CREDIT APPRAISAL REPORTTHE PUBLIC BANK LIMITEDSME LOAN

Submitted By:Rabindra RajbhandariMBA 5th TrimesterRoll no. 15, Section- AUniglobe College, KathmanduSubmitted To:Mr. Narendra K. BistaFaculty: Banking Lending and ProceduresUniglobe College, Kathmandu

CREDIT APPRAISALTHE PUBLIC BANK LOAN (TPBL)SME Credit-Hetauda BranchDate: May 31, 2015

Borrowing EntityRR Soap IndustriesWard No 8, HID, HetaudaPh: 057-523524 (O) Tel: 9841684600(M)Contact Person: Mr. Rabindra Rajbhandari( Proprietor)Group Name: None

Legal StatusProprietorship Firm Registration No. 1789PAN: 303864756Proprietor: Mr. Rabindra Rajbhandari

Business ActivitySoap IndustryLoan Purpose Code9.4

Loan Sector/Security Code5.1.1, 5.2

Interest CodeWCTO

Purpose of SubmissionTo Provide overdraft facilities of NPR 1.5 million.

CIB StatusObtained. The firm, its proprietor and guarantors were not found in black/defaulters list.

Account No. To be opened

Waiver & Deviations As per TPBL SME Product Paper, loan processing fee is 1% on loan amount. However, we recommended charge NPR 10,000.00 flat considering potentiality of customer and the commitment to provide more business in future.

Last Review

New LoanNext ReviewApril 29 2014

Risk Grade: Good

Amount in NPR 000

FacilityPurpose and Other DetailsInterest/Commission/FeesLimitOutstandingProposed Inc./ Dec.Total

Overdraft (OD)To finance working capital requirement.

CICL fee: NPR 10,000.00

12% p.a.1,0008901,5001,500

FundedNilNil1,5001,500

Non FundedNilNilNilNil

TotalNilNil1,5001,500

Collateral/Security DetailsValuation Date

Total Value

Extended Value

1. Registered mortgage over land owned by Mr. Rabindra Rajbhandari Kitta No. 294, Area: 0-0-1-3.04(R-A-P-D) and Kitta No. 352, Area: 0-2-2-2.95(R-A-P-D) located at Ward No. 08, HID, Hetauda, Makwanpur District having distress value of NPR 2.04 million. (Tobe Mortgaged).Valuator Mr. Rajesh Tiwari from SR Engineering Consultancy Pvt.Ltd. DescriptionCom. ValueFM. ValueDistress Value

Land2,9132,5752,040

Total2,9132,5752,040

December 15, 20142,5752,040

2. Hypothecation of stocks (70% extended value) To be obtained1,200840

3. Assignment of receivables (70% extended value) To be obtained1,000700

4. Personal Guarantee of Mr. Rabindra Rajbhandari (Proprietor) for NPR 2 million (To be obtained).

Other Legal Documents (To be obtained)1. Loan Deed for NPR 1.5 million.2. Promissory Note for NPR 1.5 million.3. Letter of Continuity.

Total Fixed Assets Securities 2,5752,040

Total Current Assets2,2001,540

Total Security4,7753,580

Percentage of security coverage318%239%

Collateral Land value to total credit limit172%136%

Debt Structure & Control1. Drawdown of Overdraft facility shall be restricted to 70% of net working capital requirement of the firm.2. The company shall submit stock and receivable statement on quarterly basis.3. It shall submit the financial statements on yearly basis.4. Site visit/stock inspection shall be carried out on half yearly basis.

Insurance Site VisitStatements

Insurer Latest Site VisitMarch 17,2015Stocks602071/12/30

BuildingReceivables13352071/12/30

Stock1,200To be obtainedNext Site Visit September 16,2015Payables562071/12/30

Legends

CAR: Credit Appraisal ReportTPBL: The Public Bank LimitedOD : OverdraftFY: Fiscal yearK: ThousandNPR: Nepalese RupeesHID : Hetauda Industrial Area

Supported /ApprovedSupported

.Roshan BudathokiBranch Manager

Kalpana ThapaHead, SME

Supported

Supported / Approved

Supported / Approved

Sujan MarahattaHead, Credit Risk Management

Rajan Ghimire Chief Credit Officer

Rajani AcharyaAct.Chief Executive Officer

Proposal

PurposeThe proposal has been prepared to seek approval for the renewal of TPB overdraft loan facility of NPR 1,000,000.00 (Rupees One Million Only) and enhancement on same by NPR 500,000.00 (Five Hundred Thousands Only), total of NPR 1,500,000 on account of M/s RR Soap Industries for the period of one year to meet the working capital requirement of the company. The applicable interest rate on the proposed facility will be 12.00 % p.a. along with the service charge of 1% of the proposed loan amount.

