Chapter 1

Research Methodology

Introduction to Credit Risk Management

Credit risk "is the risk to a bank's earnings or capital base arising from a borrower's

failure to meet the terms of any contractual or other agreement it has with the bank.

Credit risk arises from all activities where success depends on counterparty,

issuer or borrower performance".

Credit appraisal means an investigation/assessment done by the bank before

providing any loans & advances/project finance & also checks the commercial, financial

& industrial viability of the project proposed its funding pattern & further checks the

primary & collateral security cover available for recovery of such funds.

Objectives of the Study

· The main objective of the study is, to evaluate the Credit Appraisal system &

Risk Assessment Model for effective credit risk management

· To understand the commercial, financial & technical viability of the

proposal proposed & it's funding pattern.

· To understand the pattern for primary & collateral security cover available

for recovery of such funds and management of credit risk.

Sources of Data Data collection: The data required for the study may be collected either from

primary sources or from secondary sources. A major portion of the data in this

study has been collected through secondary sources of data.

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Secondary Data:

· Details regarding the Live Cases of applicant companies which are provided by the

Bank

· E-circulars of Bank

· Books

· Library research

· Websites

Expected contribution of the study

This study will help in understanding the credit Risk Management system at

SBM& to understand how to reduce various risk parameters, which are broadly

categorized into financial risk, business risk, industrial risk & management risk,

associated in providing any loans or advances or project finance.

Beneficiaries of the Study

Researcher This report will help researcher in improving knowledge about the credit

appraisal system and to have practical exposure of the credit appraisal scenario in bank.

Management Student The project will help the management student to know the patterns of credit

appraisal in bank.

Bank The project will help bank in reducing the credit risk parameters. It will also

help to reduce risk associated in providing any loans & advances or project

finance in future and to overcome the loopholes.

Limitations · As the credit risk management is one of the crucial areas for any bank, some of

the technicalities are not revealed which might cause destruction to the information

and our exploration of the problem.

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· Credit appraisal system includes various types of detail studies for different areas

of analysis, but due to time constraint, our analysis will be of limited areas

only.

Chapter 2

Introduction to Banking Sector

History of Banking in India

Without a sound and effective banking system in India it cannot have a healthy

economy. The banking system of India should not only be hassle free but it should be

able to meet new challenges posed by the technology and any other external and

internal factors.

The word bank is derived from the Italian banca, which is derived from German and

means bench. The terms bankrupt and “broke” are similarly derived from bancarotta,

which refers to an out of business bank, having its bench physically broken.

Moneylenders in Northern Italy originally did business in open areas, or big open

rooms, with each lender working from his own bench or table.

Banking in India originated in the first decade of 18th century with The General Bank

of India coming into existence in 1786. This was followed by Bank of Hindustan. Both

these banks are now defunct. The oldest bank in existence in India is the State Bank of

India being established as "The Bank of Bengal" in Calcutta in June 1806. A couple of

decades later, foreign banks like Credit Lyonnais started their Calcutta operations in

the 1850s. At that point of time, Calcutta was the most active trading port, mainly

due to the trade of the British Empire, and due to which banking activity took roots

there and prospered. The first fully Indian owned bank was the Allahabad Bank, which

was established in 1865.

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By the 1900s, the market expanded with the establishment of banks such as

Punjab National Bank, in 1895 in Lahore and Bank of India, in 1906, in Mumbai -

both of which were founded under private ownership. The Reserve Bank of India

formally took on the responsibility of regulating the Indian banking sector

from 1935. After India's independence in 1947, the Reserve Bank was nationalized

and given broader powers.

For the past three decades India's banking system has several outstanding

achievements to its credit. The most striking is its extensive reach.

It is no longer confined to only metropolitans or cosmopolitans in India. In fact, Indian

banking system has reached even to

the remote corners of the country. This is one of the main reasons of India's growth process.

The government's regular policy for Indian bank since 1969 has paid rich dividends

with the nationalization of 14 major private banks of India.

Not long ago, an account holder had to wait for hours at the bank counters for

getting a draft or for withdrawing his own money. Today, he has a choice. Gone are

days when the most efficient bank transferred money from one branch to other in

two days. Now it is simple as instant messaging or dials a pizza. Money has become the

order of the day.

The first bank in India, though conservative, was established in 1786. From 1786 till

today, the journey of Indian Banking System can be segregated into three distinct

phases. They are as mentioned below:

· Early phase from 1786 to 1969 of Indian Banks

· Nationalization of Indian Banks and up to 1991 prior to Indian banking sector

Reforms

· New phase of Indian Banking System with the advent of Indian Financial &

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Banking

Sector Reforms after 1991

· Scenario of Bank as per Phase I, Phase II and Phase III

Phase I

The General Bank of India was set up in the year 1786 followed by Bank of Hindustan

and Bengal Bank. The East India Company established Bank of Bengal (1809), Bank of

Bombay (1840) and Bank of Madras (1843) as independent units and called it

Presidency Banks. These three banks were amalgamated in 1920 and Imperial Bank of

India was established which started as private shareholders banks, mostly Europeans

shareholders.

In 1865 Allahabad Bank was established and first time exclusively by Indians, Punjab

National Bank Ltd. was set up in 1894 with headquarters at Lahore. Between 1906 and

1913, Bank of India, Central Bank of India, Bank of Baroda, Canara Bank, Indian Bank,

and Bank of Mysore were set up. The Reserve Bank of India which is the Central

Bank was created in 1935 by passing Reserve Bank of India Act, 1934 which was

followed up with the Banking Regulations in 1949. These acts bestowed Reserve Bank

of India (RBI) with wide ranging powers for licensing, supervision and control

of banks. Considering the proliferation of weak banks, RBI compulsorily merged

many of them with stronger banks in

1969.

During the first phase the growth was very slow and banks also experienced periodic

Failures between 1913 and 1948.There were approximately 1100 banks, mostly small.

To streamline the functioning and activities of commercial banks, the Government of

India came up with The Banking Companies Act, 1949 which was later changed to

Banking Regulation Act 1949 as per amending Act of 1965 (Act No. 23 of 1965).

Reserve Bank of India was vested with extensive powers for the supervision of

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banking in India as the Central Banking Authority.

During those day public has lesser confidence in the banks. As an aftermath

deposit mobilization was slow. Abreast of it the savings bank facility provided by

the Postal department was comparatively safer. Moreover, funds were largely given to

traders.

Phase II

Government took major steps in this Indian Banking Sector Reform after independence. In

1955, it nationalized Imperial Bank of India with extensive banking facilities on a large

scale especially in rural and semi-urban areas. It formed State Bank of India to act as the

principal agent of RBI and to handle banking transactions of the Union and State

Governments all over the country.

Seven banks forming subsidiary of State Bank of India was nationalized in 1960 on

19th July, 1969, major process of nationalization was carried out. It was the effort of

the then Prime Minister of India, Mrs. Indira Gandhi. 14 major commercial banks in the

country were nationalized.

Second phase of nationalization Indian Banking Sector Reform was carried out in 1980

with seven more banks. This step brought 80% of the banking segment in India

under Government ownership.

The following are the steps taken by the Government of India to Regulate Banking

Institutions in the Country:

1949: Enactment of Banking Regulation Act.

1955: Nationalization of State Bank of India.

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1959: Nationalization of SBI subsidiaries.

1961: Insurance cover extended to deposits.

1969: Nationalization of 14 major banks.

1971: Creation of credit guarantee corporation.

1975: Creation of regional rural banks.

1980: Nationalization of seven banks with deposits over 200 crore.

After the nationalization of banks, the branches of the public sector bank India rose

to approximately 800% in deposits and advances took a huge jump by 11,000%.

Banking in the sunshine of Government ownership gave the public implicit faith

and immense confidence about the sustainability of these institutions.

Phase III

This phase has introduced many more products and facilities in the banking sector in

its reforms measure. In 1991, under the chairmanship of M Narasimham, a committee

was set up by his name which worked for the liberalization of banking practices.

The country is flooded with foreign banks and their ATM stations. Efforts are being

put to give a satisfactory service to customers. Phone banking and net banking is

introduced. The entire system became more convenient and swift. Time is given

more importance than money.

The financial system of India has shown a great deal of resilience. It is sheltered from

any crisis triggered by any external macroeconomics shock as other East Asian

Countries suffered.

This is all due to a flexible exchange rate regime, the foreign reserves are high, the

capital account is not yet fully convertible, and banks and their customers have

limited foreign Exchange exposure.

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Reserve Bank of India (RBI)

The central bank of the country is the Reserve Bank of India (RBI). It was established

in April 1935 with a share capital of Rs. 5 crore on the basis of the recommendations

of the Hilton Young Commission. The share capital was divided into shares of Rs. 100

each fully paid which was entirely owned by private shareholders in the beginning.

The Government held shares of nominal value of Rs. 2, 20,000.

Reserve Bank of India was nationalized in the year 1949. The general superintendence

and direction of the Bank is entrusted to Central Board of Directors of 20

members, the Governor and four Deputy Governors, one Government official from the

Ministry of Finance, ten nominated Directors by the Government to give

representation to important elements in the economic life of the country, and

four nominated Directors by the Central Government to represent the four local

Boards with the headquarters at Mumbai, Kolkata, Chennai and New Delhi. Local

Boards consist of five members each Central Government appointed for a term of four

years to represent territorial and economic interests and the interests of co-operative

and indigenous banks.

The Reserve Bank of India Act, 1934 was commenced on April 1, 1935. The Act, 1934 (II of

1934) provides the statutory basis of the functioning of the

Bank. The Bank was constituted for the need of following:

Ø To regulate the issue of banknotes

Ø To maintain reserves with a view to securing monetary stability and

Ø To operate the credit and currency system of the country to its advantage

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Ba n k i ng s t ru c t u re

9

Opportunities and Challenges for Players

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The bar for what it means to be a successful player in the sector has been raised.

Four challenges must be addressed before success can be achieved. First, the market

is seeing discontinuous growth driven by new products and services that include

opportunities in credit cards, consumer finance and wealth management on the retail

side, and in fee-based income and investment banking on the wholesale banking side.

These require new skills in sales & marketing, credit and operations. Second, banks

will no longer enjoy windfall treasury gains that the decade-long secular decline in

interest rates provided. This will expose the weaker banks. Third, with increased

interest in India, Competition from foreign banks will only intensify. Fourth, given the

demographic shifts resulting from changes in age profile and household income,

consumers will increasingly Demand enhanced institutional capabilities and service

levels from banks.

Current trend in banking

Currently (2009), banking in India is generally fairly mature in terms of supply,

product range and reach-even though reach in rural India still remains a challenge for

the private sector and foreign banks. In terms of quality of assets and capital

adequacy, Indian banks are considered to have clean, strong and transparent balance

sheets relative to other banks in comparable economies in its region.

Currently, India has 88 scheduled commercial banks (SCBs) - 28 public sector banks

(that is with the Government of India holding a stake), 29 private banks (these

do not have government stake; they may be publicly listed and traded on stock

exchanges) and 31 foreign banks. They have a combined network of over 53,000

branches and 17,000 ATMs. According to a report by ICRA Limited, a rating agency, the

public sector banks hold over 75 percent of total assets of the banking industry, with

the private and foreign banks holding 18.2% and 6.5% respectively.

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Chapter3

Industry Analysis

Competitive Forces Model (Porter’s Five-Force model)

Prof. Michael Porter’s competitive forces Model applies to each and every company as

well as industry. This model with regards to the Banking Industry is presented below:

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1. Rivalry among existing firms

With the process of liberalization, competition among the existing banks has

increased. Each bank is coming up with new products to attract the customers and

tailor made loans are provided. The quality of services provided by banks has improved

drastically.

2. Potential Entrants

Previously the Development Financial Institutions mainly provided project finance

and development activities. But they now entered into retail banking which has

resulted into stiff competition among the exiting players.

3. Threats from Substitutes

Banks face threats from Non-Banking Financial Companies. NBFCs offer a higher rate

of interest.

4. Bargaining Power of Buyers

Corporate can raise their funds through primary market or by issue of GDRs, FCCBs.

As a result they have a higher bargaining power. Even in the case of personal finance,

the buyers have a high bargaining power. This is mainly because of competition.

5. Bargaining Power of Suppliers

With the advent of new financial instruments providing a higher rate of returns to

the investors, the investments in deposits is not growing in a phased manner. The

suppliers demand a higher return for the investments.

Overall Analysis

The key issue is how banks can leverage their strengths to have a better future. Since

the availability of funds is more and deployment of funds is less, banks should

evolve new products and services to the customers. There should be a rational

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thinking in sanctioning loans, which will bring down the NPAs. As there is an expected

revival in the Indian economy Banks have a major role to play. Funding corporate at a

low cost of capital is a special requisite.

SWOT Analysis

The banking sector is also taken as a proxy for the economy as a whole. The

performance of bank should therefore reflect “Trends in the Indian Economy”. Due to

the reforms in the financial sector, banking industry has changed drastically with

the opportunities to the work with, new accounting standards new entrants and

information technology. The deregulation of the interest rate, participation of banks

in project financing has changed in the environment of banks.

The performance of banking industry is done through SWOT Analysis. It mainly helps

to know the strengths and Weakness of the industry and to improve will be known

through converting the opportunities into strengths. It also helps for the competitive

environment among the banks.

