Credit Appraisal in SIDBI

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Summer Internship Project

Report
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Analysis of credit appraisal System of
the Products of SIDBI and Its Impact on
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MSME
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Shakti Mishra
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Project Under The guidance

of
Prof. Arindam Banarjee (Internal
Faculty Guide)
And
Mr. Amit Kumar, AGM
Central Loan Processing Cell, SIDBI
Project Submitted ByName: Shakti Mishra

Roll No:- 14DM192
Batch: 2014-16
CERTIFICATE
This is to certify that Mr. Shakti Mishra, Roll No. 14DM192, has completed
his summer internship at Small Industries Development Bank Of
India(SIDBI) , and has submitted this project report entitled (Analysis of
credit appraisal System of the Products of SIDBI and Its Impact on
MSME) towards part fulfillment of the requirements for the award of the Post
Graduate Diploma in Management 2014-2016.
This Report is the result of his own work and to the best of my knowledge no
part of it has earlier comprised any other report, monograph, dissertation or
book. This project was carried out under my overall supervision.
Date: 15/06/2015
Place: Lucknow
Company Project Guide
CERTIFICATE
This is to certify that Mr. Shakti Mishra, Roll No. 14DM192, has completed
his summer internship at Small Industries Development Bank Of
India(SIDBI) , and has submitted this project report entitled (Analysis of
credit appraisal System of the Products of SIDBI and Its Impact on
MSME) towards part fulfillment of the requirements for the award of the Post
Graduate Diploma in Management 2014-2016.
This Report is the result of his own work and to the best of my knowledge no
part of it has earlier comprised any other report, monograph, dissertation or
book. This project was carried out under my overall supervision.
Date:
Place: Greater Noida
Internal Faculty
Guide
5
Acknowledgement
I have been grateful to the Small Industries Development Bank of India
(SIDBI) for providing me an opportunity to go be a part of their functionality.
It has been an experience which has improved my knowledge, enhanced my
ability to withstand work environment and an opportunity to learn about the
role of most important sector in the country- banking and financial
institutions, in uplifting the sections of the economy that contribute majorly
to the economic development of the country.
I would like to extend my sincere gratitude to the management of SIDBI for
providing me the enriching opportunity of working with the organization and
its team for a period of 2 months. In particular, I would like to thank my
Company Guide, Mr. Amit Kumar for sparing the time to provide me with
necessary guidance and advice from time to time, with utmost patience, in
spite of his extremely busy schedule. I would also like to express my sincere
gratitude to Mr. Kaushlendra Kumar, Mr. Mukesh Jaiswal and Mr. Vinay Kumar
of the Central Loan Processing Cell (CLPC) Department for providing me with
valuable inputs.
My heartfelt gratitude and warm salutations are also due to Prof. Arindam
Banarjee, the faculty of our Institute, for inculcating in me the principles of
dedication and hard work, and proving her guidance and support throughout
the Project.
Their constructive criticism of the approach to the problem and the result
obtained during the course of this work has helped me to a great extent in
bringing work to its present shape.
Shakti Mishra
7
Batch: 2014-16
Birla Institute of Management Technology
EXECUTIVE SUMMARY
The project titled Analysis of credit appraisal System of the Products

of SIDBI and Its Impact on MSME is concerned with the analysis of the
various aspects of project appraisal under various products of SIDBI and the
impact of these products on MSME.
Since micro, small and medium enterprises are important drivers for the
economy of the country therefore it is important for nodal agencies like SIDBI
to assist them with the credit requirement at a cost effective and timely
manner. So the aim of the study is to study thoroughly the various
aspects(technical, economic, financial and commercial aspects) of credit
appraisal and to study the various norms which are followed by SIDBI
towards disbursement of loans. An effort has also been made to understand
the risk assessment process of SIDBI to understand how SIDBI recognizes
risks involved and the impact it has on lending decisions.
Moreover SIDBI assists the MSMEs with various subsidy schemes which
cover various sectors like textile, leather, food etc where technology
upgradation is important for the growth of the sector. So an attempt has

been made to study the various subsidy schemes provided by SIDBI.
Table of Contents
Acknowledgement 5
Executive Summary 6
Table Of Abbreviations 9
1. Introduction 10
1.1. Industry Introduction
11
1.2. Introduction To SIDBI 12
2. Methodology 18
2.1. Objective Of The Project
19
2.2. Scope Of The Project 19

2.3. Research Methodology 20
3. Introduction To Credit Appraisal

3.1. Description of Appraisal
22
24
3.2. Central Loan Processing Cell 28

3.3. Detailed Appraisal Note29
3.4. Term Loan
31
3.4.1.
Case Study
31
3.4.2.
Conclusion
40
3.5. Working Capital Loan
41
9
3.5.1.
Case Study
43
3.5.2.
Conclusion
56
3.6. Risk Capital Loan
57
3.6.1.
Case Study
57
3.6.2.
Conclusion
74
3.7. Micro Credit Loan
75
3.7.1.
Case Study
75
3.7.2.
Conclusion
86
3.8. Findings and Recommendations
87
4.Impact Of SIDBI On MSME89