JustificationThe proprietor of RR Soap Industries (Mr. Rabindra Rajbhandari) has requested us to provide OD facility of NPR 1.5 million to meet his working capital requirement. RR Soap Industries has its own full-fledged facilities that produces and manufactures various packaged laundry soaps and detergents cakes and also manufacture and brand laundry soaps which are sold in unpacked form to satisfy the demand of the rural segment. Being one of the few registered soap manufacturer in Nepal, the company is able to cover a good share of market in Nepal with high quality and reasonable price. As the firm is situated at the Industrial area of Hetauda where other various manufacturing companies are operating as well, the company has no problem in producing and distributing soap products. The firm has taken a step forward and wants to produce detergents as well while due to increased demand, the firm needs to produce more of the finished products.Hence, the firm is in need of working capital to meet the above objective which justifies the facility. The repayment shall be made from the sales proceeds.

FY 2070/71 (Actual)FY 2071/72(Actual) FY 2071/72(Pro)Total Current AssetsNPR 1202KNPR 1,801K NPR 2,243KTotal Current LiabilitiesNPR 416KNPR 505K NPR 259KWorking Capital needNPR 786KNPR 1,296K NPR 1,984K

OverdraftOD facility shall be provided for financing its working capital requirements. The facility will enable the firm to build adequate level of stocks, finance receivables and meet various direct and indirect expenses. RR Soaps mainly produces and manufactures various packaged laundry soaps and detergents cakes and also manufacture and brand laundry soaps which are sold in unpacked form distributes all over Nepal. The market for local soaps has increased recently as people have become aware of sanitation and more of them want to promote local products if the product is worthy. The firms stocks include basically different raw materials, work-in-progress and finished soaps and chemicals.

RepaymentThe captioned firm seems able to serve the debts from the cash flow generated from its business operations. The financials suggest that the company will be able to meet its financial obligations on time. Further, the company has maintained good level of stock & sales.

SecurityThe proposed facility shall be secured by mortgage of Land having Kitta No. 294, Area: 0-0-1-3.04(R-A-P-D) and Kitta No. 352, Area: 0-2-2-2.95(R-A-P-D) located at Ward No. 08, HID, Hetauda Sub-Metropolitan City having distress value of NPR 2.04 million. (Tobe Mortgaged).Valuator Mr. Rajesh Tiwari from SR Engineering Consultancy Pvt.Ltd.Our working capital financing shall be secured by the primary collateral current assets (stocks and book debts) worth NPR 2,200K (EV- 1,540K). Beside this, we shall also obtain Personal Guarantee of Mr. Rabindra Rajbhandari for NPR 1.5 million (To be obtained).

CustomerCustomers Name: M/s RR Soap Industris Loan Sector: 4.3.1 Mnufacturing

Nature of BusinessSoap Industry Relationship start date: Existing

Basel II ClassificationClaims on regulatory Retail Portfolio

Base for Classification:SME loan adequately secured by mortgaged on property and total exposure is less than 10 million.

Registration details

Dept./OfficeGovernment of Nepal, Ministry of Finance, Inland Revenue Department

Date2071/11/10

Number1789

PAN No.303864756

VAT No.NA

Income Tax Clearance Till2071

Business operation since (if other than registration date)

Registered AddressHID, Hetauda, Makwanpur

Business Address

Contact Details Key Contact Person: Mr. Rabindra Rajbhandari/ proprietor

Office Telephone Nos.057-523524

Residence Tel. Nos.

Cell No.9841684600

Fax No-

E-mail address

Existing Review Date: 21/11/2014Next Review Date: 21/11/2015

Risk GradingAs per NRB Directive (Please Tick )Pass /Substandard /Doubtful /Bad Debt

BOD Details( ) Obtained ( ) Not Obtained ( ) NA

Board Resolution( ) Obtained ( ) Not Obtained ( ) NA

Updated shareholder register() Obtained ( ) Not Obtained ( ) NA

Authorized, Issued & paid up capital

EGM/ AGM Report*( ) Obtained ( ) Not Obtained () NA

Sister Concern (s)Name N/ANature /Line of Business

Shareholding patterns:

NameShare %NameShare%

Mr. Rabindra Rajbhandari100%

Background

Units Background: RR Soap Industries is a sole proprietorship firm registered under Local Government Act 2055, Hetauda Sub- Metropolitan City Office on 2071/05/03, having registration number 1789. Mr. Rabindra Rajbhandari is the sole proprietor of the firm.Business

The factory manufactures varieties of packaged laundry soaps and detergents cakes and also manufacture and brand laundry soaps which are sold in unpacked form to satisfy the demand of the rural segment. The key buyers are general people, hotels, restaurants and hospitals. The firm utilizes local raw materials and sale finished products into local market all around Nepal as per the needs of the customers. The firms stocks include basically different raw materials, work-in-progress and finished soaps and chemicals. The firm has status in the market as a progressive industry with quality products in reasonable prices as well as efficient distribution channels.