STRENGTHS

1. Availability of Funds

There are seven lakh crore wroth of deposits available in the banking system. Because

of the recession in the economy and volatility in capital markets, consumers prefer to

deposit their money in banks. This is mainly because of liquidity for investors.

2. Banking network

After nationalization, banks have expanded their branches in the country, which has

helped banks build large networks in the rural and urban areas. Private Banks allowed

operating but they mainly concentrate in metropolis.

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3. Large Customer Base

This is mainly attributed to the large network of the banking sector. Depositors in

rural areas prefer banks because of the failure of the NBFCs.

4. Low Cost of Capital

Corporate prefers borrowing money from banks because of low cost of capital.

Middle income people who want money for personal financing can look to banks as

they offer at very low rates of interests. Consumer credit forms the major source of

financing by banks.

WEAKNESSES

1. Loan Deployment

Because of the recession in the economy the banks have idle resources to the tune of

3.3 loch crore. Corporate lending has reduced drastically

2. Powerful Unions

Nationalization of banks had a positive outcome in helping the Indian Economy as a

whole. But this had also proved detrimental in the form of strong unions, which have

a major influence in decision-making. They are against automation.

3. Priority Sector Lending

To uplift the society, priority sector lending was brought in during nationalization. This

is good for the economy but banks have failed to manage the asset quality and their

intensions were more towards fulfilling government norms. As a result lending was

done for non- productive purposes.

4. High Non-Performing Assets

Non-Performing Assets (NPAs) have become a matter of concern in the banking

industry. This is because of change in the total outstanding advances, which has to be

reduced to meet the international standards.

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OPPORTUNITIES

1. Universal Banking

Banks have moved along the valve chain to provide their customers more products

and services. For example: - SBI is into SBI home finance, SBI Capital Markets, SBI Bonds

etc.

2. Differential Interest Rates

As RBI control over bank reduces, they will have greater flexibility to fix their own

interest rates which depends on the profitability of the banks.

3. High Household Savings

Household savings has been increasing drastically. Investment in financial assets has

also increased. Banks should use this opportunity for raising funds.

4. Overseas Markets

Banks should tape the overseas market, as the cost of capital is very low.

5. Interest Banking

The advance in information technology has made banking easier. Business can

effectively carried out through internet banking.

THREATS

1. NBFCs, Capital Markets and Mutual funds

There is a huge investment of household savings. The investments in NBFCs deposits,

Capital Market Instruments and Mutual Funds are increasing. Normally these

instruments offer better return to investors.

2. Change in the Government Policy

The change in the government policy has proved to be a threat to the banking sector.

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3. Inflation

The interest rates go down with a fall in inflation. Thus, the investors will shift his

investments to the other profitable sectors.

4. Recession

Due to the recession in the business cycle the economy functions poorly and this has

proved to be a threat to the banking sector. The market oriented economy and

globalization has resulted into competition for market share. The spread in the banking

sector is very narrow. To meet the competition the banks has to grow at a faster rates

and reduce the overheads. They can introduce the new products and develop the existing

services.

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Chapter4

Credit Risk Management

“Banks are in the business of

managing risk, not avoiding

it……………”

Introduction

Lending has always been the primary function of banking, and accurately

assessing a borrower's creditworthiness has

Always been the only method of

lending successfully. The method of

analysis varies from borrower to

borrower. It also varies in function

of the type of lending being

considered.

For example, the banking risks in

financing the building of a hotel or

rail project, or providing lending

secured by assets or a large

overdraft for a

Retail customer would vary considerably. For the financing of the project, you would

look to the funds generated by future cash flows to repay the loan, for asset secured

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lending, you would look at the assets and for an overdraft facility, you would look at the

way the account has been run over the past few years.

Credit risk is the oldest risk among the various types of risks in the financial

system, especially in banks and financial institutions due to the process of

intermediation. Managing credit risk has formed the core of the expertise of these

institutions.

While the risk is well known, growth in the markets, disintermediation, and the

introduction of a number of innovative products and practices have changed the

way credit risk is measured and managed in today's environment.

Definition

Credit risk "is the risk to a bank's earnings or capital base arising from a borrower's

failure to meet the terms of any contractual or other agreement it has with the bank.

Credit risk arises from all activities where success depends on counterparty,

issuer or borrower performance". Credit risk enters the books of a bank the

moment the funds are lend, deployed, invested or committed in any form to

counterparty whether the transaction is on or off the balance sheet.

Scope of Credit Risk

It can be understood from the above that credit risk arises from a whole lot of

banking activities apart from traditional lending activity such as trading in

different markets, investment of funds, provision of portfolio management services,

providing different type of guarantees and opening of letters of credit in favor of

customers etc.

For example, even though guarantee is viewed as a non-fund based product, the

moment a guarantee is given, the bank is exposed to the possibility of the non-

funded commitment turning into a funded position when the guarantee is invoked by

the entity in whose favor the guarantee was issued by the bank. This means that

credit risk runs across different functions performed by a bank and has to be viewed as

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such.

The nature, nomenclature and the quantum of credit risk may vary depending on a

number of factors. The internal organization of credit risk management should

recognize this for effective credit risk management. Credit risk can be segmented into

two major segments viz. intrinsic and portfolio (or concentration) credit risks. The focus

of the intrinsic risk is measurement of risk at individual loan level.

This is carried out at lending u n i t level. Portfolio credit risk arises as a result of

concentration of the portfolio to a particular sector, geographic area, industry,

type of facility, type of borrowers, similar rating, etc. Concentration risk is managed

at the bank level as it is more relevant at that level.

What is the role of Credit Analysis?

The role of credit analysis generally encounters the following questions:

· In which stage of the life cycle

the companies?

· Is the company's business cyclical

or counter cyclical?

· How will this affect the long-term cash

flow of the firm?

· What are the considerations of

general economic conditions and, if appropriate, political conditions in the

country where the company is operating?

Credit analysis supports the work of marketing officers by evaluating companies

before lending money to them. This is essential so that new loan requests can be

processed, a company's repayment ability assessed, and existing relationships

monitored. The extent of the credit analysis is determined by

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Ø The size and nature of the enquiry,

Ø The potential future business with the company,

Ø The availability of security to support loans,

Ø The existing relationship with the customer

The analysis must also determine whether the information submitted is adequate

for decision-making purposes, or if additional information is required. An analysis

can therefore cover a wide range of issues.

For example, in evaluating a loan proposal for a company, it may be necessary to:

Ø Obtain credit and trade references,

Ø Examine the borrower's financial condition,

Ø Consult with legal counsel regarding a particular aspect of the draft loan agreement

By making these checks you are ensuring that your report does not look at a

company's creditworthiness in a narrowly defined sense.

You will be taking the further step of deciding whether the provisions in the loan

agreement are appropriate for the borrower's financial Condition. Often it will be

necessary for the analyst to place the assessment of the borrower's financial

condition within the wider context of the conditions existing in the industry in which

it is operating.

Credit Risk Management Process

Credit risk is the largest and most elementary risk faced by banks. It essentially

focuses on determining likelihood of default or credit deterioration and how costly it

will turn out to be if it does occur. And this is true for consumer lending (retail)

or corporate lending (commercial) in banking.

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A comprehensive Credit Risk Management Process encompasses the following steps:

Fig.1: Processes of a typical Credit risk management lifecycle

Collect Obligor and Loan data

The very foundation of a sound credit risk management system lies in the data that it

gets. The inputs needed in this stage are the obligor (borrower), Facility (Loan) and

external (ratings) data. This is first critical step in any loan process and all necessary

data about the obligor needs to be collected Fig 2 highlights the key tasks and

challenges involved in this step.

Fig.2: Key tasks and challenges involved in collecting obligor & Loan Data

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The key steps here include,

Get the Obligor Data: The crucial task here is to get the financial, demographic

and qualitative data related to the obligor. A majority of the data comes from the

financial statements but other sources also exist for example past repayment

performances.

Get the Loan Data: Next on, the system must be adequately designed to capture Loan

data related to the type of loan, amount, maturity etc accurately. Of particular concern

here is data related to collaterals, guarantees and contract terms on netting and

liquidation. These must be accurately captured in the system as they are crucial in the

rating process.

Get External Ratings Data: The system must be capable enough to pull relevant data

from external systems such as data from rating agencies and also information such as

loan data from internal systems.

Compute Credit Risk

The next and one of the most crucial phases is calculating the credit risk in the form of

risk ratings to meaningfully differentiate risk among different firms or exposures. Fig 3

shows a typical credit risk calculation scenario.

Fig.3: Key tasks and challenges involved in Computing Credit Risk

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Key Tasks

The basic approach involves combining internal rating models (point of time) with

external risk information (through the cycle). The basic tasks involved in the rating

process of a Commercial obligor are highlighted as follows:

Develop Rating Model: The obligor has to be rated using an appropriate model for

example there are different models for a Commercial & Industrial category obligor and a

Commercial Real Estate category obligor.

Calculate Probability of Default (PD): The Probability of Default is the likelihood that

a loan will not be replayed and fall into default. The credit history of the counterparty

and nature of the investment will all be taken into account to calculate the PD figures.

The following steps will commonly be used

· Analyze the credit risk aspects of

the counterparty; This will involve not

only the quantitative aspects of the

obligor based on his/her financial

statements but also qualitative

factors related to contingencies,

management quality and other

factors which are yet to be

reflected.

Fig. 4 shows a sample of quantitative

and qualitative factors in a typical risk

grading model for a commercial

obligor.

· Map the counterparty to an internal risk grade which has an associated PD.

Calculate Loss Given Default (LGD), Exposure at Default (EAD) & Expected Loss (EL): The Credit Risk Solution also needs to calculate

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Ø Loss Given Default – It is the magnitude of likely loss on the exposure in the

event of default. Both quantitative and qualitative factors are used to calculate

Facility LGD which may include Government guarantees, Collateral Support,

Guarantor Support etc.

Ø Exposure at Default - It is defined as the exposure to the borrower at any point

of time.

Ø Expected Loss – It is calculated using the PD, LGD and EAD together. It is the

Probability weighted loss which is also used for pricing.

Monitor and Manage Risk Rating

The job is not over with the credit risk rating process. In fact, it is quintessential to

monitor and manage the risk ratings as highlighted below in Fig 5

Fig .5: Key tasks and challenges involved in Monitoring and managing Risk Rating

Key Tasks

Develop Workflow to manage approval of Ratings: The Credit Risk Solution should

ensure that the risk ratings and exceptions go through proper approvals by appropriate

authorities as laid down by guidelines such as the Bank’s credit policy. The workflow

should also accord traceability to ratings, changes and approvals.

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Ensure notification on external rating changes: The system should ensure that

external ratings changes or other material changes are reflected as early and accurately

as possible in the credit risk ratings of an obligor. The system should ensure ratings are

reviewed periodically and also based on criteria such as likelihood of credit changes.

Interface with Internal Collections: Adequate interface with internal collections is

needed so that the system is updated consistently with any default information.

Perform Back Testing of Ratings: The system should provide for back testing and

calibrating credit risk models within Basel-II guidelines.

Manage portfolio and allocate capital

Portfolio Management has become one of the most difficult challenges in the financial

world especially from the point of view of credit risk management. Efficient portfolio

management and capital allocation is a process which an organization must put on the

top of its agenda. Illustrated below in Fig 6 are the steps in this process

Fig 6: Key tasks and challenges involved in Portfolio Management and Capital Allocation

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Key Tasks

Compute and monitor Portfolio risk: The System must be capable of computing

and monitoring the credit risk at a portfolio level and also enable drill down based upon

criteria such as different lines of businesses etc. The system should provide interface

with a risk engine to calculate regulatory and economic capital, allocate capital and

calculate RAROC

Allow creation of SPVs for transfer of risk: The system must facilitate the creation of

SPVs for the appropriate transfer of credit risk.

Reporting on risk: The system must be capable enough to satisfy the reporting

requirements of the organization. There are different levels of reporting that are required

especially in the case of portfolio management.

Stress Testing/ Scenario Analysis: The system should also allow for stress testing of

the portfolio under differing conditions specially taking into consideration varying

economic circumstances.

Summary of the key priority areas

It will be quite safe to assume that any competitive and proactive financial institution

must have already started laying down the foundation blocks of a robust credit risk

management system. However it would be pertinent to summarize the key priority

areas for this Process. These areas are highlighted in Fig 7.

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Fig 7: Key Priority Areas in Credit Risk management

Notification of External Rating changes: It is crucial that an organization effectively uses a

combination of internal models with external ratings. Therefore changes in the external

inputs should be reflected as soon as possible in the internal ratings. This can be achieved

through the use of notifications in the form of real time alerts.

Data Architecture: A robust data backbone is crucial to enable credit assessment process.

The data backbone should have adequate and accurate data history. Care should be

taken to make sure the data design incorporates relevant data fields which are required

in current and future models.

Back Testing: The models should be properly back tested to improvise them and also for

regulatory approvals.

Compute & Monitor Portfolio Risk: Measuring and managing individual credit

ratings contribute to the management of portfolio risk. This is a crucial phase for

the risk department within the organization as credit risk levels have to be

maintained within statutory and organizational requirements.

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Chapter5

Overview of Credit Appraisal

Credit appraisal means an investigation/assessment done by the banks before providing

any loans & advances/project finance & also checks the commercial, financial & technical

viability of the project proposed, its funding pattern & further checks the primary

& collateral security cover available for recovery of such funds.