4.1. Importance of MSME
90
4.2. Problems Face By MSME
92
4.3. Contribution of SIDBI 92

4.4. Initiatives by SIDBI
5. Conclusion
Appendix
93
99
100
Bibliography
113
10
TABLE OF ABBREVIATIONS
MSME
MICRO SMALL AND MEDIUM SCALE ENTERPRISE
ASSOCHAM
ASSOCIATED CHAMBER OF COMMERCE
BO
BRANCH OFFICE
RO
REGIONAL OFFICE
RM
RELATIONSHIP MANAGER
LOI
LETTER OF INTENT
CLPC
CENTRAL LOAN PROCESSING CELL
DAN
DETAILED APPRAISAL NOTE
DER
DEBT EQUITY RATIO
DSCR
DEBST SERVICE EQUITY RATIO
NABARD
NATIONAL
AGRICULTURAL
DEVELOPMENT
ACR
ASSET COVERAGE RATIO
MFI
MICRO FINANCE INSTITUTION
JICA
JAPAN INTERNATIONAL COOPERATION AGENCY
NPA
NON-PERFORMING ASSET
CIBIL
CREDIT INFORMATION BUREAU(INDIA)LIMITED
TOL
TOTAL OUTSIDE LOANS
ROC
RETURN ON CAPITAL
XBO
EXTENSION BRANCH OFICE
ROCE
RATE OF CAPITAL EMPLOYED
ORM
OPERATIONAL RISK MANAGEMENT
RiMV
RISK MANAGEMENT VERTICAL
KRI
KEY RISK INDICATOR
TNW
TOTAL NET WORTH
CLCS
CAPITAL LINKED CREDIT SUBSIDY
BANK
OF
RESEARCH
AND
11
Chapter
1
INTRODUCTION
12
Introduction
1.1. Industry Introduction:
The Micro, Small and Medium Enterprises (MSMEs) play a key role in the
economic and social development of the country. They also play a major role
in the development of the economy with their effective, efficient and flexible
entrepreneurial spirit. The MSME sector contributes to the countrys
manufacturing output, exports and employment and is credited with
generating the highest employment growth.
The MSME sector in India is highly heterogeneous in terms of the size of the
enterprises, variety of products and services, and levels of technology. The
sector not only plays a critical role in providing employment opportunities at
comparatively lower capital cost than large industries but also helps in
industrialization of rural and backward areas, reducing regional imbalances
and assuring more equitable distribution of national income and wealth.
MSMEs complement large industries as ancillary units and contribute
enormously to the socioeconomic development of the country. The
continuous increase in the MSME industries and the employment in the
sector shows the importance and credibility of this sector.
Enterprises are classified into micro, small and medium category
Enterprise
(Type)
Micro
Small
Medium
Investment
in
Plant & Machinery
(Manufacturing)
Up to 25 Lakhs
Above 25 Lakhs
up to 5 Crore
Investment
in
Equipment
(Service)
Up to 10 Lakhs
Above 10 Lakhs
up to 2 Crore
Above 5 Crore up Above 2 Crore up

to 10 Crore
to 5 Crore
13
Introduction to SIDBI :
Small Industries Development Bank of India is an independent financial
institution aimed to aid the growth and development of micro, small and
medium-scale enterprises in India. Set up on April 2, 1990 through an act of
parliament, it was incorporated initially as a wholly own subsidiary of
Industrial Development Bank of India. The current shareholding is spread
among many government-owned Banks, Insurance Companies and Financial
Institutions.
SIDBI began as a refinance agency to banks and financial institutions for
their credit to small industries. Since then it has expanded its activities,
including direct credit to the SME through 100 branches in all major industrial
clusters in India. Besides, it has been playing the development role in several
ways such as support to micro-finance institutions for capacity building and
on lending. Recently it has opened seven branches christened as Micro
Finance branches, aimed especially at dispensing loans up to 5 lakh.
Some of the products of SIDBI are:
14
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SIDBI has extended financial help to many companies and organizations in
operating in the MSME sector through its diverse line of products. The total
MSME outstanding credit of the Bank increased by 4.2% to 56,060 crore as
on March 31, 2013. The cumulative disbursement by SIDBI to the MSME
sector since inception stood at over 2.85 lakh crore, benefitting more than
328 lakh persons in the MSME sector.
Different tools/Schemes used for providing credit
Credit Guarantee Fund Trust For Micro And Small Enterprises

