A project report on

Analysis of Credit Appraisal System

At Bank of India

TOWARDS FULFILLMENT OF THE REQUIREMENTS

OF POST GRADUATE DEGREE IN MASTER OF MANAGEMENT STUDIES

OF UNIVERISTY OF MUMBAI

SUBMITTED BY

Priyanka Vilas Patil

MMS- ROLL NO: M1738

BATCH 2017-19

UNDER THE GUIDANCE OF

Prof. Aradhana Tiwari

FR. C. RODRIGUES INSTITUTE OF MANAGEMENT STUDIES, VASHI

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 STUDENT DECLARATION

I, Priyanka Vilas Patil, studying in the Second Year of Master of Management Studies Course at Fr.
C. Rodrigues Institute of Management Studies, Vashi, Navi Mumbai, hereby declare that I have
completed the project titled “Analysis of Credit Appraisal System at Bank of India” as a part of the
course requirements for MMS Programme.

I further declare that the information presented in this project is true and original to the best of my
knowledge.

Date:
(Signature of the student)

Place:

2
3
 CERTIFICATE FROM THE INTERNAL GUIDE

I, Prof. Ms.Aradhana Tiwari, hereby certify that Priyanka Vilas Patil, a student for the
Master of Management Studies Course at Fr. C. Rodrigues Institute of Management
Studies, Vashi, Navi Mumbai, has completed a project on “(Analysis of Credit appraisal
System at Bank of India)” under my guidance during this year.

Her work and output has been found to be satisfactory.

Date:

Place: (Signature of the Guide)

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 ACKNOWLEDGEMENT

Acknowledgement is a genuine opportunity to express the indebtness to all those who’s

active support and encouragement, this project wouldn’t have been possible

This summer training is of an immense academic record and value for the student of any
professional course and for the MBA student who have to be in the industry with the
theoretical knowledge; this practical experience gives an extra confidence in the
performance.

It gives me immense pleasure in presenting this project report on “Analysis of Credit

Appraisal at Bank of India”. The writing of this project has been one of the significant
academic challenges I have faced and without the support, patience, and guidance of the
people involved, this task would not have been completed.

I would like to add a few words of appreciation for the people who have been a part of this
project. Firstly I would like to thanks Bank of India that gave me the honour to complete
my summer training in the field of Bank.

I hereby take this opportunity to add a special note of thanks for Mr. Ashish Ghatole,
Senior Credit Manager, who undertook to act as my mentor despite his many other
academic and professional commitments also his continuous guidance, cooperation and
valuable suggestions to initiate and carry out the study

I would like to thank the Staff of Bank of India Branch who really helped me in
understanding all the functions activities of the organization from time to time and also for
allowing me to do my project there and providing valuable help in collecting the data.

Hence, it gives me immense gratification to place on records my sincere appreciation to

each and every one of those who have helped me in this journey.

Thank you.

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 CONTENTS

CHAPTER NO. TITLE PAGE NO.

1 Introduction 1

2 Industry Overview 3

3 Company Overview 8

4 Methodology 14

5 Credit appraisal at BOI 29

6 Methods of Assessing Credit Requirement 44

7 Credit Report and Credit Rating 55

8 Case Studies 62

9 Additional Procedure 78

10 Learning 79

11 Conclusion 80

12 Bibliography/References 81

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 LIST OF ABBREVIATIONS

TNW Total Net Worth

DER Debt Equity Ratio

MSOD Monthly Statement of Drawing

CMA Credit Monitoring Arrangement

JLA Joint Lead Arranger

LIE Lenders Independent Engineer

FBWC Fund Based Working Capital

NOC No Objection Certificate

DSCR Debt service Coverage Ratio

PDCs Post Dated Cheques

KYC Know Your Customer

CIBIL Credit Information Bureau of India ltd.

TOL Total Outstanding Liabilities

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 CHAPTER 1 : INTRODUCTION

The project undertaken is “Analysis of Credit Appraisal at Bank of India”. The credit
appraisal process is the scientific way of giving the credit to corporate client by analyzing
the credit worthiness of the company through different parameters. This project will give an
insight to the procedure and credit appraisal policies followed at Bank of India to assess the
credit worthiness of the borrower.

I did my internship with Bank of India which is located in Thane. The major reason for
choosing the Banking industry was to understand the working in the banks and also to gain
knowledge about banking industry and how it is helping the economy. Due to recent surge
in industrialization, the Indian economy is booming. To provide more impetus to the
industries, the government is encouraging their foray into various industries. In order to
fund the projects, the corporate depend on the credit and trade services provided by the
banks.

In the changing trade scenario, India has come up as an emerging player. There are
great potentials and opportunities in the trading sector on the domestic and international
sector. The economic growth of any country is dependent on its Import and Export. Thus
providing need based Credit is one of the most important factor helps exporter to make
Export orders and importers to make purchases.

As finance has a risk attached, thus we need to appraise the proponent before lending any
credit this process is called Credit Appraisal which checks the need of finance for
the business. It involves appraisal of the background of the proponent,
commercial, technical and financial appraisal. Then the Term Loan / Working Capital
Assessment is done to find the limit of finance required.

The report contains the detailed study of the Credit Appraisal System at Bank of India. As
we know that no finance can be made available without the credit appraisal of the project,
thus this chapter talks about the process flow of the Advances operation. The client

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 proposal helps me to understand the Analysis of Working Capital and Term Loans which
forms the base for the advances made by the bank. The various standards and ratios used by
the bank are also analyzed. On the advances side, the Analysis of a proposal has been done
to give a clear understanding of the procedure followed at the bank.

1.2 OBJECTIVES

i. To understand the Concept of Credit Appraisal, Selection of loan applicants and the
eligibility criteria of the customers.
ii. To understand the contents of an application form & documents required for
process of loan at Bank of India.
iii. To study the policies and procedure for the Credit Appraisal for the Trade Credit
iv. To understand pre-sanction and post-sanction procedures
v. To get knowledge of the operations performed and different types of bank products
and services offered by Bank of India
vi. To understand the concept of Credit Risk Rating & Credit Risk Assessment.

1.3 LIMITATIONS:
Some of the limitations of the project that were encountered during the study are:

i. As the credit appraisal is one of the most crucial areas for any bank, some of the
technicalities are not revealed, thus getting clear picture about the internal service
provide is not possible.
ii. Credit appraisal system includes various types of detail studies for different areas of
analysis, but due to time constraint, my analysis was of limited areas only.
iii. The study was only on desk jobs related to credit. I was not exposed to the field
survey and valuation part.
iv. As per the bank’s terms and conditions related to internship, approaching customers
was not allowed.

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 CHAPTER 2 : INDUSTRY OVERVIEW

INTRODUCTION

As per the Reserve Bank of India (RBI), India’s banking sector is sufficiently capitalized
and well-regulated. The financial and economic conditions in the country are far superior to
any other country in the world. Credit, market and liquidity risk studies suggest that Indian
banks are generally resilient and have withstood the global downturn well.

Indian banking industry has recently witnessed the roll out of innovative banking models
like payments and small finance banks. The central bank granted in-principle approval to
11 payments banks and 10 small finance banks in FY 2015-16. RBI’s new measures may
go a long way in helping the restructuring of the domestic banking industry.

MARKET SIZE
The Indian banking system consists of 26 public sector banks, 25 private sector banks, 43
foreign banks, 56 regional rural banks, 1,589 urban cooperative banks and 93,550 rural
cooperative banks, in addition to cooperative credit institutions. Public-sector banks control
nearly 80 percent of the market, thereby leaving comparatively much smaller shares for its
private peers. Banks are also encouraging their customers to manage their finances using
mobile phones.
Standard & Poor’s estimates that credit growth in India’s banking sector would improve to
11-13 per cent in FY17 from less than 10 per cent in the second half of CY14.

HISTORY

Banks are among the main participants of the financial system in India. Banking offers
several facilities and opportunities. Banking in India originated in the last decades of the
18th Century. The oldest bank in existence in India is the State Bank of India, a
government owned bank that traces its origin in June 1806. It is the largest commercial
bank in the country today. There are three different phases in the history of banking in
India.

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 1. Pre – Nationalization Era

2. Nationalization Stage

3. Post liberalization Era

Pre – Nationalization Era:

In India the business of banking and credit was practiced even in very early times. The
remittance of money through Hundis, an indigenous credit instrument was very popular.
The hundis were issued by bankers known as Shroffs, Sahukars, Shahus or Mahajans in
different parts of the country.

Organizational Structure of Banks in India

In India banks are classified in various categories according to different criteria. The
following charts indicate the banking structure.

Chart No. 2.1

Organizational Structure of Banks in India

Reserve Bank of India

Banks Financial
Institutions

Scheduled Commercial Corporative Credit All- India Financial State – level Other
Banks (SCBs) Institutions Institutions Institution
Institution

Foreign Banks Regional Rural Urban Cooperative Rural

Public Sector Private Sector
Banks (RRB) (82) Banks (1,674) Cooperative
Banks (27) Banks (22) (32)
Banks (1,674)

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Growth of Indian Banking Sector

Growth in credit off-take

 Credit off-take has been surging ahead over the past decade, aided by strong
economic growth, rising disposable incomes, increasing consumerism & easier access
to credit
 In March FY16, total credit extended surged to USD1016 billion.
 Credit to non-food industries increased by 9.06 per cent reaching to USD1000 billion
in March FY16, from USD983 billion during the previous financial year.
 Demand has grown for both corporate & retail loans; particularly the services, real
estate, consumer durables & agriculture allied sectors have led the growth in credit.
 As of November 2016, the outstanding credit to NBFCs stood at USD 55.27 billion,
growing at a rate of 25 per cent on Y-o-Y basis. Bank credit granted to Non-banking
Finance Companies (NBFCs) has touched the highest in 3 years.

Chart No. 2.2

Growth in Credit off- take

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Growth in deposits

 During FY06–17, deposits grew at a CAGR of 12.03 per cent and reached 1.54
trillion by FY-17.
 Strong growth in savings amid rising disposable income levels are the major factors
influencing deposit growth.
 Access to banking system has also improved over the years due to persistent
government efforts to promote banking-technology and promote expansion in
unbanked and non-metropolitan regions.
 At the same time India’s banking sector has remained stable despite global upheavals,
thereby retaining public confidence over the years.
 Deposits under Pradhan Mantri Jan DhanYojana (PMJDY), have also increased. As
on November 9, 2016, USD6,971.68 million were deposited, while 255.1 million
accounts were opened
 Karnataka Bank has been awarded 2 Indian Banking Association awards for the best
use of digital & channels technology and for the best financial inclusion initiatives in
small bank category.
 Public sector bank Vijaya Bank would be raising US$148.74 million from the market.
The bank is targeting CRAR (Credit Adequacy Ratio) of 13 per cent plus by the end
of FY18.
Chart No. 2.3
Growth in Deposits

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Future of Banking
The Indian economy is on the brink of a major transformation, with several policy
initiatives set to be implemented shortly. Positive business sentiments, improved consumer
confidence and more controlled inflation are likely to prop-up the country’s the economic
growth. Enhanced spending on infrastructure, speedy implementation of projects and
continuation of reforms are expected to provide further impetus to growth. All these factors
suggest that India’s banking sector is also poised for robust growth as the rapidly growing
business would turn to banks for their credit needs.
Also, the advancements in technology have brought the mobile and internet banking
services to the fore. The banking sector is laying greater emphasis on providing improved
services to their clients and also upgrading their technology infrastructure, in order to
enhance the customer’s overall experience as well as give banks a competitive edge.
Many banks, including HDFC, ICICI and AXIS are exploring the option to launch contact-
less credit and debit cards in the market shortly. The cards, which use near field
communication (NFC) mechanism, will allow customers to transact without having to
insert or swipe.