Location

The firm is situated in a Hetauda industrial area, Ward no. 08, Hetauda Sub-Metropolitan City. The road excess to the property is by 10ft wide motor able pitched road. As the location is mainly popular industries, the industry has a bright future prospect. There are only hand full of registered soap producers with advanced facilities in Nepal.

Management

The Key person of this business is Mr. Rabindra Rajbhandari (Proprietor). At present the client is doing business from their own equity. Mr. Rajbhandari has experience in the soap industry over 12 years in various soap manufacturers working in various positions. After he became mentally ready and confident enough to start his own soap industry gaining a good sense of market and its business activities, he started his own firm. His family will also help him in his business.Family tree The family of Mr. Rabindra Rajbhandari is quite a gentle fellow. His family tree is as follows.

Mr. Rabindra Rajbhandari(Proprietor)

F

Mr. Rabindra Rajbhandari is not married yet. His brothers though have their own corresponding families and are reputed in their own work and field. His mother/ father are farmers.Banking RelationshipThe relationship with the client is old. He has maintained his personal account in our branch. He is a loyal and creditworthy costumer in our branch. He has an average deposit of NPR 339,000. He has outstanding overdraft loan of NPR 890,000.He has been regular in his debt payments, both interest and principal. According to CIB report he has also not taken any credit with other banks and also has no blacklist record.

Past Financials (NPR 000)Particulars

2070/71Audited2071/72Audited

Sales1,0532599

Net Profit283769

Net worth1,9312,700

Current Ratio2.903.42

Leverage (Debt/Equity)0.390.48

Total Debt Ratio (Total Debt/Net worth)0.420.53

Inventory turnover101123

Debtors turnover4367

Gross Profit Margin 35%38%

Net Profit Margin26.87%29.58%

Sales/ProfitabilityThe data shows the sale of the firm is in increasing trend every fiscal year. The firm has achieved sales turnover of NPR 1,053K during FY 2070/71 and NPR 2599K in fiscal year 2071/72. The main reason of increasing in sales is due to increasing demand of varieties of local soaps of the same brand in the market and the ability and marketing of the firm that has enabled the brand to be chosen by the customers. The firms sales market is general public, hotel, hospitals etc. all over Nepal and since the investment environment is suitable, the demand has been ever increasing. Besides that the company binds its customers with its promise of quality within reasonable prices. Similarly, gross and net profit margin of the firm was 38% and 29.58% respectively this year that guarantees improved performance and bright prospect of the company and its products.

LiquidityCurrent ratio of the firm is also in acceptable range over the period i.e. 2.90 and 3.42 during the fiscal year 2070/71 and 2071/72 respectively. It indicates sound liquidity position of firm to discharge its short-term obligation as when needed. Stocks include basically different kind of soap chemicals, raw, work-in-progress and finished goods.

LeverageThe firm is considering as moderate risk taker entity. A leverage ratio of around 0.5 seems satisfactory as the firm is able to take advantage of low cost debt. In the fiscal year 2070/71, leverage of 0.42 seems satisfactory .As the firm is planning to increase its operation and the working capital requirement has also increased, the firm has an increased debt ratios this fiscal year. The firm doesnt enjoy any loan from other banks/financial institutions. The firm is able to increase its profit every year which directly impact over its net worth. Higher net worth shows better status of the firm.

Inventory TurnoverThe stocking period of the unit has been observed 101 and 123 days in FY 2070/71and 2071/72 respectively which is acceptable considering the nature of business. If the firm doesnt keep much stock, they will lose their customers. Similarly, debt realization period is 67 days in FY 2071/72, which is ok.

Financial ProjectionsFinancial projections are based on the data given by the firm.