Brief overview of credit

Credit Appraisal is a process to ascertain the risks associated with the extension of the

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 which measures the financial condition and

the ability of the customer to pay back the loan in future. Generally the credit 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.

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

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loan loss probability / problems will be minimized, which should be the objective of

every lending officer.

Credit is the provision of resources (such as granting a loan) by one party to another

party where that second party does not reimburse the first party immediately, thereby

generating a debt, and instead arranges either to repay or return those resources (or

material(s) of equal value) at a later date. The first party is called a creditor, also known

as a lender, while the second party is called a debtor, also known as a borrower.

Credit allows you to buy goods or

commodities now, and pay for them later. We

use credit to buy things with an agreement

to repay the loans over a period of time. The

most common way to avail credit is by the use

of credit cards. Other credit plans include

personal loans, home loans, vehicle loans,

student loans, small business loans, trade.

A credit is a legal contract where one party receives resource or wealth from another

party and promises to repay him on a future date along with interest. In simple terms,

a credit is an agreement of postponed payments of goods bought or loan. With the

issuance of a credit, a debt is formed.

Credit Risk Assessment (CRA):

Credit is a core activity of banks & an important source of their earnings, which go to

pay interest to depositors, salaries to employees & dividend to shareholders

In credit, it is not enough that we have sizable growth in quantity/ volume; it is

also necessary to ensure that we have only good quality growth.

To ensure asset quality, proper risk assessment right at the beginning, that is, at the

time of taking an exposure, is extremely important.

Moreover, capital has to be allocated for loan assets depending on the risk

perception/ rating of respective assets. It is, therefore, extremely important for every

30

bank to have a clear assessment of risks of the loan assets it creates, to become Basle-II

compliant.

That is why Credit Risk Assessment (CRA) system is an essential ingredient of the Credit Appraisal exercise.

Indian Scenario:

Ø In Indian banks, there was no systematic method of Credit Risk Assessment till late 1980’s/early 1990’s.

Ø Health Code System (1985) / IRAC norms (1993) are Asset (loan) classification

systems, not CRA systems.

Ø RBI came out with its guidelines on Risk Management Systems in Banks in 1999

& Guidance Note on Management of Credit in October, 2002.

Credit Risk Assessment (CRA) – Minimum Scores / Hurdle Rates

1. The CRA models adopted by the Bank take into account all possible factors, which

go into appraising the risks, associated with a loan. These have been categorized

broadly into financial, business, industrial & management risks and are rated

separately. To arrive at the overall risk rating, the factors duly weighted are

aggregated & calibrated to arrive at a single point indicator of risk associated with

the credit decision.

2. Financial parameters: The assessment of financial risk involves appraisal of

the financial strength of the borrower based on performance & financial

indicators. The overall financial risk is assessed in terms of static ratios,

future prospects & risk mitigation (collateral security / financial standing).

3. Industry parameters: The following characteristics of an industry which pose varying Degrees of risk are built into Bank’s CRA model:

Ø Competition

Ø Industry outlook

31

Ø Regulatory risk

Ø Contemporary issues like WTO etc.

4. Management parameters: The management of an enterprise / group is rated on

the following parameters:

Ø Integrity (corporate governance)

Ø Track record

Ø Managerial competence / commitment

Ø Expertise

Ø Structure & systems

Ø Experience in the industry

Ø Credibility: ability to meet sales projections

Ø Credibility: ability to meet profit (PAT) projections

Ø Length of relationship with the Bank

Ø Strategic initiatives

Ø Payment record

Bank has introduced New Rating Scales for borrower for giving loans. Rating is

given on the basis of scores out of 100. Bank gives loans to the borrower as per

their rating like SBM gives loans to the borrower up to SB8 rating as it has

average risk till SB8 rating. From SB9 rating the risk increases. Thus, SBM do not

give loans after SB8 rating.

5. The risk parameters as mentioned above are individually scored to arrive at an

aggregate score of 100 (subject to qualitative factors – negative parameters).

The overall score thus obtained (out of a max. of 100) is rated on a 16 point

scale from SB1/SBTL1 to SB 16 /SBTL16.

32

Ø CRA model also stipulates a minimum score under financial, business, industry

and management risk parameters for a proposal to be considered acceptable in

a given form.

The details of such minimum scores are as under:

a. Minimum scores – General

b. Minimum scores under Management Risk : ( ‘Integrity/Corporate Governance’, ‘Track

Record’ and ‘Managerial Competence/ Commitment’)

An applicant unit will be required to score minimum 2 marks each (out of 3) in

t h e above three parameters of Management Risk to qualify for Bank’s assistance. In

case of existing accounts if the company scores less than this stipulated minimum

marks (02), the Bank would explore all possibilities to exercise exit option.

c. Minimum Score under Business Risk:

Compliance of Environment Regulations to qualify for financial assistance, an

applicant unit would have to secure full marks (02) under the parameter,

“Compliance of Environment Regulations.” In case, the existing units in the

books of the bank do not secure full marks (02), the bank would explore all

possibilities for the exercise of exit option.

33

d. Hurdle Scores:

REGULAR MODEL SIMPLIFIED MODEL

RISK TYPES EXISTING

COMPANY

NEW

COMPANY

EXISTING

COMPANY

NEW

COMPANY

FINANCIAL RISK 25/65 10/25 30/70 15/35

BUSINESS & INDUSTRY

RISK12/20 16/30 10/20 20/40

MANAGEMANT RISK 8/15 22/45 5/10 13/25

AGGREGATE HURDLE

SCORE45/100 48/100 45/100 48/100

OVERALL HURDLE GRADE SB10 SB10 SB10 SB10

Salient Features of CRA Models:

(a) Type of Models

No.Exposure Level (FB + NFB

Limits )

Non – TradingSector

(C&I , SSI , AGL)

Trading Sector( Trade & Services)

(i) Over Rs. 5.00 crore Regular Model Regular Model

(ii) Rs 0.25 crore to Rs. 5.00 crore Simplified Model Simplified Model

(b) Type of Ratings

No. Model Type of Rating

(i) Regular ModelBorrower Rating

Facility Rating

(ii) Simplified Model Borrower Rating

34

(c) Type of Risks Covered:

(1) Borrower Rating

Maximum Score

Regular Model Simplified ModelNo.

Risk CategoryExisting

Company

New

Company

Existing

Company

New

Company

(i) Financial Risk (FR) 65 25(65 x 0.39) 70 35 (70/2)

(ii) Qualitative Factors (-ve) (-10) (-10) (-10) (-10)

Business & Industry Risk

(iii) (BR& IR) /Business

Risk (for Trading Sector)

20 30 (20 x 1.5) 20 40 (20 x 2)

(iv) Management Risk (MR) 15 45 (15 x 3) 10 25 (10 x 2.5)

Qualitative Parameter(v)

(External Rating)(+5) (+5) (+5) (+ 5)

Total 100 100 100 100

(2) Facility Rating (Regular Model)

NO. Parameter Maximum Score

(a) Risk Drivers for Loss Given Default (LGD)

(i)

Current Ratio

[Working Capital/ Non-Fund Based Facility (except Capex)]

OR Project Debt/Equity

[Term Loan/Non-Fund Based Facility (for Capex)]

6

35

(ii) Nature of Charge 4

(iii) Nature of Charge 6

(iv) Geography 2

(v)

Unit Characteristics(a) Leverage/ Enforcement of Collateral-4

(b) Safety, Value & Existence of Assets-4

8

(vi)

Macro-Economic Conditions(a)GDP Growth Rate : Impact of Business Cycle- 2

(b) Insolvency Legislation in the Jurisdiction-1

(c) Impact of Systemic/Legal Factors on Recovery-1

(d) Time Period for Recovery-1

5

(vii) Total Security (Primary + Collateral) 60

(b) Risk Drivers for Exposure at Default (EAD)

(i)Nature of Commitment

(Revolving/Non-Revolving)1

(ii) Credit Quality of Borrower 5

(iii) Tenor of Facility 3

Total Score 100

36

(d) New Rating Scales - Borrower Rating: 16 Rating Grades

Borrower

Rating

Range of

ScoresNo. Risk Level Comfort Level

1 SB1 94-100 Virtually Zero Risk Virtually Absolute Safety

2 SB2 90-93 Lowest Risk Highest Safety

3 SB3 86-89 Lower Risk Higher Safety

4 SB4 81-85 Low Risk High Safety

5 SB5 76-80Moderate Risk with Adequate

CushionAdequate Safety

6 SB6 70-75Moderate Risk Moderate Safety

7 SB7 64-69

8 SB8 57-63Average Risk Above safety threshold

9 SB9 50-56

10 SB10 45-49Acceptable Risk (Risk

Tolerance Threshold)Safety Threshold

11 SB11 40-44 Borderline risk Inadequate safety

12 SB12 35-39 High Risk Low safety

13 SB13 30-34 Higher Risk Lower safety

14 SB14 25-29 Substantial risk Lowest safety

15 SB15 <24Pre-Default Risk (extremely

vulnerable to default) NIL

16 SB16 - Default Grade

Public

Banks

Private

banks

Co-

operative

banks

Particulars

Evaluation of types of risks

Financial risk ü ü ü

Business and industry risk ü ü

Management risk ü ü

Country risk ü ü

Documents needed for loan proposal

3 years balance sheet ü ü

6 months balance sheet ü ü

Projected financial statements for the term of the

loan in case of term loanü ü

2 years projected financial statements in case of C.C. ü ü

Details of accounts with other banks and their

passbooksü ü ü

Different types of ratings

In-house ratings for loan up to 5 crores ü ü

CRISIL or care ratings for loans ü ü

CIBIL check ü ü

Different types of check

Industry check ü ü

Check of availability of raw material, skilled labour,

etc.ü ü

Salability of the product ü ü ü

Level of competition ü ü

Infrastructural capability ü ü

Availability of power, fuels, etc. ü ü

Trend in sales ü ü ü

Price fluctuations ü ü

Management’s capability ü ü

Comparative Analysis of Credit Risk Appraisal at different types of banks:

Record of payment to banks ü ü

Age of the borrower ü ü

Consideration of geographical proximity of the

borrower’s placeü

Borrower’s background ü ü

Production capacity ü

Stock check ü ü ü

Extent of promoter’s investment ü

Technical capability of the borrower ü ü ü

Check with other banks ü ü

Reporting

Monthly ü ü

Quarterly ü

Interest period

Monthly ü ü

Quarterly ü

Insurance factor

Insurance of the owner’s item stored in the godown

in the name of bankü

Other factors

Follow up & monitoring ü ü ü

Qualitative factors(TNW related) ü ü

Financial statement quality ü ü

Visits to the borrower’s place

Visits prior to the sanctioning of loan ü ü ü

Visits after the sanctioning of loan on a regular basis ü ü

Third party guarantee ü ü ü

Collateral security ü ü ü

Chapter 6

Risk Management in Banks

Introduction

Risk management is the strategic tool, which helps in identifying, qualifying, monitoring

and controlling risks. Risk management protects an organization from dying due to

insolvency resulting from the adverse effects of risk. Though universally relevant it is

of immense importance to a banking organization or financial institution.

The economic scenario has undergone considerable changes as compared that a

few decades ago. Some of the changes that we have been witnessed are deregulation

of the banking industry, development of financial markets, transition into floating

rate of exchanges, increasing roles of capital markets and global competition, etc. In

the past the banking institution functioned in a regulated environment thereby limiting

to various types of risks. However, today that legacy no more exists.

A banking organization has to constantly strike a balance between risk and reward.

A proposal, which may seem very rewarding in the short term, may wipe out the

bank completely in the long run due to high risk embedded in it. Risk management helps

the bank in striking this balance. Thus risk management systems are not a solution, but

a tool to aid decision making.

Classification of Risks

Risk normally has two dimensions i.e. the quality of risk and the quantity of risk. Quality

of risk is essentially the probability of the risk turning into an actual loss. Quantity of

risk is the financial effect of the risk turning into loss. Both these dimensions are

extremely difficult to measure, primarily because it is an estimation of the future,

which is highly uncertain. To understand Risk Management it is extremely important

to understand the various types of risks, their characteristics and their

interrelationships.

Ø Interest rate risk

It is the risk of loss of revenue or increase or decrease in cost due to adverse movements

in the market interest rates. Risk due to a client exercising its option of pre-payment of a

loan due to lower interest rates is known as the optional interest rate risks. Most of the

balance sheet items generate revenue or incur costs, which are benched against one or

the other interest rate. This has become more significant with the emergence of floating

interest rate instruments.

The immediate impact of change in interest rate is on bank’s earnings by changing

net interest income. A long term impact of changing interest rate is on bank’s market

value of equity or net worth as the economic value of bank’s assets, liabilities and off

balance sheet items affected due to variation in market interest rate. The interest rate

risk when viewed from these two perspectives is known as “Earning Perspective”

and “Economic value Perspectives” respectively.

Ø Liquidity Risk

The bank always borrows short-term and lends long term. Due to this nature of

banking activities it is vulnerable to an asset-liability mismatch thereby resulting into an

inability in meeting its commitments. Liquidity risk is essentially a result of adverse

movements of other risks i.e. Credit risk, interest risk, foreign exchange risk. Small

information in the market about the liquidity problems faced by a bank may

result into withdrawal of enormous deposits, thereby aggravating the problem.

