Credit Appraisal Summer Internship

8/13/2019 Credit Appraisal Summer Internship

1/80

CREDIT APPRAISAL AT INDIAN OVERSEAS BANK

RAKESH KUMAR REDDY G Page 1

INTRODUCTION OF THE PROJECT

This project is done to understand, analyze and review the CREDIT APPRAISAL

SYSTEM at INDIAN OVERSEAS BANK.

The project is basically done to analyze the appraisal process carried out in the bank and the

criterias set by the bank for obtaining loan. As part of the project, a proposal has been

selected and studied fully whether it satisfies all the criterias of the bank and suggested

whether the proposal can be selected or not by the bank. It has been done by using

appropriate FINANCIAL TOOLS.

STATEMENT OF THE PROBLEM

Verifying whether all the criterias of the bank has been satisfied by the company for

obtaining the loan from bank and identifying the constraints if any.

MEANING OF CREDIT APPRAISAL:

Credit appraisal is the assessment of the viability of proposed long-term investments in terms

of shareholder wealth and the formal analysis of all project costs and benefits which is used

to justify the project proposal. Effective project appraisal offers significant benefits to a firm.

A good appraisal justifies spending money on a project. Credit appraisal or project planning

must be viewed as a process of decision-making over time, starting with project

identification, and proceeding through various stages of various feasibility studies (for

example, engineering, financial etc), then the investment phase, and finally project

evaluation. This is the so-called concept of the project cycle.

Getting the design and operation of appraisal systems right is important. The proper

consideration of each of the key components of project appraisal is essential. These are,

Need, targeting and objectives, Options, Inputs, Outputs and outcomes.

Key issues in appraising projects include the following.


2/80



NEED, TARGETING AND OBJECTIVES

The starting point for appraisal: applicants should provide a detailed description of the

project, identifying the local need it aims to meet. Appraisal helps show if the project is the

right response, and highlight what the project is supposed to do and for whom.

OPTIONS

Options analysis is concerned with establishing whether there are different ways of

achieving objectives. This is a particularly complex part of project appraisal, and one where

guidance varies. It is vital though to review different ways of meeting local need and key

objectives.

INPUTS

Its important to ensure that all the necessary people and resources are in place to

deliver the project. This may mean thinking about funding from various sources and other

inputs, such as volunteer help or premises. Appraisal should include the examination of

appropriately detailed budgets.

OUTPUTS AND OUTCOMES

Detailed consideration must be given in appraisal to what a project does and

achieves: its outputs and more importantly its longer-term outcomes. Benefits to

neighborhoods and their residents are reflected in the improved quality of life outcomes

(jobs, better housing, safety, health and so on), and appraisals consider if these are realistic.


3/80



OBJECTIVE OF THE STUDY:

The main objective of the project training is to study the CREDIT APPRAISAL SYSTEM

IN INDIAN OVERSEAS BANK

To study entire loan system In Indian Overseas Bank. To study the procedure of obtaining loan from Indian Overseas Bank. To know on what criteria the bank Appraise the loan to the business.

NEED FOR APPRIASAL:

An important need of appraisal is obtaining an understanding of the anticipated expenditure

and benefits of a project, usually expressed in terms of its inputs (costs) and outputs (results).

The expected timing of this must also be made clear.

Whilst detailed appraisal is generally necessary before decisions can be taken and offers

made.

It will enable any obviously poor or ineligible ones to be eliminated, avoid duplication and

give an early overall view of the success of the measure.

SCOPE OF THE STUDY

Credit appraisal of a proposal helps the firm to,

Be consistent and objective in choosing projects

Make sure its programme benefits all sections of the community, including those

from ethnic groups who have been left out in the past.


4/80



Provide documentation to meet financial and audit requirements and to explain

decisions to local people.

Appraisal is an important decision making tool

Appraisal involves the comprehensive analysis of a wide range of data, judgments and

assumptions, all of which need adequate evidence. This helps ensure that projects selected

for funding.

LIMITATIONS OF THE STUDY:

The data collected from various sources cannot be considered as correct information.

The figures shown in the project are just expected figures.

The result of project appraisal cannot consider as 100% correct.

All financial tools which are applied in this appraisal have their own limitations.

Time was also a major constraint for the study.

INDUSTRY PROFILE

The development of banking is not only the root but also the result of the

development of the business world." Due to considerable efforts of the government, today

we have a number of banks such as Reserve Bank of India, State Bank of India, nationalized

commercial banks, Industrial Banks and cooperative banks. Indian Banks contribute a lot to

the development of agriculture, and trade and industrial sectors.

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

economy.


5/80



PHASES OF BANKS:

1) Early phase from 1786 to 1969 of Indian Banks.

2)Nationalization of Indian Banks and up to 1991 prior to Indian banking sector reforms.

3)New phase of Indian Banking System with the advent of Indian Financial & Banking

Sector Reforms after 1991.

COMPANY PROFILE

HISTORY OF INDIAN OVERSEAS BANK

Indian Overseas Bank (IOB) was founded on February 10th 1937, by Shri.M.Ct.M.

Chidambaram Chettyar, a pioneer in many fields - Banking, Insurance and Industry with the

twin objectives of specializing in foreign exchange business and overseas banking. .

PRE-NATIONALIZATION ERA (1947- 69)

During the period, IOB expanded its domestic activities and enlarged its international

banking operations. IOB was the first Bank to venture into consumer credit. It introduced the

popular Personal Loan scheme during this period.

AT THE TIME OF NATIONALIZATION (1969)

IOB was one of the 14 major banks that were nationalized in 1 the eve of Nationalization in

1969, IOB had 195 branches in India with aggregate deposits of Rs. 67.70 Crs. and

Advances of Rs. 44.90 Crs.


6/80



POST - NATIONALIZATION ERA (1969-1992)

In 1973, IOB had to wind up its five Malaysian branches as the Banking law in Malaysia

prohibited operation of foreign Government owned banks. This led to creation of United

Asian Bank Berhad in which IOB had 16.67% of the paid up capital.

COMPUTERAIZATION:

The Bank setup a separate Computer Policy and Planning Department (CPPD) to implement

the programme of computerization, to develop software packages on its own and to impart

training to staff members in this field.

SERVICES OFFERED BY INDIAN OVERSEAS BANK

Current Account:

Savings Accounts:

Fixed Deposit:

Recurring Deposit:

Loans:


7/80



PROCESS OF LOAN

1. Submission of application

2. Primary assessment

3. Branch head recommendation

4. Final assessment of various level of bank

5. Lending committee

6. Documentation of loan application

7. Disbursement of loan

8. Creation of security

Submission of application

The main & the first step is the submission of the duty filled form or the loan application it is

the choice customer that which types of application he wants to give depending upon the

needs.

Primary assessment

When the application is received, an officer of the recipient institution reviews it to ascertain

whether it is complete for processing. If it is incomplete the borrower is asked to provide the

required additional information.

When the application is considered complete, the recipient institution prepares of

flash report, which is essentially a summarization of the loan application, to be evaluated at

the Senior Executive Meeting (SEM). Once the SEM, on the basis of its evaluation of the

flash report, decides that the project justifies a detail appraisal, it nominates lead financial

institutions.


8/80



When the application is considered complete, the recipient institution prepares of flash

report, which is essentially a summarization of the loan application, to be evaluated at the

Senior Executive Meeting (SEM). Once the SEM, on the basis of its evaluation of the flash

report, decides that the project justifies a detail appraisal, it nominates lead financialinstitutions.

The factors taken in to account for designating lead institution are: location of the project,

prior experience of institution in handling similar projects, representation of institutions in

the state and promoter group, and existing work load of the institutions.

Branch head recommendation

The appraisal is moving one step ahead that is to analysis the applicants eligibility as per the

norms provided by the considering his gross income after detecting his liabilities, his actual

repayment capacity is checked as per norms.

Final assessment of various level of bank

After referring the application form and appraisal branch head put his recommended action

whether to accept the application or not & send it the corporate office.

Lending committee

At the corporate office the final assessment is to be done & decision is taken to reject the

application is forwarded to the particular branch from where the application has been

received. Before it also lending committee decide whether to give loan or not.

Documentation of loan application

Once the Loan is Sanction Banks need to check all the document of borrower as well as

guarantor once again and only then they can proceed ahead.


