:Loans can be of two types fund base & non-fund base:  Fund Base includes: Working Capital Term Loan  Non-fund Base includes: Letter of Credit Bank Guarantee  Fund Base: Working capitalThe objective of running any industry is earning profits. An industry will require funds to acquire“fixed assets” like land, building, plant, machinery, equipments, vehicles, tools etc., & also to run thebusiness i.e. its day-to-day operations.
  45. 45. Funds required for day to-day working will be to finance production & sales. For production, fundsare needed for purchase of raw materials/ stores/ fuel, for employment of labor, for power chargesetc. financing the sales by way of sundry debtors/ receivables.Capital or funds required for an industry can therefore be bifurcated as fixed capital & workingcapital. Working capital in this context is the excess of current assets over current liabilities. Theexcess of current assets over current liabilities is treated as net, for storing finishing goods till theyare sold out & for working capital or liquid surplus & represents that portion of the working capital,which has been provided from the long-Term source.Assessment of Working Capital in Central bank of India Particulars Amount 25% of estimated sales ***** Less : 5% of estimated sales(A) ***** OR Net working capital(B) ***** Which is higher ( A or B) ***** MPBF ***** (Maximum Permissible Bank Finance) Term LoanA Term Loan is granted for a fixed Term of 3 years to 7 years intended normally for financing fixedassets acquired with a repayment schedule normally not exceeding 8 years.
  46. 46. A Term Loan is a Loan granted for the purpose of capital assets, such as purchase of land,construction of, buildings, purchase of machinery, modernization, renovation or rationalization ofplant, & repayable from out of the future earning of the enterprise, in installments, as per aprearranged schedule.From the above definition, the following differences between a Term Loan & the working capitalcredit afforded by the Bank are apparent: The purpose of the Term Loan is for acquisition of capital assets. The Term Loan is an advance not repayable on demand but only in installments ranging over a period of years. The repayment of Term Loan is not out of sale proceeds of the goods & commodities per se, whether given as security or not. The repayment should come out of the future cash accruals from the activity of the unit. The security is not the readily saleable goods & commodities but the fixed assets of the units.It may thus be observed that the scope & operation of the Term Loans are entirely different fromthose of the conventional working capital advances. The Bank’s commitment is for a long period &the risk involved is greater. An element of risk is inherent in any type of Loan because of theuncertainty of the repayment. Longer the duration of the credit, greater is the attendant uncertaintyof repayment & consequently the risk involved also becomes greater.However, it may be observed that Term Loans are not so lacking in liquidity as they appear to be.These Loans are subject to a definite repayment programmed unlike short Term Loans for workingcapital (especially the cash credits) which are being renewed year after year. Term Loans would berepaid in a regular way from the anticipated income of the industry/ trade.
  47. 47. These distinctive characteristics of Term Loans distinguish them from the short Term credit grantedby the banks & it becomes necessary therefore, to adopt a different approach in examining theapplications of borrowers for such credit & for appraising such proposals.The repayment of a Term Loan depends on the future income of the borrowing unit. Hence, theprimary task of the bank before granting Term Loans is to assure itself that the anticipated incomefrom the unit would provide the necessary amount for the repayment of the Loan. This will involve adetailed scrutiny of the scheme, its capital assets. Financial aspects, economic aspects, technicalaspects, a projection of future trends of outputs & sales & estimates of cost, returns, flow of funds &profits.Eligibility of term loan Particulars Amount Cost of machineries ***** Cost of accessories/equipment ***** Total cost of machines ***** Less : 25% of margin ***** Eligible amount of term loan *****  Non-fund Base: Letter of creditThe expectation of the seller of any goods or services is that he should get the payment immediatelyon delivery of the same. This may not materialize if the seller & the buyer are at different places(either within the same country or in different countries). The seller desires to have an assurance forpayment by the purchaser. At the same time the purchaser desires that the amount should be paidonly when the goods are actually received. Here arises the need of Letter of Credit (LCs). Theobjective of LC is to provide a means of payment to the seller & the delivery of goods & services tothe buyer at the same time.