(NPR 000)Particulars

2072/73Projected

Sales3,260

Net Profit957

Net worth2,977

Current Ratio3.52

Leverage (Debt/Equity)0.51

Inventory turnover91

Debtors turnover55

Gross Profit Margin 43.33%

Net Profit Margin29.36%

Sales & ProfitabilityThe firms business is good and established and has a high demand in the market so that the unit expects to achieve above mentioned increased sales volume in projected year. The projection of sales and profitability of the unit have been made on the following grounds:1. The firm will get new customers and retain its existing customers as before.2. The firm shall explore new parties in the market.3. The demand of soaps and related products is positively related with the increasing size of population. 4. With the increased sales volume and efficient control over direct expenses and other operating expenses, the firm shall achieve targeted profit margins.5. The people have become aware about sanitation and want local product varieties from the same brand.6. People have become conscious about the quality of the sanitation products and the quality of the RR Soaps is popular.

Net WorthIt is projected that the consolidated net worth figure of the units shall be NPR 2.977 million in FY 2072/73. Net worth comprises of paid up capital, proprietors fund and retained earnings. They will be able to strengthen the capital base as the profits are bound to grow over the years. Thus, Net worth will be in satisfactory level.

Leverage (Total Debt/Net worth)The leverage ratio of the unit is expected to be 0.51 in the projected year 2071/72. It is assumed that the unit shall utilize the bank loan at a maximum level to expand its business volume. But considering the experience of the Proprietors in the line of business, and creditworthiness in the market, the risk exposed to the bank is within acceptable range.

LiquidityThe current ratio is expected to be within the standard norm indicating that they shall utilize the bank loan to maintain adequate level of stocks and finance debts as per the market demand.

Inventory/Debtors TurnoverIt is expected that the average stock holding period and debt realization period of the unit shall be 91days and 55 days respectively in the projected year 2069/070. This is acceptable considering nature of business. If the firm doesnt keep much stock, they will lose their customers However, it shall be decreased in coming years. With the growing competition caused by entry of new players in the market, the firm is forced to provide some credit period to its customers. However the credit turnover ratio in the projected year is less than previous fiscal year which is satisfactory level.

Cash Flow NPR 000Particulars2070/712071/722072/73

Fiscal Years

Sources of Funds

Net Profit before Interest & Taxes

3458701215

+ Non Cash Expenses (Depreciation, Write Off)156210276

Funds from Operation50110801491

Interest102180237

--

Taxes5597144

Total Financial Charges157277381

Closing Cash Balance after Financial Charges3448031110

The cash flow of the firm is positive, which is due to the increasing net profits of these firms over the years. With the increase in sales in coming years, the cash flow position of the firms will be further strengthened.

Justification of Proposed Limits & Working Capital Assessment NPR 000Particulars2067/0682068/0692069/070

AuditedAuditedProjected

DaysAmountDaysAmountDaysAmount

Inventory1017521231,098911,469

Debtors/Receivables4342267668551,088

Other Current Assets28 35 110

Total Current Assets1441,20219018011462667

Less:

Trade Creditors903896843957201

Other Current Liabilities276658

Total Current Liabilities634165050528259

Working Capital Need7861,2961,984

Banking Lines010001,500

Net Working Capital786296484

% of Bank Finance0.00%77.16%75.60%

Overdraft facility shall be provided for financing the working capital requirement of the unit. The facilities will enable firm to build adequate level of stocks, finance receivables and meet various direct and indirect expenses.

The working capital assessment shows that the firm is in need of working capital because usages of funds are higher than sources of funds. The net working capital requirement of the unit for the projected year 2071/72 is NPR 1,984 million and bank financing of NPR 1.5 million is 75.60% of the net working capital requirement. It is within the acceptable level.

Outlook & PrognosisRR Soaps Industries mainly deals with the production of soaps and related products. RR Soap Industries is a sole proprietorship firm registered under Local Government Act 2055, Hetauda Sub- Metropolitan City Office on 2071/05/03, having registration number 1789. Mr. Rabindra Rajbhandari is the sole proprietor of the firm. The factory manufactures varieties of packaged laundry soaps and detergents cakes and also manufacture and brand laundry soaps which are sold in unpacked form to satisfy the demand of the rural segment. The key buyers are general people, hotels, restaurants and hospitals. The firm utilizes local raw materials and sale finished products into local market all around Nepal as per the needs of the customers. The increased awareness about sanitation among Nepalese people and importance of locals goods has resulted in the high demand of the RR Soaps products. Moreover, the product also goes to the rural areas where the brands are more popular. The recent trade of hospitals, hotels and restaurants for the package agreement for these kids of products is also a good prospect for the industry. The firm has status in the market as a progressive industry with quality products in reasonable prices as well as efficient distribution channels. In view of above, we expect the firm shall achieve regular sales growth as above. Hence, the project is viable and under bankable risks.

