Indian Overseas Bank Sip Report Loans And Advances Management

A REPORT ON

ADVANCES MANAGEMENT

BY

Soniya Sinha

ICFAI BUSINESS SCHOOL

1 ICFAI BUSINESS SCHOOL – KOLKATA
sinhasoniya87@yahoo.com

A REPORT ON

ADVANCES MANAGEMENT

BY

Soniya Sinha

INDIAN OVERSEAS BANK

Date of Submission: 17th MAY, 2009


AUTHORISATION
The report is submitted as partial fulfillment of the Masters in Business Administration (MBA)
Program of ICFAI Business School, Kolkata.


ACKNOWLEDGEMENT
I would like to thank Indian Overseas Bank for providing me an opportunity to work with them
and giving necessary guidance in completing the project to the best of my abilities.

I am obliged to Mr. Pal Basnotra, Chief Manager, Indian Overseas Bank, New Alipore, Kolkata,
who provided me the essential information and extended his best support.

I would like to extend special gratitude to Mr. Rakesh Kumar Niraj, Assistant Manager, Loans
and Advances Department, Indian Overseas Bank, New Alipore, Kolkata, for being my company
guide and providing me an insight into various issues pertaining to cases mentioned in the report.
This is his sincere support and consistent guidance that led to the completion of the project.

I am highly indebted to Prof. Dipanker Dey, for his mentorship and valuable suggestions that
gave an entirely new dimension to the project under consideration. His guidance gave immense
confidence and encouragement that helped me to put in my best.

Lastly, I would like to thank my colleague, Varun Vij for helping me with the project work.


LIST OF ILLUSTRATIONS
The illustrations are enlisted below along with their area of concern to bring forth an elucidate
understanding of the topics studied during the training period.

i) XYZ INFOTECH: Financial Analysis of Lending

ii) LIBERTY MARINE SYNDICATE LTD.: Financial Analysis, Packing Credit

iii) PRATIBHA CONSTRUCTIONS: Non Performing Asset, Legal Procedure

iv) Mr. NEAL RAJPUT: Education Loan, Non Performing Asset


TABLE OF CONTENTS
Authorization …………………………………………………………………………... i

Acknowledgement …………………………………………………………………...... ii

List of Illustrations ……………………………………………………………………. iii

1. Abstract ……………………………………………………………................... 8
2. Introduction …………………………………………………………………..... 10
2.1 Indian Banking History
2.2 Indian Overseas Bank
2.3 Scope of Study
2.4 Objective
2.5 Methodology
2.6 Outline of work
3. Main Text ………………………………………………………………………. 20
3.1 General Principles of Loans and Advances
3.2 Principles of Lending
3.3 BASEL II ACCORD: A Measure of Risk Adequacy
3.4 Lending and….
3.5 Types of Advances
3.6 What does a Transaction look like?
3.7 Financial Analysis of Lending
3.8 Method of Credit Rating
3.9 Method of Assigning Credit Limit and Drawing Power
3.10 Securities Used Against Lending
3.11 Calculation of EMI
3.12 Documentation
4. Case Analysis (XYZ Infotech) …………………………………………………. . 43


5. Export Credit ……………………………………………………………………. 60
6. Case Study (Liberty Marine Syndicate Ltd.) …………………………………… 61
7. Non Performing Assets …………………………………………………………. 70
8. Case Analysis …………………………………………………………………… 72
(i) Miscellaneous Cash Credit
(ii) Educational Loan
9. Some Problems related to Pre & Post Advances ……………………………….. 81
10. Conclusion ……………………………………………………………………… 82
11. Attachments …………………………………………………………………...... 83
12. References ………………………………………………………………………. 84
13. Glossary …………………………………………………………………………. 85


ABSTRACT
Financial sector reform in India has progressed rapidly on aspects like interest rate deregulation,
reduction in reserve requirements, prudential norms and supervision of risk. Though the progress
on the structural institutional aspects have been comparatively slower, major changes required to
take the Loans and Advances problem has gained importance.

Chennai based Indian Overseas Bank is one of the nationalized bank in India, that has a
substantive history since 1937. The bank not only deals in retail banking providing utility
services to its customers but has also expanded its area of operation in multidimensional services
like merchant banking, agri business consultancy and e-banking. It recently registered a core
profit of Rs. 1325 crores in the financial year March‟08-March‟09.

The report deals with a clear understanding of the lending procedures followed by Indian
Overseas Bank. It not only explains the basic concepts and the terminologies used in the banking
sector but also gives an insight into the legal aspects and the paper work required for final
sanction of a loan proposal.

Different types of advances, method of assigning credit limit and drawing power to individuals
and business units has been a part of the study during the internship period. The credit rating
methods applied by the banks to rate the credibility of the prospective clients, securities accepted
against lending and calculation of Equated Monthly Installments have also been discussed to
give an overview of the lending concept of the bank.

The most important part of the study includes case analysis of XYZ Infotech. This explains the
significance of financial ratios and credit rating of the client in a precise manner. The forecasting
of pecuniary status of the prospective borrower is shown by the study of balance sheets sand
other financial details furnished by the borrower and the bank.

Later, the report includes the final sanction of the loans, their regular monitoring and conversion
of accounts into standard or bad debts. The treatment of those Non Performing Assets and the
recovery of the same along with the legal procedure followed by the bank are discussed in great
detail.


A compendious note on NPAs brings about a clear understanding of the issues associated with
the recovery procedure of such assets and final treatment. The same has been explained lucidly
with the help of two cases that were witnessed during the Summer Internship Program.

Problems observed while rendering financial assistance to prospective borrowers are also
mentioned in brief. Finally, conclusion and recommendation as per the analysis during the
training period winds up the report.


INTRODUCTION

2.1 INDIAN BANKING INDUSTRY
Banks are the financial backbone of any country‟s economy. Without a sound banking system a
country cannot have a healthy economy. A bank is a financial institution which deals with money
and credit. It accepts deposits from individuals, firms and companies at a lower rate of interest
and gives it at a higher rate of interest to those who need them. The difference between the terms
at which it borrows and which it lends forms the source of profit, thus bank being a profit
earning institute. For the past three decades India‟s banking system has several outstanding
achievements to its credit. The most striking is its extensive reach to customers. It is no longer
confined to only metropolitans or cosmopolitans in India. In fact the Indian banking system has
reached even to the remote corners of the country. This is one of the main reasons for the India‟s
growth process.

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:

PHASE 1: early phase from 1786 to 1969 of Indian banks.

PHASE 2: nationalization of Indian banks and up to 1991 prior to Indian banking sector reforms.

PHASE 3: new phase of Indian banking system with the advent of Indian banking and financial
reforms after 1991.

The Indian banking can be broadly categorized into nationalized (government owned), private
banks and specialized banking institutions. The RBI acts as a centralized body monitoring any
discrepancies and shortcomings of the system. It is the foremost monitoring body in the Indian
financial sector. Since the nationalization of banks in 1969, the public sector banks have realized
the need to become highly customer centric that forced the slow moving public sector banks to
adopt a fast track approach.


The Indian Banking market is growing at an astonishing rate, with assets expected to reach US$
1 trillion by 2010. An expanding economy, middle class and technological innovations are all
contributing to this growth. The country‟s middle class accounts for over 330 million people. In
correlation with the growth of the economy, rising income levels, increased standard of living
and affordability of banking products are promising factors of continued expansion.

GROWTH OF INDIAN BANKING ASSETS (US$ billion)

1000
2000
900
2001
800
2002
700
2003
600
2004
500
2005
400
2006
300
2008
200
2010 E
100
0

WORTH OF ASSETS

The unleashing of products and services through the net has galvanized players at all levels of
the banking and financial institutions market grid to look new at their existing portfolio offering.
The Indian banking system has finally worked up to the competitive dynamics of the „new‟
Indian market and is addressing relevant issues to take on the multifarious challenges
nationalized banks have acquired a place of prominence.

Banking in India is highly fragmented with 30 banking units contributing to almost 50% of the
deposits and 60% of the advances. The nationalized banks (i.e. government owned banks)
continue to dominate the Indian banking arena. They continue to be the major lenders in the

economy due to their share size and penetrative networks which assures them high deposit
mobilization. Industry estimates indicate that out of 274 commercial banks operating in India,
223 banks are in public sector and 51 are in private sector. The private sector bank grid also
includes 24 foreign banks that have started their operations in India.

