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This document summarizes the credit appraisal process at Oriental Bank of Commerce for large corporate loans over 50 crores. It discusses the key departments involved - Credit Administration and Risk Management. The credit appraisal process involves collecting data on the client's financials and industry, conducting an analysis of operating performance and risks, and making a decision on sanctioning, reviewing or renewing the loan. A live case study example is also provided to illustrate how the process works in practice. The goal of the report is to provide an in-depth understanding of credit appraisal at OBC for large loans.
This document summarizes the credit appraisal process at Oriental Bank of Commerce for large corporate loans over 50 crores. It discusses the key departments involved - Credit Administration and Risk Management. The credit appraisal process involves collecting data on the client's financials and industry, conducting an analysis of operating performance and risks, and making a decision on sanctioning, reviewing or renewing the loan. A live case study example is also provided to illustrate how the process works in practice. The goal of the report is to provide an in-depth understanding of credit appraisal at OBC for large loans.
This document summarizes the credit appraisal process at Oriental Bank of Commerce for large corporate loans over 50 crores. It discusses the key departments involved - Credit Administration and Risk Management. The credit appraisal process involves collecting data on the client's financials and industry, conducting an analysis of operating performance and risks, and making a decision on sanctioning, reviewing or renewing the loan. A live case study example is also provided to illustrate how the process works in practice. The goal of the report is to provide an in-depth understanding of credit appraisal at OBC for large loans.
I hereby declare that this work, entitled Credit Appraisal of Large Corporate at Oriental Bank of Commerce- Head Office, is a bonafide work undertaken by me under the guidance of Mr. Rakesh Gupta (Deputy Chief Manager, Oriental Bank of Commerce) and submitted to School of Business, Public Policy and Social Entrepreneurship, Ambedkar University Delhi, in partial fulfilment of requirements for the award of the degree of Masters of Business Administration (2012-14). This project has not been submitted in part or in whole to any other University or for any other course.
Sameer Dudeja FY-24
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ACKNOWLEDGEMENT
My heartfelt gratitude towards Mr. M.L Sachdeva (Dy. General Manager, Large Corporate Credit), my Project guide Mr. Rakesh Gupta (Dy. Chief Manager, Large Corporate Credit) for providing me with the opportunity to work on the project titled Credit Appraisal of Large Corporate and constantly guiding me on the project by reviewing the project periodically. I would like to extend a special thanks to Mr. P Suresh Kumar (Chief Manager, Large Corporate Credit) and Mr. Keshav Rao (Manager, Risk Management) for providing constant encouragement, lending valuable suggestions and sharing their experience and knowledge with me with the sole motive of making my internship at the organisation worthwhile. I would like to appreciate and thank Ms. Swati Tandon, Ms. Anjana Yadav, Ms. Nikita Nigam and Mr. Mahender Singh for explaining me the nittigrities of the credit appraisal process. I would also like to thank my mentor Ms. Nidhi Kaicker, Assistant Professor, School of Business, Public Policy and Social Entrepreneurship, AUD for her guidance, encouragement and support throughout my entire project work, without which my report would not have seen the light of the day. I would like to thank School of Business, Public Policy and Social Entrepreneurship, AUD for providing me with the opportunity to intern with Oriental Bank of Commerce, respected faculty for equipping me with the right knowledge which was very useful during the entire summer internship. Last but not the least a big thanks to my family and friends for their never ending support and guidance.
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Contents EXECUTIVE SUMMARY ...................................................................................................................................................... 5 CHAPTER 1 Company Overview ....................................................................................................................................... 6 1.1 About Oriental Bank of Commerce (OBC) ............................................................................................................... 7 1.2 Organisational Design ............................................................................................................................................. 8 1.3 Functions of a Commercial Bank ........................................................................................................................... 10 1.3.1 Merchant Banking: Meaning .......................................................................................................................... 10 1.3.2 Refinancing ..................................................................................................................................................... 11 1.3.3 Investment ..................................................................................................................................................... 12 1.3.4 Accepting Deposits: ........................................................................................................................................ 12 1.3.5 Loans and Advances ....................................................................................................................................... 13 1.4 OBC- Key Offerings ................................................................................................................................................ 15 1.4.1 Oriental Bank of Commerce: Merchant Banking ........................................................................................... 15 1.4.2 Oriental Bank of Commerce: Loans and Advances ........................................................................................ 15 1.4.3 Oriental Bank of Commerce: Treasury Operations ........................................................................................ 16 1.4.4 Oriental Bank of Commerce: Foreign Exchange Business.............................................................................. 16 1.5 Industry Scenario and Competitor landscape ....................................................................................................... 17 1.5.1 Industry Scenario: .......................................................................................................................................... 17 1.5.2 Competitor Landscape: .................................................................................................................................. 18 1.6 Key Financials and Projections .............................................................................................................................. 18 CHAPTER 2 Key Deliverables & Tasks Completed .......................................................................................................... 20 2.1 Key Deliverables .................................................................................................................................................... 21 2.2 Tasks Completed ................................................................................................................................................... 21 CHAPTER 3 Research Methodology & Credit Appraisal Process ................................................................................... 22 3.1 Data Collection ...................................................................................................................................................... 23 3.2 Credit Appraisal Process ....................................................................................................................................... 23 3.2.1 Credit Administration Department (CAD): ..................................................................................................... 23 3.2.2 Risk Management Department: ..................................................................................................................... 25 3.2.2 The appraisal process: .................................................................................................................................... 30 3.3 Live Case ................................................................................................................................................................ 31 CHAPTER 4 Recommendations & Learning Outcomes ................................................................................................... 39 4.1 Recommendations ................................................................................................................................................ 40 4.2 Learning Outcomes ............................................................................................................................................... 40 Abbreviations .................................................................................................................................................................. 41 Bibliography .................................................................................................................................................................... 42 Annexures ....................................................................................................................................................................... 43
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EXECUTIVE SUMMARY The basic purpose of this report is to enable the reader to get an in depth knowledge of the credit appraisal process followed at Large Corporate Credit Department, Oriental Bank of Commerce. The report covers all the steps undertaken during the appraisal process while granting loans to Large Corporate i.e. sanction, review, renew of loans above Rs. 50Crore. The report also covers the methods used by the bank to analyse the proposal for sanction of loan. This includes conducting a financial & operating performance analysis of the client, analysis of the industry in which the client operates his/her business, analysing the past credit history of the client and then giving justifications for the demands of the client based on the above for the perusal of the sanctioning authority which take the final call on the sanction of the loan. To study this, the report also covers a live case about ABC Mills LTD. which comprehensively explains the above mentioned steps of the credit appraisal process. The report briefly discusses about how the Risk Management department plays a vital role in the credit appraisal process by assigning credit ratings to the clients on the basis of internal credit rating guidelines of the bank. Apart from studying the credit appraisal process, the report also caters to general banking, the core functions of a commercial bank, analysis of the banking industry (current scenario, future trends, competitors etc.), analysis of the credit administration department, organisational design of the bank. The report also tries to suggest ways and means to bring about efficiency in the credit appraisal process in the form of valid recommendations to the department.
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CHAPTER 1 Company Overview
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1.1 About Oriental Bank of Commerce (OBC) The bank was founded in 1943 by Late Sh. Rai Bahadur Lala Sohan Lal who was also the first Chairman of the Bank. After the partition banks registered office was moved from Lahore to Amritsar. The bank went through a lot of financial ups and downs till it was nationalized on 15 April 1980 by the Government of India. At that time total working of the bank was Rs.483Crore having 19th position among the 20 nationalised banks. Within a decade the bank became one of the most efficient and best performing banks of India. The Bank has to its utmost credit lowest staff cost with highest productivity in the Indian banking industry. OBC offers home loans, vehicle loans, and other consumer loans, as well as business and agriculture loans, cash management, savings accounts, life insurance, and internet banking. In addition to rapidly modernizing its services, Oriental Bank of Commerce also runs a number of programs aimed at assisting women and the poor The growth in retail banking business was robust recently and the bank witnessed a healthy growth across key financial and operating parameters. The main verticals of retail banking include branch banking, business banking (SME), consumer loans and agricultural & rural banking (ARB). Oriental Bank of Commerce (OBC) strikes a balance in serving rural and urban clientele. Currently the Business Mix of OBS has crossed 3.00 Lac Crore and it enjoys a customer base of more than 1.56 Crore across India. It has around 2000 branches across 31 states of India and is amongst the biggest Public Sector bank with an ATM base of 1452 and a card base of 39.09 Lac. In terms of the mix of the branches, the network is fairly spread across all the population groups with 22% in metro areas, 29% in urban areas, 27% in semi urban and 22% in rural locations.