9/80



Disbursement of loan

If loan is sanction than Bank open the account of borrower in their bank and issue the check.

Before the entire term loan is disbursed the borrowers must fully comply with all terms and

condition of the loan agreement.

Creation of security

The term loans (both rupee and foreign currency) and the differed guarantee assistance

provided by the All-India financial institutions are secured through the first mortgage, by

way of deposit of title deeds of immovable properties and hypothecation of movable

properties.

As the creation of mortgage, particularly in the case of land, tends to be a time consuming

process, the institutions permit interim disbursement against alternate security (institution the

form of guarantees provided by the promoters).

The mortgage, however, has to be created within a year from the date of the first

disbursement. Otherwise the borrower has to pay an additional charge of 1 percent interest.

Feasibility of the Project

Project Should Be Feasible And This Is Done By Detail Appraisal Of The Project

Into The Following Different Environment.

Market and Demand analysis

The first step in project analysis is to estimate the potential size of the market for the

product proposal and gets an idea about the market share that is likely to be capture. Market

and demand analysis is concerned with two broad issues:


10/80



What is the likely aggregate demand for the product/service?

What share of the market will the proposed project achieve?

The importance of market and demand analysis, it should be carried out in orderly and

systematic manners. The key steps in such analysis are,

Situation analysis and specification of objectives Collection of secondary information Conduct of market survey Characterization of the market Demand forecasting Market planning.

Technical Analysis

Technical analysis of a project idea includes designing the various processes,

installing equipment, specifying material and prototype testing.

The project manager has to be careful in finalizing the technical aspects of the project

as the decision is irreversible and the investments involved may be high.

The project manager has to select the technology required in consultation with

technical experts and consultants.

Technical analysis is concerned primarily with:

Material inputs and utilities Manufacturing process/technology Product mix Plant capacity Location and site


11/80



Machineries and equipments Structures and civil works Project charts and layouts

Work schedule

Financial Analysis

To judge a project from the financial angle, we need information about the

following:

Cost of project Means of financing Estimates of sales and production Cost of production Working capital requirement and its financing Estimates of working results Projected profitability statements Projected balance sheets

TYPES OF ADVANCES / LOANS

The credit assistance provided by banks is mainly of two types, fund-based and non-fund

based support, the difference lies mainly in cash outflow. Fund-based involves an immediate

cash flow, whereas non-fund based may or may not involve cash outflow from the bank i.e. a

grant of fund-based credit facility will result in depletion of actual liquidity to the bank

immediately, and a grant of non-fund based credit facility to a borrower may or may not

affect the banks liquidity.


12/80



OVERDRAFTS

Overdraft is an arrangement in relation to a person's current account and under the

arrangement the customer can overdraw up to an agreed limit. He has the liberty to repay theoverdraft partly or fully and borrow again at his own convenience. The overdrafts are

normally allowed against securities.

In emergent circumstances the Overdrafts are also allowed to reliable customers without any

security, which are of a very temporary nature and are known as clean overdraft.

CASH CREDIT

Cash credit provides an elastic form of borrowing and is the most popular method ofborrowing by Indian businessmen. It is elastic because the limits fluctuate according to the

needs of the business. This is similar to overdraft, but as in the case of overdraft, it is not

necessary to have current account under the arrangement, customer can avail of the credit

facility continuously. These loans are sanctioned by the Bank generally to those customer

who are actually involved in some economic activity of a continuous basis, such as traders,

manufacturers etc. Cash credit facility may be granted against: -

Hypothecation of stocks of raw material, work in progress, finished goods orstores and spares etc.

Hypothecation of book debts and receivables, Hypothecation of tea and tea crops to tea gardens, Hypothecation of vehicles/cars, (For the manufacture and traders of

vehicles/cars)

Pledge of stocks or documents of title thereto, Pledge of warehouse receipts issued by the Central and State Warehousing

Corporations also Bonded Warehouses.


13/80



TERM LOANS

Term Loans are loans which repayment period is beyond one year. Term Loans are allowed

for purchase of capital goods, for financing capital expenditure as also against Fixed and

Recovery Deposits with our bank and Central and State Government securities against

specific repayment programme. Working Capital facilities are also sometimes placed under

specific repayment programme (e.g. Working Capital demand loan and Working Capital

term loan, advances to tea and sugar manufacturer) but for all practical purposes those are

not grouped as Term Loan. Term loans are also allowed for financing specific requirement of

individuals. Amount required, purpose for which it is required, extent of participation of the

borrower (margin) including source thereof, capacity to repay the loan with interest within a

definite time frame and source thereof are the major common issues which are required to be

examined before sanctioning such loan

COMPOSITE LOANS

Composite loan is a combination of finance required for meeting working capital

requirement and capital expenditure. This type of facility is sanctioned to very small units

where quantum of loan is small and also obtention of monthly stock statements, calculation

of drawing power and allowing drawings accordingly are not feasible, particularly in the

light of small size of loan and business. Total requirement of working capital and amount of

capital expenditure required are assessed and loan amount is fixed deducting the own

contribution (margin) there from. Repayment period and programme thereof are fixed

depending on available cash generation, which may be utilized for repayment after taking

into account the borrower's personal expenses.


14/80



BANK GUARANTEE

A bank guarantee is a written contract given by a bank on the behalf of a customer. By

issuing this guarantee, a bank takes responsibility for payment of a sum of money in case, if

it is not paid by the customer on whose behalf the guarantee has been issued. In return, a

bank gets some commission for issuing the guarantee.

In the situations, where a customer fails to pay the money, the bank must pay the amount

within three working days. This payment can also be refused by the bank, if the claim is

found to be unlawful.

LETTER OF CREDIT

A standard, commercial letter of credit is a document issued mostly by afinancial institution,

used primarily in trade finance, which usually provides an irrevocable payment undertaking.

The LC can also be the source of payment for traction, meaning that redeeming the letter of

credit will pay an exporter. Letters of credit are used primarily in international tradetransactions of significant value, for deals between a supplier in one country and a customer

in another. They are also used in the land development process to ensure that approved

public facilities (streets, sidewalks, storm water ponds, etc.) will be built. The parties to a

letter of credit are usually a beneficiary who is to receive the money, the issuing bank of

whom the applicant is a client, and the advising bank of whom the beneficiary is a client.

Almost all letters of credit are irrevocable, i.e., cannot be amended or canceled without prior

agreement of the beneficiary, the issuing bank and the confirming bank, if any.
http://en.wikipedia.org/wiki/Financial_institutionhttp://en.wikipedia.org/wiki/Financial_institution


15/80



GUIDELINES FOR PREPARATION OF COMPREHENSIVE PROPOSAL

IN BOARD NOTE FORMAT:

All the columns of newly designed Board Note format along with formats for Operating

Statement, Analysis of Balance Sheet, Analytical & Comparative ratios, Working Capital

Assessment (if applicable) should be filled up without any omission.

The Background Note should cover the following points in the following sequence.

1. Background

A brief write up about the company, its promoters, banking arrangement, sanction last

reference, share holding pattern etc.,

2 Past Performance

Discussion about the quantitative growth vis--vis their installed capacity, actual

achievement, reason for shortfall (if any), any expansion/diversification, being carried out

since our last sanction.

3. Specific comments on Present Position of the account including overdue position, details

of interest charged/serviced up to etc.,

4. Future prospects

a. Discuss about industry scenario (industry, product, and outlook)

b. Production arrangements:

i) Any change in the manufacturing process during the last one year and the advantage

derived out of the same.

ii) Any additional machinery purchased/existing machinery sold & the utilization of

proceeds.


16/80



iii) Any technology up gradation made.

iv) Comments to be furnished in regard to availability of raw materials and stores and other

production facilities extraordinary features/difficulties involved in the matter of raw materialsupply or in regard to other production facilities such as power transport etc. to be

mentioned.

v) Any excess reliance on single/limited source of supply or raw materials.

vi) Special features of working in the previous accounting year regarding number of

production days lost due to labor unrest and the date of last wage agreement and period up to

which it covers etc. are to be discussed.

c. Marketing arrangements:

i) Briefly comment with regard to marketability of the company products, scope for exports

etc.,

ii) Names of main buyers.

iii) Change in price of products during last one year and the impact on sales.

iv) Nature of marketing arrangement and whether any changes were introduced in marketing

strategy.

v) Present market share and whether it has improved or declined or remained at same level in

the last one year.

vi) Name of main competitors and their total market share.

d. Competency of the management


17/80



Any change in the management including changes in the key personnel should be mentioned.