2.2 INDIAN OVERSEAS BANK
Indian Overseas Bank (IOB) was founded on 10th February 1937 and had distinction of three
branches at Chennai, Kasaikudi and Rangoon simultaneously commencing business on the
inaugural day. The founder Chairman was M.Ct.Chidambaram Chettiyar. It was started with a
vision to specialize in foreign exchange and overseas banking business in India. Before 1969, it
had ventured into consumer credit, had begun with computerization and had 195 branches in
India. In 1969, when it was nationalized, the bank had 208 branches and business mix of Rs 156
crores. IOB has gained AA rating by CRISIL for its primary issue and a rating of P1+ for its
term deposits.

IOB is currently one of the major banks based in Chennai, with 1845 domestic branches and 12
branches overseas. IOB also has an ISO certified in house information technology department,
which has developed the software that most of its branches use to provide online banking to
customers. IOB has a network of more than 500 ATMs all over India and IOB‟s international
visa debit card is accepted at all the ATMs. IOB offers internet banking (E-see banking) and is
one of the banks that the government of India has approved for online payment of taxes. IOB
provides various banking services, including saving bank, current account, credit facilities and
other services. IOB also provides non-residential Indian (NRI) services, personal banking,
foreign exchange reserves (FOREX) collections services, agri-business consultancy, credit card
and e-banking services. The bank is also engaged in merchant banking. IOB is the first public
sector bank in the country to introduce mobile banking services using wireless application
protocol (WAP). It was also the first public sector bank to introduce anywhere banking at its 129
branches in the four metros and is extending the connectivity to 100 other branches in
Hyderabad, Bangalore, Ahmadabad and Ludhiana.


In year 2000, it came out with a public issue of 11,12,00,000 shares of Rs 10 each for cash at par
aggregating Rs 111.20 crores. It also raised Rs 125 crores through bonds issue in year 2001. It
gained the rating of AA for the issue. Being ranked as the best public sector bank in India in
2007, it‟s key trade centers now include Singapore, Seoul, Hong Kong, Bangkok and Germany.

The Balance Sheet of the bank (Attachment -I) distinctly indicates the increase in both the
advances and deposits.

TOTAL ADVANCES AND DEPOSITS OF THE BANK

90000
80000
70000
Rs. IN CRORES

60000
50000
40000
30000
20000
10000
0
March' 05 March' 06 March' 07 March' 08
ADVANCES 26274 35759 47923 61748
DEPOSITS 44241 50529 68746 83204

In 2006, total business of the bank crossed Rs. 100,000 crores where as the total net profit
exceeded the same figure in 2007. As of September 2008, there were 1424 branches under Core
Banking Solution, 522 branches under Total Branch Automation and a number of branches
linked under services like NEFT and RTGS. IOB has been upgraded to „BBB‟ (long term)
rating by Standard and Poor‟s, third bank in India after SBI and ICICI.

The bank has a very strong foundation with a high profit margin and a low risk. The efficiency in
their management of funds is reflected in their past records where the balance sheets of last five


year‟s show that the net Non Performing Assets has been decreasing. The rate of deposits is not
as high as provided by the industry‟s giant State bank of India but by at the same time the loans
sanctioned by the bank have proved to be secured and successful. This in turn has led to a further
increase in total profit of the organization thereby fulfilling its prime objective of being a profit
earning enterprise. The latest audited reports reveal that the bank registered a net profit of Rs.
1325 crores in the financial year that ended on March, 2009 with an increase of almost 21% in its
total business.

2.3 SCOPE AND PURPOSE OF STUDY
The purpose of preparation of this report is to focus on the Lending function of banks with
specific reference to Indian Overseas Bank. The report states the following points:

The study gives an insight into the procedure followed by the Bank as per the norms of
the Reserve Bank of India and the Authority that governs the functioning of Indian
Overseas Bank. It also explains certain terminologies commonly used in the banking
industry.
The report states the different types of advances that are financed by the bank and their
classification as fund and non fund based advances.
The financial analysis of lending i.e. the study of balance sheets and other financial
accounts, to judge the credibility and repaying capacity of the prospective borrower is
done in great detail. The same is illustrated with the help of a practical case analysis
(XYZ Infotech) to build a better understanding of the importance and the procedure of
such a financial analysis.
It also helps us infer the risk involved in sanctioning of advances by imputing the
bankruptcy chances of the proposed borrower in quantitative terms applying Multiple
Discriminant Analysis. It also helps us understand the whole process of financial analysis
involved in appraising a loan.
This brings forth the method to assess the credit worthiness of the borrowers and estimate
the net worth of the assets owned by him, which assists the bank to ascertain the amount


that can be sanctioned to them. The extent to which the credit limit can be sanctioned and
drawing power be enhanced are also mentioned.
Other than this, the project deals with the securities that can be used against lending and
the calculation of Equated monthly Installments (EMI). Moreover procedure of follow
up, the repayment of loan in form of EMIs and credit monitoring lie under the realm of
scope of the study.
Further the documentation of the proposed advances and their final sanction forms
another major area that is taken into consideration.
Credit monitoring, identification of Non Performing Assets (NPA) and legal procedure
adopted by the bank in recovery of those advances forms the most significant part of the
study. The same is exhibited in various case studies that are included in the project to
give a better view, comprising of an integral part of the report.
The last topic discussed as per the schedule of the project involves an in depth study of
the problems related to pre and post sanction of advances and their possible solutions.
Certain conclusions and recommendations are made as per the analysis of the cases.

2.4 OBJECTIVE

The objective of the proposed project is to understand the entire process involved in successful
lending by the bank beginning from the financial analysis of lending of, identification of reliable
potential customer, legal sanction to monitoring of those accounts and their final recovery
procedure through scheduled EMI structure. This aims at analyzing the ways in which the bank
manages its Non Performing Assets (NPA). It includes identification of the problems associated
with pre and post advances and simultaneously finding out viable solutions and alternatives to
address those issues.

The project is likely to help organization understand the various issues related to the advances,
giving it certain solutions to reduce the loses due to non recovery of loans and maintain a


healthy trend line of decreasing net NPA thereby helping it to maintain a balance between its
deposits and advances and an increase in its percentage yield.

2.5 METHODOLOGY AND SOURCES OF DATA
The proposed methodology for fulfilling the objectives of the project is as follows:

The study of guidelines laid by the Reserve Bank of India and the governing authorities
of Indian Overseas Bank to be adhered to (pertaining to advances) as published in the
journals issued by these authorities from time to time.
The secondary data is deduced from the books of accounts maintained by the bank
(without disclosure of any personal details of the borrower).
The data from the official books as maintained by the bank, reference books, news letters
published by financial institutions and websites have been utilized for the analytical study
of advances made by bank.
The methodology includes a detailed study of the data collected from the bank, pre and
post requisites of lending, calculation of interest on loans and equated monthly
installments and documentation of the same.
The observation of advances sanctioned by the bank in the past few years that resulted
successful lending constitutes the most substantial part of the project work.
It also involves active participation in banking transactions and internal functioning of the
Advances Department of the branch. An elaborate study of loans and advances granted
by the branch and analysis of the same has been the most significant component of the
project.

Information mentioned in the cases are deduced from the books of accounts as maintained by the
bank branch, the figures and facts given being realistic in nature.

Finally, identification of the problems associated with advances by bank and the solution of the
same with certain recommendations is to be provided after analyzing certain loans (stated as
illustrations in the project) to help the advances department of the bank.


2.6 LIMITATIONS OF THE STUDY

The study of Advances Management pertaining to Indian Overseas Bank is subject to certain
limitations that are identified as follows:

As far as the illustrations and the case analysis included in the report are concerned, the
scope of study is limited to Indian Overseas Bank, New Alipore Branch, Kolkata.
The personal details related to the borrowers (cases under study that have also been
incorporated in the report) have intentionally not been revealed as per the norms of the
bank. Specific crucial financial details of the clients have also not been disclosed.
The secondary data collected and taken into consideration in order to fulfill the objectives
of the project includes published data from the journals, magazines and data available
from the website of the bank and other companies for general public.
It also includes the data gathered and observed during the daily functioning of the
Advances Department of above mentioned bank (excluding the data marked as critical
and confidential by the bank).
The data used for analysis includes the facts and figures from March,2004-March,2009
and at the same time the latest guidelines as laid down by the Reserve Bank of India are
strictly followed.
The scope is limited to the types of advances funded by bank branch and not all types of
advances. So Agricultural advances and advances against Shares and Unit Trust of India
(UTI) do not fall in the ambit of the study, therefore they have been excluded.