The firm is situated in a Hetauda industrial area, Ward no. 08, Hetauda Sub-Metropolitan City. The road excess to the property is by 10 ft wide motor able pitched road. As the location is mainly popular industries, the industry has a bright future prospect. There are only hand full of registered soap producers with advanced facilities in Nepal.As per our visit at the site, the proposed fixed properties are located in industrial area of Hetauda Sub-Metropolitan City, Kitta No. 294, Area: 0-0-1-3.04(R-A-P-D) and Kitta No. 352, Area: 0-2-2-2.95(R-A-P-D) located at Ward No. 08, HID, Hetauda Sub-Metropolitan City having distress value of NPR 2.04 million. (To be Mortgaged).Valuator Mr. Rajesh Tiwari from SR Engineering Consultancy Pvt. Ltd. Even in the distress situation, we can liquidate them to pay back the loan the property is accessible by 10ft wide motor able pitched road. The property lies around 1390 m meter north from the HID CHowk and boundary of the land is clear and distinct.

The facility shall be secured by hypothecation of stocks and receivables of the firm for NPR 1,200K and NPR 1,000K respectively. Beside this, we shall also obtain Personal Guarantee of Mr. Bishnu Prasad Kharel (Proprietor), Mrs. Mina Regmi (Proprietor wife) for NPR 1,500K.

SWOT/Risk AnalysisStrengths Mr. Rajbhandari is a skilled and experienced person in the field of Soaps industries having been worked in the Soap industries for more than 12 years. The general public are more aware about sanitation than ever and hence the use of sanitary products has increased. The hotels, restaurants and hospitals have a good long term agreement with the RR Soap Industries. The client has been able to capture satisfactory level and will capture a large share of market with increase product line. The products are easily accessible even in the rural areas. RR Soaps operational and financial performances are satisfactory and smooth. Investment friendly environment with reduced interest rates.

Weakness The nature of the business requires maintaining huge stocks. Less capital to increase stock. Not able to capture the demand of the market.

Opportunity Demand is increasing day by day which increases the margin of profitability. Investment friendly environment. Reduced interest rates and easy availability of loans.

Threat The threat is mainly from competitors with more players will getting in the business. Poor purchasing power of people caused by slow economic growth of the country. Load shedding. Political turbulence and workers strikes.

Risks/Mitigation

1. Supplier RiskThe firm imports its instruments from foreign and buys daily consuming items and raw materials from local market and they have maintained good relation with their suppliers.

2. Competition The market is very competitive due to the presence of various players in the market. There are other active players in the market who has really been threat to the firm with the target of the same market share. However those do not have the same source distributor network as the client possess. The client is planning to add more enhance the productions capacities and expand the product varieties due to its popularity.

3. Management RiskThe firm is registered in the name of Mr. Rabindra and the proprietor handle entire management of the firm. Mr. Rajbhandari himself manages the accounting and administrative work of the firm and is supported by his family.

4. Financial RiskThe business of this unit is running well and no adverse situation is visualized in short term. Further, the proprietor has the capacity to repay the loan in distress situation by from other sources by selling off his other fixed assets.

5. Political Situation It is expected that the present political turmoil in the country shall be resolved soon and there will be favorable environment for the growth of business. 6. Successor Risk: At present the firm is handling by Mr. Rabindra Kumar Shrestha (Proprietor). He is unmarried yet but has placed the name of his nephew as his successor.

Control Mechanism1. Drawdown of overdraft facility shall be restricted to 70% of net working capital requirement of the firm.2. The firm shall submit stock and receivable statement on quarterly basis.3. It shall submit the financial statement on yearly basis.4. Site visit/stock inspection shall be carried out on half yearly basis.Earning & ProfitabilityExpected Earning for next one year. NPR 000FacilityGross IncomeCost of Fund 8%Net Income

Interest on OD 180 12060

Loan Processing Fee 10 NA10

Total 190 12070

Assumption1. Cost of fund of 8% p.a.

Other RemarksNoneWaiver & Deviations

As per TPBL SME Product Paper, loan processing fee is 1.50% on loan amount. However, we recommended charge NPR 10,000.00 flat considering potentiality of customer and the commitment to provide more business in future.

Summary, Recommendations & Certification

Based on above analyses, deliberations and comments, it is recommended for providing overdraft facility to the client for a period of one year.

I confirm that this credit proposal is in compliance with all relevant policies and guidelines laid down by Nepal Rastra Bank and KBL credit policy.

Roshan Budathoki