5. Financial indicators

Discuss about actual position and their projection based on key indicators given earlier forthe last 3 years.

Comments on:

a) Sales & Profitability.

b) Tangible Net worth

c) TOL/TNW ratios.

d) Net Working Capital & Current Ratio.

e) Any other ratios/information relevant for the particular industry/advance.

Inter firm comparison of key financial parameters of similar units/companies should be

discussed in Back ground note.,

6. 1 Working Capital Assessment

a)Acceptability of projected level of operation (Sales & Profitability)

b) Acceptability of inventory holding.

c) Assessment of MPBF.

d) Structure of limits with specific comments on Margin and sub limits.

(If the WC assessment is done under Cash Budget method, then the assessment formats

given in CO Circular No.216/97 dated 6.2.98 should be enclosed).


18/80



6.2 For Term Loan Assessment (Points to be covered)

a) Purpose of the term loan.

b) Project details (including comments on the following lines)

Raw materials, its sources, prices etc.

Availability of necessary infrastructure facilities work force.

Technical assistance/arrangement made

Competency of the management

Market conditions & Marketing arrangements.

Demand, Supply, Pricing after the project/expansion.

c) Economics of the project (cost of project/means of finance).

d) Acceptability of projection and the assumptions considered for the assessment.

e) Profitability estimate & DSCR calculation.

f) IRR analysis.

g) Repayment programme

h) Consents, Approvals & Environmental clearance aspects.

i) Comments of existing term loan & its repayments.

j) Special monitoring requirements if any.

K) Sensitivity analysis.

7. Assessment of Non fund based facilities.


19/80



8. In case of Consortium sharing pattern to be discussed.

9. Any change in Securities offered/Directors should be discussed.

10. Credit rating and Interest rate:

(Earlier rating, proposed rating & earlier interest rate and proposed interest rate are to be

discussed. If there is any concession in interest rate than the normal applicable, then it should

be substantiated).

11. If we are exceeding our exposure prudential norms, the same should be discussed in a

separate Para.

12. Other details:

Capital market perception (Present market price with 12 months high & low to be

given).Confirmation of Excess allowed.

Any other important details relevant to the particular borrower/industry.

13. SWOT ANALYSIS.


20/80



1. BACKGROUND OF THE COMPANY

ABC Pvt Ltd., with CIN-U65993AP1991PTC013624, formerly XYZ Pvt Ltd was

incorporated in the year 2004with the objective of Manufacturing nutraceuticals, bio-

pharmaceuticals and bio-chemicals used in the Synthesis of Active Pharma Ingredients

(APIs) .The Company is a closely held private Limited company floated by the promoters

themselves, with the majority stake held byMr. A, Managing director of the company (with

more than 10 years of Experience in the Chemical Industry) and his close relatives and

friends.

The company has set up a manufacturing facility in the year 2009 (with installed Capacity of

21.70tons per annum). The company had taken up research and development of the product

line and process technology for five years, before embarking on setting up the existing

facility for manufacture of Serra Peptidase and DHA Oil.

The company has setup a fermentation plant located at APIIC Growth Centre situated at 20

Kms distance from Ongole with total investment of Rs 42 Crores.The company Started

commercial operations in May 2011. However, due to delay in commissioning major

equipment supplied by IMDC Gujarat even though the commercial production was declared,

the operations were not stabilized till January 2012. The company has overcome the teething

troubles and it is now in full stream of activity.

Now the company has drawn up an ambitious plan to setup a second plant within the existing

factory premises for manufacturing of another product called BETATHYMIDINE, which is

an import substitute.


21/80



THE PROMOTERS:

S.No NAME DESIGNATION AGE EDUCATIONAL

BACKGROUND

AND

EXPERIENCE

1. Mr. A Managing

Director

34 Master degree

holder in

chemical

engineering from

University of

Illinois Chicago.

5 years of

experience in

synthesis

especially in

designing of in

chemical plant.

Looking after

overall business

management.

2. Mr. B Executive

Director

33 Chemical

engineer & post

graduate

from IIT

Chennai.

Looking after

sales and

financial

management.


22/80



Project and Location:

The companys Second plant is being located within the existing factory land at APIIC

growth centre, Gundlapalli village, MaddipaduMandal, PrakasamDist, A.P.The site is aboutat 20 Kms distance from Ongole. The nearest see port/Airport is Chennai at a distance of

about 300 Kms.

The outlay of the project is envisaged at Rs 17.13 Crores (Civil works Rs. 2.91Crores,

Plant& machinery Rs.11.99 Crores. Preoperative expenses Rs. 0.98 Crores, Margin on WC

Rs. 1.25Crores). The company proposes to contribute Rs. 5.88 cr. towards equity and

requesting Bank for a term loan Rs 11.25Crores.

1.4 Approvals &Clearances:

The approvals for civil construction by the Director of Industries are under Process. The

approvals expected to be in place by mid October 2012.

2 PAST PERFORMANCE

As per original schedule of implementation, the commercial operations of the Companies

were to commence in the month of March 2011. However, due to delay in supply of major

equipment by IMDC, Gujarat, the project was fully implemented and commercial operations

commenced by May 2011. Because of teething troubles with regard to performance related

issues of the equipment, the operations were streamlined by January 2012 only.

During first year of operations (2011-12) the company achieved gross sales of Rs 9.23crores

(net sales 8.13 crores) as against the projections of Rs.31 Crores for the year.


23/80



The key financial indicators for the year 2011-12 are as under

PARTICULARS AMOUNT . IN CRORES

Net sales & other income 814Operating profit 313

Depreciation 139

Interest 302

Profit before tax (128)

Provision for tax (deferred tax) (22)

Net profit (106)

Paid up capital 18.94

TNW 17.75

TOL/TNW 1.63

Net working capital (3.40)

Current ratio 0.79

As detailed above the delay in commissioning the equipment and resultant time overrun, the

performance of the company has adversely effected. The net worth, current ratio is badly

affected by the teething troubles. Having taken a setback in the first year of production, the

company ends with a cash accruals of Rs 0.33 Crores and Accumulated loss of Rs 1.11

Crores (including previous year loss of Rs 0.05 Crores).


24/80



3. SPECIFIC COMMENTS ON PRESENT POSITION OF THE ACCOUNT

For setting up the plant the total cost of project is Rs. 17.13 Crs wherein the requirement of term loan

is Rs. 11.25 Crs. and working capital is Rs. 3.75 Crs.

Sanctionof following Fresh/Enhancement/Renewal of limits. (Rs. In crores)

Nature of

limit/facility

Purpose for

proposed

limits

Existing

Limits

Proposed

Limits

(+)/

(-)

Margi

n %

Interest %

Applicable

rate

Interest %

proposed

Cash credit For

operational

expenses

- 3.75 25%

PC - - -

Bills - - -

Term Loan Capital

Expenditure

- 11.25 25%

NFB: LC/LG - - -

Total: - 15.00


25/80



Sanction for (modification in sanction terms/release of security/guarantee, concessions in margin

interest etc).

a.

For working capital: - the company requires working capital for its expansion of new productb. For Term Loan:- the company require Term Loan for expansion purpose for manufacturing

new product Beta Thymidine

The company current enjoying limits with SBI on existing unit and requesting us for funding of new

project. So therefore it will be multiple banking facility with pari pasu charge with SBI

Repayment terms:

The repayment shall commence from the month of December 2013 after the initial moratorium of 12

months from the date of first disbursement. Repayment will be in 20 Quarterly Installments of Rs

0.56 Cr each.

Value of Security (Rs. in crores): Prime Rs. 26.13 Collateral Rs. 37.89

Guarantors and their net worth: (Rs. In crores)

Name Age Address Worth As on

Mr. A 35 1.61 31-03-2012

Mr. B 28 0.15 12-09-2012


26/80



Corporate Guarantee, if any (with TNW):

Details of any change in guarantors such as waiver sought/additional Guarantors offered, etc. and

their worth

Reasons for reference to MCB/CMD/ED/.(Sanctioning authority): (Rs. in crores)

Nature of Limits

Discretionary Powers Proposed limits

Above up to

Secured + Unsecured limits per borrower 25.00 15.00

Unsecured limits per borrower

Total limits for Group

Limits falls under GM. powers. Other requests fall under


27/80



4. FUTURE PROSPECTS: PRODUCT ARRANGEMENTS AND

MARKETING ARRANGEMENTS

PRODUCTS& PRODUCTION

The products initially proposed to be manufactured are:

Serratiopeptidas

Docosahexaenoic Acid (DHA Oil)

Orilistat

MycophenolateMofetil

The above four products belong to the therapeutic segments that have got very high market

potential.