Further, the study serves the Advances Department of the bank branch to identify the issues
related to advances, maintain a decreasing trend in the net value of the Non Performing
Assets in future and minimize the formation of the same. All Summer Internship Program
(SIP) regulations laid down by the bank have been duly complied with.

LITERATURE SURVEY

2.6 OUTLINE OF THE WORK

The project proposed deals in Advances Management of Indian Overseas Bank, New Alipore,
Kolkata. The project is completed and discussed in detail as per the schedule stated in the project
proposal.

In the first phase, the project highlights the general concepts of loans and advances, which
familiarizes us with the terms used in this context. It then covers principles and practices of
lending as per the instructions laid down by the Reserve Bank of India and as received by the
bank from its governing authority.

The types of advances are classified as fund based and non fund based are described, giving an
overview of the various categories of advances. This section describes the term deposits, demand
loans, secured and unsecured loans including letter of credit and bank guarantee.

Later, it explains the financial analysis of different types of advances considering both the
business concerns and the advances to the individuals. The overdraft facility provided by the
bank, cash credit and estimation of drawing power along with the way it is to be calculated is
mentioned.

The financial analysis of lending forms an integral section of the report where an attempt is made
to explain the evaluation procedure of any proposal in hand. This analysis is distinctly illustrated
with the help of a case study where the financials of a company (that had requested for the
enhancement of its credit limit) are assessed to forecast its financial health and its capacity to
repay to in near future.

The credit rating method followed by the bank to ascertain the credit worthiness in case of both
individuals and business enterprises is discussed. The different parameters of judging the same
are mentioned along with the format used by the bank to rate any business concern and assess its
financial position.


As far as the short term credits are concerned the project incorporates the methods and concepts
applied by the bank to find credit rating of the customer, assigning of the credit limits and
calculation of drawing power. The credit worthiness of the potential customer and his repayment
capacity is estimated.

Calculation of Equated Monthly Installments (EMI) based on the amount of loan to be
sanctioned and the time duration required for repayment, including the prevailing interest rates as
per the norms of the RBI are expounded.

The securities accepted against lending, the collateral that the customer offers the bank, modes
of charging securities (lien, hypothecation, pledge, assignment, mortgage) and bank guarantee
required for particular credits is also studied under the project.

Credit documentation and sanction forms another major area of the study where all the
documents pertaining to the advances are enlisted along with their legal significance and the final
advance proposal is approved by the sanctioning authority.

Categorization of advance accounts as Non Performance Assets, factors leading to such a
consequence, its provision and treatment of such accounts are studied. The legal procedure of
their recovery through SARFESI Act 2002 and ultimately their management has been included
to give a more comprehensive idea of the subject matter.


MAIN TEXT

3.1 GENERAL CONCEPTS OF LOANS AND ADVANCES

BORROWER: A borrower being a party in the loan agreement that receives money and
promises to repay it. He may bring a very attractive lending proposition. The banker needs to
know about the character, capacity and capital of the prospect. The borrower may comprise of an
individual, a firm, a company, an HUF or any other business concern.

PURPOSE: The purpose for which a borrower seeks finance should not be anti social and anti
national. The finance required should be proposed to be used for a good cause, the objective
being legal in the eyes of law.

BORROWER’S STAKE OR MARGIN: The term margin refers to that portion of the loan that
needs to be contributed by the borrower. This is most likely to sustain commitment of the
borrower throughout the life of the venture. The percentage of margin is fixed by considering
certain factors like borrower‟s capacity to bring in capital, nature of business, level of risk,
guidelines of RBI, etc.

INTEREST: Interest income refers to the profit that any lending would generate. It is the return
on the advances granted by the bank. The interest amount should be sufficient enough to cover
the cost of lending i.e. it should cover the estimated risk involved and simultaneously generate
enough revenue to fulfill banks prime objective of being profitable.

SECURITY: The banker advances loan keeping certain security which may either be collateral
in nature or in the form of personal guarantee. Each lending is backed by adequate security that
creates a binding on the part of the borrower to repay. Security acts as an assurance, an
alternative to recover the amount by liquidation but the bank‟s basic motto remains recovery of
advances from the income of the borrower. The security must qualify the parameter of being


marketable, ascertainable, transferrable and stable. This means that the security should be easy
enough to sell without incurring much cost in selling. The assets must be easy to identify and
must not result in much loss of value. It should be stable over a significant period of time and
easily transferrable.

3.2 PRINCIPLES OF LENDING

According to general principles of lending, all mortgage originators should act in "good faith and
with fair dealings" in any transaction. A reliable customer forms the basis of a successful
lending. The following principles act as the foundation of a judicious lending:

Safety of funds ensures that the bank, although being a profit generating unit,
continues to build and retain the trust of the public at large.
Security accepted from the borrower as an alternative for recovery of advances in
case of default must be of significant value.
Purpose or the objective of advances should remain in favor of nation‟s security. It
should not be anti- social or illegal.
Profitability and yield on advances should be in line with the banks objective, so the
advances made must be successful.
Liquidity of advances made by the bank indicates its ability to meet its deposit
liabilities, so the advances made should be adequately liquid.
Integrity of borrower is very vital to consider the loan proposal envisaged by him for
further sanction.
Adequacy of bank finance is of prime importance for a borrower to accomplish his
project so both under and over financing should be avoided by the bank.
Timely availability of funds to the borrowers helps the bank grow in the current
scenario.

These principles strengthen the bank finance eventually leading to safe advances.


3.3 BASEL II ACCORD: A MEASURE OF RISK

ADEQUACY
Basel II, also called The New Accord (correct full name is the International Convergence of
Capital Measurement and Capital Standards - A Revised Framework) is the second Basel Accord
and represents recommendations by bank supervisors and central bankers from the 13 countries
making up the Basel Committee on Banking Supervision (BCBS) to revise the international
standards for measuring the adequacy of a bank's capital. It was created to promote greater
consistency in the way banks and banking regulators approach risk management across national
borders.

Basel II is a type of recommendations on banking laws and regulations issued by the Basel
Committee on Banking Supervision that was initially published in June 2004.The objective of
Basel II is to create an international standard that banking regulators can use when creating
regulations about how much capital banks need to put aside to guard against the types of
financial and operational risks bank face.

THE ACCORD IN OPERATION:

Basel II uses a “three pillars” concept-

Minimum Capital Requirements
Supervisory review
Market Discipline


1st Pillar-Minimum Capital Requirements

The first pillar provides improved risk sensitivity in the way that capital requirements are
calculated for three major components of risk that a bank faces: credit risk, operational risk and
market risk. Under the Basel II Norms, banks should maintain a minimum capital adequacy
requirement of 8% of risk assets. For India, the Reserve Bank of India has mandated maintaining
of 9% minimum capital adequacy requirement. This requirement is popularly called as Capital
Adequacy Ratio (CAR) or Capital to Risk Weighted Assets Ratio (CRAR).


2nd Pillar-Supervisory Review

The second pillar deals with the regulatory response to the first pillar, giving regulators much
improved 'tools' over those available to them under Basel I. It also provides a framework for
dealing with all the other risks a bank may face, such as name risk, liquidity risk and legal risk,
which the accord combines under the title of residual risk.

3rd Pillar-Market Discipline and Disclosure

The third pillar greatly increases the disclosures that the bank must make. This is designed to
allow the market to have a better picture of the overall risk position of the bank and to allow the
counterparties of the bank to price and deal appropriately.

3.4 LENDING AND ADVANCES

Banking system in India has gone through enormous changes. In addition banks are constrained
from optimally diversifying their activities, thereby increasing the opportunity to reduce
operating risk faced by industry, but the primary activity remains lending. Lending is the
provision of monetary resources by the banker where the other party reimburses in installments
or any other form of deferred payment, thereby by generating a debt.

Loans and advances portfolio being the most significant asset of the bank has direct impact on its
profitability. Increase in competition and emergence of new types of risks in the banking sector
has lead to efficient loans and advances management. In order to ensure a strong portfolio banks
need to implement necessary policies aiming at strengthening of pre sanction appraisal and post
sanction monitoring system.

In order to cope up with the changing scenario, banks in India are strengthening their
organizational setup through specialized departments to meet the credit requirements of the
borrowers and continuous analysis of the potential credit growth.


