Credit Appraisal Summer Internship

CREDIT APPRAISAL AT INDIAN OVERSEAS BANK
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.
RAKESH KUMAR REDDY G
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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.
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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.
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.
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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.
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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:
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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.
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. 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.
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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:
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
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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.
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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 the overdraft 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 of borrowing 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 or stores 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.
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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.
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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 a financial 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 trade transactions 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.
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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.
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 material supply 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

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 for the 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).
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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.

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.
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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, biopharmaceuticals 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.
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THE PROMOTERS: S.No NAME DESIGNATION AGE EDUCATIONAL BACKGROUND AND EXPERIENCE 1. Mr. A Managing Director 34 Master holder chemical engineering from University of Illinois Chicago. 5 years of experience synthesis especially in designing of in chemical plant. Looking after in degree in
overall business management. 2. Mr. B Executive Director 33 Chemical engineer & post graduate from Chennai. Looking after sales financial management. and IIT
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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 about at 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.
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The key financial indicators for the year 2011-12 are as under PARTICULARS Net sales & other income Operating profit Depreciation Interest Profit before tax Provision for tax (deferred tax) Net profit Paid up capital TNW TOL/TNW Net working capital Current ratio AMOUNT . IN CRORES 814 313 139 302 (128) (22) (106) 18.94 17.75 1.63 (3.40) 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).
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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.
Sanction of following Fresh/Enhancement/Renewal of limits. Nature of Purpose for Existing proposed limits Cash credit For operational expenses PC Bills Term Loan Capital Expenditure NFB: LC/LG Total: 15.00 11.25 25% 3.75 25% Limits Proposed Limits (+)/ (-)
(Rs. In crores) Margi n% Interest % Interest proposed %
limit/facility
Applicable rate
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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 product. b. 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): Guarantors and their net worth: Name Mr. A Mr. B Age 35 28
Prime Rs. 26.13
Collateral Rs. 37.89 (Rs. In crores)
Address
Worth 1.61 0.15
As on 31-03-2012 12-09-2012
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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) Discretionary Powers Nature of Limits Above up to Proposed limits
Secured + Unsecured limits per borrower Unsecured limits per borrower
25.00
15.00
Total limits for Group Limits falls under GM. powers. Other requests fall under
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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 semiautomated 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
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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 various cultures. 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
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 is likely 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 201314. 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.
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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 the initial 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.
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5. FINANCIAL INDICATORS
BRIEF FINANCIAL INDICATORS OF SUBJECT COMPANY: Year ending Audit status Net Sales Operating profit Net Profit After Tax Cash Generation Net working capital Current ratio TNW Adjusted TNW ** 2011 Audited 1.56 1.72 18.12 2012 Audited 8.14 -0.44 -1.06 0.33 -2.49 0.80 17.71 2013 (Estimated)* 26.55 3.70 2.55 3.94 4.24 1.33 26.00
(Rs. in crores) 2014 Projections 46.02 11.19 7.79 9.96 5.64 1.23 38.25
TOL / TNW
1.17
1.58
0.99
1.05
Adjusted TOL/TNW** Gross Fixed assets Term loans