Liquidity risk also includes rising of funds at an abnormal cost to meet its commitments.

Management of Interest Rate risk and Liquidity risk is together known, as Asset-

Liability Management is a subset of the whole gamut of risk management tools.

Ø Credit Risk

Credit Risk is the most fundamental risk faced by a banking company. Credit Risk is the

risk of default by a borrower of funds or decline in the credit standing of a borrower.

It is the most difficult to quantify due to the large amount of subjectivity involved in it.

Thus credit risk management can assist in decision making; it cannot be a substitute to

the judgmental decision of a credit officer.

Traditionally credit risk has been managed by setting up limits to the global

exposure, industry exposure, country exposure and individual client/group exposure.

Credit Risk Management is extremely important as the pricing of a portfolio or a

transaction is dependent on the risk factor built in it. However, sometimes a bank may

only be an adopter of the prevailing market rate of interest. Nothing the else it is

important to judge the rationale behind accepting and rejecting a credit proposal.

Ø Market Risk

It is a risk of loss due to adverse movements in the market rates during the

compulsory holding period having an impact on the portfolio held by the bank.

Compulsorily holding period denotes the duration during which instrument cannot be

sold by an organization. This is normally the time period, which is required in taking

delivery of the instrument. Any adverse movements beyond the compulsory holding

period are due to the judgmental error and therefore should be analyzed differently.

Market risk is also important in constantly determining the true worth of a

collateral security provided by the borrower. Foreign exchange risk is often

regarded as a part of the market risk, but may be bifurcated for facilitating better

analysis.

Ø Operational Risk

It is the risk faced by an organization, arising due to malfunctioning of internal

systems, wrong entering of transaction details, wrong interpretation and judgmental

errors made by manpower. Operational risk is difficult to quantify and monitor.

However certain critical operations or systems have to be identified, the failure of which

would raise survival issues for the company. Close and constant monitoring of these

systems is an essential part of operational risk management.

Chapter7

Introduction to SBI

STATE BA N K OF INDIA

Working for a better tomorrow

Not only many financial institution in the world today can claim the antiquity and majesty

of the State Bank Of India founded nearly two centuries ago with primarily intent of

imparting stability to the money market, the bank from its inception mobilized funds for

supporting both the public credit of the companies governments in the three presidencies

of British India and the private credit of the European and India merchants from about

1860s when the Indian economy book a significant leap forward under the impulse of

quickened world communications and ingenious method of industrial and agricultural

production the Bank became intimately in valued in the financing of practically and mining

activity of the Sub- Continent Although large European and Indian merchants and

manufacturers were undoubtedly thee principal beneficiaries, the small man never ignored

loans as low as Rs.100 were disbursed in agricultural districts against glad ornaments.

Added to these the bank till the creation of the Reserve Bank in 1935 carried out numerous

Central–Banking functions. Adaptation world and the needs of the hour has been one of the

strengths of the Bank. In the post depression exe, For instance – when business

opportunities become extremely restricted, rules laid down in the book of instructions

were relined to ensure that good business did not go post. Yet seldom did the bank

contravene its value as depart from sound banking principles to retain as expand its

business. An innovative array of office, unknown to the world then, was devised in the form

of branches, sub branches, treasury pay office, pay office, sub pay office and out students to

exploit the opportunities of an expanding economy. New business strategy was also evaded

way back in 1937 to render the best banking service through prompt and courteous

attention to customers.

Key areas of operation:

1) Personal Banking Schemes:

The personal banking scheme consists of the following types of services:

Ø Personal loan

Ø Mortgage loan

Ø Housing loans

Ø Educational loan

Ø Cash Key: To meet unforeseen expenses, without premature withdrawal of

term deposit. Immediate overdraft facility is available

Ø ATM Facility: Round the clock ATM facility for customers of Bangalore city

and different parts of the country.

2) Commercial and Institutional Banking Schemes:

Scheme for Traders-Liberalized Trade Finance: State Bank of Mysore has

designed schemes for traders to meet their working capital needs – under C&I

and SME Segment. The following categories of borrowers will be covered:

» Small business enterprises

» Retail traders/ wholesale trade » Professional and Self employed

Handy Loans Scheme - For Trade and Services sector: Handy Loan can be availed for:

» Holding stocks / Receivables

» Acquisition of land and buildings for establishing trading house

» Building construction & renovation of offices, showrooms, godowns etc.

» Purchase of equipment, furniture & vehicles

» Augmenting networking capital

» Payment of long term deposits / advances to supplier

» General trade purposes

Corporate Loan (Earlier Name: Short Term Corporate Loan):The

Short Term Corporate Loan is essentially in the form of Term Loan for

corporate for certain specific purposes with maturity not exceeding three

years

Current Account plus: The services offered under these services are as follows:

» Issue of 30 DDs cumulative value not exceeding Rs.25 lacs per month free of charges

» Collection of 30 outstation cheques per month with a cumulative value of Rs.10

lacs, free of collection charges (This facility is only for the account holder’s

instruments and not for third party cheques). Handling charges of Rs.20/- per

instrument to be collected

» SBI Life policy of Rs.1 lakh coverage in the unfortunate event of death, SBI Life

would pay the assured to the nominee. In the event of the death due to an

accident, SBI Life would pay the Nominee double the sum assured. Free of cost,

for individuals/proprietor of concern. In case of Partnership firms / Company

Accounts any one partner/ Director.

Rent Plus: This scheme is to meet liquidity mismatch / any other

purpose of the applicants.

3) Agricultural Schemes:

The schemes under agricultural areas under:

Kisan Gold Card Scheme

Kisan Credit Card Scheme

GraminBhandaranYojana (GBY)

Scheme for Combined Harvesters

Kisan Chakra Scheme

4) Micro & Small Enterprises Scheme: The various schemes under MSE schemes are

as follows:

Credit Guarantee Fund Trust Scheme for Micro & Small Enterprises (CGTMSE)

Loans to Micro & Small Enterprises (MSEs)

Small Business Finance

Small Business Enterprises

Professionals & Self-Employed persons

Transport Operators

LaghuUdyami Credit Card Scheme

Technical Initiatives:

State Bank of Mysore is the first Karnataka-based Bank with fully networked

branches. The Bank made significant investment in order to upgrade

technology and the major developments are as under:

(1) Core Banking Solution: Which contains, Facilitates 24 X 7 Banking

Anywhere Banking

Integration with strategic sectors

Business Process Re-engineering (BPR) enabler(2) Internet Banking

(3) Real Time Gross Settlement (RTGS)

(4) National Electronic Funds Transfer (NEFT) System

(5) Mobile Banking

Mission, Vision, Values

Mission statement:

To retain the Bank’s position as premiere Indian Financial Service Group, with world-

class standards and significant global committed to excellence in customer,

shareholder and employee satisfaction and to play a leading role in expanding and

diversifying financial service sectors while containing emphasis on its development

banking rule.

Vision statement:

Premier Indian Financial Service Group with prospective world-class Standards of efficiency and professionalism and institutional values.

Retain its position in the country as pioneers in Development banking.

Maximize the shareholders value through high-sustained earnings per Share.

An institution with cultural mutual care and commitment, satisfying and Good work environment and continues learning opportunities.

Values:

Excellence in customer service

Profit orientation

Belonging commitment to Bank

Fairness in all dealings and relations

Risk taking and innovative

Team playing

Learning and renewal

Integrity

Transparency and Discipline in policies and systems

Chapter 8

SBI Norms for Credit Appraisal

& Credit Risk management

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 covers available for recovery of such funds.

Loan Policy – An Introduction

1.1 State Bank of India’s (SBI) Loan Policy is aimed at accomplishing its mission of

retaining the bank’s position as a Premier Financial Services Group, with World

class standards & significant global business, committed to excellence in

customer, shareholder & employee satisfaction & to play a leading role in the

expanding & diversifying financial services sector, while continuing emphasis on

its Development Banking role.

1.2 The Loan Policy of the any bank has successfully withstood the test of time and

within-built flexibilities, has been able to meet the challenges in the market

place. The policy exits & operates at both formal & informal levels. The formal

policy is well documented in the form of circular instructions, periodic

guidelines & codified instructions, apart from the Book of Instructions, where

procedural aspects are highlighted.

1.3 The policy, at the holistic level, is an embodiment of the Bank’s approach

to sanctioning, managing & monitoring credit risk & aims at making the

systems & controls effective.

1.4 The Loan Policy also aims at striking a balance between underwriting assets of

high quality, and customer oriented selling. The objective is to maintain Bank’s

Undisputed leadership in the Indian Banking scene.

1.5 The Policy aims at continued growth of assets while endeavoring to ensure

that these remain performing & standard. To this end, as a matter of policy the

Bank does not take over any Non-Performing Asset (NPA) from other banks.

1.6 The Central Board of the Bank is the apex authority in formulating all

matters of policy in the bank. The Board has permitted setting up of the

Credit Policy & Procedures Committee (CPPC) at the Corporate Centre of the

Bank of which the Top Management are members, to deal with issues relating

to credit policy & procedures on a Bank-wide basis. The CPPC sets broad

policies for managing credit risk including industrial rehabilitation, sets

parameters for credit portfolio in terms of exposure limits,

reviews credit appraisal systems, approves policies

for compromises, write offs, etc. & general management of NPAs besides

dealing with the issues relating to Delegation of Powers.

Based on the present indications, following exposure levels are prescribed:

Individuals as borrowers

Maximum aggregate credit facilities of Rs. 20

crores

(Fund based and Non fund based)

Non-corporate

(E.g. Partnerships, Associations, etc.)

Maximum aggregate credit facilities of Rs. 80

crores

(Fund based and Non fund based)

CorporateMaximum aggregate credit facilities as per

prudential norms of RBI on exposures

o Term Loans (loans with residual maturity of over 3 years) should

not in the aggregate exceed 35% of the total advances of SBM.

o The Bank shall endeavor to restrict fund based exposure to a particular

industry to 15% of the Bank’s total fund based exposure.

o The Bank shall restrict the term loan exposure to infrastructure projects to 10% of Bank’s total advances.

o The Bank shall endeavor to restrict exposure to sensitive sectors (i.e. to

capital market, real estate, and sensitive commodities listed by RBI) to

10% of Bank’s total advances.

o The Bank’s aggregate exposure to the capital markets shall not exceed 5% of the total outstanding advances (including commercial paper) as on March 31 of the previous year.

@ Credit Appra isa l Sta nda rds

(A) Qualitative:

At the outset, the proposition is examined from the angle of viability & also from the

Bank’s prudential levels of exposure to the borrower, Group & Industry. Thereafter, a

view is taken about our past experience with the promoters, if there is a track record to

go by. Where it is a new connection for the bank but the entrepreneurs are already

in business, opinion reports from existing bankers & published data if available are

carefully pursued. In case of a maiden venture, in addition to the drill mentioned

heretofore, an element of subjectively has to be perforce introduced as scant historical

data weights to be placed on impressions gained out of the serious dialogues with the

promoter & his business contacts.

(B) Quantitative:

(a) Working capital: The basis quantitative parameters underpinning the Bank’s c r e d i t Appraisals are as follows:-

(i) Liquidity:

Current Ratio (CR) of 1.33 will generally be considered as a benchmark level of

liquidity. However the approach has to be flexible. CR of 1.33 is only indicative & may

not be deemed mandatory. In cases where the CR is projected at a lower than the

benchmark or a slippage in the CR is proposed, it alone will not be a reason for rejection

for the loan proposal or for the sanction of the loan at a lower level. In such cases, the

reason for low CR or slippage should be carefully examined & in deserving cases the CR

as projected may be accepted. In cases where projected CR is found acceptable, working

capital finance as requested may be sanctioned. In specific cases where warranted, such

sanction can be with the condition that the borrower should bring in additional long-

term funds to a specific extent by a given future date. Where it is felt that the

projected CR is not acceptable but the borrower deserves assistance subject to

certain conditions, suitable written commitment should be obtained from the borrower

to the effect that he would be bringing in required amounts within a mutually agreed

time frame.

(ii) Net Working Capital:

Although this is a corollary of current ratio, the movements in Net Working Capital

are watched to ascertain whether there is a mismatch of long term sources vis-à-vis

long term uses for purposes which may not be readily acceptable to the Bank so

that corrective measures can be suggested.

(iii) Financial Soundness:

This will be dependent upon the owner’s stake or the leverage. Here again the

benchmark will be different for manufacturing, trading, hire-purchase & leasing

concerns. For industrial ventures a Total Outside Liability/ Tangible Net worth ratio

of 3.0 is reasonable but deviations in selective cases for understandable reasons

may be accepted by the sanctioning authority.

(iv) Turn-Over:

The tr end in turnover is carefully gone into both in terms of quantity & value as also

market share wherever such data are available. What is more important to establish a

steady output if not a rising trend in quantitative terms because sales realization may

be varying on account of price fluctuations.

(v) Profits:

While net profit is ultimate yardstick, cash accruals, i.e., profit before depreciation

& taxation conveys the more comparable picture in view of changes in rate of

depreciation & taxation, which have taken place in the intervening years. However, for

the sake of proper assessment, the non-operating income is excluded, as these are

usually one time or extraordinary income. Companies incurring net losses

consistently over 2 or more years will be given special attention, their accounts

closely monitored, and if necessary, exit options explored.