The ideal advance is one that is granted to a „reliable‟ customer for a legal purpose where he has
enough experience for efficient utilization of the amount and repays the amount within a given
time frame as per the agreement.

3.6 What is the loan sanction procedure?

LENDER (BANK)
• comes up with a • verifies the
loan proposal proposal
• collateral security • verifies the • either approves
purpose of loan (final sanction)
• financial details
• assess the or rejects
credibility of
borrower
BORROWER REGIONAL OFFICE

Banks extend loan facilities in form of fund based and non fund based facilities. The banks
provide fund based facility by way of term loans, demand loans, bill discounted, cash credit,
overdraft, etc. whereas the non fund based facilities include letter s of credit and bank guarantee.

Indian Overseas Bank offers a wide range of services in the loans and advances segment some of
which are indexed here:

i) Personal loan
ii) Educational loans
iii) loans on bank term deposits
iv) loans against National Saving Certificates (NSC)


v) loans against Insurance Policies
vi) loans against Gold Jewels
vii) loans against Collateral Security, stocks and debtors
viii) loans against Shares

3.5 TYPES OF ADVANCES

CLASSIFICATION OF ADVANCES

• Term Loan
• Cash credit
FUND • Bill discounted
BASED • Demand loans
• Overdraft

TYPES OF
ADVANCES
NON
• Letter of Credit
FUND • Letter of Guarantee
BASED

The "term" of the loan refers to the length of time you have to repay the debt. Debt financing can
be either long-term or short-term.

Long term loan financing is commonly used to purchase, improve, or expand fixed assets such
as your plant, facilities, major equipment, and real estate. If you are acquiring an asset with the
loan proceeds, you (and your lender) will ordinarily want to match the length of the loan with the


useful life of the asset. Short term loan is often used to raise cash for cyclical inventory needs,
accounts payable, and working capital.

In the current lending climate, interest rates on long-term financing tend to be higher than on
short-term borrowing, and long-term financing usually requires more substantial collateral as
security against the extended duration of the lender's risk.

SECURED AND UNSECURED DEBT: Debt financing can also be secured or unsecured. A
secured loan is a promise to pay a debt, where the promise is "secured" by granting the creditor
an interest in specific property (collateral) of the debtor. If the debtor defaults on the loan, the
creditor can recoup the money by seizing and liquidating the specific property used for collateral
on the debt. For startup small businesses, lenders will usually require that both long- and short-
term loans be secured with adequate collateral.

Because the value of pledged collateral is critical to a secured lender, loan conditions and
covenants, such as insurance coverage, are always required of a borrower. You can also expect a
lender to minimize its risk by conservatively valuing your collateral and by loaning only a
percentage of its appraised value. The maximum loan amount, compared to the value of the
collateral, is known as the loan-to-value ratio.

An unsecured loan is also a promise to pay a debt. Unlike a secured loan, the promise is not
supported by granting the creditor an interest in any specific property. The lender is relying upon
the creditworthiness and reputation of the borrower to repay the obligation. An example of an
unsecured loan is a revolving consumer credit card. Sometimes, working capital lines of credit
are also unsecured.

If the borrower defaults on an unsecured loan, the creditor has no priority claim against any
particular property of the borrower. The creditor can try to obtain just a money judgment against
the borrower. Until a small business has an established credit history, it cannot usually get
unsecured loans because of the business's risk.

LETTER OF CREDIT: It is recognized that letters of credit are an important form of collateral
that have been widely used for many years across the securities lending industry. They have


near-cash characteristics in that their value does not fluctuate with market conditions and they
can be cashed in when presented to the issuing bank. There exists a contract between two parties
subsequent to which the bank guarantees to pay the agreed amount on behalf of his client on the
accepted terms and condition. Letters of credit carry low risk of settlement failure and are
operationally efficient in applying across multiple trades. They are generally used in
international transactions, where two nations differing in legal systems find difficulty in knowing
each party personally. Thus this device facilitates trade.

BANK GUARANTEE: Bank guarantee is a guarantee from a lending institution ensuring that
the liabilities of a debtor will be met. In other words, if the debtor fails to settle a debt, the bank
will cover it. A bank guarantee enables the customer (debtor) to acquire goods, buy equipment,
or draw down loans, and thereby expand business activity.

A bank guarantee, like a line of credit, guarantees a sum of money to a beneficiary. Unlike a line
of credit, the sum is only paid if the opposing party does not fulfill the stipulated obligations
under the contract. This can be used to essentially insure a buyer or seller from loss or damage
due to nonperformance by the other party in a contract.

A bank guarantee might be used when a buyer obtains goods from a seller, runs into cash flow
difficulties and can't pay the seller. The bank guarantee would pay an agreed-upon sum to the
seller. Similarly, if the supplier was unable to provide the goods, the bank would then pay the
purchaser the agreed amount. Essentially, the bank guarantee acts as a safety measure for the
supposing party in the transaction.

SPECIFIC TYPES OF BANK LOANS: In addition to consumer loans and mortgages, the
most common types of loans given by banks to startup and emerging small businesses are:

working capital lines of credit for the ongoing cash needs of the business
credit cards: higher-interest, unsecured revolving credit
short-term commercial loans for one to three years
longer-term commercial loans: generally secured by real estate or other major assets
equipment leasing for assets you don't want to buy outright


letters of credit for businesses engaged in international trade

3.7 FINANCIAL ANALYSIS OF LENDING

Financial analysis is the systematic examination and interpretation of financial data to evaluate
the past performance of a business, its present conditions and its future prospects. It refers to an
assessment of the viability, stability and profitability of a business, sub-business or a project.
Essentially, financial analysis moves from a preliminary investigation of the client to an in depth
examination of operating performance, as interpreted from historical and projected financial
statements.

With financial analysis, the advances manager assesses the company‟s financial performance to
arrive at a conclusion about the future prospects of the loan repayment.

FINANCIAL ANALYSIS ASSESES THE FIRM’S:

1. Profitability - its ability to earn income and sustain growth in both short-term and long-term.
A company's degree of profitability is usually based on the income statement, which reports on
the company's results of operations;

2. Solvency - its ability to pay its obligation to creditors and other third parties in the long-term;
3. Liquidity - its ability to maintain positive cash flow, while satisfying immediate obligations;

4. Stability- the firm's ability to remain in business in the long run, without having to sustain
significant losses in the conduct of its business. Assessing a company's stability requires the use
of income statement and balance sheet, as well as other financial and non-financial indicators.

STEPS INVOLVED IN FINANCIAL ANALYSIS OF LENDING

Step 1: Company‟s financial statement for at least 3 to 5 years is acquired. The financial
statement must include the following:

Balance sheets
Income statements
Shareholders equity statement


Cash flow statements

Step 2: A quick scanning of all the statements is done to look for large movements in specific
terms from one year to the next. If there is something suspicious, relevant research about the
company is done from the information available to find out the reason. Notes accompanying the
financial statements are also reviewed for additional information that may be significant to
analysis.

Step 3: This stage calls for an exhaustive scrutiny of the balance sheet. While examining, the
advances manager looks for the large changes in overall components of company‟s assets and
liabilities of equity. For example, have fixed assets grown rapidly in one or two years, due to
acquisitions or new facilities? Has the portion of debt grown rapidly, to reflect a new financial
strategy?

Step 4: This level relates to an assessment of the income statement as furnished by the client.
The advances manager looks for the trends overtime. Graphs and growth of the following entries
over the past several years are calculated.

Revenue (sales)
Net income (profit, earnings)

For each key expense components on the income statement, percentage of sales of each year is
calculated. For example, percentage of cost of goods sold over sales, general and administrative
expenses over sales and development over sales are computed. Favorable and unfavorable trends
are highlighted. Manager determines whether the spending trends support the company‟s
strategies.

Step 5: The very phase pertains to an evaluation of the cash flow statement. It gives information
about the cash inflows and outflows from operations, financing and investing. While the income
statement provides information about both cash and non-cash items, the cash flow statement
attempts to reconstruct that information to make it clear how cash is obtained and used by the
business, since that is what investors really care about.