(CGTMSE)
Objective:
15
Credit to micro and small enterprises sector is generally perceived as high

risk lending, more so, when there is absence of any collateral. In order to
encourage banks to lend more to this sector, Government of India and SIDBI
have set up the Credit Guarantee Fund Trust for Micro and Small Enterprises
(CGTMSE) in July 2000, to provide credit guarantee support to collateral free /
third-party guarantee free loans up to Rs. 100 lakh.
The Ministry of Micro, Small and Medium Enterprises and Small Industries
Development Bank of India (SIDBI), established a Trust named Credit
Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) to
implement the Credit Guarantee Fund Scheme for Micro and Small
Enterprises. The scheme was formally launched on August 30, 2000 and is
operational with effect from 1st January 2000.
Eligibility
The institutions, which are eligible under the scheme, are scheduled
commercial banks (Public Sector Banks/Private Sector Banks/Foreign Banks)
and select Regional Rural Banks (which have been classified under
'Sustainable Viable' category by NABARD).
The credit facilities which are eligible to be covered under the scheme are
both term loans and working capital facility up to Rs.100 lakh per borrowing
unit, extended without any collateral security or third party guarantee, to a
new or existing micro and small enterprise. For those units covered under the
guarantee scheme, which may become sick owing to factors beyond the
control of management, rehabilitation assistance extended by the lender
could also be covered under the guarantee scheme. It is noteworthy that if
the credit facility exceeds Rs.50 lakh, it may still be covered under the
scheme but the guarantee cover will be extended for credit assistance of
Rs.50 lakh only.
Another important requirement under the scheme is that the credit facility
should be availed by the borrowing unit from a single lending institution.
However, the unit already assisted by the State Level Institution/NSIC/NEDFi
can be covered under the scheme for the credit facility availed from member
bank, subject to fulfillment of other eligibility criteria. Any credit facility in
respect of which risks are additionally covered under a scheme, operated by
Government or other agencies, will not be eligible for coverage under the
scheme.
16
The guarantee cover available under the scheme is to the extent of 75 per
cent of the sanctioned amount of the credit facility. The extent of guarantee
cover is 80 per cent for (i) micro enterprises for loans up to Rs.5 lakh; (ii)
MSEs operated and/or owned by women; and (iii) all loans in the North-East
Region.
Credit Linked Capital Subsidy Scheme(CLCSS)

Objective
The objective of this subsidy is to facilitate technology up gradation of SSI
units in the specified products / sub-sectors by providing 15 % capital
subsidy for induction of well established and improved technologies.
Eligibility
Units going for upgradation with state of the art technology with or
without expansion.
New units setting up facilities only with the appropriate and proven
technology approved
by GTAB.
The units registered with State Directorate of Industries.
Maximum Ceiling of loan eligible for support
15% of the investment in eligible plant & machinery

Ceiling on Loan- Rs.100 lakh
Ceiling on subsidy-Rs. 15 lakh
SIDBI Financing Scheme For Energy Saving Projects:

The Japan International Cooperation Agency (JICA) has extended a Line of
Credit to
Small Industries Development Bank of India (SIDBI) for financing Energy
Saving
Projects in Micro, Small, and Medium Enterprises (MSMEs) Sector. The project
is
17
expected to encourage MSME units to undertake energy saving investments

in plant
& machinery / production process to reduce energy consumption, enhance
energy
efficiency, reduce CO2 emissions and improve the profitability in the long
run.
The financial assistance to MSMEs will be through SIDBI, as well as through
refinance
to banks / State Finance Corporations (SFCs) and Non Banking Financial
Companies
(NBFCs). Under the Line technical assistance is also provided to financial
institutions
and MSME units for dissemination of information and successful
implementation of
Energy Saving projects in MSME Sector.
Financial Parameters
The financial parameters for assistance under the Scheme are:
PARAMETER
NORM
Minimum Assistance
Rs. 10 lakh
Minimum
Contribution
Promoters 25% for existing units

33% for new units
Debt-Equity Ratio
Maximum 2.5:1
Interest Rate
The interest rate is based on internal risk rating

within the band given below:
Security
Fixed rate :9.5-10% p.a

Floating rate:9.75-10.5% p.a
First Charge over assets acquired under the
scheme;
first/second charge over existing assets and
collateral security
as may be deemed necessary.
Asset coverage
Minimum Assets Coverage should be 1.4:1 for

18
new units and 1.3: 1 for existing units.

Repayment
Period
Need based. Normally, the repayment period

doesnt extend
beyond 7 years. However, longer repayment
period of more
than 7 years can be considered under the Line
if considered
necessary.
Technology Upgradation Fund Scheme-Textile Sector(TUFS)

The Scheme was launched by the Ministry of Textiles, GoI on April 1, 1999
and its objective is to upgrade & modernize the Indian Textile Industry by
encouraging it to undertake & adopt modern technological process or
undertake capacity expansion.
SIDBI is the nodal agency for the SSI in the textile and cotton ginning and
pressing sector.
TUFS Objective & Incentives:
i)
A reimbursement of 5% on the interest charged by the lending
agency on a project of technology upgradation in conformity with
the Scheme. However, for spinning machinery the scheme will
provide 4% for new stand alone / replacement / modernization of
spinning machinery; and 5% for spinning units with matching
capacity in weaving / knitting / processing / garmenting.
ii)
Additional option to the powerlooms units and independent

preparatory units to avail 20% Margin Money subsidy under
Restructured TUFS in lieu of 5% interest reimbursement on
investment in TUF compatible specified machinery subject to a
capital ceiling of Rs. 500 lakh and ceiling on margin money subsidy
of Rs.60 lakh. However, for brand new shuttleless looms the ceiling
on margin money subsidy will be Rs.1 crore. A minimum of 15%
equity contribution from beneficiaries will be ensured.
19
iii)
An option to SSI textile and jute sector to avail of 15% Margin