  48. 48. DefinitionA Letter of Credit (LC) is an arrangement whereby a bank (the issuing bank) acting at the request &on the instructions of the customer (the applicant) or on its own behalf, Is to make a payment to or to the order of a third party (the beneficiary), or is to accept & pay bills of exchange (drafts drawn by the beneficiary); or Authorizes another bank to effect such payment, or to accept & pay such bills of exchanges (drafts); or Authorizes another bank to negotiate the Terms & conditions of the credit are complied with. against stipulated document(s), provided that Bank Guarantees:A contract of guarantee is defined as ‘a contract to perform the promise or discharge the liability ofthe third person in case of the default’. The parties to the contract of guarantees are: a) Applicant: The principal debtor – person at whose request the guarantee is executed b) Beneficiary: Person to whom the guarantee is given & who can enforce it in case of default. c) Guarantee: The person who undertakes to discharge the obligations of the applicant in case of his default.Thus, guarantee is a collateral contract, consequential to a main co applicant & the beneficiary.Purpose of Bank GuaranteesBank Guarantees are used to for both preventive & remedial purposes. The guarantees executed bybanks comprise both performance guarantees & financial guarantees. The guarantees are structuredaccording to the Terms of agreement, viz., security, maturity & purpose.Branches may issue guarantees generally for the following purposes: a) In lieu of security deposit/earnest money deposit for participating in tenders; b) Mobilization advance or advance money before commencement of the project by the contractor & for money to be received in various stages like plant layout, design/drawings in project finance;
  49. 49. c) In respect of raw materials supplies or for advances by the buyers; d) In respect of due performance of specific contracts by the borrowers & for obtaining full payment of the bills; e) Performance guarantee for warranty period on completion of contract which would enable the suppliers to period to be over; realize the proceeds without waiting for warranty) To allow units to draw funds from time to time from the concerned indenters against part execution of contracts, etc. f) Bid bonds on behalf of exporters g) Export performance guarantees on behalf of exporters favoring the Customs Department under EPCG scheme.CREDIT APPRAISAL PROCESS: Receipt of application from applicant Receipt of documents (Balance sheet, KYC papers, Different govt. registration no., MOA, AOA, and properties documents Pre-sanction visit by bank officers Check for RBI defaulters list, willful defaulters list, CIBIL data, ECGC, Caution list etc Title clearance reports of the properties to be obtained from empanelled Advocates Valuation reports of the properties to be obtained from empanelled valuer/engineers
  50. 50. Preparation of financial data Proposal preparation Assessment of proposalSanction/approval of proposal by appropriate sanctioning authority Documentations, agreements, mortgages Disbursement of Loan Post sanction activities
  51. 51. LOAN ADMINISTRATION PRE- SANCTION PROCESS:Appraisal, Assessment and Sanction functions 1. Appraisal A. Preliminary appraisal Sound credit appraisal involves analysis of the viability of operations of a business and the capacity of the promoters to run it profitably and repay the bank the dues as and when they fall Towards this end the preliminary appraisal will examine the following aspects of a proposal. Bank’s lending policy and other relevant guidelines/RBI guidelines, Prudential Exposure norms, Industry Exposure restrictions, Group Exposure restrictions, Industry related risk factors, Credit risk rating, Profile of the promoters/senior management personnel of the project, List of defaulters, Caution lists, Acceptability of the promoters, Compliance regarding transfer of borrower accounts from one bank to another, if applicable; Government regulations/legislation impacting on the industry; e.g., ban on financing of industries producing/ consuming Ozone depleting substances; Applicant’s status vis-à-vis other units in the industry, Financial status in broad Terms and whether it is acceptable The Company’s Memorandum and Articles of Association should be scrutinized carefully to ensure (i) that there are no clauses prejudicial to the Bank’s interests, (ii) no limitations have been placed on the Company’s borrowing powers and operations and (iii) the scope of activity of the company. Required Documents for Process of Loan Application for requirement of loan