CALCULATION OF FINANCIAL RATIOS

Ratio analysis is a powerful tool of financial analysis. In financial analysis, a ratio is used as a
benchmark for evaluating the financial position and performance of the firm. A ratio in itself has
no meaning. It should be compared with some standard. Standards of comparison may consist of:

Past ratios
Competitors ratios
Industry ratios
Projected ratios

The most frequently used ratios by bank and financial analysts are:

Liquidity Ratio
Degree of financial leverage of debt
Profitability
Efficiency
Value

a) ANALYZING LIQUIDITY: Liquid assets are those that can be converted into cash
quickly. The short-term liquidity ratios show the firm‟s ability to meet its short-term obligations.
Thus a higher ratio (#1 and #2) would indicate a greater liquidity and lower risk for short-term
lenders. The Rules of Thumb for acceptable values are: Current Ratio (2:1), Quick Ratio (1:1).

1. Current Ratio = Total Current Assets / Total Current Liabilities

2. Quick Ratio = (Total Current Assets - Inventories) / Total Current Liabilities

In the quick ratio, we subtract inventories from total current assets, since they are the least liquid
among the current assets.

b) ANALYZING DEBT: Debt ratios show the extent to which a firm is relying on debt to
finance its investments and operations, and how well it can manage the debt obligation, i.e.


repayment of principal and periodic interest. If the company is unable to pay its debt, it will be
forced into bankruptcy. On the positive side, use of debt is beneficial as it provides tax benefits
to the firm, and allows it to exploit business opportunities and grow.

Note that total debt includes short-term debt (bank advances + the current portion of long-term
debt) and long-term debt (bonds, leases, notes payable).

1. Leverage Ratios

1a. Debt to Equity Ratio = Total Debt / Total Equity

This shows the firm‟s degree of leverage or its reliance on external debt for financing.

1b. Debt to Assets Ratio = Total Debt / Total assets

In general, with either of the above ratios, the lower the ratio, the more conservative (and
probably safer) the company is. However, if a company is not using debt, it may be foregoing
investment and growth opportunities. This is a question that can be answered only by further
company and industry research.

2. Interest Coverage (or Times Interest Earned) Ratio = Earnings before Interest and Taxes /
Annual Interest Expense

This shows the firm‟s ability to cover fixed interest charges (on both short-term and long-term
debt) with current earnings. The margin of safety that is acceptable varies within and across
industries, and also depends on the revenue generation history of a firm (especially the
consistency of earnings from period to period and year to year).

3. Cash Flow Coverage = Net Cash Flow / Annual Interest Expense

Net cash flow = Net Income is either subtracted from or added to non-cash items, as applicable
(e.g. -equity income + minority interest in earnings of subsidiary + deferred income taxes +
depreciation + depletion + amortization expenses)


Since depreciation is usually the largest non-cash item in most companies, analysts often
approximate Net cash flow as being equivalent to Net Income + Depreciation.

Cash flow is a “critical variable” in assessing a company. If a company is showing high profits
but has poor cash flow, one should investigate further before passing a favorable opinion on the
company. Analysts prefer ratio #3 to ratio #2.

c) ANALYZING PROFITABILITY: Profitability is a relative term. It is hard to say what
percentage of profits represents a profitable firm, as profits depend on factors such as the
position of the company and its products on the competitive life cycle (for example profits will
be lower in the initial years when investment is high), on competitive conditions in the industry,
and on borrowing costs. For decision-making, bank is mainly concerned with the present value
of expected future profits. Past or current profits are important only as they help us to ascertain
future profits, by identifying historical and forecasted trends of profits and sales.

1. Net Profit Margin = Profit after taxes / Sales

2. Return on Assets (ROA) = Profit after taxes / Total Assets

3. Return on Equity (ROE) = Profit after taxes / Shareholders‟ Equity (book value)

4. Earnings per Common share (EPS) = (Profits after taxes - Preferred Dividend) / (# of
common shares outstanding)

5. Payout Ratio = Cash Dividends / Net Income.

d) ANALYZING EFFECIENY: These ratios reflect how well the firm‟s assets are being
managed.

The inventory ratio shows how fast the inventory is being produced and sold.

1. Inventory Turnover = Cost of Goods Sold / Average Inventory


This ratio shows how quickly the inventory is being turned over (or sold) to generate sales. A
higher ratio implies the firm is more efficient in managing inventories by minimizing the
investment in inventories. Thus a ratio of 12 would mean that the inventory turns over 12 times,
or the average inventory is sold in a month.

2. Total Assets Turnover = Sales / Average Total Assets

This ratio shows how much sales the firm is generating for every dollar of investment in assets.
The higher the ratio, the better is the performance of the bank.

3. Accounts Receivable Turnover = Annual Credit Sales / Average Receivables

4. Average Collection period = Average Accounts Receivable / (Total Sales / 365)

Ratios #3 and #4 show the firm‟s efficiency in collecting cash from its credit sales. While a low
ratio is good, it could also mean that the firm is being very strict in its credit policy, which may
not attract customers.

5. Days in Inventory = Days in a year / Inventory turnover

Ratio #5 is referred to as the “shelf-life” i.e. how quickly the manufactured product is sold off
the shelf. Thus #5 and #1 are related.

e) VALUE RATIOS: Value ratios show the “embedded value” in stocks, and are used by
investors as a screening device before making investments.

1. Price to Earnings Ratio (P/E) = Current Market Price per Share / After-tax Earnings per Share

2. Dividend Yield = Annual Dividends per Share / Current Market Price per Share

f) DEBT SERVICE COVERAGE RATIO:

The debt service coverage ratio (DSCR) is the ratio of cash available for debt servicing to
interest, principal and lease payments. It is a popular benchmark used in the measurement of an
entity's (person or corporation) ability to produce enough cash to cover its debt (including

lease) payments. The higher this ratio is, the easier it is to obtain a loan. The phrase is also used
in commercial banking and may be expressed as a minimum ratio that is acceptable to a lender;
it may be a loan condition or covenant. Breaching a DSCR covenant can, in some
circumstances, be an act of default.

In general, it is calculated by:

A DSCR of less than 1 would mean a negative cash flow. A DSCR of less than 1 say 0.95 would
mean that there is only enough net operating income to cover 95% of annual debt payments. For
example, in the context of personal finance, this would mean that the borrower would have to
delve into his or her personal funds every month to keep the project afloat. Generally, lenders
frown on a negative cash flow, but some allow it if the borrower has strong outside income.

3.8 METHODS OF CREDIT RATING

Bank uses credit rating methods to judge the credibility and the financial strength of any business
unit that requests for loan. A set format is followed by the organization, where all the parameters
that help in determination of credibility are mentioned. Method of credit rating is explained in
great detail with the help of a case study in the later part of the report.

For all the advance proposals up to Rs. 1 crore, bank relies on internal credit rating system while
any proposal exceeding this amount calls for an authentic credit rating with the recommendation
of CRISIL.

CRISIL is India's leading Ratings, Research, Risk and Policy Advisory Company. CRISIL offers
domestic and international customers a unique combination of local insights and global
perspectives, delivering independent information, opinions and solutions that help them make
better informed business and investment decisions, improve the efficiency of markets and market
participants, and help shape infrastructure policy and projects. Its integrated range of capabilities


includes credit ratings; research on India's economy, industries and companies; investment
research outsourcing; fund services; risk management and infrastructure advisory services

3.9 METHOD OF ASSIGNING CREDIT LIMIT AND

DRAWING POWER

OVERDRAFT FACILITY FOR INDIVIDUALS
Overdraft facility is provided to individual customers. In this case, the credibility of the borrower
is assessed by tracking his past record. The transaction in his account for a minimum of past six
months is checked to judge his credibility and predict his intentions to pay back the amount in
near future. If his past record indicates that he did not default under normal circumstances, then
overdraft facility is allowed. Such a facility up to Rs.2 lacs is provided to him based on the
discretion of the branch manager. Overdraft limit over and above Rs.2,00,000 is provided only
after the approval from the Regional Office is received. The limit is sanctioned against the total
deposits of the individuals keeping 10% as the margin money.

CASH CREDIT FACILITY FOR BUSINESS CONCERN
While assigning the cash credit limit to business units the bank first does an exhaustive analysis
of the particulars furnished by the customer. The documents required include:

Balance sheet of the concern for the past three years ,
Recent stock statement where stock includes raw materials in store, loose tools, work in
progress and finished goods held in warehouse. It should be noted that only paid up
stocks are to be considered and not the stock purchased on credit basis.
Record of debtors: a statement showing the book debts up to 90 days is taken into
account.