2.77 17.45
37.00 15.70
36.99 16.18
53.49 15.53
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ABRIDGED FINANCIAL POSITION Year ending Audit status LIABILITIES Reserves - Long Term Liabilities - Current Liabilities LIABILITIES ASSETS - Fixed Assets - Non-Current Assets - Current Assets - Intangible Assets - TOTAL ASSETS 34.49 1.12 3.73 39.34 35.61 0.29 9.77 0.22 45.89 34.21 0.25 17.23 -51.69 TOTAL 19.05 2.16 39.34 15.70 12.26 45.89 12.70 12.99 51.69 Capital 2011 Audited and 18.13 2012 Audited 17.93 2013
Rs. in crores 2014 Projection 38.69
Estimate 26.00
15.63 24.47 78.79
48.25 0.43 30.11 78.79
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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.
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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 Assets Current Liabilities Working Capital Gap= Current Assets Current Liabilities (Other than Bank Borrowings) Need for WC finance a) To obtain RM for processing b) To pay wage bills, manufacturing expenses for conversion of RM into FG c) To keep WIP for smooth operation & to keep FG for regular supply d) To grant credit to its customers e) 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 process c) Conversion of stock into process to FG d) Conversion of FG into receivables/debtors or cash e) Conversion of receivables/debtors into cash.
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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 MPBF Method : 1.25:1 : 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.
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COMPUTATION OF MAXIMUMUM PERMISSIBLE BANK FINANCE (MPBF)
Method Turnover MPBF Cash Budget
MSE(Manufacturing) Up to Rs.5 Crore >5 but <10 crore 10 crore and above
MSE(Services) & Others Up to Rs.2 crore >2 but <10 crore 10 crore and above
MPBF Method and cash Budget Method are interchangeable at borrowers request. In case of Software, Sugar, Tea & Coffee industries and Real Estate Sector, the monthly cash budget will be adopted. CREDIT APPRAISAL TECHNIQUES Tandon Committee: Method 1 Min Margin 25% on WCG WCG = TCA- CL other than bank borrowings Note: 25% on WCG is minimum margin, if actual/projected margin is more, then higher margin shall be taken Actual/projected margin = TCA TCL Tandon Committee: Method 2
Min Margin 25% on TCA This will ensure a minimum current ratio of 1.33:1 Note: 25% on WCG is minimum margin, if actual/projected margin is more, then higher margin shall be taken
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Method 1 TC(TCA) 100
Method 2 100 20
Less: CL(other than bank 20 borrowings) WCG 80
80 25
Less: 25% on WCG(M1) 20 25% on TCA(M2) MPBF Min Current ratio: 1.33:1 60
55
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))
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Calculation of bank finance for WC: Turnover method a) Proposed bank finance for the year : Rs in lacs 1 Projected gross sales WC gap( 25% of gross sales) Min margin i.e 5% of projected sales Projected capital 2 minus 3 2 minus 4 Permissible bank finance 5 or 6 whichever is lower Bank finance sought for by the borrower b) In case the borrower applied for WC limit higher or lower than that of computed under si.no 7 the following procedure must be adopted: net working
5 6 7
Sr.No
Particulars/For the period (Proj.) ended
Gross Sales 1 RM 2 WIP 3 FG 4 Receivables
100
B C
Total of 1 to 4 Trade creditors
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D E F G
WC Gap (B-C) % of WCG to gross sales 20% of WCG (D) Proj. Net working Cap Surplus (NWC+ other cr.liab other Cr.Assets)
H I J
D minus F D minus G PBF H or I whichever is lower
Calculation of Bank Finance for Working Capital: MPBF 2 method
1 2
Projected current assets Current liabilities other
than bank borrowings WC gap( 1 minus 2) Minimum margin i.e 25% of the CA( i.e of 1) Projected capital 3 minus 4 3 minus 5 PBF 6 or 7 whichever is lower net working
3 4
6 7 8
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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) 2.48 (3.06 months) 0.67 (0.52 months)
2013-14 (Projected) 5.28 (3.05 months) 1.31 (0.51 months) 2.70 (1.09 months) 8.98 (2 months) 1.73 (0.88 months)
Raw Material indigenous. 0.17 (Months Consumption) Stock in process (0.76 months) 0.00
Finished
Goods
(Months 1.84 (4.17 months)
1.60 (1.24 months) 5.17 (2 months) 0.81 (0.81 months)
cost of sales) Receivables (Months sales)
inland 6.16 (8 months)
Sundry Creditors (Months 1.32 purchases)
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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.
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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 31.3.2013 (Rs. In crores) crores)
Cash & bank balance Advance to suppliers Advance taxes Misc. current assets Total
0.02 0.03 0.00 1.23 1.28
0.29 2.50 0.62 3.05 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 31.3.2013 (Rs. In crores) crores)
Total Current Assets Less: (Other Current Than
9.77
17.20 6.84
Liabilities 6.87 Bank
Borrowings) Working Capital Gap NWC 2.90 -2.49 10.37 3.97
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MPBF I Less: 25% of TCA MPBF - II
7. TERM LOAN ASSESSMENT:
COST OF PROJECT DETAILS
Particulars
Amount (In Rs. Crores)