  52. 52. Copy of Memorandum & Article of Association Copy of incorporation of business Copy of commencement of business Copy of resolution regarding the requirement of credit facilities Brief history of company, its customers & supplies, previous track records, orders In hand. Also provide some information about the directors of the company Financial statements of last 3 years including the provisional financial statement for the year 2010-11 Copy of PAN/TAN number of company Copy of last Electricity bill of company Copy of GST/CST number Copy of Excise number Photo I.D. of all the directors Address proof of all the directors Copies related to the property such as 7/12 & 8A utara, lease/ sales deed, 2R Permission, Allotment letter, Possession Bio-data form of all the directors duly filled & notarized Financial statements of associate concern for the last 3 years After undertaking the above preliminary examination of the proposal, the branch will arrive at a decision whether to support the request or not. If the branch (a reference to the branch includes a reference to SECC/CPC etc. as the case may be) finds the proposal acceptable, it will call for from the applicant(s), a comprehensive application in the prescribed proforma, along with a copy of the proposal/project report, covering specific credit requirement of the company and other essential data/ information. The information, among other things, should include: Organizational set up with a list of Board of Directors and indicating the qualifications, experience and competence of the key personnel in charge of the main functional areas e.g., purchase, production, marketing and finance; in other words a brief on the managerial resources and whether these are compatible with the size and scope of the proposed activity. Demand and supply projections based on the overall market prospects together with a copy of the market survey report. The report may comment on the geographic spread of the
  53. 53. market where the unit proposes to operate, demand and supply gap, the competitors’ share, competitive advantage of the applicant, proposed marketing arrangement, etc. Current practices for the particular product/service especially relating to Terms of credit sales, probability of bad debts, etc. Estimates of sales cost of production and profitability. Projected profit and loss account and balance sheet for the operating years during the Currency of the Bank assistance. If request includes financing of project(s), branch should obtain additionally  Appraisal report from any other bank/financial institution in case appraisal has been done by them.  ‘No Objection Certificate’ from Term lenders if already financed by them and  Report from Merchant bankers in case the company plans to access capital market, wherever necessary. In respect of existing concerns, in addition to the above, particulars regarding the history of the concern, its past performance, present financial position, etc. should also be called for. This data/information should be supplemented by the supporting statements Such as: Audited profit loss account and balance sheet for the past three years (if the latest audited balance sheet is more than 6 months old, a pro-forma balance sheet as on a recent date should be obtained and analyzed). For non-corporate borrowers, irrespective of market segment, enjoying credit limits of Rs.10 lacs and above from the banking system, audited balance sheet in the IBA approved formats should be submitted by the borrowers. Details of existing borrowing arrangements, if any, Credit information reports from the existing bankers on the applicant Company, and Financial statements and borrowing relationship of Associate firms/Group Companies. B. Detailed Appraisal The viability of a project is examined to ascertain that the company would have the ability to service its Loan and interest obligations out of cash accruals from the business. While appraising a project or a Loan proposal, all the data/information furnished by the borrower should be
  54. 54. counter checked and, wherever possible, inter-firm and inter-industry comparisons should be made to establish their veracity. The financial analysis carried out on the basis of the company’s audited balance sheets and profit and loss accounts for the last three years should help to establish the current viability. In addition to the financials, the following aspects should also be examined: The method of depreciation followed by the company-whether the company is following straight line method or written down value method and whether the company has changed the method of depreciation in the past and, if so, the reason therefore; Whether the company has revalued any of its fixed assets any time in the past and the present status of the revaluation reserve, if any created for the purpose; Record of major defaults, if any, in repayment in