OBC has made a foray into International arena with the opening of its first Representative Office at Dubai which extends assistance to NRIs and PIOs about business opportunities in India as well as market the products offered in the foreign market. 22% 29% 22% 27% Branch Distribution Rural Urban Metropolitan Semi-Urban 8 | P a g e
The bank has come of age and has been constantly updating itself with the continuous technological changes and now offers features such as internet banking, phone banking, NRI banking etc. The Bank has successfully rolled out its Financial Inclusion Plan in 569 allotted villages with population more than 2000 through different models i.e. Branch (23 Villages), Mobile Branch (54 Villages), and Business Corresponding Model (492 Villages). The bank has opened a total number of 4,38,314 No-Frill/ Other savings accounts and issued 1,59,207 Bio-metric cards for extending IT enabled banking services in 569 FIP allotted villages. The Bank has actively involved people in the planning process at grass root level to tackle the maladies of poverty. The Grameen Projects have been implemented and aims to alleviate poverty plus identify the reasons responsible for its failure or success. The Bank has implemented 14 point action plan for strengthening of credit delivery to women and has designated 5 branches as specialized branches for women entrepreneurs. 1.2 Organisational Design Organizational Design is defined as the process of reshaping organization structure and roles. It helps in enhancing communication and helps in making better use of companys resources. It provides an infrastructure into which business processes are deployed ensuring that the organization's core qualities are realized across the business processes deployed within the organization. The most common approaches to organizational design are: Functional Customers Matrix OBC is a functional organization which is designed on a strong hierarchy. Using this idea of design, the organization is divided into individual departments, where each department has a specific function and all departments function independently to achieve the organisations vision and mission.
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Chairman and Managing Director Credit Administration Department GM Large Corporate Credit DGM AGM Chief Manager Deputy Chief Manager Financial Analyst GM SME and Mid Corporate Credit GM Credit Monitoring Human Resource Development Marketing Treasury Information Technology Services 10 | P a g e
1.3 Functions of a Commercial Bank
1.3.1 Merchant Banking: Meaning Merchant Banking is a combination of Banking and consultancy services. It provides consultancy, to its clients, for financial, marketing, managerial and legal matters. Consultancy means to provide advice, guidance and service for a fee. It helps a businessman to start a business. It helps to raise (collect)finance. It helps to expand and modernise the business. It helps in restructuring of a business. It helps to revive sick business units. It also helps companies to register, buy and sell shares at the stock exchange. In short, merchant banking provides a wide range of services for starting until running a business. It acts as Financial Engineer for a business. Merchant banking was first started in India in 1967 by Grindlays Bank. It has made rapid progress since 1970. Commercial Bank Merchant Banking Investment Deposits Refinancing Loans & Advances 11 | P a g e
Functions of Merchant Banking Raising finance for clients Broker in stock exchange Project Management Advice on expansion and modernisation Managing Public Issue of companies Handling Government consent for Industrial Projects Portfolio Management Money market operations Corporate Restructuring Money market operations 1.3.2 Refinancing Refinancing may refer to the replacement of an existing debt obligation with a debt obligation under different terms. The terms and conditions of refinancing may vary widely by country, province, or state, based on several economic factors such as, inherent risk, projected risk, political stability of a nation, currency stability, banking regulations, borrower's credit worthiness, and credit rating of a nation. If the replacement of debt occurs under financial distress, refinancing might be referred to as debt restructuring. A loan (debt) might be refinanced for various reasons: 1. To take advantage of a better interest rate (a reduced monthly payment or a reduced term) 2. To consolidate other debt(s) into one loan (a potentially longer/shorter term contingent on interest rate differential and fees) 3. To reduce the monthly repayment amount (often for a longer term, contingent on interest rate differential and fees) 4. To reduce or alter risk (e.g. switching from a variable-rate to a fixed-rate loan) 5. To free up cash (often for a longer term, contingent on interest rate differential and fees) Refinancing for reasons 2, 3, and 5 are usually undertaken by borrowers who are in financial difficulty in order to reduce their monthly repayment obligations, with the penalty that they will take longer to pay off their debt. 12 | P a g e
In the context of personal (as opposed to corporate) finance, refinancing multiple debts makes management of the debt easier. If high-interest debt, such as credit card debt, is consolidated into the home mortgage, the borrower is able to pay off the remaining debt at mortgage rates over a longer period. 1.3.3 Investment The investments made by a commercial bank can be divided into SLR and Non-SLR investments 1) SLR I nvestments: As part of prudential guidelines, RBI requires Banks to maintain a portion of their deposits in liquid assets. These liquid assets can be cash, gold or government securities. The ratio of prescribed liquid investments to deposits is termed as statutory liquidity ratio. In India, banks invest in bonds issued by the government and notified by the Reserve Bank of India as qualifying for SLR to meet the prescribed ratio. Currently, the prescribed statutory liquidity ratio for banks is 25% of their deposits. SLR is occasionally used as monetary policy tool and the stipulation is made by authorities, keeping in mind the monetary policy objectives. It includes State and central government securities, treasury bills, trustee security 2) Non-SLR I nvestments: Besides giving loans to businesses and individuals, RBI has also allowed banks to invest in various capital market instruments such as stocks and bonds issued by public and private sector companies and commercial papers. In addition, banks are also allowed to invest in various mutual fund schemes. Unlike SLR investments, there is no compulsion on banks to invest in these instruments. Investments are entirely guided by commercial considerations and many such investments are in accordance with the prescribed guidelines. Non-SLR investments include investments in Debentures (Corporate, PSU, Others), Certificate of Deposit, Equity and Preference shares, Mutual Fund, Venture Capital Funds and RIDF. Since SLR investments in bonds are issued by the government or its bodies, these enjoy a sovereign protection, and hence, are perceived to be risk-free. However, in case of non-SLR investments, the RBI attaches risk weights, depending on the industry and the state of the perceived risk on that sector as a prudential measure. 1.3.4 Accepting Deposits: This function is an integral part of the functioning of any bank. Various sections of society, according to their needs and economic condition, deposit their savings with the banks. For example, fixed and low income group people deposit their savings in small amounts from the points of view of security, income and saving promotion. On the other hand, traders and businessmen deposit their savings in the banks for the convenience of payment. 13 | P a g e