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 CHAPTER 3 : COMPANY OVERVIEW

Mission and vision

Vision

“To Become the Bank of Choice for Corporates, Medium Business and Upmarket Retail
Customers and Developmental Banking for Small Business, Mass Market and Rural
Markets.”

Mission

“To provide superior, proactive banking service to niche markets globally, while providing
cost effective, responsive service to others in our role as a development bank, and in doing
so, meet the requirements of our stakeholders”.

Quality Policy

We, at Bank of India, are committed to become the bank of choice by providing
SUPERIOR, PRO-ACTIVE, INNOVATIVE, STATE-OF-THE-ART Banking services
with an attitude of care and concern for the customers and patrons

USP: A bank that gives something extra to its customers

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Company Profile

Type: Public

Industry: Banking, Financial services

Founded: 7 September 1906; 110 years ago

Headquarters: Mumbai, India

Key People:DinbandhuMohapatra (MD & CEO)

Products: Commercial Banking, Retail Banking, Private Banking, Asset Management,

Mortgages, Credit Cards

Revenue:Rs. 41,796.47 crore

Operating Income:Rs. 6,036 crore

Net Income:Rs. -6089.22 crore

Total Assets:Rs. 609,913.93 crore

Owner: Government of India

Number of Employees: 45,613 (2015)

History:

Bank of India was founded on 7th September, 1906 by a group of eminent businessmen
from Mumbai. The Bank was under private ownership and control till July 1969 when it
was nationalized with 13 other banks.

Beginning with one office in Mumbai, with a paid-up capital of Rs.50 lakh and 50
employees, the Bank has made a rapid growth over the years and blossomed into a mighty
institution with a strong national presence and sizable international operations. In business
volume, the Bank occupies a premier position among the nationalized banks.

The Bank has over 5000 branches in India spread over all states/ union territories including

9
specialized branches. These branches are controlled through 54 Zonal Offices and 8 NBG
Offices. There are 60 branches/ offices and 5 Subsidiaries and 1 joint venture abroad.

The Bank came out with its maiden public issue in 1997 and follow on Qualified Institution
placements in February.

While firmly adhering to a policy of prudence and caution, the Bank has been in the
forefront of introducing various innovative services and systems. Business has been
conducted with the successful blend of traditional values and ethics and the most modern
infrastructure. The Bank has been the first among the nationalized banks to establish a fully
computerized branch and ATM facility at the Mahalaxmi Branch at Mumbai way back in
1989. The Bank is also a Founder Member of SWIFT in India. It pioneered the introduction
of the Health Code System in 1982, for evaluating/ rating its credit portfolio.

Products and Services of Bank of India

In spite of being a public sector bank, this bank has got all kinds of products and services,
which one can get in a modern bank. With their firm adherence to the policy of caution and
prudence, they have been one of the leaders in introducing different kinds of innovative
banking services and solutions. Following are the different services offered by B. O. I. in
India:

Ancillary Services
Some of the popular supplementary services offered by the bank are as follows:

 Depository Services
 Gold Coin (New)
 Insurance (Domestic travel, health, education etc.)
 Mutual Fund
 Remittance
 Safe Custody
 Safe Deposit Locker
 Star Cash Management Service

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Cards
Apart from the normal credit or debit cards, this bank even offers valued visa or master
cards to its worldwide customers. The names of some of the cards offered by this Indian
bank are given below:

 Bank of India Master Card

 Bank of India VISA Card
 Gift Card
 Platinum Debit Card
 VISA Electron
Deposit Schemes
This bank offers varied types of deposit schemes like savings accounts, current accounts,
salary accounts, fixed deposits, term deposits, recurring deposits, double benefit deposits,
income certificates (Both quarterly and monthly) and many more. To name a few of these
products are:

 Jai Jawan Salary Plus Accounts (New)

 Star Benefit C. D. Plus Accounts
 Star Diamond Savings Account
 Star Flexi Recurring Deposit Scheme
 Star Power Salary Account
 Star Sunidhi Tax Saving Deposit Scheme
 Star Suraksha S. B. Plus Account

Online Services
The different kinds of online services offered by B. O. I. are as follows:

 Bill Payment
 Fund Transfer (Inter-bank)
 Internet Banking
 Mobile Banking
 Share Trading
 Tax Payment

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  Ticket Booking

Competitors
 State Bank of India (SBI)
 Bank of Baroda
 Punjab National Bank (PNB)
 Canara Bank
 Central Bank

Bank of India's Shareholding Pattern

Graph No. 3.1
Bank of India’s Shareholding Pattern

Percent of Share(%)
1%
0%
14.71%

16.06%
62.72%
5.32%

Promoters Individuals Institutions FII Govt Others

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 Decision making process at BOI

The proposals for all types of loans are handled by the credit department at BOI. A credit
appraisal goes through different level of sanctioning to enforce internal controls and other
practices to ensure that exceptions to policies, procedures and limits are reported in a timely
manner to the appropriate level of management for action.

Proposal reaches the branch which is scrutinized by the credit department

Then it reaches the Zonal Office for further checking

It is further sent to the Head Office (AGM/DGM)

Subsequently the proposal is sent to G.M

From G.M. it goes to Executive Director

Next it reaches Chief Managing Director

The proposal is finally sent to BOD for further clearance if needed

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 CHAPTER 4 : METHODOLOGY

INTRODUCTION TO CREDIT APPRAISAL:

Credit appraisal means an investigation/assessment done by the bank prior before providing
any loans & advances/project finance & also checks the commercial, financial & technical
viability of the project proposed its funding pattern & further checks the primary &
collateral security cover available for recovery of such funds.

4.1 : TYPE OF RESEARCH

To study the Credit Appraisal System at Bank of India

4.2 : DATA COLLECTION

A) Primary Data

 By observing the work culture, people, bank daily process.

 Took help and guidance of Senior Credit Manager, Chief Manager & AGM
 Learned from Staff members.

B) Secondary Data

 Books & magazines

 Database at BOI
 Websites
 E-circulars of BOI
 Loan Policy of BOI

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4.3 : THEORITICAL PERSPECTIVE OF THE CONCEPT

4.3.1 : AN OVERVIEW OF BANK LENDING

A developed country like USA sees it’s major lending activities done by Capital & Money
market, where banks provide services for merger & acquisition and other merchant banking
activities. In India is predominantly done by Banks. Capital Market & Money Market are
not as strong and dependable entities as yet as banks in a developing country as India and
Indian economy. Banks have different ways of extending credit to different types of
borrowers for a wide variety of purposes.

Principles of Lending and Loan Policy :

 Principles of Lending :

Banks lend from the funds mobilized as deposits from public. A bank acts in the capacity of
a custodian of these funds and is responsible for its safety, security but at the same time is
also required to deliver justified and assured returns over these borrowings. A bank looks
into following aspects before lending.

 Safety :

The first rule of lending is to ascertain the safety of the advances made. This means
assessment of the repaying capacity of the borrower and purpose of borrowing. It also
includes assessment of contingencies and a fallback plan for the same. This is ensured by
taking adequate security (readily marketable and free of encumbrances) by way of
guarantee, collateral, charges on property, etc.

 Liquidity :

The second rule of lending is to ascertain how and when the repayment of the advances
made would happen and that the repayment is timely. This is to ascertain availability of
funds in future and make sure that the funds are not locked up for a long period. This helps
in maintaining balance between deposits and advances and to meet depositor’s obligation.

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  Profitability :

The third rule of lending is to lend at higher rate of Interest than borrowing rate. This is
called as interest spread / margin. One has to strike a balance between profitability and
safety of funds. Interest rates must be charged competitively but at the same time spread
should be adequate.

 Risk Diversion :

An old saying says --- “never put all your eggs in one basket” . A lender must lend to aa
Diversified customer base. Diversification must be made in terms of geographical
locations, borrowers industry, sector etc. It is done so as to mitigate adverse financial effets
of a business cycle, catastrophe, chain effect etc.

 Loan Policy:

Banks are basically a lending institution. Its major chunk of revenue is earned from interest
on advances. Each bank has its own credit policy, based on the principles of lending, which
outlines lending guidelines and establishes operating procedures in all aspects of credit
management. The policy is drafted by the Credit Policy Committee and is approved by the
bank‘s board of directors. The credit policy sets standards for presentation of credit
proposals, financial covenants, rating standards and benchmarks, delegation of credit
approving powers, prudential limits on large credit exposures, asset concentrations,
portfolio management, loan review mechanism, risk monitoring and evaluation, pricing of
loans, provisioning for bad debts, regulatory/ legal compliance etc. The lending guidelines
reflect the specific bank's lending strategy (both at the macro level and individual borrower
level) and have to be in conformity with RBI guidelines. The loan policy typically lays
down lending guidelines in the following areas:

 Credit-deposit ratio:

Banks are under an obligation to maintain certain statutory reserves like cash reserve ratio
(CRR – to be kept as cash or cash equivalents), statutory liquidity ratio (SLR – to be kept in

16
cash or cash equivalents and prescribed securities), etc. These reserves are maintained for
asset – liability management (ALM) and are calculated on the basis of demand and time
liabilities (DTL). Banks may further invest in non – prescribed securities for the matter of
risk diversion. Funds left after providing for these reserves are available for lending. The
CPC decides upon the quantum of credit that can be granted by the bank as a percentage of
deposits.

 Targeted portfolio mix:

CPC has to strike balance between risk and return. It sets the guiding principles in choosing
preferred areas of lending and sectors to avoid. It also takes into account government
policies of lending to preferred / avoidable sectors. The bank assesses sectors for future
growth and profitability and accordingly decides its exposure limits.

 Loan pricing:

Risk-return trade-off is a fundamental aspect of risk management. Borrowers with weak

financial position and, hence, placed in higher risk category are provided credit facilities at
a higher price (that is, at higher interest). The higher the credit risk of a borrower the higher
would be his cost of borrowing. To price credit risks, bank devises appropriate systems,
which usually allow flexibility for revising the price (risk premium) due to changes in
rating. In other words, if the risk rating of a borrower deteriorates, his cost of borrowing
should rise and vice versa.