(vi) Credit Rating:

Wherever the company has been rated by a Credit Rating Agency for any instrument such

as CP / FD, this will be taken into account while arriving at the final decision. However

as the credit rating involves additional expenditure, we would not normally insist on this

and only Use this tool if such an agency had already looked into the company finances.

b) Term Loan

(i) In case of term loan & deferred payment guarantees, the project report is

obtained from the customer, which may be compiled either in-house or by a firm

of consultants/ merchant bankers. The technical feasibility & economic viability is

vetted by the bank & wherever it is felt necessary, the Credit Officer would

seek the benefit of a second opinion either from the Bank’s Technical

Consultancy cell or from the consultants of the Bank/ SBI Capital Markets Ltd.

(ii) Promoter’s contribution of at least 20% in the total equity is what we normally

expect. But promoters’ contribution may vary largely in mega projects. Therefore

there cannot be a definite benchmark. The sanctioning authority will have the

necessary discretion to permit deviations.

(iii) The other basic parameter would be the net debt service coverage ratio i.e.

exclusive of interest payable, which should normally not go below 2. On a gross

basis DSCR should not be below 1.75. These ratios are indicative & the

sanctioning authority may permit deviations selectively.

(iv) As regards margin on security, this will depend on Debt: Equity gearing for the

project, which should preferably be near about 1.5: 1 & should not in any case be

above 2:1, i.e., Debt should not be more than 2 times the Equity

contribution. The sanctioning authority in exceptional cases may permit

deviations from the norm very selectively.

(v) Other parameters governing working capital facilities would also govern Term

Credit facilities to the extent applicable.

@ Required Documents for Process of Loan

1) Application for requirement of loan

2) Copy of Memorandum & Article of Association

3) Copy of incorporation of business

4) Copy of commencement of business

5) Copy of resolution regarding the requirement of credit facilities

6) Brief history of company, its customers & supplies, previous track records, orders

in hand. Also provide some information about the directors of the company

7) Financial statements of last 3 years including the provisional financial statement

for the year 2007-08

8) Copy of PAN/TAN number of company

9) Copy of last Electricity bill of company

10) Copy of GST/CST number

11) Copy of Excise number

12) Photo I.D. of all the directors

13) Address proof of all the directors

14) Copies related to the property such as 7/12 & 8A utara, lease/ sales deed,

2R Permission, Allotment letter, Possession

15) Bio-data form of all the directors duly filled & notarized

16) Financial statements of associate concern for the last 3 years

@ Delegation of Powers

1. A scheme of Delegation of Powers comprehensively documented in 1985

and amended from time to time is in operation in the Bank in respect of

financial and administrative matters for exercise by the various functionaries.

This is based on the premise that an executive is required to exercise only

those powers which are related to the responsibilities and duties entrusted to

him/her. In exercising the powers, the authorities concerned are required to

ensure compliance also with the relevant provisions of the State Bank of India Act

and the State Bank of India General Regulations and any rules, regulations,

instructions or orders issued from time to time by appropriate controlling

authorities.

2. The Scheme of Delegation of Financial powers for advances and allied matters in

the Bank has a graded authority structure. The Executive Committee of the Central

Board (ECCB) has full powers for sanctioning credit facilities. The sanctioning

powers have been delegated down the line to Committees of officials at

various administrative offices and individual line functionaries.

3. An appropriate control system is also in operation in tune with the

Delegation structure. The powers, exercised by various functionaries, are

required to be reported to the next higher authority as laid down in the

Scheme of Delegation of

Financial powers.

SN PARTICULARS LIMITS CCCC WBCC CCC-I CCC-II NLCC AGM

SB-1 &

SB-2OVERALL 500.00 250.00 100.00 50.00 FBL 7.50 2.00

1.25

1 CORPORATESTL NA NA 35.00 15.00 TL 5.00 (WC-1.00)

OTHERS OVERALL 400.00 200.00 70.00 35.00 NFBL 7.50 1.00

TL NA NA 20.00 10.00 OVERALL 15.00 3.00

SB-1 &

SB-2OVERALL 60.00 60.00 40.00 20.00 FBL 5.00 1.00

1.00NON-

2CORPORATES

TL NA NA 10.00 5.00 TL 3.00 (WC-0.60)

OTHERS OVERALL 50.00 50.00 30.00 15.00 NFBL 5.00 0.60

TL NA NA 8.00 4.00 OVERALL 10.00 1.20

SB-1 &

SB-2OVERALL 15.00 15.00 15.00 6.00 FBL 2.00 1.00

1.00

3 INDIVIDUALSTL NA NA - - TL - (WC-0.60)

OTHERS OVERALL 10.00 10.00 10.00 5.00 NFBL 2.00 0.60

TL NA NA - - OVERALL 4.00 1.20

@ Pricing (Factors deciding interest rates and other charges)

1. Pricing of loans up to Rs.2 lacs will be as prescribed by RBI. In line with RBI

guidelines, he Bank announces from time to time its single Benchmark Prime

Lending Rate (BPLR), i.e., reference / indicative rates at which the Bank would lend

to its best customers. The BPLR would be referred to as State Bank Advance Rate

(SBAR) in our Bank. Interest rate without reference to SBAR could be charged in

respect of certain categories of loan / credit like discounting of bills, lending to

intermediary agencies etc. Interest rates below SBAR could be offered to exporters

or other credit worthy borrowers including public enterprises on the lines of a

transparent and objective policy approved by the Bank's Board. All other loans are

to be priced on the basis of Bank's SBAR with the pricing being linked to grade of

the risk in the exposure. The maximum spread over SBAR which could be charged

by the Bank will be decided by the Bank from time to time. Within such ceiling,

the pricing for various credit facilities, schemes, products, credit related services

etc. Bank may also price floating rate products by using market benchmarks (e.g.

MIBOR etc.) in a transparent manner as per Board approved policies.

2. An internal Credit Risk Rating system covering all advances of Rs.25 lacs and

above in C&I, SSI segments have been put in place to facilitate structured

assessment of credit risks. The system enables evaluation of the fundamental

strength of the borrower so as to charge a graded rate of interest based on

different ratings. However, taking into consideration the trends in movement of

interest rates and market competition, the Bank has also adopted an

appropriate authority structure to facilitate competitive pricing of loan products

linked both to risk rating and overall business considerations.

3. Bank has introduced fixed interest rates in respect of certain categories of loans

in personal segment e.g. housing term loans to individuals. Fixed interest rates are

also extended for commercial loans, albeit highly selectively.

4. Pricing of Bank's funds and services while being basically market driven is

also determined by two important considerations, i.e., minimum desired

profitability and risk inherent in the transaction.

At the corporate level, the applicable price for a particular advance or service

is fixed taking into account the marginal cost of Bank's funds and desired rate of

return as calculated from indices like profitability levels and return on capital

employed. In case of corporate relationship where the value of connections and

overall potential for profitability from a particular account are more

Important than a particular transaction, the price is fine tuned even to level of no-

loss- no-profit in the transaction. For long term exposures, the factors that weigh

are the rate charged by the financial institutions, the period of exposure, and the

pattern of volatility in the interest rates and the expected movement of the

rates in the long term perspective.

@ Credit Monitoring & Supervision

1. Broadly, the objectives of post-sanction follow up, supervision and monitoring

are as under:

(a) Follow up function:

Ø To ensure the end-use of funds.

Ø To relate the outstanding to the assets level on a continuous basis.

Ø To correlate the activity level to the projections made at the time of the

sanction/renewal of the credit facilities.

Ø To detect deviation from terms of sanction.

Ø To make periodic assessment of the health of the advances by noting some of

the key indicators of performance like profitability, activity level, and management of the unit and ensure that the assets created are effectively utilized for productive purposes and are well maintained.

Ø To ensure recovery of the installments of the principal in case of term loans as per the scheduled repayment programmers and all interest.

Ø To identify early warning signals, if any, and initiate remedial measures thereby averting the incidence of incipient sickness.

Ø To ensure compliance with all internal and external reporting requirements

covering the credit area.

(b) Supervision function:

Ø To ensure that effective follow up of advances is in place and asset quality

of good order is maintained.

Ø To look for early warning signals, identify ‘incipient sickness’ and initiate proactive remedial measures.

(c) Monitoring function:

Ø To ensure that effective supervision is maintained on loans / advances and

appropriate responses are initiated wherever early warning signals are seen.

Ø To monitor on an ongoing basis the asset portfolio by tracking changes from

time to time.

Ø Chalking out and arranging for carrying out specific actions to ensure high

percentage of ‘Standard Assets’.

Chapter 9

Proposals and Analysis

Pr o p o s a l: I – G D P L t d .

D e ta i ls of P ropos a l

Company : GDP Ltd. (GDPL)

Constitution : Public Limited Company

Industry : Fertilizers & Chemicals

Segment : C& I

Date of Incorporation : 10th May, 1976

Banking with SBM since : New Connection

Banking arrangement : Consortium

Regd. & Admin. Office : Narmadanagar, Dist. Bharuch, Pin No: 392 015Gujarat State

Company Overview:

GDPL was incorporated in May 1976 and commenced production in July 1982 with

its Ammonia-Urea complex on stream. The plant, located at Bharuch, Gujarat State (in

Western India), is well connected by road and rail trunk routes. The plant, one of the

world’s largest single stream Ammonia-Urea facilities, is based on fuel oil feedstock

with an installed capacity of 1350 tonnes per day (TPD) of Ammonia and 1800 TPD

of Urea. GDPL is the largest fuel-oil based Ammonia plant and was the first largest

single stream Urea plant in the world when commissioned.

Subsequently, the company diversified into the manufacture of other fertilizers

and industrial chemicals, primarily with a view to increase margins and utilizing the

surplus Ammonia capacity. The company’s foray into chemicals was aimed at value

addition to

Various gases produced in Ammonia Plant. It initially started with a 20,000 TPA

Methanol plant in 1985 and then, in March 1991, 1,00,000 TPA Methanol plant was

commissioned, which is one of the largest in the country. The company ventured

into Formic acid production to utilize excess Carbon monoxide gas generated in the

Ammonia plant. The 17

TPD plant was commissioned in 1989. The Acetic Acid plant was set up in 1995 and it

was the first Methanol based plant in India (all other Acetic Acid plants in India are Ethyl

Alcohol based). The 50,000 TPA plant was based on the technology provided by BP

Chemicals, UK. GDPL is the only company in the world to whom BP Chemicals, UK has

sold the technology as a Licensor, as it insists on forming joint ventures with all

companies where it provides technology.

Almost fifteen projects of the company are now operating at over 100% capacity

utilization. The company is now one of the largest manufacturers of CNA and WNA

in the country. Recently, PKI project has been selected for CSI e-Governance award for

the best deployment of technology.

Shareholding Pattern:

% Shareholding

25.5

4.54.6

13.4

0.20.10.3

10.2

41.2

Promoters

Mutual Funds

Banks, FIs & Insure. Cos

FIIs

Bodies Corporate

Indian Public

Other Trust

C.M. pool account

Custodian

Proposal:

To Sanction:

Ø Term Loan of Rs.100.00 crores (out of the total debt of Rs.2001.11 crores)

Repayable in 9 years (Including 2 years disbursement and 6 months moratorium

period)

To Approve:

Ø Concessionary interest rate of 1.00% below SBAR; presently 11.25% p.a. Floating (i.e.1.75% below SBMPLR)

Ø Reduce upfront fee of 0.10% for the Term Loan.

Ø Nine months’ time to the company (from the date of signing of Common Loan Agreement) for creation of stipulated security in favour of the Bank

Project/Purpose:

For various investments including TDI(Toluene Di Isocyanate) Complex at Dahej, Cogen

Power & Steam Plant, WNA/CNA Plant, Wet Sulphuric Acid Plant, 21 MW Wind Power

Project and various other revamp jobs at Bharuch.

Performance and Financial Indicators (Rs. in crores)

Actual2007

Actual2008

Estimates(Current year)

2009

Projections(Next Year)

2010As on 31.03

Net sales 2739.27 3433.92 2869.70 3055.70

(Exports) --- --- --- ---

Operating profit 575.84 638.32 423.14 500.82

PBT 489.30 576.21 228.18 296.85

PBT/ Net sales % 17.86 16.78 7.95 9.71

PAT 326.46 372.88 152.56 198.47

Cash accruals 435.97 483.31 316.46 375.47

PBDIT 575.84 638.32 423.14 500.82

PUC 155.42 155.42 155.42 155.42

TNW 1802.51 2061.64 1918.99 2036.50

Adjusted TNW 1802.51 2061.64 1918.99 2036.50

TOL / TNW 0.5 0.4 1.47 1.84

TOL / Adjusted

TNW

0.5 0.4 1.47 1.84

Net working capital 870.61 715.31 717.86 647.54

Current ratio 2.60 2.50 2.00 1.88

External Rating

In April 2008, ICRA has assigned credit rating to company’s fund based and non-fund

based limits. It had assigned LAA (L double A) rating, indicating high-credit quality

to the Rs 430.00 crores fund based limits and A1+ (A one plus) rating, indicating

highest credit quality in the short term to the Rs 400.00 crores non fund based limits of

GDPL.