Therefore, keeping the needs and interests of various sections of society, banks formulate various deposit schemes. Generally, there are two types of deposits which are as follows: a) Demand Deposits: Funds held in an account from which deposited funds can be withdrawn at any time without any advance notice to the depository institution. Demand deposits can be "demanded" by an account holder at any time. Many checking and savings accounts today are demand deposits and are accessible by the account holder through a variety of banking options, including teller, ATM and online banking. In contrast, a term deposit is a type of account which cannot be accessed for a predetermined period (typically the loan's term). Demand deposits can be of two types as explained below. (i) Current Deposits: The depositors of such deposits can withdraw and deposit money whenever they desire. Since banks have to keep the deposited amount of such accounts in cash always, they carry either no interest or very low rate of interest. These deposits are called as Demand Deposits because these can be demanded or withdrawn by the depositors at any time they want. Such deposit accounts are highly useful for traders and big business firms because they have to make payments and accept payments many times in a day. There is no restriction on the number of times the account is operated. (ii) Saving Deposits: In such deposits, money upto a certain limit can be deposited and withdrawn once or twice in a week. On such deposits, the rate of interest is very less as compared to fixed deposit. As is evident from the name of such deposits their main objective is to mobilise small savings in the form of deposits. These deposits are generally done by salaried people and the people who have fixed and less income. (b) Fixed (Term) Deposits: These are the deposits which are deposited for a definite period of time. This period is generally not less than one year and, therefore, these are called as long term deposits. These deposits are not generally withdrawn before the expiry of the stipulated time and, therefore, these are also called as time deposits. These deposits generally carry a higher rate of interest because banks can use these deposits for a definite time without having the fear of being withdrawn. 1.3.5 Loans and Advances Bank extends loans and advances by ways of fund based and non fund based facilities. The fund based facilities are term loans, overdrafts, cash credit, bills discounted/purchased etc and non-fund based are issuance of Inland & foreign Letter of Credit, issuance of guaranties, deferred payment guaranties. 14 | P a g e
Term Loans: A term loan is a monetary loan that is repaid in regular payments over a set period of time. Term loans usually last between one and seven years, but term loans for infrastructure projects can be allowed even with longer repayment period. A term loan can have a fixed or unfixed interest rate that will add additional balance to be repaid. Overdrafts: An overdraft is a fluctuating account balance, sometimes in credit and other times in debit. It enables a customer to draw over and above the credit balance upto the sanctioned limit. The overdrafts are allowed against the security of banks own deposits/certificates issued by post offices or other approved securities/debentures/shares or against personal security. Cash Credit: A cash credit facility is allowed against pledge/hypothecation of securities which can include goods/produce/bills etc. Once a security for repayment has been given, the business that receives the loan can continuously draw from the bank up to a certain specified amount. Bills Purchased/Discounted: Advances against documentary bills payable on demand accompanied by documents evidencing title to the goods are termed as Documentary Bills Purchased and the clean bills like Inland/Foreign Demand Drafts, cheques, traveller cheques or Bills of Exchange payable on demand are classified as Clean Bills Purchased. Advance against clean/documentary bills receipted challan accompanied of goods services sold credit payable after a certain period and discounted by banks are classified as Usance Bills Discounted (UBD). While discounting/purchasing/negotiating usance bills under L/Cs or otherwise it is to be ensured that the bills so discounted/purchased/negotiated have arisen out of the actual trade transactions. Letter of Credit: Letter of Credit is a letter issued by the Bank at the request of its customer in favour of a third party informing him that the Bank undertakes to accept his bills upto the amount stated in the Letter of Credit subject to conditions stated therein. When the bills strictly in accordance with the terms of Letter of Credit are presented for payment, the Bank is bound to make the payment according to the tenor of the bills. Loans And Advances Fund Based Term Loans Cash Credit OverDrafts Non Fund Based Bank Gurrantee Letter Of Credit 15 | P a g e
A letter of credit may be with or without recourse. Where the beneficiary of a letter of credit is the drawer of a bill who holds himself liable to the holder of a bill, if dishonoured, the credit is with recourse. In case he does not hold himself liable, the credit is without recourse. Guarantee: A contract of guarantee is a contract to perform the promise or discharge the liability of a third person in case of default. Bank issues guarantees on behalf of customer in favour of third parties. Bank has to pay the beneficiary in case the guarantee is invoked and in the event of a default made by the customer. 1.4 OBC- Key Offerings 1.4.1 Oriental Bank of Commerce: Merchant Banking The Merchant Banking Division deals with all types of shareholders complaints and grievances. M/s.MCS Limited, Delhi has been appointed the Share Transfer Agent of the Bank for the purpose of dealing with the shareholders in various matters viz., updation of change of address, non-receipt of dividend warrant, share certificate etc. The shareholders may approach directly either this Division or the Share Transfer Agent for all types of services relating to equity shares of the Bank. The Bank is a registered Category I Merchant Banker and holds registration certificate valid upto 28.02.2014. The Bank also holds permanent registration as Banker to an Issue. As Bankers to Issue, the Bank has acted as Paying Banker for payment of dividend warrants and as Self Certified Syndicate Bank (SCSB) for providing ASBA facility. 1.4.2 Oriental Bank of Commerce: Loans and Advances Agricultural Advances: Banks advances to agriculture increased by Rs. 2470 crore from 15411 crore in March 2012 to Rs.17881 crore in March 2013, registering a growth of 16.03%. The advances to direct agriculture segment increased by Rs.2006 crore from Rs.11860 crore as on 31.3.2012 to Rs.13866 crore as on 31.3.2013 constituting a growth of 16.91%. The Indirect agriculture advances increased by Rs.464 crore from Rs.3551 crore as on 31.3.2012 to Rs.4015 crore as on 31.3.2013 showing an increase of 13.07%. Small and Medium Enterprises: Banks exposure to Small Enterprises stood at Rs 20945 crore at the end of March, 2013 and has shown an increase of Rs. 2967 crore, recording a growth of 16.50% against the Year on- Year growth stipulation of 20%. Further, SME advances increased by Rs.5,886 crore to Rs.26,013 crore registering a growth of 29.25%. The Micro Enterprises sector advances increased by Rs.1700 crore to Rs.7746 crore posting a growth of 28.11%. Bank has covered 2338 fresh accounts amounting to Rs. 296.53 Crore during the FY 2012-13 under CGTMSE.
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Retail Credit: Retail Credit segment continues to be the thrust area of lending. Our 16 Retail Credit products are customer friendly, competitive and specifically designed to suit all sections of the society. In current FY, bank has achieved YOY growth of 25% in Retail Credit & recorded 11.16% of total advances. During the year, the bank has introduced loyalty concession for Home / Car loan borrowers as well as revamped loan against immovable property & personal loan schemes to make it more attractive to meet the various needs of Retail Customers. Education Loan: The Education Loan portfolio of the Bank stood at Rs. 1227.04 Crore as on 31.03.2013 and showed Y.O.Y Growth of 3.02%. The growth is adversely affected due to credit of interest subsidy Rs. 30.00 Crore (approx.) Bank continued its efforts for extending education loans for higher studies & vocational courses on soft terms based upon IBA guidelines. Specific provision for management quota & nursing education has been elaborated in the scheme. 1.4.3 Oriental Bank of Commerce: Treasury Operations The G-Sec yields softened during FY 2012-13. This was due to reduction in inflation levels, stunted economic growth and fiscal deficit remaining within targeted levels. RBI reduced Repo and Reverse Repo rates by 100 basis points during FY 2012-13 to revive growth. Equity market remained volatile during 2012- 13 and ended the year with a muted return of 8%. The secondary market turnover has been Rs. 85,332.20 crore in FY 2012-13. The net profit in the secondary market operations has been Rs.168.48 crore during FY 2012-13. The Bank has transferred Securities amounting to Rs. 4970.51 crore from Available for Sale category to Held to Maturity category. Further, securities amounting to18.30 crores were transferred from Held to Maturity category to Available for Sale category. In the process, Bank booked depreciation of Rs. 185.74 crore. The aggregate investment of the Bank has increased to Rs. 58,719.20 crore as on 31-03- 2013 from Rs. 52,460.22 crore as on 31-03-2012 an increase of 11.93%. The yield on investments have increased to 7.41% from 7.36% last year (excluding income on RIDF deposits classified as Non-SLR investments) owing to maturity of low yielding securities vis--vis fresh investments in high yielding securities in Investment portfolio. 1.4.4 Oriental Bank of Commerce: Foreign Exchange Business During the fiscal year 2012-13, Bank achieved Forex turnover of Rs 96,444 Crore as on 31.03.2013. The total earning from foreign exchange Business for the financial year 2012-13 was Rs 237.79 Crore. The Export credit of the Bank stood at Rs 5,750 Crore as on 31.03.2013 as against Rs 4,976 Crore as on 31.03.2012, thus registering a growth of 15.55%. Bank has 86 Specialized Branches to conduct foreign exchange business. The Bank has mobilized Non Resident deposits to the tune of Rs 3068 Crores as on 17 | P a g e