Civil Works Plant & Machinery ( Including contingencies) Preoperative Expenses Working Capital Margin TOTAL
2.91 11.99 0.98 1.25 17.13
MEANS OF FINANCE
Particulars
Amount (In Rs. Crores)
Equity Contribution Term Loan TOTAL
5.88 11.25 17.13
Page 43
7. DSCR CALCULATION
DEBT SERVICE COVERAGE RATIO
DEBT SERVICE COVERAGE RATIO PARTICLARS Cash Accruals 5.19 Less: Capex Net Accruals 5.19 Interest on Term Loans 3.04 Unsecured Loans Sale of Assets Total 8.23 12.45 15.06 13.20 14.04 8.82 9.49 81.29 3.69 2.86 1.11 1.59 0.65 0.13 13.07 8.76 12.20 12.09 12.45 8.17 9.36 68.22 8.76 12.20 12.09 12.45 8.17 9.36 68.22 2013 2014 2015 2016 2017 2018 2019 Total
OBLIGATIONS:
Term
Loans
Installment 4.28 4.28 4.28 4.28 2.92 Page 44
(Existing)
20.04
Term
Loans
Installments 0.56 2.25 2.25 2.25 2.25 1.69 11.25
(Proposed) Interest on Term Loans
3.04
3.69
2.86
1.11
1.59
0.65
0.13
13.07
Total 7.32 8.53 9.39 7.64 6.76 2.90 1.82 44.36
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.
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8. TURNOVER AND PROFITABILITY:
2013Particulars 1. Capacity 120000 14
201415 12000 0
201516
201617 12000
201718 12000 0
201819
201920 2020-21
Utilisation Occupancy (%) Operating Capacity (MTon's) 2. Gross Sales (
120000
120000
120000
120000
35
45
65
75
80
85
90
90
14000
54000
78000
90000
96000
102000
108000
108000
Rs. In Lakhs) 3. Gross Profit (
6.44
24.85
35.89
41.41
44.17
46.93
49.69
49.69
Rs. In Lakhs) 4. PBDIT 5. Profit 6. Interest (Rs. % of Gross
1.26 0.80
8.87 7.38
12.63 10.52
14.31 11.89
15.06 12.49
15.99 13.25
16.90 14.00
16.52 13.62
19.56
35.68
35.18
34.55
34.10
34.07
34.01
33.25
In lakhs) (On Loans) Term
1.10
0.77
0.45
0.12
0.00
0.00
0.00
0.00
Page 46
7.
Interest ( Rs. 0.23 0.55 0.55 0.55 0.55 0.55 0.55 0.55
In Lakhs) (On Working capital only) 8. Depreciation
(Under WDV) 9. Tax 10. Tax 11. % of Net Profit after Profit Before
0.49
0.99
0.99
0.99
0.99
0.99
0.99
0.99
0.21
5.20
8.54
10.24
11.16
12.25
13.33
13.07
0.18
3.63
5.92
7.06
7.67
8.40
9.13
8.93
Profit (PBT) 12. % of Net
3.26
20.92
23.81
24.72
25.27
26.11
26.83
26.30
Profit (PAT) 13. % of Material Handling Charges to Sales
2.74
14.63
16.48
17.04
17.37
17.90
18.37
17.96
53.92
53.92
53.92
53.92
53.92
53.92
53.92
53.92
14. Margin
Security
WDV of Fixed Assets Aggregate Term Outstanding Loan 10.69 8.44 6.19 3.94 1.69 Page 47
15.01
14.02
13.03
12.05
11.06
10.07
9.08
Security
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. Assets
Current 6.48 11.45 16.73 21.33 27.12 32.93 39.39 46.64
16. Liabilities
Current 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 -
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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 whole 31.07 46.02 67.86 76.54 85.21 85.21 85.21
BT Project
6.44
24.82
30.34
35.86
35.86
35.86
Page 49
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
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
BT Project
1.81
10.41
11.93
14.15
13.69
13.51
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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 whole 8.40 11.70 18.88 22.24 26.60 26.06 25.94
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 Particulars Company as a whole -1.06 6.12 8.13 12.70 14.73 17.44 16.94 16.73 (Rs. In crores) 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17 2017-18 2018-19
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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 Accruals
10.6
Cash (Rs. In crores) 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17 2017-18 2018-19
Particulars Company as a
0.33 whole BT Project -
7.80
10.30
15.37
14.76
14.83
9.04
8.83
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.
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Particulars Company as a
2011-12 2012-13 2013-14 2014-15 2015-16 2016-17 2017-18 2018-19
1.58 whole BT Project -
1.26
0.99
0.73
0.56
0.44
0.41
0.36
1.99
2.35
1.40
0.93
0.60
0.42
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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 Crores) --6.26 6.14 6.19 5.86 5.76 5.83
Breakeven point 97.28 (%) 24.73 20.41 16.35 16.05 16.26
Capacity 35 Utilization 45 55 65 65 65
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GROSS DSCR
Table10.9.1 (DSCR Gross) 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
2014Particulars 2013-14 15
201516
201617
201718
201819
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.
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Project Specific Indicators The project specific DSCR & IRR are listed below: Average gross DSCR 2.74 Average 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 viable subject 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.
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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 controlling 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 riskreward 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.
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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 risk taking 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.
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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
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.