Cost of Project & Means of finance: (Rs. in crores)

COST OF PROJECT MEANS OF FINANCE

Particulars Amount Particulars Amount

Project Land Cost 50.96 Equity Component 857.62

Land Development and Civil work 202.86

License, know-how and Basic

Engineering221.04

Plant & Machinery 1877.61 Debt component 2001.11

Pre-operating Expenses 37.84

IDC & Financing Cost 309.13

MMWC 37.61

Contingency 121.67

Total 2858.73 Total 2858.73

Funds flow analysis:

Only brief observations regarding cash accruals as well as projections, repayment of

TLs, infusion of E / QE, investments in fixed assets / Dividends, Retentions of

profit and diversion if any is as follows:

(Rs. in crores)

FY endingMarch

2009 2010 2011 2012 2013 2014 2015 2016

Sources

PAT 152.56 198.47 194.98 221.25 258.18 273.73 273.25 324.43

Deferred Tax 22.34 (10.52) 66.93 55.60 (8.50) (21.35) (31.76) (10.00)

Depreciation 163.90 177.00 288.51 285.14 285.14 285.14 283.56 192.06

Increase in

Short Term

Debt

667.83 -- --- --- --- --- --- ---

Increase in

Project Debt--- 1490.83 510.28 --- ---- ---- --- ---

Sale of

Investment(Ex

isting Bonds)

248.26 --- --- --- --- --- --- ---

Total Sources 1254.89 1855.78 1060.70 561.99 534.82 537.51 525.05 506.49

Uses

Increase in

Net Working

Capital

80.15 6.46 32.28 4.95 3.26 (0.15) (0.20) (0.30)

Repayment of

Short Term

Borrowings

-- 667.83 --- --- --- --- --- ---

Repayment of

Existing Debts4.69 --- --- --- --- --- --- ---

Repayment of

Project debts--- --- --- 210.12 290.16 300.17 300.17 300.17

Social Welfare

Contribution5.70 7.42 7.38 8.27 9.65 10.24 10.21 12.11

Dividend 73.55 73.55 73.55 73.55 73.55 73.55 73.55 73.55

Project Capex 777.43 1161.93 728.96 --- --- --- --- ---

Other Capex 82.50 21.39 21.39 21.39 21.39 21.39 21.39 21.39

Total Uses 1024.02 1938.57 863.56 318.28 398.01 405.18 405.12 406.91

Surplus 382.29 299.49 496.63 740.35 877.16 1009.49 1129.42 1229.0

Commercial Viability: (Rs. in crores)

Particulars 2009 2010 2011 2012 2013 2014 2015 2016

Sales 2875.13 3078.85 3594.27 4143.15 4256.33 4290.84 4273.38 4255.89

Net Profit 152.56 198.47 194.98 221.25 258.18 273.73 273.25 324.43

Depreciation 163.90 177.00 288.51 285.14 285.14 285.14 283.56 192.06

Interest 0.06 --- 57.53 221.07 189.57 155.34 120.82 86.30

Deferred

Taxes22.34 (10.52) 66.93 55.60 (8.50) (21.35) (31.76) (10.00)

Less Social

Welfare

Contribution

5.70 7.42 7.38 8.27 9.65 10.24 10.21 12.11

Total 333.16 357.52 600.57 774.78 714.736 682.61 635.65 580.68

TL/DPG

Repayment4.69 -- -- 210.12 290.16 300.17 300.17 300.17

Interest 0.05 --- 57.53 221.06 189.57 155.33 120.81 86.29

Total 4.74 -- 57.53 431.18 479.73 455.50 420.98 386.46

DSCR --- --- 10.44 1.80 1.49 1.50 1.51 1.50

Min DSCR 1.49

Average DSCR 1.74

Security Margin: (Rs. in crores)

Particulars 2009 2010 2011 2012 2013 2014 2015 2016

WDV of fixed

assets1369.03 1467.47 3456.03 3192.28 2928.53 2664.78 2402.62 2231.94

Aggregate

TL/DPG

outstanding

4.69 --- --- 2001.13 1791.01 1500.85 1200.68 900.51

Security

Margin

Available

1364.34 1467.47 3456.03 1191.15 1137.52 1163.93 1201.94 1331.43

% of Margin --- --- --- 59.52 63.51 77.55 100.10 147.85

Break even and sensitivity analysis and whether acceptable:

Scenarios Min DSCR Avg. DSCR

Base Case 1.49 1.74

Increase in Capex by 10% 1.38 1.61

Increase in Opex by 5% 1.21 1.44

Fall in Revenue by 5% 1.14 1.37

Increase in Interest Rate by 50 bps 1.46 1.71

Social benefit cost @ 30% and tax deductibility @ 50% 1.25 1.51

Comment:

It can be seen from above, that in all the above scenarios the debt service capacity of the Company is satisfactory.

Deviations in Loan Policy

Company’s levels as on

31.03.2008Parameters Indicative Level

1. Liquidity Min 1.33 2.5

2. TOL/TNW Max 3.00 0.5

3. Promoters’ contribution to the

project (TL)Min 20% 30%

4. Average Gross DSCR (TL) Min 1.75 1.74

5. Debt / Equity Max 2:1 2.32:1

An a l y s i s – G D P Ltd.

Ø The Company is a profit earning and dividend paying company.

Ø The main chunk behind giving loan is that globally there are limited players in

TDI manufacture and the technology is closely guarded. GDPL’s Plant is the only TDI

plant in SAARC region and TDI production is licensed in India.

Ø Considering the company’s implementation capability and past track record of different

Projects, no delay or cost overrun in implementation of various projects is envisaged.

Ø The promoters are having considerable experience and market presence in the

field where the bank is financing.

Ø The demand estimated by TSMG indicates that there will be sufficient domestic

and export demand potential for TDI production of the company as the company

being the only seller of TDI in the South East Asia region will have no problem in

marketing the product.

Ø The promoters’ contribution to the project is 30% which is considerable and is above

the margin requirement.

Ø The current ratio was 2.5, which is satisfactory.

Ø Profits have increasing trend for the last two years and projections are also satisfactory.

Ø TOL/TNW should be maximum 3, which is 0.5 here, as the company has

done consortium banking arrangement and it has also outstanding loans with

other banks, still the company is being able to maintain the lower TOL/TNW ratio.

Ø The bank also checks commercial viability of the company & found that the DSCR

for term loan is 1.74 instead of 1.75 which is not satisfactory as per credit policy but

looking to the other areas and future prospect of the company TL has been

sanctioned.

Ø Further, the bank has also done B.E. analysis & found that in all the scenarios the

debt service capacity of the Company is satisfactory

Ø The bank has significantly higher Debt to Equity ratio but based on the

various implementation, costing, financing, profitability, operating assumptions

and subject to

the risks & sensitivities enumerated the overall debt to equity of the company has

been considered as satisfactory.

Ø The net sales & PAT of the company is increasing year after year so overall

profitability is good.

Remarks:

Here bank has sanctioned loan to the company, but there are some issues which seems

to be ignored due to its reputation and future prospects.

1) DSCR is not as per the hurdle score

2) Debt to equity ratio is above the maximum limit prescribed

3) Interest rate charged, is also low as compare to other lending arrangements

4) As the term loan has maximum limit of 8 yrs. still bank has sanctioned this

corporate loan for 9 yrs. which will come back after 11.5 yrs.

Pr o p o s a l: II – CAB L t d .

D e ta i ls of P ropos a l

Company : CAB Ltd. (CABL)

Constitution : Public Limited Company

Industry : Infrastructure

Segment : C & I

Date of Incorporation : 26th May, 1998

Banking with SBM since : New Connection

Banking arrangement : Syndication of term loan

Regd. & Admin. Office : CAB HouseMahalakshmi Six Roads, Paldi,

Ahmedabad- 380

013

Company Overview:

CABL’s Port is located in the Kutch District in the State of Gujarat on the northwest

coast of India. Initially, Gujarat Maritime Board (GMB) granted permission to

CABL for the construction of a captive jetty at Mundra Port. Subsequent to the

announcement of Port Policy and BOOT guidelines, which envisaged privatization

of the construction and operations of new wharves / jetties at selected site, Mundra

was identified for development of a direct berthing deep-water port in the joint sector.

CABL received approval as a developer of a multi-product SEZ at Mundra and

the surrounding areas from the Government of India on April 12, 2006, making it one

of the first port-based multi-products SEZ in India. CABL is the conservator and

developer of the Mundra Port including jet-ties / quays, SPMs, rail-road -pipeline

connectivity, pilot age and related ancillary facilities.

Shareholding Pattern:

% Shareholding

0.05

18.66 Promoters andPromoter Group

Directors

81.29

Public Holdings+ Institutions

Proposal:

To sanction

Ø A Rupee term loan and FCNR (B) interchangeable limit of Rs. 100.00 crores

(out of total debt of Rs.1178.50 crores) to part finance the company for

developing a dedicated coal terminal to cater to the imported coal requirement

of the two power plants; payable in 13.5 years (construction and moratorium

period of 3.5 years+ repayment period of 10 years).

To Approve:

Ø Reduced interest rate of 12.00% p.a. (1.25% below SBMPLR)

Ø Reduced upfront fee of Rs.20.00 lacks (Banks standard rate 1.25% of loan amount).

Ø Tenor of loan -13.5 years (Banks norms of 8 years)

Ø To approve CRA rating of SBMTL-2 based on unaudited balance sheet of 31.03.2008.

Purpose:

To part finance for developing a dedicated coal terminal to cater the imported

coal requirement of the two power plants. Out of the two power plants, one is of CAB ltd.

Performance and Financial Indicator (Rs. in crores)

Year ended March 31, Aud. 2006 Aud. 2007 Un Aud. 2008

Net Sales 384.50 579.70 818.20Operating Expenses 173.40 272.10 282.80EBIDTA 211.20 307.60 535.40EBIDTA/ Net Sales (%) 55% 53% 65.4%PBT 116.20 174.90 366.80PBT/ Net Sales (%) 30% 30% 44.8%PAT 67.20 187.40 213.40PAT/ Net Sales (%) 17% 32% 26.10%Share Capital 183.00 363.20 403.40Reserves & Surplus 409.90 377.30 2269.10TNW 1056.30 1529.00 3531.10Investments (in group companies) 122.80 78.90 256.10Adj. TNW 933.50 1403.00 3279.00Secured Loans 891.90 1281.30 1884.70Unsecured Loans 69.90 0.90 21.90Total Outside Liabilities (TOL) 1226.20 1554.20 2200.10TOL/TNW 1.2 1.0 0.62Adj. TNW 1.3 1.1 0.67Net Fixed Assets 1485.80 1983.50 2841.80Total Debt 961.80 1282.20 1906.60Total Debt /TNW 0.9 0.9 0.54Current Asset 262.20 555.80 1398.90Current Liability 199.30 224.90 293.30

Current Ratio 1.30 2.50 4.76

Rating & Pricing

Working capital Term loan

Existing Proposed Existing Proposed

CRA --- ---- ---- SBMTL-2

Pricing --- --- --- 1.25% belowSBMPLR

ICRA had assigned LA+ rating to bank limits of CABL inOther ratings, if available

July, 2008.

Cost of the project and Means of finance:

The estimated Project Cost of Rs. 1964.20 crores is proposed to be funded at a debt-

equity ratio of 60:40 and the break-up of means of finance is given below:

Source of Funds Amount % of Project Cost

Equity Share Capital 785.70 40%

Debt 1178.50 60%

Total Project Cost 1964.20 100%

Funds flow analysis

Projected Cash Flow of the Project

(Rs. in crores)

FY 2009 2011 2013 2015 2017 2019 2021 2023

Sources of Fund

PAT+

Depreciation +

Non cash items

0.00 83.65 459.26 568.80 659.29 758.26 832.62 933.56

Equity 374.20 291.10 --- --- --- --- --- ---

RTL 26.88 436.67 --- --- --- --- --- ---

Bank Borrowings --- --- --- --- --- --- --- ---

Total 401.08 811.43 459.26 568.80 659.29 758.26 832.62 933.56

Uses of Funds

Capital

Expenditure401.8 727.78 --- --- --- --- --- ---

Change in

Working Capital--- --- --- --- --- --- --- ---

RTL repaid --- --- 117.85 117.85 117.85 117.85 117.85 ---

Dividend Paid

during the period--- --- --- --- --- --- --- ---

Total 401.80 727.78 117.85 117.85 117.85 117.85 117.85 ---

Net Cash Flow --- 83.65 341.41 450.95 541.44 640.41 714.78 933.56

Commercial Viability:

Ø Projected profitability statement of the project (Rs. in crores)

March 31 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

No of days 182 366 365 365 365 366 365 365 365 366

Throughput

(in MMTPA)4.6 15.5 26.0 28.0 31.0 31.0 31.0 31.0 31.0 31.0

Total

Revenue189.91 522.54 827.28 888.41 968.43 1035.14 1071.25 1108.98 1187.03 1228.26