At the macro level, loan pricing for a bank is dependent upon a number of its cost factors
such as cost of raising resources, cost of administration and overheads, cost of reserve
assets like CRR and SLR, cost of maintaining capital, percentage of bad debt, etc. Loan
pricing is also dependent upon competition

 Collateral security:

As part of a prudent lending policy, bank usually advances loans against some security. The
loan policy provides guidelines for this. In the case of term loans and working capital
assets, bank takes as 'primary security' the property or goods against which loans are
granted. In addition to this, banks often ask for additional security or 'collateral security' in

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the form of both physical and financial assets to further bind the borrower. This reduces the
risk for the bank. Sometimes, loans are extended as 'clean loans' for which only personal
guarantee of the borrower is taken.

4.3.2 : RBI Guidelines relating to Bank Credit:

The credit policy of a bank should be conformant with RBI guidelines; some of the
important guidelines of the RBI relating to bank credit are discussed below.

 Directed credit stipulations:

The RBI lays down guidelines regarding minimum advances to be made for priority sector
advances, export credit finance, etc. These guidelines need to be kept in mind while
formulating credit policies for the Bank.

 Capital adequacy:

If a bank creates assets-loans or investment-they are required to be backed up by bank

capital; the amount of capital they have to be backed up by depends on the risk of
individual assets that the bank acquires. The riskier the asset, the larger would be the capital
it has to be backed up by. This is so, because bank capital provides a cushion against
unexpected losses of banks and riskier assets would require larger amounts of capital to act
as cushion.

 Credit Exposure Limits:

As a prudential measure aimed at better risk management and avoidance of concentration

of credit risks, the Reserve Bank has fixed limits on bank exposure to the capital market as
well as to individual and group borrowers with reference to a bank's capital. Limits on
inter-bank exposures have also been placed. Banks are further encouraged to place internal
caps on their sector exposures, their exposure to commercial real estate and to unsecured
exposures.

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Table 1:

Exposure norms for Commercial Limit

Banks in India Exposure to

1 Single Borrower 15% of capital fund (Additional

5% on infrastructure exposure

2 Group Borrower 40% of capital fund (Additional

10% on infrastructure exposure)

3 NBFC 10% of capital fund

4 NBFC – AFC 15% of capital fund

5 Indian Joint Venture/ Wholly owned 20% of capital fund

subsidiaries abroad/ Overseas step
down subsidiaries of Indian corporate

6 Capital Market Exposure The lesser of 30% of paid-up

(a) Bank’s holding of shares in any share capital of the banks 40% of
company of the company or 30% of its net worth
the paid-up capital

(b) Bank’s aggregate exposure to

capital market (solo basis) 40% of its consolidated net worth
(c) Bank’s aggregate exposure to
20% of its net worth
capital market (group basis)
20% of its consolidated net worth

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 (d) Bank’s direct exposure to capital
market (solo basis)

(e) Bank’s direct exposure to capital

market

7 Gross holding of capital among banks/ 10% of capital fund

FIs

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4.3.3 : TYPES OF LENDING

Lending can be for long term tenure or short term tenure. Lending is broadly classified into
two broad categories: Fund based lending and Non-fund based lending

CASH CREDIT

FUND BASED
OVERDRAFT
WORKING
SHORT TERM
CAPITAL
LENDING LETTER OF CREDIT
NON FUND
TENURE
BASED
LONG TERM TERM LOAN
BANK
GUARANTEE

Fund Based Lending:

This is a direct form of lending in which a loan with an actual cash outflow is given to the
borrower by the Bank. In most cases, such a loan is backed by primary and/or collateral
security. The loan can be to provide for financing capital goods and/or working capital
requirements.

I. Loan:

In this case, the entire amount of assistance is disbursed at one time only, either in cash or
by transfer to the company’s account. It is a single advance. The loan may be repaid in
installments, the interests will be charged on outstanding balance.

II. Overdraft:

In this case, the company is allowed to withdraw in excess of the balance standing in its
Bank account. Bank fixes a limit beyond which the company will not be able to overdraw
the account. Legally, overdraft is a demand assistance given by the bank i.e. bank can ask

21
for the repayment at any point of time. It is given for a very short period of time, at the end
of which the company is supposed to repay the amount. Interest is payable on the actual
amount drawn.

III. Cash Credit:

In practice, the operations in cash credit facility are similar to those of overdraft facility
except the fact that the company need not have a formal current account. Here also a fixed
limit is stipulated beyond which the company is not able to withdraw the amount. Legally,
cash credit is a demand facility, but in practice. The interests is payable on actual amount
drawn and is calculated on daily product basis. Concept of margin also plays a vital role
unlike overdraft.

IV. Working Capital Term Loans:

These Loans are a business loan that is commonly used to help businesses which are
experiencing cash flow problems. To meet the working capital needs of the company banks
may grant the working capital term loans for a period of 3 to 7 years, payable in yearly or
half yearly installments.

V. Packing Credit:

This type of assistance may be considered by the bank to take care of specific needs of the
company when it receives some export order. Packing credit is a facility given by the bank
to enable the company to buy the goods to be exported. If the company holds a confirmed
export order placed by the overseas buyer or a letter of credit in its favor, it can approach
the bank for packing credit facility.

This type of facility is included in short term facilities. Packing credit facility is in two
forms:

i. Pre-shipment Packing Credit

ii. Post-shipment Packing Credit

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Non-fund Based Lending:

In this type of facility, the Bank makes no funds outlay. However, such arrangements may
be converted to fund-based advances if the client fails to fulfill the terms of his contract
with the counterparty. Such facilities are known as contingent liabilities of the bank.
Facilities such as 'letters of credit' and 'guarantees' fall under the category of non-fund
based credit.

The non-fund based lending in the form of letter of credit is very regularly found in the
international trade. In case the exporter and the importer are unknown to each other. Under
these circumstances, exporter is worried about getting the payment from the importer and
importer is worried as to whether he will get the goods or not. In this case, the importer
applies to his bank in his country to open a letter of credit in favor of the exporter whereby
the importer’s bank undertakes to pay the exporter or accept the bills or drafts drawn by the
exporter on the exporter fulfilling the terms and conditions specified in the letter of credit.

I. Letter of Credit:

Letter of credit (LC) is a method of settlement of payment of a trade transaction and is

widely used to finance purchase of raw material, machinery etc. It contains a written
undertaking by the bank on behalf of the purchaser to the seller to make payment of a stated
amount on presentation of stipulated documents and fulfillment of all the terms and
conditions incorporated therein. Letters of credit thus offers both parties to a trade
transaction a degree of security. The seller can look forward to the issuing bank for
payment instead of relying on the ability and willingness of the buyer to pay.

Parties to a Letter of Credit

i. Applicant/Opener: It is generally the buyer of the goods who gets the letter of
credit issued by his banker in favor of the seller. The person on whose behalf and
under whose instructions the letter of credit is issued is known as applicant/ opener
of the credit.
ii. Opening bank/issuing bank: The bank issuing the letter of credit.

23
 iii. Beneficiary: The seller of goods in whose favor the letter of credit is issued.
iv. Advising Bank: Notification regarding issuing of letter of credit may be directly
sent to the beneficiary by the opening bank. It is, however, customary to advise the
letter of credit through sane other bank operating at the place/country of seller. The
bank which advises the letter of credit to the beneficiary is known as advising bank
v. Confirming Bank: A letter of credit substitutes the credit worthiness of the buyer
with that of the issuing bank. It may sometimeshappen especially in import trade
that the issuing bank itself is not widely known in the exporter's country and
exporter is not prepared to rely on the L/C opened by that bank. In such cases the
opening bank may request other bank usually in the country of exporter to add its
confirmation which amounts to an additional undertaking being given by that bank
to the beneficiary. The bank adding its confirmation is known as confirming bank.
The confirming bank has thesame liabilities towards the beneficiary as that of
opening bank.
vi. Negotiating Bank: The bank that negotiates the documents drawn under letter of
credit and makes payment to beneficiary. The function of advising bank, confirming
bank and negotiating bank may be undertaken by a single bank only.

Letter of Credit Mechanism

Any business/industrial venture will involve purchase transactions relating to

machine/other capital goods and raw material etc., and also sale transactions relating to its
products. The customer may be an applicant for a letter of credit for his purchases while be
the beneficiary under other letter of credit for his sale transaction. The complete mechanism
of a letter of credit may be divided in three parts as under:

i. Issuing of Credit:

Letter of credit is always issued by the buyer's bank (issuing bank) at the request and on
behalf and in accordance with the instructions of the applicant. The letter of credit may
either be advised directly or through some other bank. The advising bank is responsible for
transmission of credit and verifying the authenticity of signature of issuing bank and is
under no commitment to pay the seller. The advising bank may also be required to add

24
confirmation and in that case will assume all the liabilities of issuing bank in relation to the
beneficiary as stated already.

ii. Negotiation of Documents by beneficiary:

On receipt of letter of credit, the beneficiary shall arrange to supply the goods as per the
terms of L/C and draw necessary documents as required under L/C. The documents will
then be presented to the negotiating bank for payment/acceptance as the case may be. The
negotiating bank will make the payment to the beneficiary and obtain reimbursement from
the opening bank in terms of credit.

iii. Settlement of Bills Drawn under Letter of Credit by the opener:

The last step involved in letter of credit mechanism is retirement of documents received
under L/C by the opener. On receipt of documents drawn under L/C, the opening bank is
required to closely examine the documents to ensure compliance of the terms and
conditions of credit and present the same to the opener for his scrutiny. The opener should
then make payment to the opening bank and take delivery of documents so that delivery of
goods can be obtained by him.

Types of Letter of Credit

Letter of credit may be divided in two broad categories as under:

a) Revocable letter of credit:

This may be amended or cancelled without prior warning or notification to the
beneficiary. Such letter of credit will not offer any protection and should not be
accepted as beneficiary of credit.
b) Irrevocable letter of credit:
This cannot be amended or cancelled without the agreement of all parties thereto.
This type of letter of credit is mainly in use and offers complete protection to the
seller against subsequent development against his interest.
c) Confirmed LC:
The seller may ask for the confirmation of the LC by a bank in his own country if
he is not satisfied about the issuing bank’s credentials.