Money subsidy in lieu of 5% interest reimbursement on investment
in TUF compatible specified machinery subject to a capital ceiling of
Rs. 500 lakh and ceiling on margin money subsidy of Rs.45 lakh. A
minimum of 15% equity contribution from beneficiaries will be
ensured.
iv)
5% interest reimbursement plus 10% capital subsidy for specified

processing, garmenting and technical textile machinery..
v)
5% interest reimbursement plus 10% capital subsidy for brand new

shuttleless looms.
vi)
25% capital subsidy in lieu of 5% interest reimbursement on

purchase of the new machinery and equipments for the pre-loom &
post-loom operations, handlooms/up-gradation of handlooms and
testing & Quality Control equipments, for handloom production
units.
vii)
25% capital subsidy in lieu of 5% interest reimbursement on

benchmarked machinery of silk sector as applicable for Handloom
sector.
20
Chapter 2
300ACT OF SIDBI ON MSMEcro Credit Loan
Metho
21
SMECrediFlGowt1.TchmLansOIf
2.1 Objective Of The Project :-
The project focuses on the in-depth study and analysis of the appraisal
system of four important products of SIDBI viz. term loan, working capital
loan, risk capital loan and micro credit loan. Appraisal plays an important role
in lending decision of any organization planning to lend money.
This project report will focus mainly on the following points:-
22
To understand the working of SIDBI

To understand the features of different products of SIDBI
To understand the process of appraising a project and understanding the
various risk involved.
Understand the impact of SIDBI on the MSME sector
2.1.
Scope of The Study :-
Small and medium enterprises credit appraisal process as done in SIDBI,

CLPC department; Lucknow is covered under the report. Suitable cases are
taken to understand four of the most important products availed by the
customer and the credit appraisal of these products of SIDBI. Through this
study detail analysis of appraisal process is illustrated. Comparison between
the appraisal processes of these products is based on my general
observation, understanding and interviewing with officials during the two
months internship.
2.2.
Research Methodology
LOCALE OF THE STUDY: The locale of the study has been narrowed down
to the Head Office, Lucknow office of Small Industries Development Bank Of
India. The study is categorized into many departments of the SIDBI but it
mainly deals with the Central Loan Processing Cell Of SIDBI.
Sources of Data: Most of the data collected is primary data as CLPC
provides its clients with a checklist of documents required for further
processing of the proposed loan. This checklist includes documents like legal
documents, IT returns, financials etc. These documents come directly from
the client and do not require field visits. Field visits are done only to have
meeting with the client or to examine the available assets and security.
Secondary data like industry information; industry trend etc. will be
collected from online sources. Audited Balance Sheets and Valuation report
of existing assets and securities of the project are collected from their
respective sources.
23
Sample Size: I have taken one case for term loan, working capital loan,
micro credit loan and risk capital loan each and explained loan appraisal
process end to end. Hence my sample size is 4.
Data Analysis: Actual proposals were done to get hands on experience on
the procedure of Project Appraisal. Excel statistical tools have been used for
analyzing the data.
Following steps were taken for analysis (appraising the project):
Doing a management appraisal-checking the promoters contribution,
credentials and years of experience in the business.
Doing a technical appraisal-visiting the locality of the project and
checking whether the machines and other utilities for the plant are
sufficient to sustain the project.
Doing a financial appraisal-Doing a ratio analysis and checking whether
the ratios adhere to the prescribed norms. Calculating Debt Service
Coverage Ratio, IRR, NPV and doing a sensitivity analysis.
Doing a commercial appraisal- Checking the demand and supply of the
project.
Technique Used: Comparison is done through understanding detail credit
appraisal process for all the mentioned products. By explaining project
appraisal case of each I have tried to bring comparison between them.
24
CHAPTER 3
Introduction to
Credit Appraisal
25
How a borrower approaches bank for a Small Business

Loan?
Obtaining a small business loan has been difficult for entrepreneurs over the
past few years, as lenders instituted stricter credit standards and investors
tightened their purse strings following the financial crisis.
Step 1: Take stock
When approaching a bank about a potential lending opportunity, its crucial
to have a solid business plan that shows how you plan to use the money. A
loan application package will need to include hard numbers to back up the
viability of the plan, and should support a case for how your business will be
able to pay back the loan.
Reviewing financial statements in advance of approaching a lender is also
wise because it will give you a chance to take stock of potential collateral for
the loan, which may include hard goods, real estate, stocks or bonds and
personal assets or guarantees.
Step 2: Consider resources
There are many local and national organizations that provide support and
services to SME for seeking loans. Before approaching a lender, an
entrepreneur can reach out to these organizations.
Step 3: Make a good first impression, cultivate the relationship
Applying for a loan could be the start of a long relationship with a financial
institution, so its important for entrepreneurs to put their best foot forward
from the start of the process. Business owners who have done the necessary
homework of drafting a solid plan and considering collateral should be able
to make a specific case for why they are a good candidate for a loan, having
clear answers for such basic questions as how much money is needed, how it
will be spent and how it will be repaid.
Entrepreneurs would also be wise to consider what kind of financial
institution they will be working with, to prepare for meeting with a loan
officer. Regardless of whether youre working with a large financial institution
or a community lender, its important to maintain good relationships with
loan officers and other representatives of the lending institution. This could
substantially ease the process of applying for future loans.
26
Bankers Perception: A banker will focus on evaluating the credit