Presently the company is manufacturing Serratiopeptidase&Docosahexaenoic Acid Only.

Besides these two products, the company plans to manufacture the following products

immediately.

The company has developed process technology for manufacture of the above products at

very competitive rates. While the manufacture of Methylcobalamin will start in a few

months time during this financial year, the company intends to go with a CAPEX plan to

manufacture Beta-Thymidine on a large scale, which will contribute to the top line and

bottom line of the company substantially.

Technology & Manufacturing Process & Technology Employed ABC has set up a semi-

automated fermentation system for handling different microbial cultures like bacteria,

fungus, yeast etc. The fermentation set up consists of production and seed fermentators of

various capacities ranging from 50 L to33000 L. Continuous feeding of carbon source or

substrate, dosing of micronutrients, anti-form, acid or base for pH maintenance in the

production fermenter can be done through dosing vessels. Important parameters like

temperature, pH, dissolved oxygen in fermenters and ancillary vessels are monitored and


28/80



controlled through Distributed Control System. These fermenters are suitable for handling

different microbial cultures like bacteria, fungal, yeast etc.

The downstream operations have been equipped to process broths obtained from variouscultures. At any point of time, two different products can be processed. The downstream

equipments consist of membrane filtration systems, whole broth extraction and separation

equipment, reactors of various sizes, filtration systems likeCentrifuge, Nutsche Filter,

Sparkler Filter and other unit operations like Tray Dryer, Lyophilizer etc. These unit

operations enable extraction, separation and purification of intracellular and extracellular

products.

TECHNOLOGY KNOW HOW

The companies have conducted extensive research & in the process have identified the

specific strains for each of the five products. These strains are cultivated through mutation &

the product samples are developed. The research equipments& the fermenters utilized for the

purpose are on par with the industry standards. The entire development process,

identification processes & the results are documented meticulously.

PROCESS:

The in-house R&D team of the company has worked on optimization of yields of all the

products at R&D level and also further at pilot scale of operations through a specialized

integrated Fermentation equipment imported from Germany thereby the optimization of

yields was reached. Thereby, the R&D team has documented the process technology for the

products to go for scale up operation.

MARKET & MARKETING STRATEGY& INDUSTRY OVERVIEW

The pharmaceutical sector in India is all set to boom. According to the new research report

Indian Pharma Sector Forecast 2014, Indian pharmaceutical industry is projected to show

double-digit growth in near future owing to a rise in pharmaceutical outsourcing and rising

investments by multinational companies. Large percentages of Pharma products produced in

India are exported, which has led the leading players to expand their reach into the Western

nations. Due to the investments in R&D and the clinical trials market is expected to grow at


29/80



blistering pace in coming years. For comprehensive outlook of the industry, an extensive

research has been done on various segments of the Indian Pharma industry, such as the

domestic & export market, branded & generics drugs, formulations & bulk drugs, etc.

The baseline for optimistic future outlook of the pharmaceutical market is improvement in

the access to medicines to the Indian population. The focus of the industry will shift towards

capitalizing the potential of Tier-III and rural areas. Emerging sectors, such as bio-generics

and Pharma packaging will also pave way for the pharmaceutical market to continue its

upward trend during the forecast period (FY2012- FY 2014).

The Indian Pharmaceutical Sector has come a long way, being almost non-existent during

1970s, to a prominent provider of health care products, meeting almost 90% of countrys

pharmaceutical needs. The domestic pharmaceutical output has increased at a compound

growth rate (CAGR) of 14.11% per annum in last ten years.

MARKETING STRATEGY

As the company is producing APIs, which are sold to the major pharma companies, the

company adopted a direct marketing strategy with pharmaceutical companies. They are also

marketing the companys products through dealers in states like Gujarat.M/s Reddys

laboratories and M/s Divis laboratories have inspected the manufacturing facility for entering

into a contract manufacturing agreement. An agreement with one of these companies islikely to fructify in the coming months. Major sales agents shall be employed once export

orders materialize.

The company plans to have a direct marketing approach. The current demand for

BetaThymidine in India is about 700 tones, worth about Rs 350 Crores which is totally

dependent on imports. The company is proposing to set up a plant with an installed capacity

of 120 MTs per annum. It is proposing to operate at 35% capacity in the first year i.e 2013-

14. In the first year it is confident of tapping a market share of about10%. The company

wants to go for a direct marketing strategy. The buyers do not normally place orders based

on laboratory production. After the manufacturing facility is set up, major companies shall

be invited for production setup audit.


30/80



The equipment used in the laboratory is capable of stimulating commercial production

conditions. However, the samples of product manufactured under laboratory conditions have

been given to leading pharmaceutical companies like Aurobindo and Mylan. They have been

well received. An agreement with one of these companies is likely to materialize in the

coming months.

PRICING

The company has considered the pricing of its products at 10% lower than the prevailing

market prices. Hence no reduction in prices was considered for future years. The company

has projected sales on the basis of selling price of Rs 4500/ per Kg, which is 10 % lower than

the prevailing import price. Hence no reduction is considered for projecting the sales in theinitial years. As the product is not being manufactured in India, some Indian chemical traders

are importing and marketing in India. The price will be against enquiry.

The main importers are:

i. M/s Amoli Organics Limited, Mumbai

ii. M/s Pacific Agencies, Mumbai.

iii. M/s Inter Trade Exim, Mumbai.

iv.M/s Thomas Baker (Chemicals) Pvt Ltd, Mumbai.


31/80



5. FINANCIAL I NDICATORS

BRIEF FINANCIAL INDICATORS OF SUBJECT COMPANY: (Rs. in crores)

Year ending 2011 2012 2013 2014

Audit status Audited Audited (Estimated)* Projections

Net Sales - 8.14 26.55 46.02

Operating profit - -0.44 3.70 11.19

Net Profit After Tax - -1.06 2.55 7.79

Cash Generation - 0.33 3.94 9.96

Net working capital 1.56 -2.49 4.24 5.64

Current ratio 1.72 0.80 1.33 1.23

TNW 18.12 17.71 26.00 38.25

Adjusted TNW **

TOL / TNW 1.17 1.58 0.99 1.05

Adjusted TOL/TNW**

Gross Fixed assets 2.77 37.00 36.99 53.49

Term loans 17.45 15.70 16.18 15.53


32/80



ABRIDGED FINANCIAL POSITION Rs. in crores

Year ending 2011 2012 2013 2014

Audit status Audited Audited Estimate Projection

LIABILITIES - Capital and

Reserves

18.13 17.93 26.00 38.69

- Long Term Liabilities 19.05 15.70 12.70 15.63

- Current Liabilities 2.16 12.26 12.99 24.47

- TOTAL

LIABILITIES

39.34 45.89 51.69 78.79

ASSETS - Fixed Assets 34.49 35.61 34.21 48.25

- Non-Current Assets 1.12 0.29 0.25 0.43

- Current Assets 3.73 9.77 17.23 30.11

- Intangible Assets - 0.22 -- -

- TOTAL ASSETS 39.34 45.89 51.69 78.79


33/80



COMMENTS ON FINANCIALS/PERFORMANCE OF THE COMPANY:

Sales: - The Company fully implemented the project in end of march 2011 and the

commercial production commenced in the month of May 2011. So being first year operation

of the unit the company achieves Rs. 8.14 crores net sales.

However, the company has projected Rs. 26.55 Crores Net sales for current year.

Profits: -The company had operational loss during first year of operation that is Rs. (0.44)

crores and PAT Rs. (1.06) during financial year 2011-2012. However, the company is

expecting operational profit during current year of Rs. 4.45 crores and Net profit of Rs. 3.51

crores.