25
d) Sight/ Usance LCs: In case of the sight LCs beneficiary gets immediate payment
upon presentation of the documents while in the case of usance, the payment is
made after a certain period as per the LC terms. SightLCs have to be paid bythe
drawee (buyer) immediately whereas he gets credit as per LC terms under Usance
LCs.
e) LC with advance payment to the seller.
The LC which authorizes the advising bank to advance a part of LC amount to the
seller to meet pre-shipment expenses is known as Red Clause Letter of Credit. The
seller gives the receipt & an undertaking to present the documents before the LC
expires. Advance amount would be adjusted from the proceeds of the export
documents. However, the risk is assumed by the buyer. When the Red Clause LC
provides for the cost of shortage facilities at the port of shipment in addition to the
pre-shipment advance to the beneficiary it is called Green Clause LC. The goods are
stored in the name of the issuing bank.
f) Revolving LC:
Under this, the issuing bank undertakes to restore the credit to the original amount
after it has been utilized. Number of such utilization & the period of time by which
this should take place are stipulated in the LC. On receipt of bill payment advise the
LC amount gets reinstated
g) Transferable LCs:
Transferable LC are transferable in whole or in part to one or more beneficiaries
depending on the terms of LC. As per UCPDC stipulated in the LC, all LC are not
transferable e.g) Back to back LCs: When the bank opens new LCs against the
backing of an LC received by a beneficiary having the first LC as security for the
new LCs opened, the transaction is referred to as Back to Back. For example let us
assume a customer A, who exports marine products by buying them from a number
of suppliers. If A receives an LC for USD 100000 for shipment of marine products
& he approaches the Bank for opening LCs in favour of his suppliers of marine
products within the original value & in keeping with the terms of the original LC
these new LCs are opened against the backing of the original LC. This is the back

26
 to back transaction. However, it may be noted that this arrangement is not under the
provisions of UCPDC though the individual LCs are governed by it.

II. Bank Guarantee

A contract of guarantee can be defined as a contract to perform the promise, or discharge

the liability of a third person in case of his default. The contract of guarantee has three
principal parties as under:

 Principal debtor/Applicant: The person who has to perform or discharge the

liability and for whose default the guarantee is given.
 Principal creditor/Benefiary: The person to whom the guarantee for due
fulfillment of contract by principal debtor. Principal creditor is also sometimes
referred to as beneficiary.
 Guarantor or Surety: The person who gives the guarantee.

Bank provides guarantee facilities to its customers who may require these facilities for
various purposes.

The guarantees may broadly be divided in two categories as under:

 Financial guarantees: Guarantees to discharge financial obligations to the

customers.
 Performance guarantees: Guarantees for due performance of a contract by
customers. Let us explain with an example how guarantees work. A company takes
a term loan from Bank A and obtains a guarantee from Bank B for its loan from
Bank A, for which he pays a fee. By issuing a bank guarantee, the guarantor bank
(Bank B) undertakes to repay Bank A, if the company fails to meet its primary
responsibility of repaying Bank A. Banks carry out a detailed analysis of borrowers'
working capital requirements. Credit limits are established in accordance with the
process approved by the board of directors. The limits on working capital facilities
are primarily secured by inventories and receivables (chargeable current assets).

27
Purpose of Bank Guarantees

Bank Guarantees are used to for both preventive & remedial purposes. The guarantees
executed by banks comprises both performance guarantees & financial guarantees. The
guarantees are structured according to the terms of agreement, viz. security, maturity &
purpose.

Branches may issue guarantees generally for the following purposes:

a) In lieu of security deposit/earnest money deposit for participating in tenders;

b) Mobilization advance or advance money be fire commencement of the project by the

Contractor & for money to be received in various stages like plant layout, design/drawings
in project finance;

c) In respect of raw materials supplies or for advances by the buyers;

d) In respect of due performance of specific contracts by the borrowers & for obtaining full
payment of the bills;

e) Performance guarantee for warranty period on completion of contract which would

enable the suppliers to realize the proceeds without waiting for warranty period to be over;

f) To allow units to draw funds from time to time from the concerned indenters against part
execution of contracts, etc.

g) Bid bonds on behalf of exporters

h) Export performance guarantees on behalf of exporters favouring the Customs

Department under EPCG scheme.

28
 CHAPTER 5 : CREDIT APPRAISAL AT BOI

Credit Appraisal means an investigation done by the bank prior before providing any loans
& advances /project finance & also checks the commercial, financial& technical viability of
the project proposed its funding pattern & further checks the primary & collateral security
cover available for recovery of such funds.

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 to its customers. Credit risk is a risk related to non-repayment
of the credit obtained by the customer of a bank. Thus it is necessary to appraise the
credibility of the customer in order to mitigate the credit risk. Proper evaluation of the
customer is performed this measures the financial condition and the ability of the customer
to repay back the Loan in future. Generally the credits facilities are extended against the
security know as collateral. But even though the Loans are backed by the collateral, banks
are normally interested in the actual Loan amount to be repaid along with the interest. Thus,
the customer's cash flows are ascertained to ensure the timely payment of principal and the
interest.

It is the process of appraising the credit worthiness of a Loan applicant. Factors like age,
income, number of dependents, nature of employment, continuity of employment,
repayment capacity, previous Loans, credit cards, etc. are taken into account while
appraising the credit worthiness of a person. Every bank or lending institution has its own
panel of officials for this purpose.

However the 3 ‘C’ of credit are crucial & relevant to all borrowers/ lending, which must be
kept in mind, at all times.

- Character

- Capacity

- Collateral

29
If any one of these is missing in the equation then the lending officer must question the
viability of credit. There is no guarantee to ensure a Loan does not run into problems;
however if proper credit evaluation 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 APPRAISAL PROCESS

Receipt of application from applicant

Receipt of documents (Balance sheet,

KYC papers, Different govt. registration
no., MOA, AOA etc

Pre-sanction visit by bank officers

Check for RBI defaulters list, willful defaulters list, CIBIL data, ECGC, Caution list etc

Title clearance report s of the properties to be obtained from empanelled Advocates

Valuation reports of the properties to be obtained from empanelled Advocates

Preparation of Financial Data

Proposal preparation

Assessment of Proposal

Sanction/approval of proposal by appropriate sanctioning authority

30
 Documentations, agreements, mortgages

Disbursement of Loan

Post sanction activities such as receiving stock statements, review of accounts, renew of accounts, etc
(On regular basis)

31
5.1: CREDIT APPRAISAL PROCESS

I. Initial due diligence & financial analysis

The process of credit appraisal would begin with the selection of the borrower. The process
would broadly cover:

(i) Appraising the borrower/business

(ii) Appraising/assessing the credit requirement and structuring the credit delivery, security,
covenants etc. Appraisal of the borrower would include background check and assessment
of managerial, commercial, technical and financial capability/strength, project
execution/management ability, success in joint venture for technology/ market, retention of
professional talent at various levels, management control, promoters’ shareholding etc.

Both the above aspects need to be appraised/ examined at the time of the initial entry of a
customer to the Bank as also at the time of subsequent periodic reviews. Naturally, the
appraisal would be different in respect of:

- Retail segment like personal loans for consumer durables, house etc

- Small business like loans to business enterprises

- Farming sector/agriculturists

- MSME sector

- Corporates in manufacturing, infrastructure, services, wholesale trade and other sectors.

II. Background of the Borrower & Management

Background of the borrower needs to be done through scrutiny of antecedents, experience

in the line of business, managerial, marketing, technical competence, organizational
strength, integrity etc. Track record with us, status report from the other banks, reports in
the sector from banks borrowers in similar business, RBI/CIBIL reports on

32
defaulters/willful defaulters, Corporate action taken by SEBI/NSE/BSE, reports from their
vendors/dealers who may be our customers, reasonability of CMA projections, actual
performance v/s estimates, frequent overdrawing, history of restructuring/OTS etc. In case
of adverse report in any of the above areas, there could be justifications/mitigations which
should be looked into. If need be the appraising officer may personally visit the other bank
for personal discussions. The gist of such oral discussion may be recorded in the file ofthe
borrower and brought out in the proposal. KYC guidelines as framed by RBI and adopted
by Bank are to be followed by the branches.

III. Commercial appraisal

The nature of the product, demand for the same, the existing and perceived competition in
the segment, ability of the proponents to withstand the same, government policies
governing the industry, etc. need to be taken into consideration. The trade practices in
respect of the product should be thoroughly understood. Branches should use the reports
from ICRA/CRISIL & Capitaline available on Stardesk.

IV. Technical appraisal

Technical appraisal of the project needs to be carried out for industrial activity proposals
beyond the cut-off limits prescribed from time to time. Such appraisal may be carried out
in- house by Technical Officers working in Technical Appraisal Department/ Technical
Appraisal Cells or officers having technical expertise for the same or by an outside agency
as determined by the appropriate authority. Where technical appraisal is carried out by All
India Financial Institutions, PSU Banks/other leading banks having expertise in the area,
their report may be accepted for appraisal purposes.

V. Financial appraisal

Analysis of financial parameters/ratios should be done.

Aspects like :

i. Balance sheet strength

ii. Growth in TNW, Sales, PAT etc

33
iii. Borrower’s ability to service the principal and interest, meet the cash flow requirement
in respect of payments under LC opened, absorb additional burden due to escalation of raw
material cost etc

iv. Position of receivables/inventory etc should be looked into.

The following parameters ratios should be computed:

i. TNW with reconciliation of change in TNW

ii. Current Ratio

iii. Total outside liabilities/equity (DER)

iv. Profit before interest, depreciation, taxes, appropriation (PBIDTA/EBIDTA)

v. Profit After Tax/Net sales

vi. Inventory + receivables/Sales ratio

vii. DSCR if the borrower enjoys any term loan with any bank/FI even if no TL is being
considered by our bank.

viii. Capital Employed

ix. PAT/Capital employed

x. Investments

xi. Segmental Revenue if applicable

34
Based on the present indications, following exposures levels are prescribed :

Individual Borrowers Maximum Aggregate credit facilities of Rs

20 crores.

(FB and NFB)

Non corporate Maximum aggregate credit facilities of Rs.

80 Cr.
(E.g. Partnership , HUF &Associates)
(FB & NFB)

Corporates Maximum aggregate credit facilities as per

prudential norms of RBI on exposures.

REQUIREMENTS OF DOCUMENTS FOR PROCESS OF LOAN

 Application for requirement of Loan

 Copy of MOA & AOA
 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 & suppliers, previous track record, orders
in hand, also provide some information of directors of the company
 Financial statements of last 3 years including the provisional financial statement
 Copy of PAN/TAN No of the company
 Copy of last electricity bill of the company
 Copy of GST/CST Number
 Copy of Excise Number
 Photo ID of all the Directors
 Address proof of all the Directors

35
 Copies related to the property such as 7/12 7 8Autara, lease/sales deed, 2R
permission, Allotment letter, possession
 Bio data form of all the Directors duly filled & notarized
 Financial statements of the associates concern for last 3 years

36
5.2: CHECK POINTS FOR DUE DILIGENCE/ASSESSMENT IN CREDIT
PROPOSAL

1. Articles of Incorporation:

A corporate registration is the cornerstone and basis for legitimacy, as it requires the
business to rely upon its corporate name, image and reputation.