worthiness of the borrower and will see whether the proposed project has the
potential to generate profits or not. This ensures the safety of the money. For
this, a banker uses a special tool called credit appraisal.
Credit appraisal is the assessment of credit worthiness of a borrower. It
involves assessment of the various risks that can have an impact on the
repayment of loan. This assessment gives a very good idea of the borrowers
repayment capability and plays a major role in the lending decisions of the
lender. During this whole process, the repayment capacity of the customer is
established, mainly based on Income, Age, Qualifications, Experience,
Employer, Nature of business (if self employed), Security of tenure, Taxation
history, Assets owned, Alternative /additional sources of income, Other loan
obligations, Investments, Other present and future liabilities.
The appraisal system also aims to determine the credit needs/requirements
of the borrower taking into account the financial resources of the client. It is
to ensure that there is no under - financing or over - financing.
Below is the pictorial summary of factors scrutinized in appraising a project

proposal.
27
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Description of the Appraisal Process
1. Promoter
Promoter is the most important person in a company as he is
responsible for the successes of the project. Thus, it is very important
to assess the capability of the promoter. As per the lender point of
view, it is very crucial to assess every relevant detail about the
promoters. 5 Cs are very useful key which plays a very important role
to select the promoters/project. These are as under:
Credit(goodwill)
Character
Capital
Capacity
Closeness(project attachment)
Character of the borrower is the most crucial factor. Bad conduct
put the money of the bank under grave risk. Hence, assessment of the
character of the borrower is very important. This is done by scrutinizing
the past conduct of accounts in the lending bank as well as other
banks for any discrepancies. Also, the list of willful defaulters is
28
checked to see if the borrower has ever defaulted on repayment. By

talking to borrower, its suppliers and customers, the character/goodwill
of borrower is confirmed.
Next important thing is capital. Because if borrower has sufficient
capital he can run his company in adverse situation easily, his stake in
the company increases so his exposure increases and bank exposure
decreases. In short capital helps bank to reduce their exposure and
increases the credit worthiness of borrower.
Repayment capacity of the borrower is also major factor in
checking the feasibility of the project. For checking repayment capacity
DSCR(debt service capacity ration) is used. Average of five years of
DSCR is checked for term loan and Interest coverage ratio is checked
for working capital. Borrower should be capable of repaying the loan
from his projects profit or cash flow. A min DSCR should be attained by
the lenders project to be eligible for a loan. But sometimes if the
lender has good record in other areas, relaxation is sought in the
minimum DSCR requirement. Whether borrower is bringing sufficient
security to cover his assets is a concern for the bank. Because, if
borrower fails to return money, security is the only shield which
protects banks money. Security should be checked and all the papers
related to valuation of assets should be checked before proceeding for
calculation of asset coverage ratio and security margin.
Closeness means how much the borrower is attached to his
project/company. This is the study of the stake of the promoter in the
project, whether he is positive about his project and sees a long term
commitment/prospects towards/for the project/company.
2. Financial Analysis
The financial analysis is necessary to understand the projects financial
feasibility. All the required documents are collected from the borrower
for carrying out analysis of important parameters. Important
documents/financials which are checked are:
Cash flow
Fund flow
Balance sheet
Ratio analysis
Cash flow statement analysis is done to understand whether
borrower have/will have sufficient funds for carrying out his business
properly. Capability of the project to generate sufficient cash to repay
the banks funds is also checked. If the firm is an existing one then last
3 years actuals, current year estimates and next year projected cash
flow and other financials are analyzed. If the firm is new only estimated
29
financials sheets are asked from the borrower and then those are
analyzed. Loan officer checks for any discrepancies in the financials of
the company which may raise suspicions regarding the conduct of the
company.
Balance sheet of the existing firm gives the idea about the fund
management, financial position, current asset and liability
management and position of the firm. Loan officer analyses the
balance sheet by checking the asset liability management of funds,
checking the entries and forming his own corrected copy of balance
sheet (writing the entries under relevant heads for example the
borrower may have written some expenses under fixed assets but bank
consider them as only expenses not assets). In case of working capital
finance bank calculates Maximum permissible bank finance (MPBF)
with the help of total current assets, total other current liabilities and
also promoters minimum contribution. These are calculated from the
estimated balance sheet prepared by banks so balance sheet analysis
is done thoroughly.
SIDBI and other banks have loan policy which says that
borrowers project must fulfill some important financial ratio
limits/norms for allowing bank to give loans to the borrower. Important
ratios are ACR, DER, TOL/TNW, DSCR, interest coverage, current ratio,
etc. The ratio plays important tool in deciding the loan appraisal
proposal. Some more factors are debtor and creditor days which should
be within maximum days limit. These are very important in working
capital appraisal.
3. Security Analysis
Bank does security analysis by following techniques:
Visit of the land
Legal of authority
Valuation
Before proceeding for visit of land loan officer analyses the
projects details such as what the borrower demands, what is his
financial status, what is his manufacturing procedures, what security
he is offering. Also analysis of other company/firm in the same
business line should be done for comparing the proposal of the
promoter with its competitor. To cross check what borrowers claims, a
loan officer visit the manufacturing/service proposed/working site. He
visits the land and holds meeting with the promoter. For existing
companies/firms, bank checks that what exactly is its manufacturing/
operating cycle. For new companies/firms it is very risky for bank to
30
understand authenticity and feasibility of the project. So security