TNW:- The company has Total Net worth of Rs. 17.71 crores at the end of March 2012.

And expecting TNW of Rs. 28.86 crores which is reasonable.

TOL/TNW: The Company had TOL/TNW 1.58 times in the end of March 2012, which is

reasonable and acceptable to the bank.

The company is expecting 1.34 times in the current year which is acceptable to the bank.

CR/NWC:

Comments on large amounts held under Non-current assets, other current assets other

current liabilities with break-up details must be furnished with justification thereof.


34/80



6. WORKING CAPITAL ASSESSMENT

Working capital (also known as net working capital) is a financial metric which represents

the amount of day-by-day operating liquidity available to a business. It is considered a part

of operating capital.

Mathematically, we can describe Working Capital in the following ways:

Gross Working Capital = Total Current Assets Net Working Capital (or Net Current Assets) = Current AssetsCurrent Liabilities Working Capital Gap= Current Assets Current Liabilities (Other than Bank

Borrowings)

Need for WC finance

a) To obtain RM for processingb) To pay wage bills, manufacturing expenses for conversion of RM into FGc) To keep WIP for smooth operation & to keep FG for regular supplyd) To grant credit to its customerse)

To incur day to day expenses

Operating Cycle

a) Conversion of cash into RM RM procured wither on cash or credit. even if credit,cash has to be paid after a certain period.

b) Conversion of RM into stock in processc) Conversion of stock into process to FGd) Conversion of FG into receivables/debtors or cashe) Conversion of receivables/debtors into cash.


35/80



BENCH MARK RATIOS

All credit proposals for Working Capital shall conform to the stipulated minimum current

ratio norms required under different methodology for assessment of need based working

capital requirement, as follows :-

Turnover Method : 1.25:1

MPBF Method : 1.33:1

Cash Budget Method : 1.50:1

b) A lower/ higher ratio in case of existing account may be considered under specific loan

scheme or in deserving cases. The reasons for lower current ratio or slippage should be

carefully examined. Though a Current Ratio less than 1:1 may be considered in such cases, it

should be stipulated that company shall improve its current ratio to more than 1:1 and

thereafter maintain it above the stipulated current ratio.

c) Exemptions in bench mark Current Ratio: The Current Ratio up to 1:1 may be accepted

with justification in some cases, but is usually not done at branch level.


36/80



COMPUTATION OF MAXIMUMUM PERMISSIBLE BANK FINANCE (MPBF)

MethodMSE(Manufacturing) MSE(Services) & Others

TurnoverUp to Rs.5 Crore Up to Rs.2 crore

MPBF>5 but 2 but


37/80



Method 1 Method 2

TC(TCA) 100 100

Less: CL(other than bank

borrowings)

20 20

WCG 80 80

Less: 25% on WCG(M1)

25% on TCA(M2)

20 25

MPBF 60 55

Min Current ratio: 1.33:1

Nayak Committee recommendations for computation of WC Limits (Turnover Method)

Assumes a min WC cycle of 3 months

It takes projected turnover as the main basis for computation of Min WC Limits

Projected Annual Turnover (P.A.T) means projected gross sales including excise duty.

Reasonableness of PAT may be checked on the basis of annual statements of accounts or any

other documents such as returns filed with sales tax revenue authority

Total WC requirement to be estimated at 25% of PAT(min).

Min margin to be 5% of PAT

IF Actual/Projected margin is more than 5% of PAT then that higher margin shall be

considered

Minimum WC limit to be : (25% of PAT (5% of PAT or projected margin, whichever is

more))


38/80



Calculation of bank finance for WC: Turnover method

a) Proposed bank finance for the year : Rs in lacs1 Projected gross sales

2WC gap( 25% of gross

sales)

3Min margin i.e 5% of

projected sales

4Projected net working

capital

5

2 minus 3

62 minus 4

7Permissible bank finance

5 or 6 whichever is lower

8Bank finance sought for by

the borrower

b) In case the borrower applied for WC limit higher or lower than that of computedunder si.no 7 the following procedure must be adopted:

Sr.No Particulars/For the period

ended

(Proj.)

AGross Sales 100

1 RM

2 WIP

3 FG

4 Receivables

BTotal of 1 to 4

CTrade creditors


39/80



DWC Gap(B-C)

E% of WCG to gross sales

F20% of WCG (D)

GProj. Net working Cap

Surplus (NWC+ other

cr.liabother Cr.Assets)

HD minus F

ID minus G

JPBF H or I whichever is

lower

Calculation of Bank Finance for Working Capital: MPBF 2 method

1Projected current assets

2 Current liabilities otherthan bank borrowings

3WC gap( 1 minus 2)

4Minimum margin i.e 25%

of the CA( i.e of 1)

5Projected net working

capital

6 3 minus 4

73 minus 5

8PBF 6 or 7 whichever is

lower


40/80



ASSESSMENT OF WORKING CAPITAL REQUIREMENT

The company requested for working capital limits of Rs. 3.75 crores for its new expansion

project to manufacture a bulk drug called Beta thymidine. The company already enjoying

limits of Working capital and Term Loan with SBI on its existing manufacturing unit and

propose for multiple banking facility

INVENTORY & RECEIVABLE NORMS - CONSOLIDATED

Year 2011-2012

(Audited)

2012-13

(Estimated)

2013-14

(Projected)

Raw Material indigenous.

(Months Consumption)

0.17

(0.76 months)

2.48

(3.06 months)

5.28

(3.05 months)

Stock in process 0.00 0.67

(0.52 months)

1.31

(0.51 months)

Finished Goods (Months

cost of sales)

1.84

(4.17 months)

1.60

(1.24 months)

2.70

(1.09 months)

Receivables inland

(Months sales)

6.16

(8 months)

5.17

(2 months)

8.98

(2 months)

Sundry Creditors (Months

purchases)

1.32 0.81

(0.81 months)

1.73

(0.88 months)


41/80



COMMENTS ON HOLDING LEVELS

RAW MATERIAL

The raw material mainly consists of specialty chemicals and bulk drugs are used in

manufacturing of the companys products. All raw materials are locally and internationally

available. The company has therefore estimated a holding period of 3 months in current year

as compare to 0.76 months in previous year. However, looking to the availability of the

material the holding level of 3 months is justified.

STOCK IN PROCESS

The company has projected stock in process holding level of 0.52 months which is normal

for a company in pharmaceutical industry. Looking to the above the holding level is

accepted.

FINISHED GOODS

The company is manufacturing bulk drugs which are on instant delivery to the clients. The

company holding in past was 4.17 months. However the company is estimating holding

period of 1.24 months which is normal and hence may be acceptable.

RECEIVABLES

The average realization of the indigenous receivable was around 8 months in year 2011-12

which is higher side. However the company estimating around 2 months for current and

projected year which are reasonable in the industry and the same may acceptable to the bank.


42/80



OTHER CURRENT ASSETS

The detail break up of other current assets both existing and projected is furnished below

Particulars As on 31.3.2012 (Rs. In

crores)

31.3.2013 (Rs. In crores)

Cash & bank balance 0.02 0.29

Advance to suppliers 0.03 2.50

Advance taxes 0.00 0.62

Misc. current assets 1.23 3.05

Total 1.28 6.46

CREDITORS

The company had creditors for goods at 2 months as on 31.3.12. The company is projecting

the same to be at 0.81 months.

b)WORKING CAPITAL ASSESSMENT

Particulars As on 31.3.2012 (Rs. In

crores)

31.3.2013 (Rs. In crores)

Total Current Assets 9.77 17.20

Less: Current Liabilities

(Other Than BankBorrowings)

6.87 6.84

Working Capital Gap 2.90 10.37

NWC -2.49 3.97


43/80



MPBFI

Less: 25% of TCA

MPBF - II

7. TERM LOAN ASSESSMENT:

COST OF PROJECT DETAILS

Particulars Amount (In

Rs. Crores)

Civil Works 2.91

Plant & Machinery ( Including contingencies) 11.99

Preoperative Expenses 0.98

Working Capital Margin 1.25

TOTAL 17.13

MEANS OF FINANCE

Particulars Amount (In

Rs. Crores)