2. Status Reports:

This is useful to show that the company continues to exist and operate as a legal entity, and
has not been dissolved and/or reincorporated under another name. Most companies that
actively engage in business with serious clients will have one that is relatively recent.
Whenever new proposals are put up for approval, status reports of the company / group
needs to be obtained from their existing bankers. Obtaining status reports is an essential
step in due diligence process, in all advance accounts.

3. Market enquiries:

This serves as an important tool. Verification of the antecedents of the borrower through
discrete market enquiries could amply reveal inherent deficiencies. Cross verification with
existing customers in the line and other players in the line, would serve as first hand
information.

4. Licenses / Certifications:

Bank ask for a copy of licenses, permits, registrations or certifications if they are directly
related to and required for the specific work the company must perform. If copies are not
available, request the number and issuing authority of each document.

5. Web Site Addresses -

All Companies have their websites. Companies that say they do not have a website or do
not need one have to be treated with caution. Good companies always make efforts to allow
clients or partners to keep in touch with them, receive notice of changes of office address,

37
e-mail addresses or phone numbers, reminders of services offered or updates on new
services.

6. Resume of Managers or Key Employees:

Bank ask for resume (also called "professional bio") of managers / key employees of the
company. This will give some additional leads and information to verify the company's
ability to perform the work promised and general capabilities.

7. Corporate Brochure or Company Overview:

Every company should have a professional and well-developed presentation of their

business concept or services. This evidences the level of preparation of the company, and
demonstrates whether they have sufficiently developed their capabilities. Project Reports /
Information Memoranda, are not to be taken for face value. They need to be critically
examined vis-à-vis other sources like similar businesses.

8. Each proposal should bear reference related to RBI/CIBIL/ECGC/ List of Defaulters /

willful Defaulter List, etc. As per existing guidelines, Branch / Zonal Office must bring out
this aspect in the proposal.

9. Pre-Sanction Inspection:

Branches should conduct pre-sanction inspections before submitting new proposals.

Inspection reports should be prepared strictly as per the format. Findings of the inspection
should be brought out in the proposal. It should invariably include the place of work of the
entity in addition to visiting the corporate office, meeting promoters & employees etc.

12. Critical information as envisaged in Credit policies / Circulars, are to be obtained and
scrutinized.

13. Scrutiny of statements of accounts with previous / existing bankers, to be done, to

ascertain their conduct. This is more so necessary while takeover of the facilities is
involved.

38
14. Risk Mitigation:

Proper coverage of risk and mitigation in the proposal reflects good understanding of the
business. As per existing guidelines, Branch / Zonal Office must bring out these aspects in
the proposal.

15. Status of Litigation:

If the company is involved in any litigation/disputes/ arbitration, Zone / Branch should

give details in the proposal.

16. Assessment of Limits:

Financial parameters like Debt Equity Ratio, Current Ratio for Working Capital & Debt
Service Coverage Ratio, BEP, Sensitivity analysis for Term Loan are to be properly
captured in the proposals. Proposals should not be considered without these parameters
being adequately brought out.

17. Assessment about promoter/s ability to bring in the funds envisaged, to be properly
done.

18. Risk Rating:

Risk Rating Exercise for Credit Rating & Pricing has to be done as per different Risk
Scoring Modules.

19. The security which is obtained by the Bank (either as principal or as collateral) shall be
verified as to its title clearance as well as value by independent Panel Advocates/ Valuers
and periodical Encumbrance Certificate shall be obtained. In this regard, extant guidelines,
is enumerated in Branch Circular from time to time are to be meticulously observed.

39
 5.3 Check points for Pre and Post Monitoring Norms

A. PRE DISBURSEMENT

i. Suitable monitoring of various acts by the customer/Branch officials/out-side

agencies should be done at the pre-disbursement stage. Depending upon the terms of
sanction in each case, the following actions/steps, wherever applicable, may be taken prior
to disbursement.
ii. Obtention of satisfactory credit reports from existing lenders and other service
providers such as D&B, CIBIL etc. if stipulated. Branch staff, which is processing the
applications for credit requests of new customers, should personally call on the Bank/FI
with whom the incumbent is presently enjoying facilities and discreetly enquire about the
conduct and general aspects of the account. This is in addition to obtaining status reports.
The personal visit to the operating staff of that Bank/FI may reveal more about the
proposed borrower which may not have been incorporated in the report. Wherever it is not
desirable to obtain Status Report for the fear of putting our competitor on guard, decision
may be taken on the basis of scrutiny of proponent’s statement of account for the last one
year with the existing Banker and the fact that the Sanctioning Authority has satisfied itself
about the credit worthiness of the proponents on the strength of statement of account for the
last one year and that status report is not being obtained for the fear of putting the existing
banker on guard should be recorded in the proposal.
iii. Adhering to Head Office guidelines for Credit Rating exercise pertaining to entry
level for new accounts.
iv. Post-sanction inspection of the unit prior to disbursement. Needless to add, pre-
sanction inspection report cannot substitute the need of pre-disbursement inspection
v. Issuance of sanction letter and acceptance of terms, conditions and stipulations of
sanctions by the borrowers.
vi. Execution of all relevant documents, including creation of collateral security /
mortgage etc. as per terms of sanction
vii. Furnishing of Letters of guarantee by guarantors.
viii. Disbursement of amounts by other participating financial agencies / Banks /
Financial Institutions etc.

40
ix. Post Sanction Pre Disbursement approval wherever branch level sanction
x. Keeping the duly completed/signed check list on record along with other security
documents.

B. DURING DISBURSEMENT

Credit delivery in loan accounts is distinct from running accounts such as Cash Credit. All
disbursements whether in loan account or in running accounts, will be related to actual /
acceptable performance of the business unit and should never lose sight of basic objective
of safety of Bank's exposure in the credit assets. The disbursements should commensurate
with the progress of the project / business activity, also taking into account the extent of
margin brought in by the promoters up to the given point of time.

The sanction of the limit is not a commitment in isolation to extend funds to the borrower
under all circumstances. It is only a financial contract to make available funds for due
performance of various business objectives and goals set out in his proposal. Bank's
disbursements depend upon due performance /compliance of/with borrower's own
commitments. Therefore, the credit delivery has to be used as an effective monitoring tool
to ensure that there are only normal and acceptable credit risks.

The following aspects wherever applicable, may be considered for monitoring :

(a) LOAN ACCOUNTS :

i. Actual Implementation vis-a-vis Project schedule.

ii. Possibility of time or cost overrun.

iii. Adequacy of arrangements to meet cost overruns.

iv. Impact of time overrun on timely cash generations of the project.

v. Verification of end-use of funds with reference to verifiable records such as invoices,

account books, registers, records, inspection of the unit etc.

41
vi. Certificate from Company’s Statutory Auditors on the extent of cost incurred on the
project at any given point of time, implementation progress certificate from approved
architect/contractor etc., wherever applicable.

vii. Disbursements to be made, to the extent possible, directly to the suppliers / service
providers and the element of cash withdrawals to be kept minimum.

viii.Status report on the suppliers of machinery as per the guidelines which ensures
genuineness of supplier/transaction must be obtained.

ix.Even while making direct payments, whenever doubt arises about the genuine nature of
the transaction, due care is to be exercised.

(b) CASH CREDIT ACCOUNTS:

i. Compliance of sanction terms / stipulations (any exception requires approval of

appropriate authority)

ii. Verification of completion of the implementation of the project/business activity and

readiness to commence commercial production.

iii. Disbursements to be made, to the extent possible, directly to the suppliers/service

providers and the element of cash withdrawals to be kept minimum.

iv. Even while making direct payments, whenever doubt arises about the genuine nature of
the transaction, due care is to be exercised.

v. Stock inspection data regarding regular movement of goods, actual sales keeping pace
with projections, not having unacceptable quality rejections in sales, not accumulating
slow/ obsolete inventory, elongation of debtors beyond acceptable levels, change in credit
periods from suppliers etc.

vi. Meaningful on site/off site verification of Stock/Book Debt statements to ensure

adequacy of Drawing Power/Drawing Limit

42
 C. POST DISBURSEMENT:

i. Monitoring of the actual performance of the borrowers on monthly basis by calling for
MSOD statements and comparing the same with the projected performance figures
appearing in the customer’s own CMA data submitted to Bank, sanctioned proposal / QIS
returns etc. Any substantial deviation will have to be probed into, not waiting for
submission of audited financials.

ii. Obtention of Stock/Book debts statements as per stipulation and scrutiny thereof

iii. Periodical inspections by staff

iv. Stock Audit by approved C.As as per extant policy.

v. Timely obtention and analysis of Audited statements of Accounts.

vi. Timely review of account

vii. Conducting periodical consortium meet/ JLA meet and sharing the information with
member of consortium /JLA.

viii. Obtaining LIE report periodically and verifying the progress, wherever applicable.
Following it up & complying post disbursement conditions.

ix. Timely identification of accounts showing symptoms of strain and, wherever considered
fit, resort to prompt restructuring of the account, so that the rehabilitation process is
meaningful.

Monitoring of an account is not confined to any single office (Branches including Large
Corporate/Mid Corporate branches/Zonal Office /NBG office/Divisional Office/Head
Office) and concerted efforts will have to be made at all levels with whatever information
available at each level, to prevent any deterioration in asset quality. Under-lending or delay
in lending can be equally painful to the wellbeing/viability of the borrower’s unit and this
itself can lead to asset becoming non-performing.

43
CHAPTER 6 : METHODS OF ASSESSING CREDIT REQUIREMENT

I. WORKING CAPITAL :

The 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 the business i.e. its day to day operations.

Funds required for day to-day working will be to finance production & sales. For
production, funds are needed for purchase of raw materials/ stores/ fuel, for employment of
labour, for power charges etc., for storing finishing goods till they are sold out & for
financing the sales by way of sundry debtors/ receivables.

Capital or funds required for an industry can therefore be bifurcated as fixed capital &
working capital. Working capital in this context is the excess of current assets over current
liabilities. The excess of current assets over current liabilities is treated as net working
capital or liquid surplus & represents that portion of the working capital which has been
provided from the long term source.

Working capital is defined as the funds required to carry the required levels of current
assets to enable the unit to carry on its operations at the expected levels uninterruptedly.

Thus Working Capital Required is dependent on

(a) The volume of activity (viz. level of operations i.e. Production & sales)

(b) The activity carried on viz. mfg process, product, production programme, the materials
& marketing mix.

44
6.I.1 METHODS & APPLICATION .