Sales turnover: the sales turnover of the past three years should be clearly shown. In case
where the sales turnover exceeds an amount of Rs 40 lacs, a certification from Chartered
Accountant (CA) is to be obtained.
PAN card details of the client are mandatory.
Asset and liability statement of both the borrower and the guarantor for the preceding
three years is to be verified.
Two years of projected sales and balance sheets need to be procured from the borrower to
comply with all the regulations laid down by the governing authorities.

The details and documents related to stocks, debtors and sales are to be furnished regularly by
the client on a quarterly basis to review his credit limit from time to time. The basic formula
includes for calculation of the drawing power is as follows:

75% of stock + 50% of debtors (stocks and debtors calculated as per the details showed in the
documents procured from the customer)

3.10 SECURITIES USED AGAINST LENDING

The securities are broadly classified as primary security and collateral security. Collateral
securities are the provisional securities accepted by banks that cover the loan amount and can be
legally liquefied in case of default in repayment.

The securities that are included under collateral are mentioned below:

Policies: Endowment policy matures after the death of the policy holder or the
predefined time duration, such as Life Insurance Policy of LIC is acceptable as security.
One of the cheapest ways to borrow small amounts of money is to raise a loan against an
endowment policy. The loans are not common with endowments taken out to back
mortgages, but they are offered against savings policies. The banks usually sanction loan
amount up to 80%-90% of the surrender value of the policy.

National Saving Certificates (NSC) and Kendriya Vikas Patra (KVP): NSCs and
KVPs may be pledged in the bank‟s name along with transfer application to request for


sanction of loans, thus forming another type of bank security. The bank marks lien on the
certificates surrendered by the borrower and informs the same to the issuing authority.
Fixed Deposit Receipts (FDR): The medium term savings of the individuals may act as
a liquid security for all types of loans and advances. The banks willingly sanction
advances against the FDRs of their regular customers keeping 10% as margin.
House property: It is not uncommon for real estate or intellectual property to be
included as part of the calculation of the loans. Under house loan request, the house
property of the borrower is usually taken as security that acts as an insurance against the
loan amount sanctioned. One can avail up to 80% of cost of property as assessed by
authorized official after all legal compliance.
Other assets: Collateral is focused on accounts receivable, inventory and equipment.
Assigning an appropriate possession as security is a common way of making secured
term loans. The possessions may be any machinery, equipment, or business property that
is accepted as collateral. The asset remains with the borrower unless there is default, in
which case the same goes to the bank. Generally, credit against machinery and equipment
is restricted primarily to new or highly serviceable and resalable used items.

MODES OF CHARGING SECURITIES
Charging a security refers to creating a legal RIGHT to payment out of the assets given as
security. It assigns judicial power to the banker to take recourse to the assets given as security in
case of non remittal of the amount on part of the borrower.

Five different modes of creating charge are stated as follows:

i) Lien: Banker‟s lien is the right to retain goods given as securities belonging to the
debtor in order to get the debts discharged. This may either be general lien or specific
in nature. However, to exercise this banker is required to prove his diligence that it
had no notice of defect in the title.
ii) Hypothecation: This is a charge upon any movable property of the debtor without
transfer of its ownership to the creditor. So the goods remain in the possession of the
owner but the borrower is under an obligation to submit regular returns to the bank


indicating any increase or decrease in the value of said goods to help bank determine
his drawing limit.
iii) Pledge: Pledge is just the opposite of hypothecation but the purpose remains same.
Under this the goods that are charged remain in actual possession of the bank and no
withdrawals or additions to the stock are permissible without bank‟s permission.
iv) Mortgage: It is the transfer of interest in specific movable property for the purpose
of securing the payment of money advanced or to be advanced by way of loan, an
existing or future debt, or the performance of an engagement which may give rise to a
pecuniary liability.

3.11 CALCULATION OF EMI
EMI (Equated Monthly Installment) in simple terms means a fixed payment made by a borrower
to a lender at a specified date in each calendar month. Equated monthly installments are used to
pay off both interest and principal each month, so that over a specified number of years, the loan
is paid off in full.
The formula for calculation of EMI given the loan, term and interest rate is:

EMI = (p*r) (1+r)^n

(1+r)^n - 1
p = principal (amount of loan)

r = rate of interest per installment period i.e., if interest is 12% p.a. r = 1
n = no. of installments in the tenure

^ denotes whole to the power.

3.12 DOCUMENTATION
Advances are not reimbursed by the bank until documents are duly filled and properly executed
in compliance with the guidelines of the bank. Documentation in a loan account is of prime
consideration since these documents act as physical evidence in case the bank decides to initiate
any legal proceedings for recovery of its dues.

In all kinds of loans, bank ensures that it has all the pertinent documents from the borrowers to
protect their interests. Banks have predesigned printed forms that are duly filled and kept in their
record for future references.

IMPORTANCE

Document, being a written statement of facts, states certain rights and liabilities of parties
entering into contract (in this case bank and the prospective borrower). It binds the parties to
advance under law. The documents need to be properly executed and adequately stamped for it
to be fit to pass order for a decree.

GENERAL PRECAUIONS IN EXECUTING NECESSARY DOCUMENTS

Documents may be typed or printed. Handwritten documents should be completed in same
handwriting to avoid unnecessary misleading inferences. All documents should be signed in full
signature and in the same font without overwriting or signature in initials. The date and place of
the execution must be mentioned. And the ambiguity in writing the same should be avoided. The
language should be simple enough for the borrower to understand and comprehend.

EXECUTION OF DOCUMENTS

The documents need to be executed in presence of the manager. In case it is to be executed by
any illiterate person, the contents need to be explained ensuring that the executants are not under
undue influence or coercion.

In case of joint borrowers, the borrowers must jointly sign the documents where as in case of
partners, any one (authorized) on behalf of all may sign. The execution in case of a company
requires common seal to be affixed along with the signature of the authorized person as decided
by the Board of Directors. As to the HUF, it is usually signed by the Karta on behalf of all the
family members.

STAMPING OF DOCUMENTS:

According to Indian Stamp Act 1899, the documents that are properly stamped before or at the
time of execution, can only act as the basis of a suit. Stamps are classified under two categories-


judicial and non judicial. Judicial stamps are used in courts for filing suits and appeals while the
non judicial stamps are used by the banks. Adhesive stamps and embossed stamps form part of
the non judicial stamps and are used as applicable. Stamping of documents (wherever required)
provides an identity and legal existence to the document to act as a proof of evidence in case of
any dispute.

RENEWAL OF DOCUMENTS

It is mandatory to renew documents within three years. While reviewing the documents it should
be ensured that all the necessary amendments as per the terms of advances are incorporated in
the renewed document.

SECURITY RECORD AND SAFE CUSTODY OF DOCUMENTS

Document should be adequately examined by the officer-in-charge of advances. All the relevant
particulars related to the original and the renewed document should be recorded in the
Documents Execution Register.

3.13 CREDIT MONITORING

Credit monitoring in a bank is to ensure that the funds are utilized for the sanction purposes and
at the same time complying with all sanction terms and conditions. The purpose of this exercise
is to avoid the time lag and cost over runs, to detect early warning signals and symptoms of
incipient sickness in the units financed by banks and to initiate timely action for recovery or
rehabilitation. Under credit monitoring arrangement bank ensures the following:

a) Borrower should maintain reasonable estimates of current assets, current liabilities and
working capital.

b) Should maintain classification of current assets and current liabilities as per bank guidelines.

c) Should maintain a minimum current ratio of 1.33 except for export industry and for new units.

d) Should submit annual audited accounts in time for annual review bay banks.


e) Ad hoc limits are sanctioned for periods not exceeding three months

f) As far as possible, post sale limits are sanctioned in the form of bill finance.

CREDIT APPRAISAL TECHNEQUIES
Under this process, the decision maker finds the answer to two important questions, one being
whether the entrepreneur requires funds, what are his credentials? If the answer to the question is
positive then the second question being the extent of his requirement and the ways in which it
can be met. Assessment of credit requirement is often difficult because of lack of data. So RBI
suggested that the banks may not insist on submission of audited financial statements up to credit
requirements of Rs 25 lakhs, but beyond this limit, a structured analysis of the financial
statements is a must. Due to increasing non performing assets, credit appraisal techniques are
increasingly focused on the assessments of repayment capacity of the borrower that depends on
his revenue generating ability.

RENEWAL OF DOCUMENTS
At the time of renewal, the bank should obtain a fresh set of documents duly supported by
supplemental deeds if required. A formal letter from the borrower agreeing to continue the credit
facility by bank in future, is obtained. Acknowledgment of the debt and security incorporating
particulars of the original security document duly signed by the borrower are obtained and
attached to form a part of the renewed documents.