the past and history of past sickness, The position regarding the company’s tax assessment - whether the provisions made in the balance sheets are adequate to take care of the company’s tax liabilities; The nature and purpose of the contingent liabilities, together with comments thereon; Pending suits by or against the company and their financial implications (e.g. cases relating to customs and excise, sales tax, etc.); Qualifications/adverse remarks, if any, made by the statutory auditors on the company’s accounts; Dividend policy; Apart from financial ratios, other ratios relevant to the project; Trends in sales and profitability, past deviations in sales and profit projections, and estimates/projections of sales values; Production capacity & use: past and projected; o Estimated requirement of working capital finance with reference to acceptable build up of inventory/ receivables/ other current assets; Projected levels: whether acceptable; and Compliance with lending norms and other mandatory guidelines as applicable Project financing:
  55. 55. If the proposal involves financing a new project, the commercial, economic andFinancial viability and other aspects are to be examined as indicated below:Statutory clearances from various Government Depts. / AgenciesLicenses/permits/approvals/clearances/NOCs/Collaboration agreements, as applicableDetails of sourcing of energy requirements, power, fuel etc.Pollution control clearanceCost of project and source of financeBuild-up of fixed assets (requirement of funds for investments in fixed assets to be criticallyexamined with regard to production factors, improvement in quality of products, economiesof scale etc.)Arrangements proposed for raising debt and equityCapital structure (position of Authorized, Issued/ Paid-up Capital, Redeemable o Preference Shares, etc.)Debt component i.e., debentures, Term Loans, deferred payment facilities, unsecuredLoans/ deposits. All unsecured Loans/ deposits raised by the company for financing a projectshould be subordinate to the Term Loans of the banks/ financial institutions and should bepermitted to be repaid only with the prior approval of all the banks and the financialinstitutions concerned. Where central or state sales tax Loan or developmental Loan is takenas source of financing the project, furnish details of the Terms and conditions governing theLoan like the rate of interest (if applicable), the manner of repayment, etc.Feasibility of arrangements to access capital marketFeasibility of the projections/ estimates of sales, cost of production and profits covering theperiod of repaymentBreak Even Point in Terms of sales value and percentage of installed capacity under a o Normal production yearCash flows and fund flowsProposed amortization scheduleWhether profitability is adequate to meet stipulated repayments with reference to DebtService Coverage Ratio, Return on InvestmentIndustry profile & prospects
  56. 56. Critical factors of the industry and whether the assessment of these and management plans in this regard are acceptable Technical feasibility with reference to report of technical consultants, if available Management quality, competence, track record Company’s structure & systems Applicant’s strength on inter-firm comparisonsFor the purpose of inter-firm comparison and other information, where necessary, source data fromStock Exchange Directory, financial journals/ publications, professional entities like CRIS-INFAC,CMIE, etc. with emphasis on following aspects: Market share of the units under comparison Unique features Profitability factors Financing pattern of the business Inventory/Receivable levels Capacity utilization Production efficiency and costs Bank borrowings patterns Financial ratios & other relevant ratios Capital Market Perceptions Current price 52week high and low of the share price P/E ratio or P/E Multiple Yield (%)- half yearly and yearlyAlso examine and comment on the status of approvals from other Term lenders, market view (ifanything adverse), and project implementation schedule. A pre-sanction inspection of the projectsite or the factory should be carried out in the case of existing units. To ensure a higher degree ofcommitment from the promoters, the portion of the equity / Loans which is proposed to be brought
  57. 57. in by the promoters, their family members, friends and relatives will have to be brought upfront.However, relaxation in this regard may be considered on a case to case basis for genuine andacceptable reasons. Under such circumstances, the promoter should furnish a definite planindicating clearly the sources for meeting his contribution. The balance amount proposed to beraised from other sources, viz., debentures, public equity etc., should also be fully tied up.