31.03.2013 as against Rs 2323 Crores for the year ended 31.03.2012, thereby registering a growth of 32% over the preceding financial year. The operations at Representative Office, Dubai has completed four years of operations, acting as a catalyst to canvass non- resident accounts of Indian Expatriates in UAE to expand the Nonresident customer base of the bank. 1.5 Industry Scenario and Competitor landscape 1.5.1 Industry Scenario: a) Changes in the monetary policy as announced by RBI in the Monetary Policy statement 2013-14:- Reserve Bank of India announced the monetary policy 2013-14. Repo rate, being the policy rate, has been reduced by 25 basis points from 7.5% to 7.25% and reverse repo rate at with a spread of 100 basis points below repo rate stands adjusted to 6.25%. Similarly, the marginal standing facility (MSF) rate, which has a spread of 100 bps above the repo rate, also stands unchanged at 8.25%. RBI however clearly indicated that the policy action undertaken in this review carries forward the measures put in place since January 2012 towards supporting growth in the face of gradual moderation of headline inflation. Recent monetary policy action, by itself, cannot revive growth. It needs to be supplemented by efforts towards easing the supply bottlenecks, improving governance and stepping up public investment, alongside continuing commitment to fiscal consolidation. b) Banking Laws (Amendment) Bill will pave the way for new private banks:- The Lok Sabha on 18th December 2012 passed the Banking Laws (Amendment) Bill, paving the way for setting up new private banks and strengthening the regulatory role of the Reserve Bank of India. The RBI has now been empowered to supersede bank boards to safeguard depositors and shareholders interests, as the RBI will be able to investigate the books of the associate enterprises of a bank. c) Basel III* may impose some costs in near future:-As per the RBI report, banks in India will require an additional capital of Rs 5 trillion to meet the new global banking norms, Basel III. The new norms will be implemented by the banks in a phased manner by March 2018. The government, which owns 70% of the banking system, will have to pump in Rs 900bn equity to retain its shareholding in the Public Sector Banks (PSBs) at the current level to meet the norms. The fiscal constraint poses significant challenges to the government to re-capitalise banks to help them meet the Basel III norms. RBI however explained that Basel III may impose some costs in the short-term but it will secure medium to long term growth prospects. *Refer Annexure 1 Two critical factors driving change over the next 10-20 years: firstly, India has a large number of young population in the country and will see a sharp rise in its working age population. A study by Mc Kinsey suggests that average households income will triple over the next two decades and it will become the worlds fifth largest consumer economy by 2025. The demand for financial services will 18 | P a g e
increase and the banking and the financial sector will have a key role in intermediating savings and investment from large number and growing incomes, which will fuel growth. 1.5.2 Competitor Landscape: We are comparing OBC with other three public sector banks. In terms of margin Allahabad bank performed better than OBC as the formers cost of funds was lower due to higher CASA ratio (30.5%). In terms of ROE and ROA however OBC performed better than Indian Overseas Bank. Comparing OBC with the other three banks in terms of Gross and Net NPA we can see OBC has a high Gross and Net NPA (Still better than Allahabad Bank and India Overseas Bank) which is not good for the bank. This indicates that the asset quality of OBC has been deteriorating over the years as compared to its peer banks. It warrants OBC to improve the monitoring of their clients and to strengthen their recovery mechanism. 1.6 Key Financials and Projections The Bank has posted a total income of Rs.19359.49 crore during the year as against Rs.17055.13 crore last year thus registering an increase of Rs.2304.36 crore showing a growth of 13.51% during the fiscal 2012-13. Operating Profit of the Bank has increased to Rs.3690.69 crore as against Rs.3140.58 crore last year showing a growth of 17.52% The Bank has earned a net profit of Rs.1327.95 crore, after making all requisite provisions showing an increase of Rs.186.39 crore, a growth of 16.33% during the fiscal 2012-13. For the year 2013-14, the financial estimates look good. The bank will witness an estimated growth of 15% to 16% in Deposits & Advances with CASA level of more than 25% of total Deposits. Towards this, the bank has planned to add 125-150 branches during 2013-14.
Bank Net Profit (In Rs. Cr.) NIM Gross NPA Net NPA ROE ROA Oriental Bank of Commerce 1327.95 2.49% 3.21% 2.27% 11.91% 0.71% Allahabad Bank 1185.79 2.81% 3.92% 3.19% 17.8% 0.64% India Overseas Bank 567.23 2.8% 4.02% 2.5% 8.8% 0.24% Corporation Bank 1434.67 2.29% 1.26% 0.87% 16.27% 1.06% 19 | P a g e
Projections (Rs. Mn) FY-09 FY-10 FY-11 FY-12 FY-13 FY-14E Interest Income 88565 102571 120878 158149 177048 190460 % Growth 16% 18% 31% 11.95% 7.57% Other Income 10760 12000 9601 12403 16547 15190 % Growth 12% -20% 29% 32.6% -8.2% Total Income 99325 114572 130479 170551 193595 205650 % Growth 15% 14% 31% 13.5% 6.22% Operating Expenditure 19281 25036 31008 23155 26652 47977 % Growth 30% 24% -25.3% 15.10% 80% Operating Income 30725 41075 51376 54560 61965 69405 PBT 11445 16039 20368 31405 35313 21428 EPS 31 39 52 39 45.51 51 20 | P a g e
CHAPTER 2 Key Deliverables & Tasks Completed
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2.1 Key Deliverables To study and analyse the credit products/facilities offered by the bank To gain an exhaustive knowledge of the credit analysis process, the compilation of a business credit application (process note) and the overall loan disbursement process flow. To check the financials of the borrower as well as of the group concern of the borrower To judge the creditworthiness of the borrower based on OBCs internal credit ratings and various rating parameters of international agencies like CARE, CRISIL, FITCH, SMERA, Brickworks. To get a brief knowledge as to how internal and external risk rating are given to a particular company based on its past performance and future projections To study various steps involved in the disbursement of loan 2.2 Tasks Completed Carefully understood the Loan and Credit Risk Management Policy of the bank which have been made in accordance with the policies laid down by RBI for all commercial banks. Understood what each document submitted by the client for obtaining loan implies. Compared the figures in audited balance sheet with the CMA figures for client XYZ Ltd. and found out the differences (if any) between the data of the two reports. Studied the process note (LF-82) prepared by the bank, for review, renewal or sanction of fresh loan, this note is then placed before the higher committees (HLCC, CAC, MCB) for approval Analysed the audited balance sheet of clients XYZ Ltd. and ABC Ltd. by entering the audited data in the Balance Sheet Performa of the bank. Filled the process note for clients XYZ Ltd. and ABC Ltd. with emphasis on Operating and Financial performance of the borrower and forwarded the same to our project guide. Carefully understood both the internal and external ratings assigned to the banks clientele on the basis of BASEL II and BASEL III norms set by RBI.
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CHAPTER 3 Research Methodology & Credit Appraisal Process
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The objective of the project is to understand the credit appraisal system used in the bank. The various techniques and processes used in the Credit Appraisal System have been studied and analyzed which are then applied on one proposal received in the Credit Administration Department of the bank. Credit Appraisal means assessment done by the bank before sanctioning of loans to the borrower. It also checks the commercial, financial and industrial viability of the project and its proposed funding patterns. 3.1 Data Collection Primary Data: Informal interactions with the Deputy General Manager and Deputy Chief Manager of Large Corporate Credit Department. Secondary Data: Loan Policy and Internal Circulars of the bank Appraisal manuals of the bank Annual Report of the bank Websites (RBI website, moneycontrol.com, OBC official website) 3.2 Credit Appraisal Process 3.2.1 Credit Administration Department (CAD): The Credit Administration department implements sound credit administration procedures throughout the bank to ensure full and appropriate use of bank resources consistent with goals and objectives. The Credit Administration Department at Oriental Bank of Commerce has three arms namely: Large Corporate Credit, SME & Mid Corporate Credit and Credit Monitoring.