CASE ANALYSIS

XYX INFOTECH: A CASE ON CREDIT APPRAISAL

BORROWER/COMPANY PROFILE
The borrower is banking exclusively with IOB since September 2006. He is successfully running
an NIIT computer training centre at Midnapore for which he is having a cash credit account in
IOB with a limit of Rs 1 lakh. Credit rating of the borrower is „A‟ as in December 2008 and the
worth of the proprietor is Rs 33.77 lakh. He has also taken a term loan of Rs 12.00 lakh from the
bank out of which Rs 9.89 is still outstanding. There are no irregularities in the cash credit and
term loan account till date.

Comments on Operation (Full Last Year & Current Year up-to-date)

A) F 209 period from to Max Min Turnover Income earned

(Rs. in Lacs)

1) Fund Based`

01.4.07-31.3.08 01.97 00.36 14.57 0.15

03.46 01.18 22.21 0.14

2)‟ Non Fund Based _____________ ______ _______ ___________

3) Obtention of Stocks and Book debts Regular
statements and Quarterly Auditors
certificate on book debts and their
latest dates

43 sinhasoniya87@yahoo.com ICFAI Business School

B) Details of Ad-hoc/Excess granted The excess granted under Br discretion and were
with period and its adjustment within regularized within the commitment period.
the expiry time etc.

(Whether permission of sanctioning
authority obtained)

PRESENT REQUEST/ PROPOSAL
The borrower is into business since 1992, and his existing branch of NIIT is working
successfully. NIIT has offered him for opening a new unit at Kharagpur and he has paid more
than Rs 10 lakhs as advance for starting the same. The present proposal of the borrower is as
follows:

PRESENT REQUEST/PROPOSAL

LIMIT (Rs. in Lacs)

Nature of Facility Existing Proposed Increase

Term Loan Limit-12.00 19.69 07.80

DP- 09.89

Cash Credit against Stocks/Book 01.00 05.00 04.00
Debts (not exceeding 90 days)

Bills /Others ___________ __________ ____________

Non Fund Based __________ __________ ____________


COLLATERALS/ GUARANTORS

Collateral RS. In Lacs.

Nature Face Value Present Value Owned/held by

Deposit 01.50 01.73 _____________

NSCs/KVPs ____ ____ ____________

LIC Policy 05.00 ____ _____________

Others 09.85 09.85 _____________

Total 16.35 11.58

Details of Land Land Constructed Area Forced Owned by
and Area/Extend in Sale
Covered Area Value (Relationship between
Building/Flat Acre/Sq. ft. (for building) partner / directors)

Details of Collateral Security (Land &
Building)

(Should contain details of ownership,
nature of property, location, extent of Forced Sale Value Rs 9.85
land and building, preliminary
valuation report/Desk- top valuation /
whether Agricultural/Housing
plot/Commercial etc.


FINANCIAL ANALYSIS

PARTICULARS (1) (2) (3) (4)

31.03.07 31.03.08 31.03.09 31.03.10

Tangible Net Worth (TNW) 07.01 07.57 11.87 16.77

Debt Equity Ratio 02.83 02.70 01.39 01.78

Current Ratio 01.55 01.59 01.42 01.56

Net Working Capital 00.56 01.63 02.69 04.83

TOL/TNW 02.83 02.70 01.39 01.78

Sales (Net Sales) (Less Excise) 0.26 21.00 30.00 40.00

Gross Fixed Assets 10.79 09.06 07.33 06.23

NPAT 00.03 02.34 04.50 07.40

Net Cash Generation (net of ------ 04.07 06.23 08.50
Dividend/drawings

N P A T / Sales 11.54 11.14 15.00 18.50

P B I T / Sales 11.54 11.14 22.40 27.63

Stocks 00.00 02.40 02.40 03.00

Sundry Debtors ------- ------ 03.70 05.00

Sundry Creditors for Goods ------- ------ ------ -------

Unsecured Loan (To be pegged) ------- ------- ------- -------
(From
Directors/Partners/Friends/

Relatives /Associates)


NET WORKING CAPITAL ASSESSMENT Comments on estimates:
Sales Current year (2008 - 2009)
Net worth of the borrower is Rs 33.77 lakhs.
Guarantor in this case is the proprietor‟s
Estimated Sales current year 2008-09
wife. Details of the collateral security are as
Projected Sales (next year) 2009-10
follows:
Accepted Sales turnover- (2009 - 2010 )

Comments in brief: :

a) Estimated/Projected sales turnover: 40

b) 25% of projected/estimated sales turnover: 10
,,

c)Minimum Margin at 5% of Projected/estimated sales
2
turnover:
3
c) Available margin (as per Latest Balance Sheet):
7
d) PBF ((b) –(c ) or (b) – (d) whichever is less):

P B F (As per Nayak/Vaz Committee/Turnover Method) 07.00 Lacs, Proposed and
sanctioned Rs.05.00 Lacs

Comments on Margin /adequacy NWC for 2007-08 is 1.63 and
for 08-09 is 2.69, we consider
3.00 for arriving MPBF

Structure of limits proposed

Facility Limit Margin

1) Cash Credit 05.00 25%

2) Term Loan 07.80 25%


Present stocks and
Book debts value are
Comment on the adequacy of Drawing Power Availability
sufficient to cover
based on the latest Balance Sheet
D.P

TERM LOAN ASSESSMENT

New NIIT centre to be opened at
Kharagpur with rental flat, along with
Capital Asset to be Purchased / Created
all furniture, fixtures, machineries, and
stationeries

Margin Proposed: 05.80

(As per norms- Minimum of 50% for land 40% for
Building 25% for Machinery / equipment)

Available from internal generation/fresh/ 15.40

Infusion of addl. Capital/USL (to be pegged)

Need for capital asset / machinery / Building 07.80

construction ( Justification to be commented)

Availability of adequate space / power / Man Yes
power (All other requisite infrastructure facilities)

Calculation of D S C R (values in Rs. lakhs)

PARTICULARS 1 2 3 4 5 6

31.03.08 31.03.09 31.03.10 31.03.11 31.03.12 31.03.13

PAT 2.34 4.50 7.40 9.01 9.78 10.24


Depreciation 3.07 1.73 1.10 0.80 0.64 0.54

Interest on term loan – 1.63 1.60 1.56 1.51 0 0
Existing

Proposed 1.05 1.00 0.95 0.91 0.86 0.80

A) Funds Available 8.09 8.83 11.01 12.23 11.28 11.58

Repayment

Term Loan Installment – 3.62 3.62 3.62 3.62 ______ ______
Existing

- 2.14 2.14 2.14 2.14 2.14 2.14
Proposed

Interest on Term Loan - NA NA NA NA NA NA
Existing

NA NA NA NA NA NA
Proposed

B) Total Obligation 5.76 5.76 5.76 5.76 2.14 2.14

D S C R (A/B) (Range 1.50 to 2.00 is acceptable as bank Norms)

1.40 1.53 1.91 2.12 5.27 5.41

Comments
(Whether the machinery/equipments to be purchased is new or second hand ( Higher
margin to be stipulated), Obtention of authenticated invoices/quotations/comparative
price list on similar brands and satisfactory credit reports on the suppliers to be ensured)
The debt service coverage ratio (DSCR), is the ratio of cash available for debt servicing
to interest, principal and lease payments. It is a popular benchmark used in the
measurement of an entity's (person or corporation) ability to produce enough cash to
cover its debt (including lease) payments. The higher this ratio is, the easier it is to obtain


a loan. The phrase is also used in commercial banking and may be expressed as a
minimum ratio that is acceptable to a lender; it may be a loan condition or covenant.
Breaching a DSCR covenant can, in some circumstances, be an act of default.
The DSCR up to 2011 is considerable as it rounds about the level 2.00. From 2012, since
the existing term loan will be closed their total obligations will be reduced suddenly and
accordingly the DSCR level will also be enhanced. However bank will be revising the
DSCR with every year estimates and projections to compare with the actual achievements

METHOD OF CREDIT RATING NOTES (Specimen given in the case analysis)
Average should be arrived at by dividing the net marks obtained (after deducting the negative
marks) by total number of applicable positive features.