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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 types of 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, nonavailability 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.
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
BANKS POLICY ON CRE DIT 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 and minimizing losses 4. Managing risks to boost long-term profit and competitive position 5. Establishing and identifying specific procedures to ensure high quality credit portfolio through risk management practices /processes. 6. Maintaining an appropriate credit administration, risk measurement and monitoring process. CREDIT RISK MANAGEMENT PROCESS 1. Bank continues to put in place effective Credit Risk Management Process to identify, 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 as under: a. Portfolio Level (Macro level approach for Intrinsic Risk of Banks Credit Portfolio i.e. Prudential Limits / Concentration etc.). b. Individual Borrower Level (to deal / address default risk of individual borrower through Assessment/Measurement of asset quality of borrowal accounts and risk through Credit Risk Grading /Rating.) 3. Loan pricing on a scientific basis.
4. Controlling the risk through effective Loan Review Mechanism, by effectively implementing 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 over various 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
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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.
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THE PROCESS OF RISK GRADATION: There will be three stage processes involved in assessing overall risk grade of a borrowal account in banks rating modules (RAM & CRG) except the rating coverage as made under CRG 1. 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. The user is required to score the company on risk factors only (which are automatically built up stage by stage into the final grading). Stage I Stage II The user scores each risk factor The risk factors are aggregated to arrive at the grading for each parameter The scores for risk parameters are further aggregated to arrive at a Stage III 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 be aggregated to arrive at the grading/scores of each Risk category.
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4. Stage III: Scores of each Risk Category will be aggregated to arrive at the Overall 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. Weightage assigned to various Risk Categories MODULE Industry/ Activity CRISILS RAM* CRG2 CRG3 CRG4 CRG5 CRG6 CRG 7A CRG 7B 15% 10% 20% 20% 20% 15% 10% 20% Business Financial Management Operational Aspects NIL NIL* NIL* NIL* NIL* NIL* 20% NIL* 30%(Includes: Market CRG 7C Nil 10% 20% 40% 10% Security/Gtee Coverage- 20%) CRG 7D 20% 15% 30% 35% NIL* Report-
30% 20% 25% 20% 30% 25% 10% 15%
40% 35% 35% 25% 30% 40% 40% 30%
15% 35% 20% 35% 20% 20% 20% 35%
*Operational Aspects are included under Management/ Business Risk etc. (Wherever applicable) in various other Modules.
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RISK GRADE DEFINITION
Overall Weighted Risk Range The fundamentally strong debt servicing capacity of such 5.10 - 6.00 AB 1 companies is more unlikely to be adversely affected by changes in circumstances. Adverse business conditions are unlikely to affect debt 4.40 - 5.10 AB 2 servicing capacity. Such companies differ in safety from those in Grade 1 only marginally. Changes 3.80 - 4.40 AB 3 affect grades. While 3.40 - 3.80 AB 4 to such default companies than faced those by are in them less lower could susceptible grades, adversely in debt circumstances servicing are more than likely for to Risk Score Grade Grade Description
capacity
higher
uncertainties
affect debt servicing capacity. 3.00 - 3.40 AB 5 Uncertainties faced by issuer could lead to inadequate capacity to make timely debt repayments. Adverse business or economic conditions are likely to lead to lack of ability or willingness to service debt obligations. Timely payment of debt would continue only if favorable circumstances continue. Debt servicing capacity is in default and returns from this may be realized only on reorganization or liquidation.
2.50 - 3.00
AB 6
1.75 - 2.50
AB 7
1.00 - 1.75
AB 8
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REPORTING SYSTEM: The reporting formats on Credit Risk Gradation will be submitted to Head Office/ Zonal Office in the manner prescribed below: Statement No Statement01(Quarterly) (Quarterly) Summary Risk Profile of Name of Statement Guidelines Branches the the days accounts limit/ with ZOs report of to will Branch/ Zone will submit 10 the and submit statement Management within of 15 each Year/
within end of
Account wise statement in respect of quarter Standard Statement-02 (Half-yearly) Statement-03 (Yearly) aggregate Borrowal credit
ZOs,
balance consolidated to Risk HO of end
outstanding of Rs 10.00 lacs& above Statement on grade
wise Deptt, days
migration to default/NPA Statement on for Sector-wise Assessment
Asset quarter/Half
Statement-04 (Yearly)
Quality
of Financial Year to which it relates.
Historical Loan Losses
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12. SWOT ANALYSIS:
Strength