CAD Large Corporate Credit SME & Mid Corporate Credit Credit Monitoring 24 | P a g e
a) SME & Mid corporate Credit: handles loan proposals upto Rs. 50Crore. Their basic function is to give recommendations to Credit committees at the head officeregarding loan sanctions upto Rs. 50 Crore b) Large Corporate Credit: handles loan proposals of Rs. 50Crore and more. Their basic function is to give recommendations to credit committees at the head office regarding loan sanctions of Rs. 50Crore and more. c) Credit Monitoring: The function of credit monitoring is post sanction follow up. They take care of the account of the client to which the loan has been sanctioned.
Functions of LCC and SME & Mid Corporate: New Business group (NBG): Large Corporate borrowers constitute one of the major profit centres of the bank. In the emerging competitive market scenario there is a need to quicken the pace of decision making to garner the business of good corporate. NBG has been set up to quicken the decision making process for sanctioning loans to first time Large Corporate borrowers. At the Head office, the NBG is headed by the CMD whereas the NBG at regional office is headed by the Regional head. Review/Renewal of Credit Facilities: All borrowal accounts enjoying working capital limits have to be reviewed / renewed annually. The review covers the conduct of the account, financial position of the borrower, achievement of projected turnover / profits, future outlook, inspection irregularities etc. If these are satisfactory, the facilities are renewed and / or enhanced based on merits. Modification of terms and conditions and concessions: Based on the value of account of the client, the bank can modify terms and conditions on which the loan has been taken. If the value of account to the bank is
New Business Group Sanction of fresh loans
Review /Renewal of credit facilities
Modification of terms and conditions: Reduction of rate (concession), Validity Extention Monitoring Functions of LCC and SME& Mid Corp. 25 | P a g e
high, then concessions in interest rate can be granted to the client. Also in case the borrower is unable to submit the requisite papers for renewal of credit limits, the system provides for extension of validity of the limit for a maximum period of six months, within which the renewal exercise must be completed. The Credit Committees at Head Office: Sanctioning Authority Headed By Delegated Powers Single Group MCB CMD Unlimited Unlimited CAC CMD 250 Unlimited HLCC Executive Director 75 150 *MCB = Management Committee of Board *CAC = Credit Approval Committee *HLCC = Head Office Level Credit Committee 3.2.2 Risk Management Department: Credit risk is defined as the possibility of losses associated with diminution in the credit quality of borrowers or counter parties. In a banks portfolio, losses stem with outright default due to inability or unwillingness of a customer or counter party to meet commitments in relation to lending, trading, settlement and other financial transactions. While CAD is concerned with pre sanction and post sanctions follow up of a loan proposal, RMD has the responsibility of analyzing and assigning risk ratings to each client on the basis of its financial performance i.e. past performance and future projections. Under RBI latest guidelines on Risk Management it has become imperative that each Bank should have a robust credit risk management system, which is sensitive and responsive to the emerging needs of the Organization. The Bank has already formulated Credit Risk Management Policy which is reviewed every year. RBI advises banks to use ratings of the any one of the following rating agencies for the purpose of risk weighting their claim: Credit Analysis and Research Limited (CARE) CRISIL Limited India Ratings & Research (FITCH India) ICRA Limited SMERA Brickworks Ratings 26 | P a g e
Besides this the bank has developed an internal rating mechanism which is used to assess the risk associated with a particular proposal. Internal Rating Mechanism: Credit rating of the client is vetted independently by the Risk Management Department. Rating officer vets the proposal and rates the following parameters on a scale of 1to 4: Financial Risk Business Risk Management Risk Industry Risk Project Risk Conduct of Account Where: - 1=Excellent, 2=Good, 3=Marginal, 4=Weak
Final Risk Grade Financial Risk Business Risk Management Risk Industry Risk Project Risk Conduct of Account 27 | P a g e
(a) Financial Risk: Calculated on two parameters Qualitative and Quantitative. i) Quantitative In this we have Model Ratio Analysis, where important ratios are calculated on the basis of financials filled in XYZ Rating software. The important ratios are: Sales Growth (%) Gearing ROCE (%) Quick ratio Cash Flow Accuracy Average Sales Free Reserves/Equity EBITDA/Sales ii) Qualitative: (measured on a scale of 1 to 4) Contingent Liabilities/Net worth Accounting Quality Foreign currency exposure Financial Restructuring history Quality of Auditor Firm b) Business Risk: The following qualitative sub parameters are converted to quantitative by rating them on a scale of 1 to 4 Customer Quality and Concentration Supplier Reliability and Concentration Order Book position Competition impact on GP Margin Industrial/ Employee relations
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c) Management Risk: The following qualitative sub parameters are converted to quantitative by rating them on a scale of 1 to 4 Integrity Business Commitment Management Competence Business Experience Succession Planning Financial strength/group support Credit Track record Ability to raise funds (next 12 months) General Reputation Internal Control Intra Company/ Group conflicts d) Industry Risk: is provided by the outside rating agency i.e. ICRA Industry Cyclicality Industry Seasonality Regulatory issues/fiscal policy dependence Technology Dependence Environmental Impact Demand Supply situation e) Project Risk: The following qualitative and quantitative sub parameters are rated on a scale of 1 to 4 Status of Project Clearances Status of Financial closure Sensitivity analysis (10% reduction in demand or 10% increase in project cost). Percentage of project completion Past track record of Management in project implementation 29 | P a g e
Infrastructure availability Contractor Track Record and Financial strength Construction Contract Legal and Regulatory environment Market Demand Ability to handle projects in hand Design and Technology Risk Debt service coverage ratio Internal Rate of Return f) Conduct of Account: The following qualitative sub parameters are converted to quantitative by rating them on a scale of 1 to 4 Number of bills/ cheques returned Number of times DP/ limit overdrawn Cumulative no of days DP/ limit overdrawn Compliance with sanctioned/ disbursement conditions Submission of progress reports Delay in receipt of principal/interest installments Delay in submission of Audited BS and PL to the Bank Delay in rectification of inspection irregularities Variance in projected sales versus actual sales Number of LC/BG issued in favor of the borrower invoked When all these parameters have been rated then the final rating is assigned to the client on a scale of 1 to 10 where 1 means excellent and 10 means default.
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3.2.2 The appraisal process: 1.
2.
3.
4.
5.
6.
*Refer Annexure 2 **Refer Annexure 3 Form LF-81 Filled by the client Project Report submitted by the Client along with following documents: Last three years Audited Balance Sheet(ABS) CMA Estimations and Projections Projected financials for the entire repayment period Net worth Statement ITR filed by the Client Board Resolution: Memorandum of Association Articles of Association
Pre Sanction visit to the Client Site by the Branch
Checking of following database for defaulters: RBI Defaulter list CIBIL Defaulter list OBC Defaulter list
Filling of the process note (LF-82) by the Bank It contains following about the Client: Clients Profile and Details of Proposal: Management Analysis Industry/Business Analysis Operational/Financial Performance Analysis of Financial Indicators Appraisal of credit facility requirements
Credit rating of client based on internal ratings* and credit rating of the facility based on external ratings** carried out by Risk Management Department and External Rating Agencies respectively
After this the loan proposal is placed before sanctioning committees (HLCC, CAC, MCB) along with the recommendations for approval.