Equity Contribution 5.88

Term Loan 11.25

TOTAL 17.13


44/80



7. DSCR CALCULATION

DEBT SERVICE COVERAGE RATIO

DEBT SERVICE COVERAGE RATIO

PARTICLARS 2013 2014 2015 2016 2017 2018 2019 Tot

Cash Accruals

5.19 8.76 12.20 12.09 12.45 8.17 9.36 68.2

Less: Capex

- - - - - - - -

Net Accruals

5.19 8.76 12.20 12.09 12.45 8.17 9.36 68.2

Interest on Term Loans

3.04 3.69 2.86 1.11 1.59 0.65 0.13 13.0

Unsecured Loans- - - - - - - -

Sale of Assets

- -

Total

8.23 12.45 15.06 13.20 14.04 8.82 9.49 81.2

OBLIGATIONS:

Term Loans Installment

(Existing) 4.28 4.28 4.28 4.28 2.92 - - 20.0


45/80



Term Loans Installments

(Proposed) - 0.56 2.25 2.25 2.25 2.25 1.69 11.2

Interest on Term Loans

3.04 3.69 2.86 1.11 1.59 0.65 0.13 13.0

Total

7.32 8.53 9.39 7.64 6.76 2.90 1.82 44.3

Average DSCR

1.12 1.46 1.60 1.73 2.08 3.04 5.22 1.83

Average DSCR is 1.83 which is satisfactory as per loan policy guidelines.


46/80



8. TURNOVER AND PROFITABILITY:

Particulars

2013-

14

2014-

15

2015-

16

2016-

17

2017-

18

2018-

19

2019-

20 2020-21

1. Capacity

Utilisation 120000

12000

0 120000

12000

0

12000

0 120000 120000 120000

Occupancy

(%) 35 45 65 75 80 85 90 90

Operating

Capacity

(MTon's) 14000 54000 78000 90000 96000 102000 108000 108000

2. Gross Sales (

Rs. In Lakhs) 6.44 24.85 35.89 41.41 44.17 46.93 49.69 49.69

3. Gross Profit (

Rs. In Lakhs) 1.26 8.87 12.63 14.31 15.06 15.99 16.90 16.52

4. PBDIT 0.80 7.38 10.52 11.89 12.49 13.25 14.00 13.62

5. % of Gross

Profit 19.56 35.68 35.18 34.55 34.10 34.07 34.01 33.25

6. Interest (Rs.

In lakhs) 1.10 0.77 0.45 0.12 0.00 0.00 0.00 0.00

(On Term

Loans)


47/80



7. Interest ( Rs.

In Lakhs) 0.23 0.55 0.55 0.55 0.55 0.55 0.55 0.55

(On Working

capital only)

8. Depreciation

(Under WDV) 0.49 0.99 0.99 0.99 0.99 0.99 0.99 0.99

9. Profit Before

Tax 0.21 5.20 8.54 10.24 11.16 12.25 13.33 13.07

10. Profit after

Tax 0.18 3.63 5.92 7.06 7.67 8.40 9.13 8.93

11. % of Net

Profit (PBT) 3.26 20.92 23.81 24.72 25.27 26.11 26.83 26.30

12. % of Net

Profit (PAT) 2.74 14.63 16.48 17.04 17.37 17.90 18.37 17.96

13. % of Material

Handling Charges

to Sales 53.92 53.92 53.92 53.92 53.92 53.92 53.92 53.92

14. Security

Margin

WDV of Fixed

Assets 15.01 14.02 13.03 12.05 11.06 10.07 9.08 -

Aggregate

Term Loan

Outstanding 10.69 8.44 6.19 3.94 1.69 - - -

Security-


48/80



Margin Available 4.32 5.58 6.84 8.11 9.37 10.07 9.08

% of Margin 28.78 39.81 52.52 67.31 84.74 100.00 100.00 -

15. Current

Assets 6.48 11.45 16.73 21.33 27.12 32.93 39.39 46.64

16. Current

Liabilities 4.57 8.91 10.96 12.33 13.19 14.17 15.15 15.58

17. Current Ratio 1.42 1.29 1.53 1.73 2.06 2.32 2.60 2.99

18. TOL/TNW 2.31 2.78 1.82 1.12 0.72 0.51 0.38 0.32

19. Cash Accruals 0.67 4.62 6.90 8.04 8.66 9.39 10.11 9.91

20. Debt Equity

Ratio 1.52 0.79 0.37 0.17 0.05 - - -


49/80



9. ECONOMIC VIABILITY

Revenue & Sales:

Even though the existing project was fully implemented by the company and

commercial operations commenced by the end of 2011 May, due to mechanical

&performance related issues of the equipment, by Jan 2012 only the company was able

to streamline the operations. During the first year the company production was 8333

Kgs (in 2 months viz. Feb & March 2012) the projections are furnished here under:

Revenue Projections. (Rs. In crores)

Particulars 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17 2017-18 2018-19

Company as a

8.14 31.07 46.02 67.86 76.54 85.21 85.21 85.21

whole

BT Project - - 6.44 24.82 30.34 35.86 35.86 35.86


50/80



Expenditure:

The expenditure follows the same trend as that of income. Gradual increase in

expenditure is an account of gradual increase in capacity utilization the year wise

estimates of expenditure are furnished here under with value of respective years.

expenditure (Rs. In crores)

Particulars 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17 2017-18 2018-19

Company as a

5.29 16.98 27.49 39.18 44.55 49.03 49.98 50.31

whole

BT Project - - 4.67 13.96 17.66 20.66 21.12 21.29

PROFIT BEFORE INTEREST DEPRECIATION & TAX (PBDIT)

The PBDIT reflects a gradual increasing trend as that of revenue and expenditure

Projection. The projections of PBDIT with annual value are presented below.

PBDIT (Rs. In crores)

Particulars 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17 2017-18 2018-19

Company as a

3.14 13.68 17.45 26.09 28.62 32.04 30.98 30.53whole

BT Project - - 1.81 10.41 11.93 14.15 13.69 13.51


51/80



PROFIT BEFORE TAX (PBT)

The existing project has posted loss of Rs.1.27 Crores in the first year of operation.

From 2012-13 onwards the capacity utilization increased for the existing unit and

production starts from 2013-14 in the new unit and as such the PBT increased

gradually. The year on year PBT is tabulated below.

Table 10.4 (Rs. In crores)

Particulars 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17 2017-18 2018-19

Company as a

-1.27 8.40 11.70 18.88 22.24 26.60 26.06 25.94

whole

BT Project - - 0.73 7.25 8.97 11.51 11.37 11.52

PROFIT AFTER TAX (PAT)

The profit after tax follows the path of PBT. The year on year profit after tax furnished

here under. The PAT is in tune with the current market trend.

Table 10.5 PAT (Rs. In crores)

Particulars 2011-122012-132013-142014-152015-162016-172017-182018-19

Company as a

whole -1.06 6.12 8.13 12.70 14.73 17.44 16.94 16.73


52/80



CASH ACCRUALS:

The cash accruals from the operations are considered enough for taking care of

repayment burden of the project. The year wise cash accruals are presented in the

table below

Table 10.6 Cash

Accruals (Rs. In crores)

Particulars 2011-122012-132013-142014-152015-162016-172017-182018-19

Company as a

0.33 7.80 10.30 15.37 14.76 14.83 9.04 8.83

whole

BT Project - - 1.03 6.04 7.19 8.92 8.80 8.89

LONG TERM DEBT EQUITY (TOL/TNW)

The yearly debt equity ratio after project implementation since 2012-13 shows a

declining trend which indicates high net worth proportion during the debt tenure.

Thus from the projections it is evident that the initial debt equity ratio of 1.58

gradually reaches to 0.36 by 2018-19.