analysis becomes very important for new firms.
Bank has their experts who evaluate the legal authenticity of the
papers of land/machinery etc given as security by the promoter. By
obtaining legal opinion of the experts bank can ascertain the
authenticity of the security.
The valuation of the property/security as given by borrower is
crossed check by the bank with the help of internal valuation team.
These measures are important because securitys correct value should
be known for ascertain asset coverage ratio which is also a norm which
should be fulfilled by the borrower. Also it is important to know whether
security offered are at first charge or not. If the security is shared
between two or more banks then the valuation as obtain by one bank
should be acceptable to all banks.
4. Risk
Before proceeding for detail credit appraisal, risk assessment of the
borrowers project is very important. This is firstly because project
should fulfill rating norms of banks (to understand riskiness of the
borrowers project) and secondly because risk is directly related to
return for the bank. Higher the risk higher will be interest rate charged
by the bank to the borrower. Risk assessment includes assessment and
rating of the following kind of risks:
Industry
Risks
Industry
risk
includes
risks
associated
with
Government regulations and policies, availability of
infrastructure facilities, Industry Rating, Industry
Scenario & Outlook, Technology Upgradation,
availability
of
inputs,
product
obsolescence,
reach/penetration of the firm, position of firm in target
market, competitors in the market, competitors price
strategies, industry risk, etc.
Business
Risks
Operating efficiency, competition faced from the units

engaged in similar products, demand and supply
position, cost of labor, cost of raw material and other
inputs, pricing of product, surplus available,
marketing, dependency on suppliers and customers,
quality of the product manufactured etc.
31
Management
Risks
Background,
integrity
and
market
standing/
reputation of promoters, organizational set up and
management hierarchy, expertise/competence of
persons holding key position in the organization,
delegation
and
decentralization
of
authority,
achievement of targets, track record in execution of
project, debt repayment, industry relations etc.
Financial
Risks
Financial
strength/standing
of
the
promoters,
reliability and reasonableness of projections, past
financial performance, reliability of operational data
and financial ratios, adequacy of provisioning for bad
debts, qualifying remarks of auditors/inspectors etc.
3.2 CLPC (Central Loan Processing Cell):

Central Loan Processing Cell (CLPC) department works under regional office.
Central Loan Processing Cells (CLPCs) were introduced in the Bank for past
few years for enhancing credit appraisal quality. These are specialized cells
which have resulted in expeditious processing of credit proposals, besides
bringing in quality in processing. In order to further sharpen the focus on
customer service and to cover reduce turnaround time, the existing set-up of
CLPCs were extended to high potential centres. Besides bringing about
coverage of more locations under CLPC set-up, it would also improve credit
delivery in those areas.
The role/functions of CLPC are many folds and are as under:
CLPC access and analyses the information sent by branches for
appraising the case and data is generally retrieved from a centralized
server.
Joint visit/site inspection by branches and CLPC officer.
CLPC officer may interact with the promoter keeping the Branch officer
in loop.
32
CLPC team may directly negotiate with the promoters for improvement
in terms of sanctions and for speeding up the process.
CLPC may hold discussions with various parties to supplement the
information given by the branch and to improve quality of the
appraisal.
CLPC is required to finalize the appraisal in not more than 20 days from
the date of receiving of complete information from BO (SIDBI
guideline).
33
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34
3.3 Detailed Appraisal Note:

Detail appraisal note is the concise summary of information processed,
analyzed and presented by the credit department about the financial,
economical, technical, and managerial feasibility of the project.
Recommendations, terms of sanction of loan, eligibility of schemes are also
mentioned in this note. In other words it is the complete document for credit
appraisal decision making.
After taking necessary information from the borrower, these are analyzed
and processed based on the eligibility criteria of the scheme sought by
borrower. If the loan proposal does not fulfill the eligibility criteria for the
scheme, bank can try to provide for another loan scheme if they find the
borrowers proposal potential and/or feasible.
Structure of Detailed Appraisal Note:

Structure is divided into seven broad heads which are:
I.
II.
III.
IV.
V.
VI.
VII.
Introductory
Eligibility under various schemes
Management
Technical
Project cost and means of finance
Financial/other
Terms of sanction/conclusion/recommendations
These major heads are further divided into sub-heads covering all the
necessary details required for appraisal. Structure of DAN remains same for
appraisal of all kinds of loans but according to the kind of loan, some parts
are given more importance than others. Every appraisal process is tailormade to cover different features of a loan. Below are DAN and highlights of
the most important features of the DAN for a particular loan.
35
3.4 Term Loan