  58. 58. C. Present relationship with Bank: Compile for existing customers, profile of present exposures: Credit facilities now granted Conduct of the existing account Utilization of limits - FB & NFB Occurrence of irregularities, if any Frequency of irregularity i.e., number of times and total number of days the account was irregular during the last twelve months Repayment of Term commitments Compliance with requirements regarding submission of stock statements, Financial Follow-up Reports, renewal data, etc. Stock turnover, realization of book debts Value of account with break-up of income earned Pro-rata share of non-fund and foreign exchange business Concessions extended and value thereof Compliance with other Terms and conditions Action taken on Comments/observations contained in RBI Inspection Reports: CO Inspection & Audit ReportsD. Credit risk rating: Draw up rating for (i) Working Capital and (ii) Term Finance.E. Opinion Reports: Compile opinion reports on the company, partners/ promotersand the proposed guarantors.F. Existing charges on assets of the unit: If a company, report on search of chargeswith ROC.G. Structure of facilities and Terms of Sanction:Fix Terms and conditions for exposures proposed - facility wise and overall: Limit for each facility – sub-limits
  59. 59. Security - Primary & Collateral, Guarantee Margins - For each facility as applicable Rate of interest Rate of commission/exchange/other fees Concessional facilities and value thereof Repayment Terms, where applicable ECGC cover where applicable Other standard covenantsH. Review of the proposal:Review of the proposal should be done covering (i) strengths and weaknesses of the exposureproposed (ii) risk factors and steps proposed to mitigate them(ii) Deviations, if any, proposed from usual norms of the Bank and the reasons thereforeI. Proposal for sanction:Prepare a draft proposal in prescribed format with required backup details and withrecommendations for sanction.J. Assistance to Assessment:Interact with the assessor, provide additional inputs arising from the assessment, incorporate theseand required modifications in the draft proposal and generate an integrated final proposal forsanction.2. Assessment:Indicative List of Activities Involved in Assessment Function is given below:
  60. 60. Review the draft proposal together with the back-up details/notes, and the borrower’sapplication, financial statements and other reports/documents examined by the appraiser.Interact with the borrower and the appraiser.Carry out pre-sanction visit to the applicant company and their project/factory site.Peruse the financial analysis (Balance Sheet/ Operating Statement/ Ratio Analysis/Fund Flow Statement/ Working Capital assessment/Project cost & sources/ Break Evenanalysis/Debt Service/Security Cover, etc.) to see if this is prima facie in order. If anydeficiencies are seen, arrange with the appraiser for the analysis on the correct lines.Examine critically the following aspects of the proposed exposure.Bank’s lending policy and other guidelines issued by the Bank from time to timeRBI guidelinesBackground of promoters/ senior managementInter-firm comparisonTechnology in use in the companyMarket conditionsProjected performance of the borrower vis-à-vis past estimates and performanceViability of the projectStrengths and Weaknesses of the borrower entity.Proposed structure of facilities.Adequacy/ correctness of limits/ sub limits, margins, moratorium and repayment scheduleAdequacy of proposed security cover o Credit risk ratingPricing and other charges and concessions, if any, proposed for the facilitiesRisk factors of the proposal and steps proposed to mitigate the riskDeviations proposed from the norms of the Bank and justifications there forTo the extent the inputs/comments are inadequate or require modification, arrange foradditional inputs/ modifications to be incorporated in the proposal, with any requiredmodification to the initial recommendation by the AppraiserArrange with the Appraiser to draw up the proposal in the final form.Recommendation for sanction: Recapitulate briefly the conclusions of the appraisal andstate whether the proposal is economically viable. Recount briefly the value of thecompany’s (and the Group’s) connections. State whether, all considered, the proposal is a
  61. 61. fair banking risk. Finally, give recommendations for grant of the requisite fund-based and non-fund based credit facilities.3. Sanction:Indicative list of activities involved in the sanction function is given below:  Peruse the proposal to see if the report prima facie presents the proposal in a comprehensive manner as required. If any critical information is not provided in the proposal, remit it back to the Assessor for supply of the required data/clarifications.  Examine critically the following aspects of the proposed exposure in the light of corresponding instructions in force: Bank’s lending policy and other relevant guidelines RBI guidelines Borrower’s status in the industry Industry prospects Experience of the Bank with other units in similar industry Overall strength of the borrower Projected level of operations Risk factors critical to the exposure and adequacy of safeguards proposed There against Value of the existing connection with the borrower Credit risk rating Security, pricing, charges and concessions proposed for the exposure and covenants  Stipulated vis-à-vis the risk perception. Accord sanction of the proposal on the Terms proposed or by stipulating modified or additional conditions/ safeguards, or Defer decision on the proposal and return it for additional data/clarifications, or Reject the proposal, if it is not acceptable, setting out the reasons.