53/80



Particulars 2011-12 2012-132013-142014-152015-162016-172017-182018-19

Company as a

1.58 1.26 0.99 0.73 0.56 0.44 0.41 0.36

whole

BT Project - - 1.99 2.35 1.40 0.93 0.60 0.42


54/80



BREAK EVEN

In the early years of production for the new product (BT) in view of low fixed

cost and substantial contribution, the Break Even point sales work out at 25% as

against projected capacity utilization of 45% in the second year of production

Particulars 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17 2017-18 2018-19

Breakeven

sales(Rs.in --- - 6.26 6.14 6.19 5.86 5.76 5.83

Crores)

Breakeven point

97.28 24.73 20.41 16.35 16.05 16.26

(%)

Capacity

35 45 55 65 65 65

Utilization


55/80



GROSS DSCR

Table10.9.1 (DSCRGross) for company as a whole

Particulars 2012-13 2013-14 2014-15 2015-16 2016-17 2017-18 2018-19

DSCR 1.48 1.64 1.94 2.08 2.43 3.34 4.93

Average 2.12

Table 10.9.2 (DSCR-Gross) for new project

Particulars 2013-14

2014-

15

2015-

16

2016-

17

2017-

18

2018-

19

DSCR 1.50 1.98 2.34 2.99 3.17 4.37

Average 2.74

The project specific average gross DSCR is 2.74. The lowest and highest DSCR

during repayment period is 1.50 and 4.37 respectively. The average net DSCR

works out to 3.63. However, the Average Gross DSCR & Average Net DSCR of

the company as a whole works out to 2.12 and 2.59 respectively.


56/80



Project Specific Indicators

The project specific DSCR & IRR are listed

below:

Average gross DSCR2.74Average net DSCR

3.63

The companys financial indicators as above indicate a favorable situation and as

such it is deemed that the project is considered economically viablesubject to

our observations brought out elsewhere in the report.

10. CREDIT:

The word credit comes from the Latin word credere, meaning trust. When sellers

transfer his wealth to a buyer who has agreed to pay later, there is a clear implication of

trust that the payment will be made at the agreed date. The credit period and the amount

of credit depend upon the degree of trust.

Credit is an essential marketing tool. It bears a cost - the cost of the seller having to

borrow until the customers payment arrives. Ideally, that cost is the price but, as most

customers pay later than agreed, the extra unplanned cost erodes the planned net profit.

RISK:

Risk can be defined as any uncertainty about a future event that threatens the

organizations ability to accomplish its mission. The Oxford dictionary defines risk as

the possibility of loss, injury, disadvantage or destruction.

But in the lexicon of banking business risk can be defined as:

I. The probability of loss due to default of a customer or counter-party

2. The probability of loss due to non-occurrence of events as anticipated; and

3. The probability of loss due to occurrence of unexpected events.


57/80



The loss due to the above causes may be financial or non-financial. It could also be

expected loss or unexpected loss.

RISK MANAGEMENT.

Risk Management is a discipline at the core of every financial institution and

encompasses all the activities that affect its risk profile. It involves identification,

measurement, monitoring and controll ing risks to ensure that

a) The individuals who take or manage risks clearly understand it.

b) The organizations Risk exposure is within the limits established by Board of

Directors.

c) Risk taking Decisions are in line with the business strategy and objectives set by

BOD.

d) The expected payoffs compensate for the risks taken

e) Risk taking decisions are explicit and clear.

f) Sufficient capital as a buffer is available to take risk

The acceptance and management of financial risk is inherent to the business of banking

and banks roles as financial intermediaries. Risk management as commonly perceived

does not mean minimizing risk; rather the goal of risk management is to optimize risk-

reward trade -off. Notwithstanding the fact that banks are in the business of taking risk,

it should be recognized that an institution need not engage in business in a manner that

unnecessarily imposes risk upon it: nor it should absorb risk that can be transferred to

other participants. Rather it should accept those risks that are uniquely part of the array

of banks service.


58/80



Risk Management framework

A risk management framework encompasses the scope of risks to be managed, the

process/systems and procedures to manage risk and the roles and responsibilities of

individuals involved in risk management. The framework should be comprehensive

enough to capture all risks a bank is exposed to and have flexibility to accommodate

any change in business activities. An effective risk management framework includes

a) Clearly defined risk management policies and procedures covering risk identification,

acceptance, measurement, monitoring, reporting and control.

b) A well constituted organizational structure defining clearly roles and responsibilities

of individuals involved in risk taking as well as managing it.

Banks, in addition to risk management functions for various risk categories may

institute a setup that supervises overall risk management at the bank.

Such a setup could be in the form of a separate department or banks Risk Management

Committee (RMC) could perform such function (A recent concept in this regard is

Enterprise risk management (ERM)). The structure should be such that ensures effective

monitoring and control over risks being taken. The individuals responsible for review

function (Risk review, internal audit, compliance etc) should be independent from risktaking units and report directly to board or senior management who are also not

involved in risk taking.

c) There should be an effective management information system that ensures flow of

information from operational level to top management and a system to address any

exceptions observed. There should be an explicit procedure regarding measures to be

taken to address such deviations.

d) The framework should have a mechanism to ensure an ongoing review of systems,policies and procedures for risk management and procedure to adopt changes.


59/80



Integration of Risk Management

Risks must not be viewed and assessed in isolation, not only because a single

transaction might have a number of risks but also one type of risk can trigger other

risks. Since interaction of various risks could result in diminution or

Increase in risk, the risk management process should recognize and reflect risk

interactions in all business activities as appropriate. While assessing and managing risk

the management should have an overall view of risks the institution is exposed to. This

requires having a structure in place to look at risk interrelationships across the

organization.

Business Line Accountability

In every banking organization there are people who are dedicated to risk management

activities, such as risk review, internal audit etc. It must not be construed that risk

management is something to be performed by a few individuals or a department.

Business lines are equally responsible for the risks they are taking. Because line

personnel, more than anyone else, understand the risks of the business, such a lack of

accountability can lead to problems.

Risk Evaluation/Measurement

Until and unless risks are not assessed and measured it will not be possible to control

risks. Further a true assessment of risk gives management a clear view of institutions

standing and helps in deciding future action plan. To adequately capture institutions risk

exposure, risk measurement should represent aggregate exposure of institution both risk

type and business line and encompass short run as well as long run impact on

institution. To the maximum possible extent institutions should establish systems /

models that quantify their risk profile, however, in some risk categories such as

operational risk, quantification is quite difficult and complex. Wherever it is not

possible to quantify risks, qualitative measures should be adopted to capture those risks.

Whilst quantitative measurement systems support effective decision-making, better

measurement does not obviate the need for well-informed, qualitative judgment.

Consequently the importance of staff having relevant knowledge and expertise cannot

be undermined. Finally any risk measurement framework, especially those which


60/80



employ quantitative techniques/model, is only as good as its underlying assumptions,

the rigor and robustness of its analytical methodologies, the controls surrounding data

inputs and its appropriate application.

Independent review

One of the most important aspects in risk management philosophy is to make sure that

those who take or accept risk on behalf of the institution are not the ones who measure,

monitor and evaluate the risks. Again the managerial structure and hierarchy of risk

review function may vary across banks depending upon their size and nature of the

business, the key is independence. To be effective the review functions should have

sufficient authority, expertise and corporate stature so that the identification and

reporting of their findings could be accomplished without any hindrance. The findings

of their reviews should be reported to business units, Senior Management and, where

appropriate, the Board.

Contingency planning

Institutions should have a mechanism to identify stress situations ahead of time and

plans to deal with such unusual situations in a timely and effective manner. Stress

situations to which this principle applies include all risks of all types. For instance

contingency planning activities include disaster recovery planning, public relations

damage control, litigation strategy, responding to regulatory criticism etc. Contingency

plans should be reviewed regularly to ensure they encompass reasonably probable

events that could impact the organization. Plans should be tested as to the

appropriateness of responses, escalation and communication channels and the impact on

other parts of the institutions.


61/80



TYPES OF RISK

An important input to risk management is risk assessment. Many public bodies such as

advisory committees are concerned with risk management. There are mainly three typesof risk are:

Market risk Credit Risk Operational risk

Risk analysis and allocation is central to the design of any project finance, risk

management is of paramount concern. Thus quantifying risk along with profit

projections is usually the first step in gauging the feasibility of the project. Once risks

have been identified they can be allocated to participants and appropriate mechanisms

put in place.

Non-Financial Risks

Non-financial risk refers to those risks that may affect a bank's business growth,

marketability of its product and services, likely failure of its strategies aimed at business

growth etc. These risks may arise on account of management failures, competition, non-availability of suitable products/services, external factors etc. In these risk operational

and strategic risk have a great need of consideration.

Operational Risk- It may be defined as the risk of loss resulting from inadequate or

failed internal process people and systems or because of external events.