Above 7.5 A+

Above 6.5 A

Above 4.5 B

Below 4.5 C

PARAMETERS SCORE

1. Sales

If the growth is increasing over the last 3 years 5
@ 20 % and over
@ 10 to 19 % 5
@ 5 to 9 % 4
3
@ less than 5 % or decline in sales in any year during last 3 years 0

2. Net Profit to Above 5 % 5 5

to satisfy our DSCR.


Sales 3 to 4 % 4

1 to 2 % 2

below 1 % 1

3. Sales to Bank 6 times 5

Borrowing 3 to 5 times 3 3

1 to 2 times 1

below 1 0

4. Sales to TNW 5 times 5

3 to 4 times 4

1 to 2 times 2 2

below 1 0

5. Level of Above 80 % 5

utilization 70 to 79 % 3

of limits 50 to 69 % 1

below 50 % 0

6. Documentation

Perfect compliance 5 5

Imperfect but beyond borrower‟s control 4

Not responsive 0

7. Compliance of Terms and Conditions

Prompt compliance 5 5

Delayed or unsatisfactory compliance 3


Not responsive 0

8. Payment of Bills NA

Prompt payment with :

overdue less than 5 % 5




overdue more than 25 % 0

9. DPG /Term Loan Installments and
Periodical interest

Timely repayment 5

Delayed repayment 3 3
(1 installment/1 quarter Interest
outstanding)
Not repaid (2 or more 0
installments/quarterly Interest outstanding)

10. Renewal of Limits

Timely renewal 5

Delayed renewal upto 3 months 3 3

Non-renewal beyond 3 months 0

11. Current Ratio 1.33 and above 20 20

1.25 and above 12

1.15 and above 8


1.00 and above 4

RATING:

The conduct of the accounts so far is satisfactory. However he is facing some problems in
remitting funds to his account from Midnapore frequently. But ultimately he is sincere towards
the repayment of the loan installments as well as CC A/c operations.

TRADE CREDIT ACCOUNTS

12. Total Liability:
(A) TNW (For Companies other
than HP and Leasing)

Upton 2.0 25 25
Upton 2.5 23
Upton 3.0 20
Upton 3.5 16
Upton 4.0 12
Upton 4.5 8
Upton 5.0 4
Above 5.0 0


(B) For HP and Leasing Companies If public

deposits are : NA

7 to 10 times of NOF 25

6 to 6.9 times of NOF 23

(Ratio of Public Deposits to NOF)





1 to 1.9 4

Less than 1 0


13. Sundry Debtors Level

Actual in line with level assessed 5 5
(including 20 % deviation)

Deviation : 20 to 50 % 3

Deviation : Above 50 % 0

NEGATIVE FEATURES

1. Delayed submission of QIS, CMA and
financial statement :

Delay up to 3 months 2 2

Delay between 3 and 6 months 3

Delay beyond 6 months 5

2. Delay in submission of Stock statements :

Beyond 15 days from due date 3 3
up to 30 days

Beyond 30 days from due date 5

3. Documentation Irregularities :

Not rectified within 30 days from date 5
of detection or borrower not responsive

4. Non fund/ancillary business routed 5
through other banks/non consortium
members (in case of Consortium advance)
without the concurrence of consortium.


5. Merchant Banking Business not 5
offered to IOB

6. Sales-actual at variance with
projections Estimate

Variance between 10 and 15 % 3

Variance exceeding 15 % 5

7. Default in payment of LC obligations
including A & E :

Paid with a delay of 1 to 7 days 2

Paid with a delay of 7 to 15 days 3

Paid with a delay of beyond 15 days 5

8. Current ratio below 1 5

9. Business Mix (for HP and Leasing Cos only) :

Concentration of business within the group

30 to 50 % 3

above 50 % 5

10. Default in payment of installments/ 5
Interest on funded loans beyond
30 days

11. Return of Bills - 10 to 25 % 3


more than 25 % 5

12. For HP and Leasing Companies only :

Over dues in HP installments/Lease rentals

10 to 25 % 3

more than 25 % 5

NOTES:

1. For scoring under point No. 7 under „Positive Features‟ viz., compliance with other
terms and conditions, branch should take in to account the following :
Terms and Conditions in sanction letter such as maintenance of margin, obtention of letter of
pegging, no lien letter, power of attorney, non-declaration of dividend etc.

2. In case of guarantees invoked, if payment of invoked amount is not settled within 15 days,
the rating of the borrower should be downgraded to “C”.

3. If LCBR dues are not met even after 15 days from the due date, the rating of the borrower
should be downgraded to “C”.

TOTAL POSITIVE POINTS------------ 86

TOTAL NEGETIVE POINTS-----------05

NET POINTS = 81

AVG = 81/12 = 6.75

RATING-------------A

MULTIPLE DISCRIMINANT ANALYSIS
The studies above provide for looking at a number of separate clues (ratios to sickness or
failure). It would be more useful to combine the different ratios into single measure of the


probability of sickness or failure (bankruptcy). The technique of Multiple Discriminant Analysis
(MDA) helps us to do so. The use of MDA helps to consolidate the effect of all ratios. It is
derived from the following discriminant function:

Z= 0.012X1 + 0.014X2 + 0.033X3 + 0.006X4 + 0.010X5 where

Z = discriminant function score of the firm

X1= net working capital/total assets (%)

X2= retained earnings/total assets (%)

X3= EBIT/total assets (%)

X4= market value of total equity/book value of debt (%)

X5= sales/total assets (times)

According to the established guideline Z score which can be used to classify firms as either
financially sound- a score above 2.675- or headed towards bankruptcy- a score below 2.675. the
lower the score, the greater is the likelihood of bankruptcy and vice versa.

Z SCORE
3
2.73
2.5

2
2.12

1.5

1 1.08

0.5

0
2008 2009 2010


The Z score of XYZ INFOTECH has seen a considerable rise in 2009(2.12) compared to 2008
(1.08), which will further rise to 2.73 in the year 2010 if we consider the projected balance sheet
of the firm. This gives the clear indication that the company is in the sound position as compared
to the previous year and it will very soon cross the acceptable mark of 2.675 in the coming year
which proves numerically that the firm is financially sound.

BANK FINANCE

Limits recommended for sanction BPLR+ RS. LACS.

Nature of Facility Limit Margin Interest Security(PRIME)

1) Cash credit 5.00 Stocks-25% BPLR+0.50 Hypothecation of stocks
% and book debts
B.Debts-50%

2) Term loan 7.00 25% BPLR+0.50 Hypothecation of
% machineries, furniture‟s,
fixtures.etc

RECOMMENDATIONS
The captioned party has been enjoying the mentioned limits from September 2006. The
proprietor is an experienced person engaged in business for the last 4-5 years. He started unit at
Midnapore in 2006 and handled successfully. Some of the big names in Pvt. Sectors (like-IBM)
are approaching the institute for campus interview.

NIIT, a brand in itself, had offered him to open another branch at Kharagpur, and has already
issued the license. Their Kharagpur unit‟s future seems quite blooming, since it is an industrial
place strongly supported by IT sector background and basis. The government has also come up
with many new policies and schemes which are favorable for opening new Private Sector biggies
at Kharagpur. So the customer‟s this unit will be unquestionably getting huge opportunities for
their services, i.e. imparting of training for employment.


EXPORT CREDIT
Pre-shipment finance is also known as packaging credit it refers to any loan or advance granted
or any other credit provided by a bank to an exporter for financing the purchase processing
manufacturing or packaging of goods prior to shipment on the basis of letter of credit opened in
his favor or in favor of some other person.

Post-Shipment finance means any loans or advance granted or any other credit provided by an
institution by an institution to an exporter of goods services from India from the date of
extending the credit after shipments of goods rendering of services to the date realization of
exporter proceeds

Pre Shipment Finance is issued by a financial institution when the seller wants the payment of
the goods before shipment. The principal objective behind pre-shipment finance or pre export
finance is to enable exporter to:

Procure raw materials.
Carry out manufacturing process.
Provide a secure warehouse for goods and raw materials.
Process and pack the goods.
Ship the goods to the buyers.
Meet other financial cost of the business.

The concepts related to export credit and their treatment are more lucidly explained with the help
of a case study (Liberty Marine Syndicate Ltd.) that was witnessed during the SIP period. This
would bring a decipherable picture of the manner in which the export credit is granted to any
party.


Indian Overseas Bank Sip Report Loans And Advances Management

Indian Overseas Bank Sip Report Loans And Advances Management

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