METHOD LIMIT PERMISSIBLE BANK

FINANCE

A) Turnover Method Upto 5cr. Working Capital = 25% of

Projected Sales
To all borrowers (Enjoying
FB+NFB) Operating Cycle = 3 Months

Margin = 5% of Projected
Sales

Eligible Amount of Loan=

20% of Projected Sales

B)Inventory/MBPF
Method
A.Margin = 25% Of WCP
i.e. (CA-CL)
a.(Enjoying FB-New
Above 5 Cr
Business, not more than one Eligible Amount of Loan=

Financial results available WCG – (CA-CL)

for Scrutiny)

B. Margin = 25% Of CA
b.(Enjoying FB- Already in Eligible Amount of Loan=
Business & at least two WCG – (CA-CL)
Financial Financial results
available for Scrutiny)

45
Illustration: Inventory/MBPF Method :

Total current Assets : Rs. 1000 Lacs

Total current Liabilities (Other than Bank borrowing): Rs. 400 Lacs

WCG = 600 Lacs

Margin Requirement

a. =(25% of 600) = Rs. 150Lacs

b.= (25% of 1000) = Rs. 250 Lacs

Eligible amount of Loan

a. =600-150

=Rs. 450

b.=600-250

=Rs.350

46
C.OPERATING CYCLE METHOD

a) Any manufacturing activity is characterized by a cycle of operations consisting of

purchase of raw materials for cash, converting these into finished goods & realizing cash by
sale of these finished goods.

b) Diagrammatically, the OPERATING CYCLE is represented as under

RAW
MATERIAL

STOCK IN
CASH
PROCESS

FINISHED
BILLS
GOODS

c) The time that lapses between cash outlay & cash realization by sale of finished goods &
realization of sundry debtors is known as the length of the operating cycle.

d) The length of the operating cycle = a+b+c+d

If

a = 60 days

b = 10 days

c = 20 days

d = 30 days

47
 The operating cycle is 120 days (nearly 4 months). This means there are 365/120 = 3
cycles of operations in a year.

Sales = Rs. 1,00,000 per annum

Operating expenses = Rs. 72,000 per annum

But the working capital requirement, is not Rs. 72,000.

In these cases, there are 3 operating cycles in a year. That means each rupee of working
deployed in the unit is turned over 3 times in a year. (This is also known as working
capital turnover ratio).

Therefore WCR = Operating Expenses = Rs. 72,000/- = Rs 24,000/-

No. of cycles per annum 3

WCR is therefore, not Rs. 72,000/- but Rs. 24,000/-

Illustration : Assessment of Working Capital Requirement & Permissible Bank

Finance using Operating Cycle Concept

Let us consider a case of a unit where:

Sales = Rs. 20,000 p.m. (A)

Raw Materials = Rs. 14,000 p.m.

Wages = Rs. 2,000 p.m.

Other manufacturing

Expenses = Rs. 3,000 p.m.

Total expenses = Rs. 19,000 p.m. (B)

Profit = Rs. 1,000 P.m. (C)

48
The operating cycle is

Raw Materials = 15 days

Stock in Process = 2days .

FG = 3 days

Sundry Debtors = 15 days

The total length of Operating cycle = 35 days (D)

WCR = B * D = 19,000 * 35 = Rs. 22,167/- (approx.)

30 30

Where B = Operating Expenses; &

D = Length of Operating cycle

49
II. TERM LOAN

1. A term loan is granted for a fixed term of not less than 3 years intended normally for
financing fixed assets acquired with a repayment schedule normally not exceeding 8 years.

2. A term loan is a loan granted for the purpose of capital assets, such as purchase of land,
construction of, buildings, purchase of machinery, modernization, renovation or
rationalization of plant, & repayable from out of the future earning of the enterprise, in
installments, as per a prearranged schedule.

Appraisal of Term

Appraisal of term loan for, say, an industrial unit is a process comprising several steps.
There are four broad aspects of appraisal, namely

• Technical Feasibility - To determine the suitability of the technology selected & the
adequacy of the technical investigation & design;

• Economic Feasibility -To ascertain the extent of profitability of the project & its
sufficiency in relation to the repayment obligations pertaining to term assistance;

• Financial Feasibility - To determine the accuracy of cost estimates, suitability of the

envisaged pattern of financing & general soundness of the capital structure; &

• Managerial Competency – To ascertain that competent men are behind the project to
ensure its successful implementation & efficient management after commencement of
commercial production.

50
III. LETTER OF CREDIT

Basic Principle:

The basic principle behind an LC is to facilitate orderly movement of trade; it is therefore

necessary that the evidence of movement of goods is present. Hence documentary LCs is
those which contains documents of title to goods as part of the LC documents.

If importer is BANKS borrower, the bank has to advice him to convert all his requirements
in the form of documents to ensure quantity & quality of goods.

Illustration for computation of LC limit

M/S XYZ Co Ltd (Rs. in crores)

Letter of credit limit of Rs. 20 crore

Total purchase of raw material =Rs.172.64

Purchase of raw materials under LC =Rs.69.41

Average monthly purchase of raw material under LC (A) =Rs.5.78

Average holding of imported raw materials (2.2 months’ consumption) =Rs.11.30

Average usance period (B) = 3 months

Lead time & transit period (C) =1 month

Total of (B) & (C)= (D) =4 months

The requirement of LC limit (A) * (D) =23.12

Limit recommended say 23.00

51
IV. BANK GUARANTEES

Purpose of Bank Guarantees

Bank Guarantees are used to for both preventive & remedial purposes. The guarantees
executed by banks comprises both performance guarantees & financial guarantees. The
guarantees are structured according to the terms of agreement, viz., security, maturity &
purpose.

Branches may issue guarantees generally for the following purposes:

a) In lieu of security deposit/earnest money deposit for participating in tenders;

b) Mobilization advance or advance money before commencement of the project by the

contractor & for money to be received in various stages like plant layout, design/drawings
in project finance;

c) In respect of raw materials supplies or for advances by the buyers;

d) In respect of due performance of specific contracts by the borrowers & for obtaining full
payment of the bills;

e) Performance guarantee for warranty period on completion of contract which would

enable the suppliers to realize the proceeds without waiting for warranty period to be over;

f) To allow units to draw funds from time to time from the concerned indenters against part
execution of contracts, etc.

g) Bid bonds on behalf of exporters

h) Export performance guarantees on behalf of exporters favouring the Customs

Department under EPCG scheme.

52
Specimen of the First Page of Bank Guarantee

(To be stamped as an agreement in accordance with the Stamp Act in force)

BANK OF INDIA

…………………….Branch (Stamp)

FormNo.……….………

…………………………

……….…………………

…….……………………

Dear Sir,

Guarantee No.

Amount of Guarantee Rs……………….

Guarantee cover from 1.1.20*0 to 31.3.20*1

Last date for lodgment of claim – 31.3.20*1

This Deed of guarantee executed by the State Bank Of India constituted under the State
Bank of India Act, 1955 having its Central Office at Nariman Point, Mumbai & amongst
other places, branch at……………………………….(hereinafter referred to as ‘the Bank’)
in favour of…………………………(hereinafter referred to as ‘the Beneficiary’) for an
amount not exceeding Rs……………..(Rupees
……………………………………………………..only) at the request
of…………………….(hereinafter referred to as ‘the Contractor/(s)).

This guarantee is issued subject to the condition that the liability of the bank under this
Guarantee is limited to a maximum of Rs. ……………
(Rupees………………………..only) &the Guarantee shall remain in full force up to
31.3.20*1 (date of expiry) & cannot be invoked otherwise than by a written demand or

53
claim under this Guarantee served on the Bank on or before the 31.3.20*1, last date of
claim).

SUBJECT TO AS AFORESAID

(Main Guarantee matter may be typed hereafter)

54
 CHAPTER 7 : CREDIT REPORT AND CREDIT RATING

The credit report is an important determinant of an individual's financial credibility. They

are used by lenders to judge a person's creditworthiness .They also help the person
concerned to narrow down on the financial problem areas.

Credit report is a document, which comprises detailed information about the credit payment
history of an applicant. It is mostly used by the lenders to determine the credit worthiness
of an applicant. The business credit reports provide information on the background of a
company. This assists one to take crucial business related decisions. People can also assess
the amount of business risk associated with a company and then decide whether they would
be comfortable in providing them with credit facilities. The degree of interest that would be
shown by investors in their company can also be gauged from the business credit reports as
they can get an idea of the conception of their customers regarding themselves. Since these
records are updated at regular intervals of time they enable people to identify the risk levels
associated with a business as well as its future. These reports also allow businesses to get
detailed information about the financial status of business partners and suppliers.

What Is A Corporate Credit Rating?

Ratings can be assigned to short-term and long-term debt obligations as well as securities,
loans, preferred stock and insurance companies. Long-term credit ratings tend to be more
indicative of a country's investment surroundings and/or a company's ability to honor its
debt responsibilities. The ratings therefore assess ability to pay debts.

There are various organizations that perform credit rating for various business
organizations.

Bank of India follows a finely defined Credit Rating Model for assessing the
creditworthiness of the applicant. The credit rating model of BOI assesses various aspects
of the projects and assigns scores against them thereby determining the risk level involved
with the project.

It is divided in five sections:

55
1. Rating of the borrower

- Financial risk

- Management risk

2. Market condition/ Demand situation

3. Rating of the facility

4. Business consideration

5. Cash flow related parameters

1) Rating of the borrower:

This part of credit rating model deals with assessing the financial and managerial ability of
the borrower. The financial ability of the firm is derived by calculating ratios that determine
the short term and long term financial position of the firm.

Short term ratios include Current Ratio, determines the liquidity position of the
company over a period of one year. The current ratio is an indication of a firm's market
liquidity and ability to meet creditor's demands. It is excess of current assets over current
liability. If current liabilities exceed current assets (the current ratio is below 1), then the
company may have problems meeting its short-term obligations. If the current ratio is too
high, then the company may not be efficiently using its current assets.

According to the guidelines given to BOI the ideal level is at 1.33:1 however the acceptable
level is at 1.17:1.

However at times current ratio may not be a true indicator, the current ratio for road
projects is very high but this does not indicate that the company is not using its assets well
but the ratio is high because the activity involves more in dealing with current assets.
Hence it is important for the evaluator to understand the nature of the industry.

Long term ratio include Debt Equity Ratio is a financial ratio indicating the relative
proportion of equity and debt used to finance a company's assets. This ratio is also known

56
as Risk, Gearing or Leverage. A high debt equity ratio is not preferable by an investor as
the company already has acquired high amount of funds from market thereby reducing the
investor share over the securities available, increasing the risk.

According to the guidelines given to BOI the ideal level is at 2:1

It is also important for the lender bank to assess the firm’s debt paying capacity over a
period. Such capacity is derived by calculating ratio like Debt Service Coverage Ratio
minimum acceptable level is 1.50.

It is also necessary for the lender to determine the ability of the firm to achieve the
projected growth by evaluating the projected sales with actual. However such parameter
remains non applicable if the business is new.

Financial risk evaluation is only one of the parameter and not the only parameter for
determining the risk level. It is important to evaluate the Management Risk also while
evaluating the risk relating to borrower.