Strategic Risk - Strategic risk is the risk that arises from the inability to implement

appropriate business plans and strategies, decisions with regard to allocation of

resources or adaptability to dynamic changes in the business/operating environment.

These are a number of other risk factor through which operations risk, credit risk and

market risk may manifest. It should be recognized that many of these risk factors are

interrelated, one results to other.


62/80



Financial Risks

Market Risk

Market risk is the risk of incurring losses on account of movements in market prices on

all positions held by the banks. Liquidity risk of banks arises from funding of long term

assets (advances) by short term sources (deposits) changes in interest rate can

significantly affect the Net Interest Income (NII). The risk of an adverse impact on NII

due to variations of interest rate may be called interest rate risk. Forex risk is the risk of

loss that bank may suffer on account of adverse exchange rate movements against

uncovered position in foreign currency. It comprises of

Interest Rate Risk Liquidity Risk Currency Forex Risk Hedging Risk

Credit Risk

Credit risk is defined as the possibility of losses associated with decrease in the credit

quality of the borrower or the counter parties. In the bank's portfolio, losses stem from

outside default due to inability or unwillingness of the customer or the counter party to

meet the commitments, losses may also result from reduction in the portfolio value

arising from actual or perceived deterioration in credit quality. It comprises of: Counter

Part or Borrower Risk, Intrinsic or Industry Risk, Portfolio or Concentration Risk.

CONTRIBUTORS OF CREDIT RISK:

Corporate assets

Retail assets

Non-SLR portfolio

May result from trading and banking book

Inter bank transactions

Derivatives


63/80



BANKS POLICY ON CREDIT RISK MANAGEMENT

OBJECTIVE OF THE POLICY

To ensure sound judgment under a credit risk framework this seeks to follow industry

best practices to achieve the following objectives:

1. Establishing an appropriate Credit Risk Management environment.2. Maintaining an appropriate credit administration, risk management and

monitoring process.

3. Optimizing resource use, earning protection by maximizing return andminimizing losses

4. Managing risks to boost long-term profit and competitive position5. Establishing and identifying specific procedures to ensure high quality credit

portfolio through risk management practices /processes.

6. Maintaining an appropriate credit administration, risk measurement andmonitoring process.

CREDIT RISK MANAGEMENT PROCESS

1. Bank continues to put in place effective Credit Risk Management Process toidentify, measure, monitor and control Credit Risk as a part of an overall

approach to risk management.

2. Primary Focus of Credit Risk Management process would be at two levels asunder:

a. Portfolio Level (Macro level approach for Intrinsic Risk of Banks CreditPortfolio i.e. Prudential Limits / Concentration etc.).

b. Individual Borrower Level (to deal / address default risk of individualborrower through Assessment/Measurement of asset quality of borrowal

accounts and risk through Credit Risk Grading /Rating.)

3. Loan pricing on a scientific basis.


64/80



4. Controlling the risk through effective Loan Review Mechanism, by effectivelyimplementing Banks Lending Policy containing exposure norms for borrowers /

group / sectors / industries besides other issues to maintain healthy and

diversified portfolio, Portfolio Management and credit selection based on credit

risk acceptability criteria / hurdle rate.

5. Building up of historical data based on migration of borrowal accounts overvarious rating grades for using the same in measurement of credit risk under

advanced approaches (IRB Framework).

MEASURES/INSTRUMENTS OF CREDIT RISK MANAGEMENT

All the credit related policies including Banks Lending Policy will be trigger points for

proper Credit Risk Management of the Bank. However at individual and portfolio level

the undernoted measures would be measures/ instruments to identify and measure the

credit Risk.

Credit Approving Authority.

Prudential Limits

Risk Grading/Rating of Borrowal Accounts.

Portfolio Management

Loan Review Mechanism & other various Credit Monitoring Tools


65/80



11. RISK GRADING SYSTEM

Risk Grading of any account reflects upon the borrowers strength and soundness based

on the study of past results and future projections. A good Credit-risk Rating

Framework (CRF) should act as a single point indicator to identify good or a bad

category. It can be aggregated through various external and internal risk faced by the

Borrower.

External Risk or Activity Risk Or Industry Risk

Assessment is usually based on: Demand-Supply Position, Govt. policy for the sector,

Extent of Competition, Input Related Risk, variability of operating margin/income for

sector as a whole etc

Internal Risk with respect to counter party:

Business Risk

Assessment is usually based on: brand equity, consistency in quality, product range, and

distribution set up, diversity of market, financial ability to withstand competition, after

sales service, availability of raw material, capacity utilization, employee cost, energy

cost, selling cost, cost effective technology etc

Financial Risk

Assessment is usually based on Financial Ratios in balance sheet/profit & loss statement

Management Risk

Assessment is usually based on: experience of promoters/ management, business

&financial policy, track record etc

Other risk parameters

Assessment of Clearances & financial closures, Operational Aspects etc. covered.


66/80



THE PROCESS OF RISK GRADATION:

There will be three stage processes involved in assessing overall risk grade of a

borrowal account inbanks rating modules (RAM & CRG) except the rating coverageas made under CRG1.

CRG1 Module is used for risk grading of borrowal accounts with credit limit below Rs

10 lacs as also some other category of advances as detailed above. There will not be

scoring system for various Risk Factors under this module and grade will be allocated as

per thumb rule for various categories of advances.

The three stage process in case of RAM & CRG-2 to CRG-7 modules are as under:

1. Rating Modules helps isolate risk elements using a top-down approach. Theuser is required to score the company on risk factors only (which are

automatically built up stage by stage into the final grading).

Stage I The user scores each risk factor

Stage IIThe risk factors are aggregated to arrive at the grading for each

parameter

Stage III

The scores for risk parameters are further aggregated to arrive at a

grading for a risk category. Finally the overall grading is a result of

the aggregation of the different risk category scores

2. Stage I: Various Risk Factors/Parameters within various Risk Category (i.e.,Industry/Activity Risk, Business Risk, Financial Risk, Management Risk,

Operational Aspects etc) will be scored on six point scales (6 being the

highest score and 1 is the lowest score, However, different scoring system

has also been incorporated in some parameters under various CRG modules.

Scale gradation will vary depending on the borrowers profile.

3. Stage II: Scores under various Risk Factors of each parameter will beaggregated to arrive at the grading/scores of each Risk category.


67/80



4. Stage III: Scores of each Risk Category will be aggregated to arrive at theOverall Credit Risk Grading of a particular borrowal account. The final

aggregated scores vis--vis Risk Grade (which is on eight point scale) is

given. While aggregating the scores of various Risk Categories, a weightage

as below will be assigned to arrive at the final score in various modules to be

used for grading.

MODULE

Weightage assigned to various Risk Categories

Industry/

ActivityBusiness Financial Management

Operational

Aspects

CRISILS

RAM*

15% 30% 40% 15% NIL

CRG2 10% 20% 35% 35% NIL*

CRG3 20% 25% 35% 20% NIL*

CRG4 20% 20% 25% 35% NIL*

CRG5 20% 30% 30% 20% NIL*

CRG6 15% 25% 40% 20% NIL*

CRG 7A 10% 10% 40% 20% 20%

CRG 7B 20% 15% 30% 35% NIL*

CRG 7C Nil 10% 20% 40%

30%(Includes:

Market Report-

10%

Security/Gtee

Coverage- 20%)

CRG 7D 20% 15% 30% 35% NIL*

*Operational Aspects are included under Management/ Business Risk etc.(Wherever applicable) in various other Modules.


68/80



RISK GRADE DEFINITION

Overall

Weighted

Risk Score

Range

Risk

GradeGrade Description

5.10 - 6.00 AB 1

The fundamentally strong debt servicing capacity of such

companies is more unlikely to be adversely affected by

changes in circumstances.

4.40 - 5.10 AB 2

Adverse business conditions are unlikely to affect debt

servicing capacity. Such companies differ in safety from

those in Grade 1 only marginally.

3.80 - 4.40 AB 3

Changes in circumstances are more likely to

affect debt servicing capacity than for higher

grades.

3.40 - 3.80 AB 4

While such companies are less susceptible

to default than those in lower grades,

uncertainties faced by them could adve

Credit Appraisal Summer Internship

Documents

Transcript of Credit Appraisal Summer Internship