Cost competitiveness due to lower labor cost and production cost Well-developed industry with strong manufacturing base Well established network of Laboratories and R & D infrastructure for new drug discovery and development
Access to pool of highly trained and skilled scientists, both in India and abroad Strong marketing and distribution network in domestic as well as international market
India is second largest country in terms of population in world with rich biodiversity Expertise in reverse engineering and development of new Chemical process made Indian pharmaceutical industry as one of the strongest generic industry
Weakness

Low investment in innovative Research & Development Lack of resources to compete with MNCs for New Drug Discovery Research and to commercialize molecules on a worldwide basis
Lack of culture of innovation in the industry Low per capita medical expenditure and healthcare spend in country Inadequate regulatory standards Production of spurious and low quality drugs tarnishes the image of industry at home and abroad
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Opportunities

Significant export potential to the developing as well as developed countries Licensing deals and collaborations with MNCs for New Chemical Entities and New Drug Delivery Systems
Providing marketing operations to sell MNC products in domestic market India can be niche player in global pharmaceutical R & D by developing world class infrastructure
Contract manufacturing arrangements with MNCs Potential for developing India as a centre for International Clinical Trials Increasing aging world population. Increasing incomes and buying power of people especially in rural areas has opened the great opportunity for Indian pharma companies. Around 70% of the total population of India is residing in rural areas.
Growing awareness for health and increasing spending on health
Threats
Product patent regime poses serious challenges to domestic industries unless it invests in R & D.
R & D efforts of Indian pharmaceutical companies hampered by lack of enabling regulatory requirement. For instance, restrictions on animal testing out-dated patent office.
DPCO (Drug Price Control Order) puts unrealistic ceilings on product prices and profitability and prevents pharmaceutical companies from generating investible surplus.
Exports effort hampered by procedural hurdles in India as well as non-tariff barriers imposed abroad.
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13. ASSUMPTIONS
The installed capacity of the Proposed Plant is 120 TPA.
The revenues have been calculated on the basis of capacity utilization @ 35% in the first year (2013-14) with an increase of 10% till the year 2017 and at an yearly increase of 0% thereafter.
The plant will operate 330 days a year.
The sales are assumed on account of 100% domestic market.
Excise duty and sales duty are considered at 12.36 % and 4% respectively.
All raw material costs are considered at prevailing market prices.
Power cost has been assumed at Rs5.50 per unit and cost of coal at Rs 5500/ per ton.
The depreciation is calculated under straight line method at the following rates as per schedule XIV of Companies Act 1956 as mentioned below
Interest on term loan is taken at 14.25% p.a and on WC limits it is taken as 14.00% p.a.
It is assumed that the term loan shall be first disbursed by December 2012 and drawal shall be completed by April 2013.
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The repayment of the term loan shall be commencing after a moratorium of 12 months from the date of first disbursement i.e. tentatively in December 2013 and the loan shall be repaid in 20 equal quarterly installments starting from December 2013.
Income Tax is taken at 30.9% as applicable to Companies.
Page 73
14. CONCLUSION
Based on the discreet observations of the location, existing facilities in the plant and prevailing market scenario for the products, the following conclusions can be drawn about the company.
The promoters of the company are well experienced in business and marketing.
The company will gain from the experience and insight of Mr. S. Chandrasekhar, Managing Director of the company, who has rich experience in manufacture of pharmaceutical products.
The plant is located in a notified industrial growth centre of AP
The location of the plant is close to NH5 with all facilities available within reach and qualifies as ideal location for an industry.
The land owned by the company, over which the plant is set up is adequate for the plant and is with rich ground water potential.
The buildings and civil constructions are adequate for the existing operations of the plant and are of good construction.
The plant & machinery are of reputed makes and adequate for the present production volumes.
All the utilities required exist in the plant and are adequate for the plant operations.
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The layout of the plant is well laid out for convenient operations in the plant.
All the raw materials and packing materials are available indigenously and no difficulty is faced in procuring the same.
The existing manpower is adequate for the plant operations.
The production has been active since 2012 only due to delayed commissioning of plant.
Presently the company is manufacturing Serratiopeptidase&Docosahexaenoic Acid only
Besides the above two products, the company plans to manufacture the following product immediately Beta-thymidine
The proposed will come up adjacent to the existing production facility in the plant.
The civil constructions and plant & machinery proposed for the additional facility are adequate for the volume of production.
The company has established a state of the art research & development facility for developing new products on their own.
Quality control laboratory with all required equipments & apparatus is existing in the plant, for quality testing and ensuring the quality of final products.
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In
view
of
the
above
observations
and
conclusions,
the
proposed
expansion project for manufacture of Beta Thymidine can be considered as technicallyfeasible.
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CREDIT APPRAISAL AT INDIAN OVERSEAS BANK