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3.3 Live Case ABC Mills LTD. Renewal cum enhancement of fund based working capital limits from Rs. 7.00 Crore to Rs. 10.00 Crore and renewal cum reduction in LC limits from Rs. 5.00 Crore to Rs. 2.00 Crore by keeping the overall working capital limits at existing level. Review of Term Loan Renewal of BG Limits Clients Profile: Borrowers Name ABC Mills LTD. Constitution & Date of constitution
Public td. 1986. However the company was taken over by present management on 19.08.2001 Dealing with the bank since August 2001 with new management Management/Main Person behind the Group Mr. X, Mr. Y Net Worth of the Borrower as on 31.03.2012 Rs. 22.36 Crore (ABS) Whether Priority sector / Export/ Others Others Type & Size of industry MSI Industry/Trade to which the borrower belongs Paper Industry Latest Market value of the Share (if listed) of the borrower as N.A being unlisted company Credit Rating Internal: OBC 4 (Adequate Safety) External: CARE BB+ for long term facilities CARE A4 for short term facilities
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About the management: The company belongs to XYZ group of industries of Uttar Pradesh. All the promoters as well as the directors of the company are well experienced people. There are three directors on the board of the company. All three directors are looking after the affairs of the company. They are having extensive experience of more than 20 years in this line of business and already managing other paper manufacturing companies of the group namely PQR Pulp & Papers Limited, M/S DEF paper Limited and M/S XYZ Duplex Limited successfully since a long time. All the said units are also financed by us, and conduct of all accounts is satisfactory. The group is also engaged in the business of iron & steel through M/S XYZ Sponge Limited financed by the bank under consortium banking arrangements. Brief History of the Client: The subject company was incorporated in 1986 and availed credit facilities from our bank. Subsequently, the account was classified as NPA with the bank as on 31.03.2001. The present management took over the company in August 2001 and since then the account has been running regular. Industry/Business Profile: The company is engaged in manufacturing of coated Duplex paper, M.G. poster part & Kraft Paper and has an installed capacity of 24500 TPA. The product of the companys product is well accepted in the market and it also has high efficiency hood and other pollution prevention equipment for the smooth and efficient running of the plant. The said proposal falls under Paper and paper products segment. The development in education system and an increasing literacy rate has lead to increase in per capita consumption of paper, so good demand of paper is expected in the future. The paper industrys products include Kraft paper and paperboard that are primarily used in packaging. The segment accounts for the largest share of production, approximately 45% in the Indian paper industry, followed by printing and writing paper accounting for approximately 40%, and newsprint accounting for the balance. The segments products are used as inputs in a host of industries such as agriculture, fast moving consumer goods (FMCG), processed foods, pharmaceuticals, consumer durables, cigarettes and packaging materials for exports. Demand for packaging is closely linked to demand for product of end-user industries. Demand for some of the important user industries such as agriculture, consumer durables and exports tends to cyclical which exposes the industrial paper segment to cyclicality. Further, internationally, the cyclical behaviour of the industry is also influenced by the periodic supply shocks that result from the simultaneous building up of significant production capacities leading to consequent spells of over capacity in the markets. The cyclicality 33 | P a g e
gets reflected in the industry margins and investment activity patterns. During upturns, prices move upward at a faster rate than the costs of inputs while during the downtrend, prices fall at a faster rate s compared to cost of inputs. This has a direct impact on profitability. Based on the information provided above and the audited balance sheet of the client, conduct an analysis of the Operating Performance and Financial Position of the client. Operating Performance and Financial Position of the client (Rs. Crore) For the year ended / ending 31.03.11 31.03.2012 31.03.13 31.03.14 Audited Estimated Audited Estimated Projected Gross Sales 58.67 61.62 61.06 64.36 67.58 - Domestic 58.67 61.62 61.06 64.36 67.58 - Export 0.00 0.00 0.00 0.00 0.00 Net Sales (net of excise duty)
56.42
59.26
58.24
61.40
64.47 % growth 4.99 3.23 5.43 5.00 Other Income 0.01 0.00 0.29 0.00 0.00 EBIDTA / PBIDTA 4.94 4.69 4.55 4.21 4.12 Profit Before Tax 2.10 2.13 1.47 1.50 1.56 Profit After Tax 1.45 1.40 1.01 0.99 1.03 Depreciation 1.41 1.42 1.44 1.44 1.45 Cash Accruals 2.86 2.82 2.45 2.43 2.48 Authorized Capital 13.50 13.50 13.50 13.50 13.50 Paid up Capital 13.50 13.50 13.50 13.50 13.50 Reserves & Surplus 7.90 9.31 8.86 9.85 10.88 Intangible Assets 0.00 0.00 0.00 0.00 0.00 Share Application Money 0.00 0.00 0.00 0.00 0.00 a) Tangible Net Worth (TNW) 21.40 22.81 22.36 23.35 24.38 b) Deferred Tax Liability/(Asset) 0.00 0.00 0.00 0.00 0.00 c) Investment in group concerns 9.78 9.78 10.78 10.78 10.78 d) Adjusted TNW (a + b - c)
11.62
13.03
11.58
12.57
13.60 Unsecured Loans 1.40 7.00 5.17 5.62 5.62 Term Loans from Banks / FIs
2.17
0.31
0.43
0.00
0.00 Other Term Liabilities 1.95 1.26 4.51 3.35 1.80 Total Term Liabilities 5.52 8.57 10.11 8.97 7.42 Capital Employed 26.92 31.38 32.47 32.32 31.80 Net Block 14.71 13.79 13.81 12.42 11.01 Total Non Current Assets 16.28 10.53 15.51 11.53 11.53 34 | P a g e
Total Current Assets 27.97 32.53 34.08 35.01 36.28 Total Current Liabilities 32.04
25.47
30.93
26.64
27.02 TL Instalments payable in 12 months
1.79
1.86
1.72
0.43
0.00 CL-TL instalment 30.25 23.61 29.21 26.21 27.02 Net Working Capital -4.07 7.06 3.15 8.37 9.26 Adjusted NWC # -2.28 8.92 4.87 8.80 9.26 Ratios: Current Ratio 0.87 1.28 1.10 1.31 1.34 Adjusted Current Ratio # 0.92
1.41 TOL/ Adj. TNW 3.23 2.61 2.54 2.83 2.53 Net profit to net sales (%) 2.57
2.36
1.73
1.61
1.60 Debtor Turnover Ratio 4.81 - 5.53 4.17 4.15 Inventory Turnover Ratio 4.44 - 3.38 4.12 4.08 Creditor Turnover Ratio 1.91 - 2.16 3.39 2.88
# By considering term loan installments payable within 12 months as non-current liabilities Analysis of Financial Indicators: a) Sales: Net sales of the company have increased from Rs. 56.42 Crore as on 31.03.2011 to Rs. 58.24 Crore as on 31.03.2012 registering a growth of 3.23%. The company had estimated turnover of Rs. 59.26 Crore for the year 2011-12 against which the actual turnover during 2011-12 is Rs. 58.24 Crore which is 98.28% achievement. The company has estimated net sales of Rs. 61.40 Crore during 2012-13 and Rs. 64.47 Crore during 2013-14. The company has achieved net sales of Rs. 60.61 Crore during 2012-13. As such, the projected turnover for the year 2013-14 appears to be achievable. Keeping in view the past performance, we may accept the sales projections. b) Other Income: Other income consist of interest from bank and insurance claim received during the year which are nominal in value and are received in ordinary course of business c) Net Profit: There is a decline in the net profit of the company from Rs. 1.45 Crore for FY 2010-11 to Rs. 1.01 Crore for FY 2011-12 due to price fluctuation as well as increase in cost of raw materials, fuels & chemicals during last quarter of 2011-12. PAT has been estimated/projected at Rs. 0.99 Crore and Rs. 1.03 Crore as on 31.03.2013 & 31.03.2014 respectively. Keeping in view the proposed increase in sales, the projected profit seems achievable. 35 | P a g e
d) Authorized & Paid-up capital: The Authorized and paid up capital of the company is Rs. 13.50 Crore which is proposed to be unchanged for the ensuing years also. e) Tangible Net Worth: Net worth of the company has increased from Rs. 21.40 Crore as on 31.03.2011 to Rs. 22.36 Crore as on 31.03.2012. The same is estimated to increase to Rs. 23.35 Crore as on 31.03.2013 & Rs. 24.38 Crore as on 31.03.2014. There is constant increase in the TNW of the company on account of retention of profit in the business. f) Term Liabilities: Term liabilities of the company consist of term loans from banks, unsecured loans from relatives and friends and dealers security. Term Liabilities have increased from Rs. 5.52 Crore as on 31.03.2011 to Rs. 10.11 Crore as on 31.03.2012 on account of increase in unsecured loans from related parties and from others. The company is enjoying term loan facility from the bank. All the term loan accounts are regular. The company has estimated term liabilities at Rs. 8.97 Crore and Rs. 7.42 Crore as on 31.03.2013 & 31.03.2014 respectively. g) Net Block: Net block of the company consists of land, building, plant & machinery, furniture & fixtures and vehicles etc. The net block of the company is estimated at Rs. 13.81 Crore as per audited balance sheet as on 31.03.2012. Net block is estimated to decrease in future due to normal charge of depreciation. h) Net Working Capital: The fund flow statement is placed as under L.T sources 31.03.2012 31.03.2013 31.03.2014 Increase in TNW 0.96 -0.99 1.03 0.99 1.03 Increase in Term Liability 4.59 -1.14 -1.55 Net L.T sources (A) 5.55 -0.15 -0.52 L.T Applications Increase in Net Block -0.90 -1.39 -1.41 Increase in Non-Current Assets -0.77 -3.98 0 Net L.T Application (B) -1.67 -5.37 -1.41 Surplus/Deficit L.T funds (C) = A-B 7.22 5.22 0.89