O&M

expenses33.44 118.95 198.67 218.58 243.55 260.77 271.47 284.61 302.87 317.44

EBITDA 156.47 403.59 628.61 669.83 724.88 774.37 799.78 824.38 884.16 910.82

EBITDA

margin%82.4 77.2 76.0 75.4 74.9 74.8 74.7 74.3 74.5 74.2

Depreciation 41.83 83.88 83.88 83.88 83.88 83.88 83.88 83.88 83.88 83.88

Int. on RTL 67.58 134.20 121.99 108.44 94.88 81.54 67.78 54.22 40.67 27.18

Pre Exp. 0.33 0.66 0.66 0.66 0.66 0.33 0.0 0.0 0.0 0.0

PBT 46.73 184.84 422.07 476.85 545.46 608.62 648.12 686.27 759.60 799.76

Tax 5.24 20.74 47.36 53.50 61.20 68.29 72.72 77.00 85.23 89.73

Def Tax Prov. 0.0 0.0 0.0 21.56 23.31 16.37 10.41 5.30 0.90 -2.89

PAT 41.49 164.10 374.72 401.79 460.94 523.96 564.99 603.97 673.48 712.92

PAT/

Revenue %21.8 31.4 45.3 45.2 47.6 50.6 52.7 54.5 56.7 58.0

Ø DSCR Calculations (Rs. in crores)

FY 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Revenue 189.91 522.54 827.28 888.41 968.43 1035.14 1071.25 1108.98 1187.03 1228.26

Less: Op

Costs33.44 118.95 198.67 218.58 243.55 260.77 271.47 284.61 302.87 317.44

Less: Tax

Paid5.24 20.74 47.36 53.50 61.20 68.29 72.72 77.00 85.23 89.73

Cash Flow

available for

debt

servicing

151.23 382.85 581.25 616.33 663.68 706.08 727.06 747.38 798.93 821.09

Int. on RTL 67.58 134.20 121.99 108.44 94.88 81.54 67.78 54.22 40.67 27.18

Principal

Repayment

for RTL

0.0 58.92 117.85 117.85 117.85 117.85 117.85 117.85 117.85 117.85

Total Debt

Servicing

Requirement

67.58 193.13 239.84 226.28 212.73 199.39 185.63 172.07 158.52 145.03

Annual DSCR 2.2 2.0 2.4 2.7 3.1 3.5 3.9 4.3 5.0 5.7

Security Margin: (Rs. in crores)

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

WDV 2841 3667 4523 5392 5775 6203 6780 7670 8906 8583 8260 7937

Aggr. TL 1906 2041 2523 2664 2381 2048 1740 1477 1189 910 629 355

Security

Margin935 1626 2000 2728 3394 4155 5039 6192 7716 7672 7630 7581

% of

Margin49 79 79 102 142 202 289 419 648 842 1211 2130

Break even and sensitivity analysis:

The same has not been attempted in view of the project size and comfortable

DSCR of the project

Total Score Obtained

Particulars Max. Score Score Obtained Min. Acceptable

Financial Risk 25 20 11

Business Risk 25 25 10

Industrial Risk 10 6.875 5

Management risks 40 35.20 24

Total 100 87.07 50

Loan Policy Guidelines:

The following quantitative parameters as set out in the Loan Policy Document have been

examined.

Company’s levels as on

31.03.2008(Unaudited)Parameters Indicative Level

1. Liquidity Min 1.33 4.76

2. TOL/TNW Max 3.00 0.62

3. Promoters’ contribution to the

project (TL)Min 20% 40%

4. Average Gross DSCR (TL) Min 1.75 3.99

5. Debt / Equity Max 2:1 0.54:1

An a l y s i s–CAB L t d.

Ø The Company is one of the most successful private port operators and has positive

influence on the project implementation and operations.

Ø The project is being set up near the existing port of company at Mundra and,

therefore, the project is not likely to experience issues related with Greenfield port

project.

Ø India has severe power and energy shortages currently. The 2001 Census revealed

that only 55.8% of the households in India have access to electricity. Thus, GOI has a

vision of achieving “Power for all by 2012”. These signify the requirement of proposed

term loan.

Ø The promoters are having considerable experience and market presence in the field

where the bank is financing.

Ø Considering the company’s financial past track record, company has a good

proportion of liquidity. So we can anticipate that the project will utilize the term loan

purposefully and no issues related to shortage of working capital will be envisaged.

Ø The promoters’ contribution to the project is 40% which is considerable and is above

the margin requirement. This indicates promoters’ confidence in the project.

Ø The current ratio is 4.76, which is satisfactory.

Ø The net sales & PAT of the company is increasing year after year. So, overall

profitability is good.

Ø TOL/TNW is 0.62 here, which eligible the company to take extra credit to expand as

well as enter into new project.

Ø Considering the debt to equity proportion i.e. 0.54:1; company is able to achieve the

loan proposed.

Ø The Company has average gross DSCR of approx. 4 times which show a good credit

cover for the loan proposed.

Ø High liquidity and higher DSCR ensures there are less chances of nonpayment

of interest.

Ø SBM has a good credit cover in term of security margin over the term of the project.

Remarks:

Here bank has sanctioned loan to the company, but there are some issues which seems to

be ignored due to its reputation and future prospects.

1) Interest rate charged, is low as compare to credit policy of bank.

2) As the term loan has maximum limit of 8 yrs. still bank has sanctioned this

corporate loan for 10 yrs. which will come back after 13.5 yrs.

Pr o p o s a l: I I I – I M P L t d .

D e ta i ls of P ropos a l

Company : IMP Ltd.

Constitution : Private Limited Company

Industry : Service Sector

Segment : C & I

Date of Incorporation : 11th October, 1994

Banking with SBM since : July, 2005

Banking arrangement : Consortium

Regd. & Admin. Office : Jeevan Baug Society, Paldi,

Ahmadabad.

Company Overview:

IMP Ltd. is one of the Group companies of Jeevan Group. It was formed in the year 1994

with an objective to bring all the Service Activities of the group under one

umbrella/banner and to cater to the needs of NRIs especially from Gujarat who is settled

abroad. IMP Ltd is a group company of M/s Jeevan Ltd (one of the giants of

Pharmaceuticals industry) which has taken over the travel business of M/s GCTS Pvt. Ltd

w.e.f. 31.03.2003 under the scheme of merger and acquisition, along with seven

investment companies and internet business of M/s WC Pvt. Ltd.

Since last five years GCTS is licensed as Full Fledged Money Changers by Reserve Bank

of India. GCTS is handling foreign currency transactions of ICICI Bank as their Implant

in Mumbai and Gujarat Region. The Implant operations are in 3 branches of ICICI in

Mumbai and 8 in Gujarat. The money changing operations are being presently handled

at 18 cities across India.

The company is also engaged in the facility management. At present the co. is managing

guest house building at Mumbai, Delhi and Bangalore for Jeevan Ltd, apart from

managing guest house at Ahmadabad, canteen business center etc. for corporate office

and factory.

These facilities are provided to third parties, besides mainly to cater M group of

companies. The company is also engaged in various event management and various

consultancies, inside and outside the group.

IMP Ltd is also in the process of setting up further branches countrywide.

Proposal:

To Sanction:

Ø Fund based working capital limit sanctioned to the company to Rs. 11.00 crores

from Rs. 8.50 crores (Renewal with enhancement)

Ø Non-fund based working capital limit (BG) of Rs.1.84 crores (Renewal at the

existing level)

To Approve:

Ø Reduced rate of interest of 2.75% BELOW SBMPLR presently @1 0 .7 5 % p.a. (In

line with the consortium leader)

Ø Continuation of concessionary BG issuing charges 1.50% p.a. (as against 3.00%)

Name of the lead Bank and Names of other banks and their % share

Fund Based Non Fund Based

Existing Proposed Existing ProposedBank

Limit%

Share

Limit%

Share

Limit%

Share

Limit%

Share

Indian

Bank

(Lead

Bank) SBM

10.00 54 12.50 44 2.16 54 2.16 54

8.50 46 11.00 39 1.84 46 1.84 46

Bank of

Maharashtra--- --- 5.00 17 --- --- --- ---

Total 18.50 100 28.50 100 4.00 100 4.00 100

Performance and Financial Indicators:

2006-07

Audited

2007-08

Audited

2008-09

Estimates

2009-10

ProjectionsAs on 31.03

Net sales 762.84 600.91 796.30 1180.63

(Exports) (224.63) --- (115.20) (432.00)

Operating profit 5.69 7.09 8.73 10.85

PBT 2.65 3.47 4.04 5.27

PBT/ Net sales % 0.35 0.58 0.51 0.45

PAT 1.77 2.39 2.76 3.61

Cash accruals 3.24 4.19 4.89 5.95

PBDIT 7.62 9.06 10.96 13.30

PUC 3.00 3.00 3.00 3.00

TNW 21.77 22.83 24.73 27.46

Adjusted TNW 20.44 21.50 23.40 26.13

TOL / TNW 2.36 2.34 2.65 2.30

TOL / Adjusted TNW 2.21 2.20 2.50 2.18

Net working capital 7.87 9.12 12.76 13.35

Current ratio 1.33 1.34 1.33 1.34

Rating & Pricing

Working capital Term loan

Existing Proposed Existing Proposed

CRA SBM-3 SBM-3 N.A. N.A.

Pricing3.25% below

SBMPLR

2.75% belowN.A. N.A.

SBMPLR

Other ratings, if available The Company has assigned the job to ICRA.

Deviations in Loan Policy

Company’s levels as on31.03.2008

Parameters Indicative Level

1. Liquidity Min 1.33 1.342. TOL/TNW Max 3.00 2.343. Promoters’ contribution to the

project (TL)Min 20% N.A.

4. Average Gross DSCR (TL) Min 1.75 N.A.5. Debt / Equity Max 2:1 N.A.

Assessment of working capital facilities:

Indian Bank, the lead bank of the consortium, has assessed the working capital

requirement of the company. Our proposal is based on the appraisal done by the lead

bank and is as

Detailed below:

a) Inventory & receivable levels: (Months / Days)

(Rs. in crores)

Inventory / Payments Actual Estimated Projected

Raw material

Currency Export

Money Changer

--

5.54 (3.48 days)

3.05 ( 3.17 days)

6.33 (3.50 days)

3.55 ( 3 days)

6.96 (3.50 days)

FG 0.55 (24.66 days) 0.70 (27.50 days) 0.74 ( 27.50 days)

Receivables 18.81 (11.18 days) 26.24 ( 9.18 days) 27.84 ( 8.45 days)

Other CA 8.46 9.78 8.13

b) Assessed Bank finance

(Rs. in crores)

Particulars Actual Estimated Projected

Total Current Assets (TCA) 32.04 46.10 47.20

Other Current Liabilities (OCL) 5.85 6.07 6.68

Working Capital Gap 26.19 40.02 40.52

Net Working Capital 8.05 11.52 12.02

Assessed Bank Finance 18.14 28.50 28.50

NWC To Total Current Assets % 25.12 25.01 25.46

Bank Finance To TCA % 56.61 61.82 60.38

Other Current Liabilities to Total Current Assets % 18.25 13.16 14.15

S. Creditors To TCA % 7.27 6.29 6.67

Assessment of BG limit:

The company has requested for continuation of Bank Guarantee limit of Rs.4.00

crores (SBM share 1.84 crores). The Bank Guarantee limit is utilized for issue of

guarantees favoring American Express for supply of travelers’ cheque. The lead bank

has assessed the Bank guarantee limit at Rs.4.00 crores for the current year also as

under:

Expected sales of TCs (Rs. in crores)

Projected TC Stock 5.50

Margin proposed to Amex (75%) 4.12

BG Required 4.00

SBM share 1.84

Efficiency ratios:

Particulars Actual Actual Estimate Projection

Net Sales to Total Tangible Assets (times) 7.55 5.71 6.00 8.75

PBT to Total Tangible Assets (%) 2.62 3.30 3.04 3.91

Bank Finance to Current Assets (%) 58.57 56.61 61.82 60.38

Inventory + Receivables to Net Sales (days) 11 15 14 12

An a l y s i s–I M P L t d .

Ø Company is engaged in very sensitive activity of money changer but at the same

time company has diversified itself in activities like ticket booking, rent a

car, facility management, event management etc. to mitigate the risk factor.

Ø They have the backing of M/s Jeevan Ltd., a leading pharmaceuticals co.

Ø The conduct of the account is satisfactory, interest is being serviced regularly &

there is growth in business. Thus, proposed extension of the FB and NFB limits have

been given due consideration.

Ø Total Income for the year 2007-08 was Rs.2664.10 lacs as against Rs. 2425.95 lacs

for the year 2006-07 i.e. increase of 9.81%

Ø PBT has gone up to Rs.346.77 lacs in 2007-08 as against Rs.265.52 lacs in 2006-07

i.e. increase of 30.60%.

Ø PAT has gone up to Rs.238.82 lacs in 2007-08 as against Rs.176.97 lacs in 2006-07

i.e. increase of 35%

Ø Cash profit has gone up to Rs.708.79 lacs in 2007-08 as against Rs. 569.27 lacs in

2006- 07 i.e. increase of 24.50%

Ø The Business of the company proposes to expand overseas also and the

operational base of the travel division is even growing by entering into the field

of International Touring Operations along with Ticketing and Cargo Business.

Ø Interest rate charged is too low. But Consortium Leader Indian Bank has

recommended Rate of Interest @ 10.75%, so bank may also fall in line with the Lead

Bank.

Ø Operating cycle of the business is also satisfactory as we look at estimation of

inventory and receivables.

Ø No delay in the payment of interest and reporting has been observed in business

with the company.

Ø Looking to the past performance and current trend of achievement up to December 2009, the estimated sales is considered realistic and achievable.