  62. 62. Loan administration - Post sanction Credit process:.NeedLending decisions are made on sound appraisal and assessment of credit worthiness. Past record ofsatisfactory performance and integrity are no guarantee for future though they serve as a usefulguide to project the trend in performance. Credit assessment is made based on promises andprojections. A loan granted on the basis of sound appraisal may go bad because the borrower didnot carry out his promises regarding performance. It is for this reason that proper follow up andsupervision is essential. A banker cannot take solace in sufficiency of security for his loans. He has to- a) Make a proper selection of borrower b) Ensure compliance with terms and conditions c) Monitor performance to check continued viability of operations d) Ensure end use of funds. e) Ultimately ensure safety of funds lent.Stages of post sanction processThe post-sanction credit process can be broadly classified into three stages viz., follow-up,supervision and monitoring, which together facilitate efficient and effective credit management andmaintaining high level of standard assets. The objectives of the three stages of post sanction processare detailed below.
  63. 63. TYPES OF LENDING ARRANGEMENTS:IntroductionBusiness entities can have various types of borrowing arrangements. They are  One Borrower – One Bank  One Borrower – Several Banks (with consortium arrangement)  One Borrower – Several Banks (without consortium arrangements – Multiple Banking  One Borrower – Several Banks (Loan Syndication)  One BankThe most familiar amongst the above for smaller loans is the One Borrower-One Bank arrangementwhere the borrower confines all his financial dealings with only one bank.Sometimes, units would prefer to have banking arrangements with more than one bank on accountof the large financial requirement or the resource constraint of his own banker or due to varyingterms & conditions offered by different banks or for sheer administrative convenience. Theadvantages to the bank in a multiple banking arrangement/ consortium arrangement are that theexposure to an individual customer is limited & risk is proportionate. The bank is also able to spreadits portfolio. In the case of borrowing business entity, it is able to meet its funds requirementwithout being constrained by the limited resource of its own banker. Besides this, consortiumarrangement enables participating banks to save manpower & resources through common appraisal& inspection & sharing credit information.The various arrangements under borrowings from more than one bank will differ on account ofterms & conditions, method of appraisal, coordination, documentation & supervision & control.  Consortium LendingWhen one borrower avails loans from several banks under an arrangement among all the lendingbankers, this leads to a consortium lending arrangements. In consortium lending, several banks pool
  64. 64. banking recourses & expertise in credit management together & finance a single borrower with acommon appraisal, common documentation & joint supervision & follow up. The borrower enjoysthe advantage similar to single window availing of credit facilities from several banks. Thearrangement continues until any one of the bank moves out of the consortium. The bank taking thehighest share of the credit will usually be the leader of consortium. There is no ceiling on the numberof banks in a consortium.  Multiple Banking ArrangementMultiple Banking Arrangement is one where the rules of consortium do not apply & no inter seagreement among banks exists. The borrower avails credit facility from various banks providingseparate securities on different terms & conditions. There is no such arrangement called ‘MultipleBanking Arrangement’ & the term is used only to denote the existence of banking arrangement withmore than one bank. Banking Arrangement has come to stay as it has some advantages for theborrower & the banks have the freedom to price their credit products & non-fund based facilityaccording to their commercial judgment. Consortium arrangement occasioned delays in creditdecisions & the borrower has found his way around this difficulty by the multiple bankingarrangements. Additionally, when units were not doing well, consensus was rarely prevalent amongthe consortium members. If one bank wanted to call up the advance & protect the security, anotherbank was interested in continuing the facility on account of group considerations.Points to be noted in case of multiple banking arrangements Though no formal arrangement exists among the financing banks, it is preferable to have informal exchange of information to ensure financial discipline Charges on the security given to the bank should be created with utmost care to guard against dilution in our security offered & to avoid double financing Certificates on the outstanding with the other banks should be obtained on the periodical basis & also verified from the Balance sheet of the unit to avoid excess financing  Credit Syndication