S.T Sources Increase in Current Liability (D) -1.11 -4.29 0.38 S.T Applications Increase in Current Assets (E) 6.11 0.93 1.27 Surplus/Deficit S.T Funds (F) = D-E -7.22 -5.22 -0.89
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The NWC has improved from Rs. -4.07crore as on 31.03.2011 to positive figure of Rs. 3.15crore as on 31.03.2012 due to the induction of long term funds in the form of unsecured loans to the tune of Rs. 3.77crore during this period, besides plough back of profits. The fund flow statement table reveals that the company has surplus long term funds which have been utilised to meet the financing of portion of current assets and this is a good trend. NWC will further improve to Rs 4.87 Crore if the term loan instalments repayable within 12 months are treated as non-current liabilities. Further the party has projected the same at Rs. 8.37 Crore as on 31.03.2013 & Rs. 9.26 Crore as on 31.03.2014 which shall be achieved by retention of profits in the business. i) Financial Ratios: All the financial ratios except current ratio are well within benchmark. The term loan instalments due within one year have been treated as current liability, while calculating the current ratio. The term loan instalment shall be paid out of cash accruals. Hence on adding back term loan instalments for calculating the current ratio, the same would increase to 1.17:1 as on 31.03.2012. The company has estimated/projected current ratio of 1.31:1 & 1.34:1 as on 31.03 2013 & 31.03.2014 respectively. We also see that the Debtor Turnover Ratio and Creditor Turnover Ratio show an improvement in 2012 as compared to 2011 and the projections for the coming two years are also favourable. This tells us that the ability of the company to collect from its customers is improving which boosts the liquidity of the company; this in turn results in improved ability to pay back its creditors which is visible in the improved Creditor Turnover Ratio of the company. The Inventory Turnover Ratio shows a decline in 2012 as compared to 2011 which tells us that the inventory has increased and the cash available for operations has decreased. Thus the inventory management at the company needs to be improved. Benchmark Ratios Financial Ratio Benchmarks Current Ratio Upto 1.33:1 (Working Capital limits beyond Rs. 5.00 Crore) Upto 1.17:1 (Working Capital limits upto Rs. 5.00 Crore) Debt Equity Ratio 2:1 (Other than SME, capital intensive industries, infrastructure projects) 4:1 (In respect of SME, capital intensive industries, infrastructure projects) Leverage Ratio 4:1 (Other than SME, capital intensive industries, infrastructure projects) 6:1 (In respect of SME, capital intensive industries, infrastructure projects)
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Justification for the Fund Based Working Capital Limits The working capital limits of Rs. 7.00 Crore were assessed on the basis of projected turnover of Rs. 62.22 Crore for the year 2012-13. The business of the company is having consistent growth. The company has estimated net sales of Rs. 64.47 Crores during 2013-14. Keeping in view the past performance, we may accept the sales projections. The company is using non fund based limits for procuring imported raw materials and other consumables which constitutes a lower proportion of total raw materials and consumables. Due to which, the company has not utilised the LC limit of Rs. 5.00 Crore during the year. The company has stated that they are in requirement of fund based working capital limits for capturing the market of goods produced by the company, retain existing customers by extending credit period, stocking of raw materials, fuel and other consumables in sufficient quantity for un-interrupted manufacturing process as well as fulfilment of demand of products. In view of the above, the company has requested for Renewal cum enhancement in fund based working capital limits from Rs. 7.00 Crore to Rs. 10.00 Crore and Renewal cum reduction in LC limits from Rs. 5.00 Crore to Rs. 2.00 Crore by keeping the overall capital working limits at existing level. Justification for the Non Fund Based Working Capital Limits The company has to maintain stock of imported as well as domestic waste paper in sufficient quantity & keeping in view that the indigenous as well as imported raw materials/consumables are procured against L/C, the company had also been sanctioned non fund based limit of Letter of Credit (Foreign/Inland) for Rs. 5.00 Crore for uninterrupted production process for fulfilment of demand of product in the market. However, the company has requested for renewal of cum reduction in LC limit from Rs. 5.00 Crore to Rs. 2.00 Crore because the company has stated that they require more of fund based working capital limits for their operations. The company is also enjoying BG limit of Rs. 0.50 Crore for furnishing BG to various Govt. Department. The same is need based as per the business of the borrower and is being proposed to be renewed for one year on existing terms & conditions. The Branch/RO has recommended for favourable consideration of the above requests of the company, which we also propose.
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Our Observations Promoters of the organisation are not figuring in any of the defaulter lists The client has been dealing with the bank since 2001with good credit track record Reasonably good credit rating has been assigned to the client The company is making continuous profits Management introduced long term funds in the form of unsecured loans to the tune of Rs. 3.77crore during FY 2012-13 to improve the liquidity position Areas of Concern & Our Suggestions Profitability margin is on a declining trend despite increase in sales Company may explore more raw material supply sources to control cost The company may explore the possibility of backward integration to produce the required raw material if it results in better margin Company may also add new market areas for better margins
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CHAPTER 4 Recommendations & Learning Outcomes
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4.1 Recommendations The proposals given to an employee should be concentrated to just one sector i.e. one employee can handle all infrastructure loans, one can handle the power sector, one can look after the food and beverages sector etc. This will lead to more expertise and faster delivery of services.
The bank can develop an online loan application system by which the prospective client can apply for a loan. The client can provide all the relevant details about the proposal and a database can be attached to it which contains the entire defaulters list. So if a client is in those defaulter lists, then the software will automatically raise a red flag and the clients application will get rejected then and there only thus saving bank a lot of time and resources.
Creation of a list of FAQs for the department where the employees can post there queries and an can get immediate response from the server resulting in increase in efficiency and speed of work. To make this dynamic and address some new queries, an employee who has knowledge of all the functions can regulate it and forward different queries to their respective departments.
Setting up of a specialised loans and advances branch for Large Corporate under Relationship Manager so that the loan process is fast, attracts more clients thereby leading to more efficiency and better utilization of banks resources.
4.2 Learning Outcomes The most essential and important functions of a commercial bank were studied to get a wholesome view of what banking sector does and how all departments of a bank work independently yet in synchronization with each other. OBCs thrust areas and its major financial indicators like Net Profit, NPA etc were looked into so that they can be compared with the banks competitors. The loan sanction process of ABC Mills Ltd. starting from the client and culminating at the sanctioning authority was done to give the recommendations for its approval. The nomenclature associated with the various internal and external rating agencies were learnt to know how they are used to the judge the creditworthiness of the client.