Pr o p o s a l: IV - A B C E n ter p r i s e s L t d .

D e ta i ls of P ropos a l

Company/Firm : ABC Enterprises Ltd.

Constitution : Partnership Firm

Industry : Trading whole sale & retail

Segment : C & I

Date of Incorporation : April-1995

Banking with SBI since : New Connection

Banking arrangement : Sole Banking

Regd. & Admin. Office : 2, 3AanganArcade, Maktampur, Bharuch-392012.

Firm Overview:

M/s ABC Enterprise is engaged in the business of distribution of various branded

Glassware items, Crockery, Cutlery & other miscellaneous gift items in Gujarat State. It

also supplies corporate gift items to various institutions. The firm also distributes goods

under its own brand “KITCHEN’S” after outsourcing the manufacture and finishing and

packing at their end. The firm has wide network at Gujarat and is in the same line of

activity since 1984. The firm is having its outlets at Bharuch and Ahmadabad.

Proposal:To Sanction:

Ø Enhancement of Working Capital Limits from the existing level of Rs 60.00 lacs to

67.00 lacs under Traders Easy Loan Scheme.

Ø Renewal of Bank Guarantee Limit of Rs 1.50 lacs

Ø Sanction of Ad-Hoc Limit of Rs 6.50 lacs for a period of 3 months from the date of

disbursal (Expected 25.03.10)

Synopsis of Balance Sheet:

Sources of Funds As on 31st March 2008 2009

Share Capital (Partners capital account) 71.24 77.41

Reserves and Surplus -- --

Others (including Pref. Shares, debentures etc.) -- --

Secured Loans : Short term 31.76 28.97

Secured Loans : Long term 2.91 1.27

Unsecured Loans 51.01 52.62

Deferred Tax Liability -- --

Total 156.92 160.27

Application of Funds

Fixed Assets (Gross Block) 23.15 24.70

Less Depreciation 7.60 10.25

Net Block 15.55 14.45

Capital Work in Progress -- --

Investments -- --

Inventories 57.04 71.74

Sundry debtors 125.32 89.10

Cash & bank balances 8.30 2.87

Loans & advances to subsidiary/group companies 0.94 1.33

Loans & advances to others 6.90 9.33

Others -- --

Deferred Tax Assets -- --

Total Current Assets 198.50 174.37

( Less : Current liabilities ) 50.86 23.95

(Less : Provisions ) 6.27 4.60

Net Current Assets 141.37 145.82

Misc. Expenditure (To the extent not written off or adjusted ) -- --

Total 156.92 160.27

Performance and Financial Indicators (Rs in Lacs)

Audited

2007-08

Audited

2008-09

Estimates

2009-10

Projections

2010-11Sales/ Income 411.07 451.57 603.50 629.00

Net Profit 9.64 3.46 4.58 6.87

PBT/Sales (%) 3.09 1.25 1.26 1.65

Cash Accruals 12.37 6.11 7.08 9.07

Paid up Capital 71.24 77.41 80.00 83.00

TNW 71.24 77.41 80.00 83.00

TOL/TNW 2.00 1.44 2.31 1.85

Current ratio 2.18 2.94 1.90 2.23

Deviations in Loan PolicyCompany's level as on

31.03.2009Parameters Indicative

1. Liquidity Min 1.33 1.44

2. TOL/TNW Max 3.00 2.94

3. Average gross DSCR (TL) Min 1.75 N.A.

4. Debt / equity Max 2:1 N.A.

5. Promoters contribution Min 20% 30%

6. Prudential norms - Within limit

An a l y s i s- A B C E nt erpr i s es L t d .

Objective behind loan:

The unit has now received an order worth Rs. 1.02 crores from Pantaloons (India)

Ltd., Mumbai (through one of its associate concern viz. M/s Trade Links). The unit will

purchase the goods, viz., Coffee Set, Tea Set and other kitchen items and supply the

same to M/s Trade Links. Thereafter, packing of goods as per customer’s requirement

and logistics will be taken care by M/s Trade Links. M/s Trade Links has no bank

borrowing.

Management analysis:

Mr. M who is looking after the administration of the business is having an experience

of 30 years in this same line of activity and Mr. R, brother of Mr. M, who is a

graduate in B.E (Mechanical), is looking after the marketing of the products and is

having an experience of

25 years in this line of business and he himself handles the shop at Bharuch. Mr. S who is a

Science graduate and son of Mr. M handles the outlets situated at Ahmadabad.

Market analysis:

The credibility of the promoters of the firm in the market is very good and the firm

also enjoys a good reputation in the market. They have many good and reputed

companies as their consumers from which they gain orders every year during some

festivals season for some gift items. This proves that the firm has a good reputation in

the market and that the promoters are capable enough to attract new customers and

retain old customers. Even the new order gained by them from a big company such as

Pantaloons (India) Ltd. shows that the promoters are having good capability to bag

such a big order from such a big company.

Technical analysis:

The firm has a wide network in Gujarat and the promoters of the firm are in the same

line of activity since 1984. The firm is having its outlets at two places; one is situated

at BARODA the other is situated at AHMEDABAD. Both the outlets are under the

direct control of the Partners.

Financial indicators Analysis:

SALES: The unit had achieved sales of Rs 451.07 lacs as on 31.03.2009 with 9.73%

increase over the previous year. The unit is trading in variety of products and the

increase in sales cannot be appropriated to few specific products. The sales have been

estimated at Rs

603.50 lacs for the FY ending 2009-10 and the firm have already achieved sales of Rs

419.50 lacs as on 31.01.10. Looking into the present order in hand the estimated sales

for the year ending 2009-10 are considered as realistic and achievable.

PROFIT: Even though there was an increase in sales, the profit of the firm declined to Rs

3.46 lacs from the previous year’s profit of Rs 9.64 lacs. As said by the partner, it was

mainly on account of lower margins during the year on account of overall

recession in the economy.

TNW & TOL/TNW: By plough back of profits and by reducing the level of sundry

creditors, the TOL/TNW of the firm improved to 1.44 as on 31.03.09 from 2.00 as on

31.03.2008. But the ratio is estimated to decline to 2.31 as on 31.03.2010 with the full

utilization of Bank’s limit and raising of short term funds to execute the new supply

order. The ratio is still well within the Bank’s bench mark.

CURRENT RATIO: This ratio also improved to 2.94 from the existing level of 2.18 as

on 31.03.09. The ratio will be further estimated at 1.90 as on 31.03.2010 due to

above said reason. However the ratio is well within the banks bench mark.

In Brief:

Ø The partners are well experienced and qualified enough to successfully run the venture.

Ø The proposal complies with the loan policy guidelines and other aspects as laid

down by the Bank.

Ø The conduct of the account is satisfactory.

Ø The unit is eligible for working capital limit of Rs 67.00 lacs under Trades Easy Loan Scheme.

Ø The proposed exposure of Rs.75.00 lacs will be collaterally secured by mortgage

of immovable assets worth Rs.106.54 lacs, besides, personal guarantee of all the

partners.

Ø The overall financial position of the firm is satisfactory and the proposed exposure

is considered a fair banking risk.

@ Proposa l I & I

C o m p a r a t i ve A n a l y s i s o f t h e p r o p o s a l s

1) Both the proposals are new connection to the bank, applying for the term loan of Rs.

100 crores.

2) The bank has sanctioned both the loan after doing all credit analysis related to credit

policy of the bank. But some of very sensitive aspects have been neglected by the

bank.

3) In proposal I, the company has not attained the minimum level of DSCR still it gets

eligible for the loan at a comparatively low rate of interest than it has been charged

to the company in proposal II; having more than doubled DSCR from the required

level.

4) The same contradiction has been observed in debt to equity proportion. In

proposal I, company has a very high proportion of debt and its not falling under the

maximum level of credit policy whereas company in proposal II has sound D/E

proportion. This shows the bank’s liberal view towards the credit policy norms.

5) Both the proposals have been sanctioned at a concessional rate of interest i.e. below the SBMPLR.

6) The term loan has maximum limit of 8 yrs. still bank has sanctioned these

corporate loans for 9 yrs. and 10 yrs. which will come back after 11.5 yrs. and 13.5

years respectively. The decision seems to right one in term of extension of

tenure of loan; because both the project have investment in long term

developmental activities and are needs of society.

7) After going through both of the proposals, we can say that the management of both

the company have enough influence on the bank to get sanctioned their proposals.

Another view point is that the bank seems to be liberal and has sanctioned the

loan to comply with the proportion of priority and non-priority sector lending.

@ Proposa l III & IV:

1) Both the proposals are for the extension of the limit of working capital facility (FB)

provided by the bank.

2) They also proposed for the renewal of the bank guarantee at the existing level. The

difference is just that Proposal IV has also proposed for the cancellation the letter of

credit of Rs.7 lacs.

3) Both the firms’ Liquidity ratios & TOL/TNW are in the limits prescribed by the bank.

4) Looking at the past performance of the business, financial projections and other

parameters; no discrepancy has been found in both the proposals and therefore

bank has sanctioned their respective proposals.

5) Both the firms are regular in their code of conduct and doing periodic reporting and

bank also does regular visits to check the reported conditions and proper utilization

of funds to avoid default or credit risk.

Chapter 10

FindingsØ Credit Risk Management is done to check the commercial, financial & technical

viability of the project proposed its funding pattern & further checks the primary

or collateral security cover available for the recovery of such funds.

Ø Credit & risk go hand in hand. Credit is the core activity of the banks & important

source of their earnings. In the business world risk arises out of:

» Deficiencies / lapses on the part of the management

» Uncertainties in the business environment

» Uncertainties in the industrial environment

» Weakness in the financial position

Ø Bank’s main function is to lend funds/provide finance but it appears that norms are

taken as guidelines not as a decision making.

Ø A banker’s task is to identify/assess the risk factors/parameters and

manage/mitigate them on continuous basis.

Ø The CRA models adopted by the bank takes into account all possible risk factors

like financial, industrial, business, and management; which are rated separately.

Ø After analyzing proposals, we found that in some cases, loan is sanctioned due to

strong financial parameters.

Ø Where as in some cases, financial performance of the company/firm was poor,

even though loan was sanctioned due to some other strong parameters such as the

unit has got confirm order, the unit was an existing profit making unit,

management was very sound or the company is working in the developmental

needs of the society.

Ø Thus, we can say that bank considers the subjective matters which generally CRA

model ignores.

Chapter 11

Suggestions

After studying the CRA process and credit policy of bank, we are of the opinion that

the Bank is required to have a system for monitoring the overall composition and

quality of the various portfolios since credit related problems in banks are concentrated

within the credit portfolio. It can take many forms and can arise whenever a

significant number of credits have similar risk characteristics.

Also the Bank will not necessarily forego booking sound credits solely on the

basis of concentration. Bank may use alternatives to reduce or mitigate

concentration. Such measure includes:

1) Pricing for additional risk

2) Ask borrower to increase holdings of capital to compensate for the additional risk

3) Making use of loan participation in order to reduce dependency on a particular

sector of economy or group of related borrowers

4) Fixing exposure limits for borrowers and for various industrial sectors

5) Collateral security in addition to main securities stipulating asset coverage ratio on

case to case basis

6) Personal Guarantees / Corporate Guarantees having reasonable net worth

7) Escrow mechanism for meeting the financial commitments on time

Chapter 12

Conclusion

Credit risk management in today’s deregulated market is a challenge. To avoid

being blindsided, banks must develop a competitive Early Warning System which

combines strategic planning, competitive intelligence and management action.

Here in our study, SBM loan policy contains various norms for sanction of different

types of loans. These all norms do not apply to each & every case. SBM norms for

providing loans are flexible & it may differ from case to case.

The CRA models adopted by the bank take into account all possible risk factors to

mitigate the risk with a loan. These have been categorized broadly into financial,

business, industrial, and management risks.

Usually, it is seen that credit appraisal is basically done on the basis of

fundamental soundness. But, after analyzing different types of proposals, our conclusion

was such that, in SBM, credit appraisal system is not only looking for financial

wealth; other strong parameters also play an important role in analyzing

creditworthiness of the firm.

Out of the 5 proposals, in one proposal, loan was sanctioned despite of having poor

financial records. In another case, even the financial performance was good and loan

was defaulted due to management related issues.

In all, the viability of the project from every aspect is analyzed, as well as type of

business, industry, promoters, past records, experience, projected data and

estimates, goals, long term plans also plays crucial role in increasing chances of getting

project approved for loan.

At last we can say that…,

“…….…A bank’s success lies in its ability to assume and

aggregate risk within tolerable and

manageable limits”.

Bibliography

Books:

Credit Risk Assessment (CRA) system. State Bank of India, 2010.

Reports:

IBEF "Industry update: Banking." IBEF website. March 9, 2010. h ttp: // www .i b ef . org (Accessed March 9, 2010).

Websites: h ttp: / / www . g oo g le .co. in/

h ttp: / / www . w i k i p edia. c om/ (accessed Jan 9, 2010).

h ttp: / / www .r b i. g o v . i n / (accessed Jan 25, 2010).

h ttp: / / www . b a n k e r s i n d i a . c om/ (accessed Feb 2, 2010).

h ttp: / / www .s t a t e b a n k ofm y sore . c o . i n p ro f ile . h t m (accessed March 1, 2010).