It is the management of the company that acts as guiding force for the firm. The key
managerial personnel should bear the capacity to bail out the company from crisis situation.
In order to remain competitive it is essential to take initiatives. Such skills are developed
over years of experience, thus for better performance it is required to have a team of well
qualified and experienced personnel.

57
CREDIT APPRAISAL STANDARDS

The basis quantitative parameters underpinning the banks credit appraisal are as
follows:

Sector/ Parameters Mfg Others

Liquidity 1.33 1.20

Current Ratio (min) (For FBWC limits above Rs.

5 Cr.)

1.00

(For FBWC limits upto Rs. 5

Cr.)

Financial Soundness 3.00 5.00

TOL/TNW (min)

DSCR 1.50 1.50

Gearing 2:1 2:1

(D/E) (max)

Promoters Contribution 30% of equity 20% of equity

(min)

58
2) Market potential / Demand Situation

A Company does not operate in isolation there are various market forces that acts in either
favorable or unfavorable manner towards its performance. Thus the rating would not give
true picture if does take market or demand situation in consideration.

The demand supply situation / market Potential plays an important role in determining the
growth level of the company like

1. Level of competition: Monopoly, Favorable, and Unfavorable

2. Seasonality in demand: affected by short term seasonality, long term seasonality or may
not be affected by seasonality in demand.

3. Raw material availability

4. Location issues like proximity to market, inputs, and infrastructure: Favorable, neutral,
unfavorable

5. Technology i.e. proven technology: Not to be changed in immediate future, technology

undergoes change, outdated technology.

6. Capacity utilization

3) Rating of the Facility:

The company can start functioning only after completing statutory obligations laid down by
the governing authority. Such statutory obligation involves obtaining licenses, permits for
ensuring smooth operations. Preparation and Submission of Financial Statements, Stock
statements in the standard format within the given time schedule.

4) Business Consideration:

The length of relationship with the bank enables the lender to assess the previous
performance of the account holder. A good track record acts in the favor of the applicant,
however an under-performance make the lender more vigilant.

The income value to the bank is also given due consideration.

59
Thus Credit Rating of the Business takes into consideration various aspects that have direct
or indirect effect on the performance of the business.

After evaluating the risk level involved the lender bank decodes on lending interest rate.

In BOI they are categorized in 16 segments:

RATING SCALES FOR GIVING LOANS

SR BORROWER RATING RANGE OF RISK LEVEL

NO SCORE

1 CR1 94-100 Virtually Zero risk

2 CR 2 90-93 Lowest Risk

3 CR 3 86-89 Lower Risk

4 CR 4 81-85 Low Risk

5 CR 5 76-80 Moderate Risk with adequate

Cushion

6 CR 6 70-75 Moderate Risk

7 CR 7 64-69

8 CR 8 57-63 Average Risk

9 CR 9 50-56

10 CR 10 45-49 Acceptable Risk (Risk

Tolerance threshold)

11 CR 11 40-44 Borderline Risk

12 CR 12 35-39 High Risk

13 CR 13 30-34 Higher Risk

60
14 CR 14 25-29 Substantial Risk

15 CR 15 <24 Pre Default Risk

16 CR 16 _ Default Grade

Bank gives loans to the borrower as per their rating

In BOI, a business receiving Credit Rating above level 9 are not considered good from
point of investment and thus are avoided.

CREDIT RISK ASSESSMENT MODELS

SR EXPOSURE LEVEL (FB+NFB) MODEL

NO

1 FB+NFB >= Rs.30Cr. OR Hybrid LC Model

TURNOVER >= Rs.150 Cr.

2 FB+NFB >Rs. 5Cr. & upto Rs. 30Cr. Large Corporate Model

3 FB+NFB >Rs. 10 Lacs & upto Rs. 5Cr SBS Model

61
 CHAPTER 8 : CASE STUDIES

CASE-I

Mr. Jagdish Chandra Barik is a customer of the bank who holds a current account with the
branch. He owns a cement store nearby and approached the bank for a loan of Rs. 4, 00,
000 as he wanted to expand his business.

PRE-SANCTION ACTIVITIES:

1. KYC formalities

2. Scrutiny of bank accounts

3. Family background, social reputation, duration in the business

4. Checking RBI’s willful defaulters’ list, Special Approval List (SAL) of ECGC, CIBIL
report.

5. The acceptability of the product, its market demand/supply position, market competition,
market arrangement etc. has to be checked

6. Techno-economic appraisal of the unit to be carried out as per the guidelines by

Technical Appraisal Department (TAD) of BOI.

7. Visit to the store and residence of the applicant

8. Checking store rent agreement, residence proof etc.

9. Checking of documents.

62
ASSESSMENTS:

1. Working capital assessment: As this unit’s WC requirement is below Rs.5 crores, the
bank adopts Turnover method for assessment.

Under this method the WC is arrived @ 25% of the projected turnover (Sales) , of which
20% has to be provided by the bank as WC Finance & 5% is to be contributed by the
borrower as a margin towards WC & it is based on the assumption of a three month
operating cycle.

2. Financial ratios:

- Debt equity ratio: Mr. Barik’s business’ D/E ratio stood at 1.7:1 which was considered
as a very strong one by the bank.

- Current ratio: His current ration was 1.5:1 as he does business on a credit basis more
often and received the money once in a month from the customer.

- Debt Service Coverage Ratio: He had a fair DSCR ratio of 1.65:1 which implied that he
generated enough Net operating income to pay off his debts.

As all factors were satisfactory, Mr. Barik’s application was passed

POST-SANCTION ACTIVITIES:

1. Monitoring the accounts on a regular basis

2. Visit to the store for checking of stock

3. Acquire monthly stock statement as well as receivables account

4. Balance sheet evaluation

5. Collection of repayment should be maintained

6. Prevent account form being sub-standard

7. Ensure utilization of funds for genuine purpose.

63
CASE II

Company : Janak transport Co.

Firm : Partnership

 Mr. Sukhvinder Rai

 Mr. Jaiprakash Rai
 Mr. Anil Ahuja
 Mr. Jaswinder Chopra

Industry : Transport activity

Date of Incorporation : 03.09.82

Banking with BOI Since : 16 years as Current account Holder

Banking arrangement : Multiple Banking arrangement

Registered & Admin Office : opp. Simandhar flat, Near Pashabhai Petrol pump, Pune.

Janak Transport Company is a partnership firm established in 1982, for carrying a transport
Business.

As the company is in this business since incorporation & the unit has good contracts with
ONGC since last 26 years so it has good repo with ONGC.

As the company has good repo with ONGC, the ONGC outlook for the business is
considered positive.

The firm has approached for the Term Loan of Rs. 295 lacs to finance the purchase of
Mahindra Bolero. The total project cost is estimated to Rs. 363.44 lacs.

Brief of Contracts :

1. Fixed Hire charges /taxi/month = Rs, 29150

(with fixed 3000Km run / month & 12 hrs duty /day)
2. Additional /km charges beyond 3000 km = Rs. 3.57

64
 3. Duration of Contract = 3yrs

Proposed Credit Requirement :

Fund based = Rs. 295 Lacs

Performance Details :

a) Performance & Financial indicators :

(Rs. In lacs)

Audited Audited Estimated Projected Projected Projected Projected

31st March 2017 2018 2019 2020 2021 2022 2023

Net sales 501.78 546.65 713.82 898.65 898.65 898.65 898.65

Operating 149.64 182.92 234.24 326.69 374.32 404.08 425.06

Profit (after
interest)

PBT 1.20 2.90 22.48 92.62 125.47 143.51 151.96

PBT/Sales 0.24 0.53 3.15 10.31 13.96 15.97 16.91

(%)

PAT 1.20 2.90 22.48 92.62 125.47 143.51 151.96

TNW 21.04 22.56 113.48 181.10 256.57 340.08 427.04

Adjusted 21.04 22.56 113.48 181.10 256.57 340.08 427.04

TNW

TOL 257.11 288.76 571.93 389.37 259.13 159.83 115.30

TOL/TNW 12.22 12.80 5.04 2.15 1.01 0.47 0.27

TOL/Adjuste 12.22 12.80 5.04 2.15 1.01 0.47 0.27

65
d TNW

Current ratio 1.57 1.42 2.22 2.53 2.71 3.80 6.47

NWC 81.95 80.45 186.14 249.18 323.80 361.29 438.25

66
b) Audited Balance sheet

Sources of Funds 31.03.2017 31.03.2018

i) Share Capital 21.02 22.00

ii) Reserves & Surplus 0.02 0.56

iii) Secured Loans

 Short Term 22.49 44.97

 Long Term 240.00 260.00

iv) Deferred Tax Liability

Total 283.53 307.53

Application Of Funds

i) Net Fixed assets 160.72 147.58

ii) Investments 40.86 79.50

iii) Net Current Assets 81.95 80.45

Current Assets : 225.71 272

Inventories 110.59 134.66

Sundry Assets 92.61 78.70

Cash Bank balance 11.93 48.15

Loans & advances to others 10.58 10.49

Less : current Liabilities 143.76 191.55

Misc expenditure - -

Total 283.53 307.53

67
c)Movement in TNW

2017 2018 2019 2020 2021 2022 2023

Operating 17.63 21.04 22.56 113.48 181.10 256.57 340.48

TNW

Add : PAT 1.20 2.90 22.48 92.62 125.47 143.51 151.96

Add : 8.42 10.17 68.44

Transfer to
Reserve

Add/Subtract
: Change in
Intangible
assets

Adjust prior
year
expenses

Deduct 6.21 11.55 25.00 50.00 60.00 65.00

Dividend
payment /
withdrawals

Closing 21.04 22.56 113.48 181.10 256.57 340.08 427.04

TNW

68
Company : Janak Transport Company (JTC)

Term Loan :

a. Proposal : Term Loan Rs. 295 lacs under the Transport plus Sceme
b. Project/Purpose : To purchase 59 new Mahindra Bolera under tie up arrangement
with ONGC
c. Appraised By : Inhouse examined by the branch & found to be economically
viable.
d. Cost of Finance & means of Finance

Cost Means

Mahindra Bolero 328.63 Equity 68.44

Insurance 15.34

RTO Tax 19.47

WC Margin Debt 295.00

Total 363.44 Total 363.44

e)Remarks on cost of Project & means of finance (in brief)

Each vehicle shall cost Rs. 6.16 lacs as per details given below:

Basic Price : Rs. 5.57 lacs

RTO : Rs. 0.33 lacs

Insurance : Rs. 0.26 lacs

The cost mentioned above is as per the quotation submitted by Shreejji Motors. The firm
is required to purchase 59 Mahindra Bolero for this purpose. Total cost of vehicle
including the insurance and RTO is Rs. 363.44 lacs. The project is proposed to be
financed proposed by way of medium term loan of Rs. 295.00 lacs and firm shall raise
capital of Rs. 68.44 l acs as a margin.