INTRODUCTION OF THE PROJECT

Key issues in appraising projects include the following.

RAKESH KUMAR REDDY G

CREDIT APPRAISAL AT INDIAN OVERSEAS BANK

NEED, TARGETING AND OBJECTIVES

OUTPUTS AND OUTCOMES

CREDIT APPRAISAL AT INDIAN OVERSEAS BANK

OBJECTIVE OF THE STUDY:

NEED FOR APPRIASAL:

SCOPE OF THE STUDY

Credit appraisal of a proposal helps the firm to,

CREDIT APPRAISAL AT INDIAN OVERSEAS BANK

LIMITATIONS OF THE STUDY:

RAKESH KUMAR REDDY G

CREDIT APPRAISAL AT INDIAN OVERSEAS BANK

HISTORY OF INDIAN OVERSEAS BANK

RAKESH KUMAR REDDY G

CREDIT APPRAISAL AT INDIAN OVERSEAS BANK

POST - NATIONALIZATION ERA (1969-1992)

SERVICES OFFERED BY INDIAN OVERSEAS BANK

Current Account: Savings Accounts: Fixed Deposit: Recurring Deposit: Loans:

RAKESH KUMAR REDDY G

CREDIT APPRAISAL AT INDIAN OVERSEAS BANK

CREDIT APPRAISAL AT INDIAN OVERSEAS BANK

RAKESH KUMAR REDDY G

CREDIT APPRAISAL AT INDIAN OVERSEAS BANK

Feasibility of the Project

Market and Demand analysis

CREDIT APPRAISAL AT INDIAN OVERSEAS BANK

Technical analysis is concerned primarily with:

RAKESH KUMAR REDDY G

CREDIT APPRAISAL AT INDIAN OVERSEAS BANK

RAKESH KUMAR REDDY G

CREDIT APPRAISAL AT INDIAN OVERSEAS BANK

RAKESH KUMAR REDDY G

CREDIT APPRAISAL AT INDIAN OVERSEAS BANK

RAKESH KUMAR REDDY G

CREDIT APPRAISAL AT INDIAN OVERSEAS BANK

RAKESH KUMAR REDDY G

CREDIT APPRAISAL AT INDIAN OVERSEAS BANK

GUIDELINES FOR PREPARATION OF COMPREHENSIVE PROPOSAL IN BOARD NOTE FORMAT:

All the columns of newly designed

Board Note format along with formats for Operating

CREDIT APPRAISAL AT INDIAN OVERSEAS BANK

iii) Any technology up gradation made.

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

ii) Names of main buyers.

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

d. Competency of the management

CREDIT APPRAISAL AT INDIAN OVERSEAS BANK

b) Tangible Net worth

d) Net Working Capital & Current Ratio.

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

b) Acceptability of inventory holding.

RAKESH KUMAR REDDY G

CREDIT APPRAISAL AT INDIAN OVERSEAS BANK

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

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.

h) Consents, Approvals & Environmental clearance aspects.

i) Comments of existing term loan & its repayments.

j) Special monitoring requirements if any.