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Abbreviations 1. BG Bank Guarantee 2. BPS Basis Point 3. CAC Credit Approval Committee 4. CAD Credit Administration Department 5. CARE Credit Analysis & Research ltd. 6. CASA Ratio Current Account Savings Account Ratio 7. CMD Chairman & Managing Director 8. CRISIL Credit Rating Information Services of India ltd. 9. CDSL Central Depository Services ltd. 10. EBIDTA Earnings before Interest, Depreciation & Tax 11. EPS Earnings Per Share 12. FOREX Foreign Exchange 13. HLCC Head Office Level Credit Committee 14. IBA Indian Banks Association 15. ICRA Investment Information & Credit Rating Agency of India 16. L/C Letter of Credit 17. MCB Management Committee of Board 18. MSF Rate Marginal Standing Facility Rate 19. NBG New Business Group 20. NIM Net Interest Margin 21. NPA Non Performing Assets 22. NSDL National Securities Depository limited 23. NSIC National Small Industries Corporation Limited 24. NWC Net Working Capital 25. PBT Profit Before Tax 26. RBI Reserve Bank of India 27. RIDF Rural Infrastructure Development Fund 28. ROA Return on Assets 29. ROE Return on Equity 30. SLR Statutory Liquidity Ratio 31. SME Small & Medium Enterprise 32. SMERA SME Rating Agency of India Limited 33. TL Term Loan 34. TNW Total Net Worth 42 | P a g e
Bibliography 1. Loan Policy & Credit Risk Management Policy 2012-13 module of OBC 2. Clients loan sanction file 3. www.obcindia.co.in (OBC official website) 4. www.crisil.com (CRISIL official website) 5. www.icra.in (ICRA official website) 6. www.fitchratings.com (FITCH official website) 7. www.rbi.org.in (RBI official website) 8. www.Moneycontrol.com 9. www.fullertonsecurities.co.in 10. www.epaper.timesofindia.com (Official website of Times of India, Economic Times)
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Annexures
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Annexure 1 BASEL III ACCORD Basel III or Basel 3 released in December, 2010 is the third in the series of Basel Accords. These accords deal with risk management aspects for the banking sector. In a nut shell we can say that Basel iii is the global regulatory standard (agreed upon by the members of the Basel Committee on Banking Supervision) on bank capital adequacy, stress testing and market liquidity risk. (Basel I and Basel II are the earlier versions of the same, and were less stringent). Basel III is a comprehensive set of reform measures, developed by the Basel Committee on Banking Supervision, to strengthen the regulation, supervision and risk management of the banking sector. Basel III measures aim to: Improve the banking sector's ability to absorb shocks arising from financial and economic stress, whatever the source Improve risk management and governance Strengthen banks' transparency and disclosures
The basic structure of Basel III remains unchanged with three mutually reinforcing pillars:- Pillar 1: Minimum Regulatory Capital Requirements based on Risk Weighted Assets (RWAs): Maintaining capital calculated through credit, market and operational risk areas. Pillar 2: Supervisory Review Process: Regulating tools and frameworks for dealing with peripheral risks that banks face. Pillar 3: Market Discipline: Increasing the disclosures that banks must provide to increase the transparency of banks.
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The Major Features of Basel III:- Better Capital Quality Capital Conservation Buffer: Countercyclical Buffer Minimum Common Equity and Tier 1 Capital Requirements Leverage Ratio Liquidity Ratios
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Annexure 2 Internal Credit Risk Rating Grades Rating Grade Nomenclature Description OBC-1 Highest Safety Borrowers with this rating are considered to have the highest degree of safety regarding timely servicing of financial obligations. Such borrowers carry lowest credit risk. OBC-2 Very High Safety Borrowers with this rating are considered to have very high degree of safety regarding timely servicing of financial obligations. Such borrowers carry very low credit risk. OBC-3 High Safety Borrowers with this rating are considered to have the high degree of safety regarding timely servicing of financial obligations. Such borrowers carry low credit risk. OBC-4 Adequate Safety Borrowers with this rating are considered to have the adequate degree of safety regarding timely servicing of financial obligations. Such borrowers carry average credit risk. OBC-5 Moderate Safety Borrowers with this rating are considered to have the moderate degree of safety regarding timely servicing of financial obligations. Such borrowers carry moderate credit risk. OBC-6 Average Safety Borrowers with this rating are considered to offer average safety of timely payment of interest and principal. Such borrowers carry above average credit risk. OBC-7 Nominal Safety Borrowers with this rating are considered to offer nominal safety of timely payment of interest and principal. OBC-8 Low Safety Poor standing and are subject to very high credit risk 47 | P a g e
OBC-9 Very Low Safety High susceptibility to risk and are likely to become default in the near future OBC-10 Default Lowest and are typically in default or close to default
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Annexure 3 The rating symbols of the respective External Credit Rating Agencies for long term and short term instruments are standardized as follows: LONG TERM RATING SYMBOLS OF CARE, CRISIL, FITCH, ICRA, BRICKWORK AND SMERA FOR BANK EXPOSURE CARE CRISIL FITCH ICRA BRICKWORK SMERA CARE AAA CRISIL AAA Fitch AAA ICRA AAA BWR AAA SMERA AAA CARE AA CRISIL AA Fitch AA ICRA AA BWR AA SMERA AA CARE A CRISIL A Fitch A ICRA A BWR A SMERA A CARE BBB CRISIL BBB Fitch BBB ICRA BBB BWR BBB SMERA BBB CARE BB CRISIL BB Fitch BB ICRA BB BWR BB SMERA BB CARE B CRISIL B Fitch B ICRA B BWR B SMERA B CARE C CRISIL C Fitch C ICRA C BWR C SMERA C CARE D CRISIL D Fitch D ICRA D BWR D SMERA D SHORT TERM RATING SYMBOLS OF CARE, CRISIL, FITCH, ICRA, BRICKWORK AND SMERA FOR BANK EXPOSURE CARE CRISIL FITCH ICRA BRICKWORK SMERA CARE A1 CRISIL A1 Fitch A1 ICRA A1 BWR A1 SMERA A1 49 | P a g e
Description of RATING SYMBOLS OF THE EXTERNAL CREDIT RATING AGENCIES LONG TERM RATING DESCRIPTION FOR BANK EXPOSURE Rating Symbol Rating Description AAA Instruments with this rating are considered to have the highest degree of safety regarding timely servicing of financial obligations. Such instruments carry lowest credit risk. AA Instruments with this rating are considered to have high degree of safety regarding timely servicing of financial obligations. Such instruments carry very low credit risk. A Instruments with this rating are considered to have adequate degree of safety regarding timely servicing of financial obligations. Such instruments carry low credit risk. BBB Instruments with this rating are considered to have moderate degree of safety regarding timely servicing of financial obligations. Such instruments carry moderate credit risk. BB Instruments with this rating are considered to have moderate risk of default regarding timely servicing of financial obligations. B Instruments with this rating are considered to have high risk of default regarding timely servicing of financial obligations. CARE A2 CRISIL A2 Fitch A2 ICRA A2 BWR A2 SMERA A2 CARE A3 CRISIL A3 Fitch A3 ICRA A3 BWR A3 SMERA A3 CARE A4 CRISIL A4 Fitch A4 ICRA A4 BWR A4 SMERA A4 CARE D CRISIL D Fitch D ICRA D BWR D SMERA D 50 | P a g e
C Instruments with this rating are considered to have very high risk of default regarding timely servicing of financial obligations. D Instruments with this rating are in default or are expected to be in default soon.
SHORT TERM RATING DESCRIPTION FOR BANK EXPOSURE Rating Symbol Rating Description A1 Instruments with this rating are considered to have very strong degree of safety regarding timely payment of financial obligations. Such instruments carry lowest credit risk. A2 Instruments with this rating are considered to have strong degree of safety regarding timely payment of financial obligations. Such instruments carry low credit risk. A3 Instruments with this rating are considered to have moderate degree of safety regarding timely payment of financial obligations. Such instruments carry higher credit risk as compared to instruments rated in the two higher categories. A4 Instruments with this rating are considered to have minimal degree of safety regarding timely payment of financial obligations. Such instruments carry very high credit risk and are susceptible to default. D Instruments with this rating are in default or expected to be in default on maturity.
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