Term loan is a monetary loan given to individuals or businesses which is
repaid in installments, at equal duration, over a set period of time. A fixed
interest rate is charged over the remaining balance of the loan and is
generally compounded annually.
Term Loans are generally granted to finance capital expenditure, i.e. for
acquisition of land, building and plant and machinery, required for setting up
a new industrial undertaking or expansion/diversification of an existing one
and also for acquisition of movable fixed assets. Term Loans are also given
for modernization, renovation, etc. to improve the product quality or increase
the productivity and profitability.
3.4.1 Case Study: Term Loan

A proposal for term loan of 1230 Lakh was received by Lucknow CLPC from
ABC Hotels. It is a new, upcoming project in Lucknow. The company was
incorporated on 25.03.2011 and its past performance has been satisfactory.
The appraisal note has been prepared as per the standard format as shown
above. Following are the most important factors of appraisal of a term loan.
I.
INTRODUCTORY
1. Particulars of the unit:
Name of the unit:- ABC Hotels

Constitution (private, public, etc):- Private Ltd. Company
Date of SSI registration/No. :- The company is in the process
of applying for EM-1
Date of commencement:- Yet to commence commercial
operation
Address:- Lucknow
Existing products and installed capacity of each:Greenfield Project
Distance from BO:- 15 Kms
2. Industry Status:
36
Detail about industry (existing Hotel (service industry)

or proposed) :
Products :
Hospitality
Installed capacity :
38 rooms
No. of days/shifts :
365 days/24x7
End use :
Service
Export orientation :
None
3. Bio-data of the existing and proposed promoters / Directors:
Name of the Director
Vivek Sethia
DoB / Age
01/04/1980, 35
Father
/
Husband
Arun Setia
name
Address
Gomti Nagar, Lucknow
Educational
Graduate
Qualification
Relationship
with Self
Chief Promoter
Experience- in what
capacity/
industry/years
Net worth
IT /Wealth Tax status
PAN Card No.
Other
companies/
interests/ capacity
Saransh Saxena
01/04/1979, 36
Sunil Saxena
Gomti Nagar, Lucknow
Graduate
Self
Promoter has 8 years Promoter has 12 years

experience in business
experience in business
784.22 Lakh
IT Payee
ABCD12345E
M/S Hanuman Hardware
and Tyres
1233.45 Lakh
IT Payee
WXYZ12345P
M/s Saxena and Co.
Since, term loan is a long term loan; the projects viability in the long run is
given the utmost importance. Credit appraisal of a term loan focuses more
on the following points:
Whether the project is feasible.

Whether the project will be profitable enough.
If the promoter will be able to repay the loan from the profits earned.
37
The first thing that is checked in the credit appraisal process is the
character/credibility of the promoter. Willful defaulters and caution lists
are checked for matches. CIBIL score of the promoters and associates
are obtained. Also, details of facilities availed by the company, its
promoters and the associates by other banks are checked for
discrepancies. After scrutinizing all the documents and details, the
character of the borrower is established.
Case details:
No match was found in the willful defaulter/ caution list. CIBIL score was
found to be satisfactory. The existing facilities of the company, promoters
and associates were also checked and found to be satisfactory. Overall, the
conduct of the company and its promoters was found to be without any
discrepancies and satisfactory.
After the credibility of the borrower is established, the project

proposals eligibility under various schemes of SIDBI is checked. This is
done by tallying the available information with the prescribed norms. If
found eligible for a scheme, necessary additions are made to the
appraisal process.
Case Details:
Eligible for Term Loan.
Next, the management of the proposed project is checked. This is a

very important part of the appraisal process for term loan because
management makes or breaks a company. All the important decisions
are taken by the management and for a project to be successful, the
management should be competent. In this step, the hierarchy of the
management is checked. Shareholding pattern is also studied to
understand the stake and interest of different associates in the
project/company.
38
Case Details:
The overall business operation of proposed hotel would be supervised
directly by two directors viz. Shri Vivek Sethia and Shri Saransh Saxena. In
addition, the company will hire professionals to look after the day to day
running of the proposed hotel. The operational head of the hotel will be the
General Manager, who will be hired after considering the experience of such
person in running a hospitality business. Once operational, the hotel
operations will be divided into five sections as shown below:
EFGHD
anoOei
egoAnur
cides
mnarec
AenRakt
medol
irBMe
aieps
nvi
gean
rg
ae
gr
e
s
ir
n
ffi
n
u
n
n
s
ed
t
d
t
t
o
c
n
r
/
m
o
a
r
o
Share-holding Pattern:
S. No.
Name
Number
of Shares
1
2
Vivek Sethia
Saransh
Saxena
Relatives
of
Directors
Others
Total
3
4
Amount
(Rs.)
155000
55000
Face
value
(Rs.)
10
10
1550000
550000
Sharehold
ing
(%)
36.21
12.85
100000
10
1000000
23.36
218000
428000
10
2180000
4280000
27.58
100
In the technical aspects of the appraisal process, feasibility of the