69
f)Break Even & Sensitivity Analysis and whether acceptable:

Break even 31.03.19 31.03.20 31.03.21 31.03.22 31.03.23

analysis

Net Sales (A) 713.82 898.65 898.65 898.65 898.65

Variable Cost

Power & Cost 223.76 253.68 253.68 253.68 253.68

Other Operating 44.89 47.39 48.89 50.89 55.98

Exp.

Total variable 268.65 301.07 305.57 304.57 309.66

Cost (B)

Fixed cost

Direct labour 72.40 85.52 87.52 90.72 94.07

Selling, admin & 8.50 9.50 10.50 11.50 12.50

general exp.

Interest Exp. 20.76 33.25 22.96 13.54 3.36

Depreciation 106.77 141.12 98.78 69.15 48.40

Total Fixed Cost 208.43 269.39 219.76 184.91 158.33

(C)

Contribution 445.17 597.58 596.08 594.08 588.99

(D=A-B)

Contribution ratio 0.62 0.66 0.66 0.66 0.66

(E=D/A)

70
BE Sales (F=C/E) 336.18 408.17 332.97 280.17 239.89

BE sales as % of 47.10 45.42 37.05 31.18 26.69

net sales

Fixed Cost 101.66 128.27 120.98 115.76 109.93

without
depreciation (G)

Contribution 445.17 597.58 596.08 594.08 588.99

(H=A-B)

Contribution ratio 0.62 0.66 0.66 0.66 0.66

(I=D/A)

Cash BE Sales 163.97 194.35 183.30 175.39 166.56

(J=G/I)

Cash sales as % 22.97 21.63 20.40 19.52 18.53

of Net Sales

g)Commercial Viability :

Year Ending 2019 2020 2021 2022 2023 TOTAL

31st March

Capacity 100% 100% 100% 100% 100%

Utilization

Sales 713.82 898.65 898.65 898.65 898.65

Net Profit 22.48 92.62 125.47 143.51 151.96 536.04

Depreciation 106.77 141.12 98.78 69.15 48.40 464.22

71
Cash 129.25 233.74 224.25 212.66 200.36 1000.26
accruals

Interest 20.76 33.25 22.96 13.54 3.36 93.87

TOTAL 150.01 266.99 247.21 226.20 203.72 1094.13

TL 83.75 132.92 94.58 93.85 43.02 448.12

Repayment

(Principal)

Interest 20.76 33.25 22.96 13.54 3.36 93.87

TOTAL 104.51 166.17 117.54 107.39 46.38 541.99

DSCR 1.44 1.61 2.10 2.11 4.39

Average 2.02
DSCR

h)Deviation in Loan Policy / scheme :

Parameters Indicative Min/Max level Companies level as on

as per scheme 31.03.2018

Liquidity Min 1.33 1.42

TOL/TNW Max 3.00 12.80

Average gross DSCR (TL) Min 2.00 2.02

Promoters contribution Min 10 % 18.86%

(Under tie up)

Profits in the last 2 yrs Min Rs. 3.00 lacs with rising Actual profit Rs. 1.20 lacs
for yr 2016-17&Rs. 2.90

72
 trend lacs for year 2017-18

Others Nil Nil

i)CREDIT RATING

PARAMETRES MEASURES SCORE ASSIG WEIGHT TOTAL

NED SCORE
SCORE WEIGHT*
ASSIGNED
SCORE (4*5)

A. Financial Risk (4)

score

1. Sales Growth  15 % & above  1 2 4 8

 5 % & above  2 (8.94
 0% & above  3 %)
 Negative  4

2. Profitability  25 % & above  1 3 4 12

(PBITDA/Sales *100)  15 % & above  2 (9.58
 0% & above  3 %)
 Negative  4

3. Liquidity (CA/CL)  1.5& above  1 2 4 8

 1.33 & above  2
(1.42)
 1.00 & above  3
 Below 1.00  4

73
4.Leverage  0.00& above  1 4 4 16
(TOL/TNW)  1.00 & above  2 (12.8
 3.00 & above  3 0)
 4.00 & above  4

5.Coverage  2.00& above  1 1 4 4

 1.50 & above  2
A) debt Service
 1.00 & above  3
Coverage Ratio
 1.00 & above  4

TOTAL 48
FINANCIAL RISK
SCORE (A)

B.Management risk
score

1.Management  1 2 4 8
Character  2
 3
a.Diversion of funds
 4
b.Integrity

c. Business
Commitment

2. Management  1 1 4 4
Capacity  2
 3
a. financial Strengrh
 4

74
b. Conpetence

c. Business
Experience

d. Internal controls

e. Employee Quality

3.Management  1 2 4 8
Succession  2
 3
a.Successor
 4
Identification

b.Successor
Preparedness

4.Management  1 3 4 12
Reputation  2
 3
a. Business Loan
 4
History

b.Credit Track record

c.Firms Age

d. Reputation with
Customers and
Supplies

MANAGEMENT 32
RISK SCORE (B)

C)Business industry
Risk score

75
a.Customer Quality  1 2 4 8
& Concentration  2
 3
b. Supplier Quality &
 4
Concentration

c. Impact of
Competition pn GP
Margins

d. Technology
Dependence

e. Environmental
impact

BUSINESS RISK 8
SCORE (C)

TOTAL SCORE 88

(A+B+C)

ANALYSIS :

 Janak Transport Company is an existing profit making unit.

 The main chunk behind giving loan is that Janak transport Company is doing
contract with ONGC since incorporation
 The promoters are having considerable experience as transport contractor with
ONGC.
 The unit has got confirm order/tie up with ONGC
 A letter of authority from ONGC was received, that if Janak Transport Company
will not make the payment than ONGC will directly make the payment to the bank.

76
  The promoters contribution to the project is 18.86% which is above the margin
requirement
 The Current ratio is 1.42 that is satisfactory.
 Profits in the last two yrs : Min Rs. 3 lacs with rising trend

Actual profit Rs. 1.20 lacs for the year 2016-17&Rs. 2.90 lacs for the year 2017-18

If the partner’s remuneration & interest is included, the profit for the year ended 31.03.2017
& 31.03.2018 is Rs. 4.81 lacs &Rs. 6.21 lacs.

 TOL/TNW should be max. 3 which is 12.80, here, as the co. has done multiple
banking arrangement it has o/s loans with other banks also but the co. is regularly
making the payment of loans of principal amount along with the interest so the loan
is given.
 Also the contract awarded is backed by guarantee from ONGC regarding direct
payment of monthly bills to BOI, Hence surety of repayment is assured.
 The banks also check commercial viability of the company & found that the DSCR
for term loan is 2.02 which is considered satisfactory.
 Despite that the bank has also done BE Analysis & found that the BE Sales was
47.10% of net sales for this current year
 The net sales & PAT of the company is increasing year after year so overall
profitability is good
 Companies Credit Rating is 88 which come in the range of 86-89, and classified as
CR 3 (Lowest Risk) as per banks Credit rating norms. The marks secured i.e. 88 is
within the level of norms as per guidelines.
 The overall projected performance & financial of the unit are considered
satisfactory.

As all factors were satisfactory, the application was passed.

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CHAPTER 9 : ADDITIONAL PROCEDURE

1. Procedures and documents required while opening Saving Bank Account,

Pension account, Recurring deposit account and Salary Account
Customers should submit One Identity Proof and One Address proof along with
Account Opening Form and for Recurring Deposit Account, Customer must open a
Saving Bank account in our Bank.
2. Procedure of availing facilities of Internet Banking and how bank deals with
issues related to Internet Banking
Customers should apply for internet Banking Facility and ATM facilities just by
filling simple forms. After 2-3 processing days, facility of Internet banking and
ATM will be provided to Customers.
3. Term Deposits and advantages of its various types available to Customers.
4. Procedure of how to apply for Loan Against Fixed Deposits
5. Procedures followed by Bank in relation to Death Claim of Customers.
6. Verification of KYC Documents
Updating customers personal details i.e. signature, latest photos and address details
in every 8 years.
7. Understanding issues related ATM Services and how bank deals with such
issues
8. Basic Knowledge of schemes available to Senior Citizens at Bank of India E.g.
Senior Citizen Saving scheme in which more rate of Interest is given to Senior
citizen on their Saving Bank Account Deposits as compared to other Saving
Account holder.
9. Updating details of Form 15G and 15H in system in order to not to deduct TDS
of Customers on Interest Income from Fixed Deposit Interest and Saving Bank
Account interest having overall Income below basic tax exemption limit.
Form 15G is for normal Customers and Form 15H is for Senior Citizens.

10. Preparing notices to be sent to customers who are defaulters for paying Loan
EMI.

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 CHAPTER 10: LEARNINGS

1. Gained an understanding of the procedures used by the bank to evaluate its loan
applicants.
2. Learned the process of documenting work which is performed on loan applications
3. Learned the regulations related to lending policies of the firm.
4. Learned to work with the various departments of the bank at a time.
5. Learned to work with bank customers and explain the account options available at the
bank.
6. Learned the detailed procedure, rules, regulations, different risk rating models used by the
bank to assess the risk for sanctioning the loan to particular client and various parameters
on the basis of which loans were sanctioned.
7. Learned credit monitoring procedures to be followed by the bank after disbursement of
Loan e.g. evaluation of stock statements and accounts receivable details, to analyzed the
actual performance of the client and comparing it with estimated data provided by the
client in financial statements.
8. After doing the assessment of the financial indicators it is up to the judgment of the top
management of the bank to sanction such loan. The very decision could be against the
assessment result.
9. After studying a few cases, I found that in some cases, loan is sanctioned due to strong
financial parameters
10. If the company is with bank from inception stage then they are given preference, as
credible and loyal party over their financial indicators.

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 CHAPTER 11 : CONCLUSION

1. Customers have a good respond towards Bank of India advance products.

2. BOI has a wide customer base, so that bank should concentrate on this to retain these
customers.
3. In present scenario, BOI is in a good position in advance product due to employee
dedication towards the organization, fastest growing Indian economy & brand image.
4. BOI should focus on the following things:
 Launch innovative product
 Better customer services
 Fastest customer problem solving techniques
 Customer retention
5. Apart from all of the above, BOI believes in providing good customer services to
their customers which is a key factor for success in future.

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 CHAPTER 12 : BIBLIOGRAPHY

Websites:

https://www.ibef.org/industry/banking-india.aspx

https://en.wikipedia.org/wiki/Bank_of_India

www.bankofindia.co.in/english/history3.aspx

www.moneycontrol.com/india/stockpricequote/banks-public-sector/bankofindia/BOI

www.wikipedia.com

www.investopedia.com

www.bankofindia.co.in

https://www.ndtv.com/business/stock/bank-of-india_bankindia/holdings

Bank of India journals:

 BOI Credit Policy-2016 (Revised) e-book

 BOI Individual loan policy documents
 Customer loan files from bank records.

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