  65. 65. A syndicated credit is an agreement between two or more lending institutions to provide a borrowera credit facility using common loan documentation. It is a convenient mode of raising long-termfunds.The borrower mandates a lead manager of his choice to arrange a loan for him. The mandate spellsout the terms of the loan & the mandated bank’s rights & responsibilities.The mandated banker – the lead manger – prepares an information memorandum & Circulatesamong prospective lender banks soliciting their participation in the loan. On the basis of thememorandum & on their own independent economic & financial evolution the leading banks take aview on the proposal. The mandated bank convenes the meeting to discuss the syndication strategyrelating to coordination, communication & control within the syndication process & finalizes dealtiming, management fees, cost of credit etc. The loan agreement is signed by all the participatingbanks. The borrower is required to give prior notice to the lead manger about loan drawal to enablehim to tie up disbursements with the other lending banks.Features of syndicated loans Arranger brings together group of banks Borrower is not required to have interface with participating banks, thus easy & hassle fee Large loans can be raised through syndication by accessing global markets For the borrower, the competition among the lenders leads to finer terms Risk is shared Small banks can also have access to large ticket loans & top class credit appraisal & managementAdvantages Strict, time-bound delivery schedule Streamlined process of documentation with clearly laid down roles & responsibilities Market driven pricing linked to the risk perception Competitive pricing but scope for fee-based income is also available Syndicated portions can be sold to another bank, if required Fixed repayment schedule & strict monitoring of default by markets which punish indiscipline
  66. 66. CREDIT APPRAISAL MODELCREDIT TO SME SECTORCentral bank of India provides credit to SME sector under following Schemes  SME – Schematic (Fast Track)It includes structured products basically to provide fast services to clients. It includes variousproducts like: Business Loan for Property Power Rent Power Trade Zero Collateral Loans (ZCL) to MSE under CGS Card Power Enterprise Power Business Power . Business Loan for Property: The product is aimed at providing finance to business enterprises for acquition of an immovable property. The facility is in the form of a Term Loan repayable by EMIs. The maximum Loan amount under the product is Rs. 5 crores. Power Rent: The product generally known in market parlance as “Lease Rental Discounting” is aimed at providing a Term Loan to owners of properties against their lease rental receivables. The Loan amount is assessed on the basis of the net present value of the rental receivables over the lease period (after deducting margin and taxes). The lease rentals are hypothecated in bank’s favor and the Loan is further collateralized by charge over the property. The product specifies a minimum- security coverage of 1.5 times. Maximum Loan amount under the product is Rs. 20 crores.
  67. 67. Power Trade:The product aims to provide both working capital and Term finance requirementsof a trade enterprise. The facility is in the form of a cash credit (for workingcapital requirements) and Term Loan (financing capital expenditure). The facilityis secured by hypothecation of working capital assets and further collateralized bycharge over an immovable property/ financial asset. Non- fund based facilities canalso be granted under the product. The maximum Loan amount under the productis Rs. 2.5 crores.Zero Collateral Loans (ZCL) to MSE under CGS:This product facilitates the MSEs and software/IT related services to avail bothworking capital and term finance from bank. The facility is secured by guaranteecover of credit guarantee fund trust for micro and small enterprises (CGTMSE)and there is no collateral security to be taken in such cases. Maximum loanamount under the product is Rs. 1.00 crore.Card Power:This is a scheme for financing credit/debit card receivables of units installing pourEDC machines. Both demand loan & term loan facilities are offered to theborrowers, subject to a maximum of Rs. 2.5 crores. All trading/ retailing activities(with a few exceptions like liquor, tobacco, seasonal business etc.), where credit/debit cards are used are eligible for the loans.Enterprise Power:This product has been developed to meet the credit needs of the Micro and smallenterprises covering both manufacturing and the service sectors. The facilitiesoffered include CC Rupee export credit; pre & post shipment credit & non-fundbased facilities like LC & BG. The maximum limit is restricted to Rs. 1.00 Crore.Business Power:
  68. 68. Business Power is an unsecured Term Loan (Maximum loan amount under the product is Rs. 35 lacs) to be repaid by way of EMI’s over a maximum period of 4 years.  SME- Non Schematic (Standard)For a business on the growth phase with a wide range of opportunities to explore, timelyavailability of credit is an integral ingredient needed to scale new heights. Central Bankunderstands this and endeavor to be not just a bank but also financing partner, so that focuson business needs becomes possible whereas Bank cater to meet financing needs.Their services ranging from Funded to Non-Funded, from Short Term to Long Term andfrom Credit to Trade Services ensures to get finance the way it is best suited for business.Services: Cash Credit Working Capital Demand Loan Export Finance Short Term Loan Term Loan Clean Bill Discounting LC Backed Bill Discounting Co-Acceptance of Bills Credit Facilities against Guarantee or Stand By Letter of Credit issued by Foreign Banks Letter of Credit Bank Guarantee Solvency Certificates Cash Credit:
  69. 69. Bank offer Cash Credit facilities to meet day-to-day working capital needs. Cash Credit isprovided against the primary security of stock, debtors, other current assets, etc.,and/or collateral security of movable fixed assets, immovable property, personal orcorporate guarantee, etc. Interest is charged not on the sanctioned amount but on theutilized amountWorking Capital Demand Loan:Bank also provides working capital facilities in the form of Working Capital DemandLoan instead of cash credit facility. The primary or collateral security will be asmentioned in cash credit facility. Here also interest is levied on the amount drawnrather than on the amount utilized.Export Finance:Bank provides finance for export activities in the form of Pre-Shipment Credit againstfirm order and or Letter of Credit and Post shipment credit. Credit is available forprocuring raw materials, manufacturing the goods, processing and packaging the goodsand shipping the goods. Finance is provided in Indian or foreign currency dependingupon the need of the borrower.Short Term Loan:Bank provides Working Capital facilities to meet day-to-day working capital needs andTerm Loan for capacity. However there may be occasions where there is need of ad hocor short-Term finance for general corporate purposes, meeting temporary mismatchesin working capital or for meeting contingent expenses. In such situations it providesShort Term Loans for tenure up to a year to ensure that business runs smoothly.Term Loan:When there is need of long-Term funds for capacity expansions or plant modernizationand so on. Keeping these requirements in mind Bank provides Term Loans up toacceptable tenor with suitable moratorium, if required, and repayment options
  70. 70. structured on the basis of customer’s estimated cash flows. These Loans are primarilysecured by a first charge on the fixed assets acquired through the Loan amount.Suitable collateral security is also taken whenever required.Clean Bill Discounting:Bank provides clean bill discounting facilities to fund receivables. Bank discount bills orreceivables and provide credit against that. This facility is provided for a period of 3-6months depending upon the tenor of the bill.LC Backed Bill Discounting:Bank discount trade bills drawn under Letters of Credit issued by reputed banks to fundreceivables. This facility is provided for a period of 3-6 months depending upon thetenor of the bill or Letter of Credit.Co-Acceptance of Bills:Bank also provides co-acceptance of trade bills depending upon the need of theborrower.Credit Facilities against Guarantee or Stand By Letter of Credit issued by ForeignBanks:Various foreign companies set up subsidiary in India. Bank provides funding to suchcompanies against guarantees or SBLCs of acceptable foreign banks.Letter of Credit:Apart from fund based working capital facilities Bank provides a range of Non-FundBased facilities such as Letter of credit, Bank Guarantees, Solvency certificates, etc.Letter of Credit is provided to meet trade purchases. These are generally provided for 3-6 months depending upon Trade cycle. Apart from this it provides Import Letter ofCredit for importing machinery or capital goods. Such LCs are for tenure ranging from 1-