project is checked by considering the technical factors affecting the
project. Scope of the project, location of the project, Industry experts
involved with the project, availability of various resources, availability
39
of utilities (electricity, water, waste disposal) and implementation

schedule are some of the factors taken into consideration.
Case Details:
All the available documents were scrutinized and the provided information
was found satisfactory.
The next step in the appraisal process is the study of cost of project
and means of financing of the project. This is an important step in
every appraisal as this helps in estimating the cost of the project and
the actual loan requirement of the borrower. It ensures that no underfinancing or over-financing takes place.
Case Details:
The broad break-up of cost of project:
S.No
1
2
3
4
5
6
7
8
Particulars
Land
Site development
Building and civil works
Plant and machinery
Misc. fixed assets
Preliminary and preoperative expenses
Contingencies
Working Capital
Total
(`lakh)
Amount
251.30
77.55
878.70
166.23
151.84
197.66
63.72
58.00
1845.00
Preliminary & Pre-operative Expenses- Being a green field unit, a sum of

Rs 197.66 lakhs has been provided in the project towards preliminary and
preoperative expenses.
Contingencies A sum of Rs 63.72 lakhs has been provided towards
contingencies to take care of increase in the other heads of the project and
also towards meeting any unforeseen expenses related to the project.
Means of finance:
Particulars
Amount in ` Lakh
Already
To be incurred
Total
40
incurred
Share Capital
51.30
363.70
415.00
Interest free unsecured loans
200.00
0.00
200.00
Promoters Contribution
251.30
363.70
615.00
Term Loan from SIDBI
0.00
1230.00
1230.00
Total
251.30
1593.70
1845.00
Promoters' Contribution (%)
33.33%
DER
3.45
Next in the appraisal process is the analysis of the financials of the

company. This step involves financial analysis of the past performance
of the company as well as analysis of the projected performance of the
company to estimate the financial health of the firm in the past as well
as in the coming future. This step is very important as it gives a good
idea of whether the project will be profitable enough for the promoter
to be able to repay the loan.
Case details:
The financial/other parameters for term loan assistance are given
below:
S.
No.
(i)
(ii)
Particulars
Norms
Promoters
contribution
project
New projects 33%, Rs 615 lakh

for the lower contribution [up (33.33%)
to 25%] could be
accepted in respect of
existing
well
performing
companies / firms.
Others
25%
(minimum)
Term loan proposed
Rs1230 lakhs
for the project
41
(iii)
(iv)
(v)
(vi)
(vii)
viii
(ix)
(x)
(xi)
xii
xiii
Overall
Exposure
(Existing + proposed)
DER (for proposed Generally
not
project)
exceeding 2:1 for the
company/firm
as
a
whole.Relaxable to 3:1
foe MSEs
DER (for the company
as a whole)
Primary
Security
Value/margin
Collateral
Security
Value
Overall
Security
value/Margin
Overall
Asset Minimum overall asset
Coverage Ratio
coverage of 1.3 for
existing
companies
and
1.4
for
new
projects
should
be
ensured.
DSCR (Maximum)
Minimum 1.5
(Minimum)
(average)
Breakeven point (%)
Cash BEP (%)
Rs 1230 lakhs
ROCE
IRR
Cost of capital
25.01%
16.66%
11.86%
2:1
2:1
Rs 1589.34 lakhs
Rs 227.70 lakhs
Rs 1817.04 lakhs
1.48 times
2.08
1.23
1.52
32.91%
27.64%
Along with financial analysis, industry/ market analysis is also done to

check if the current business plan will be able to survive in the market.
Current scenario and past trend of the industry is taken into
consideration to estimate future possibilities. SWOT analysis and
sensitivity analysis of the company is done. Financial and economic
viability of the project is also checked. Status of government approvals
are taken into consideration and as well as a project cannot operate
without them.
42
Risk categorization is done for risk assessment and to give a rating to

the company and project. Risks are recognized and listed under the
heads of high risk, medium risk and low risk. The rating of the project
and the company is done on the basis of this list.
Case Details:
The favorable and risk factors of the projects are determined with the help of
SWOT analysis:
Strength:
The promoters are resourceful and having good net worth.

Involvement of professional agency in implementation of the project.
The proposed star category would help the hotel in attracting good
number of clients.
Weakness:
Promoters do not have any experience in running hotel.

Competition from existing hotels and from new entrants.
No tie up with the established brands of the sector.
Opportunities:
Absence of star category medium level hotel in the area.

Good business opportunity for the banquet hall during marriage
seasons.
Strategically located as the proposed hotel is in the area which is
having large number of business establishment.
Threats:
Entry of big corporate with international tie up like Marriot for mid
segment hotels. However the demand outnumbers the supply in the
segment and this allow number of other establishment to enter and
flourish.
The increase in no. of available rooms may dampen the business of the
overall hotel industry.
Sensitivity Analysis:
43
From the above sensitivity analysis, the position of the firm may be
considered strong enough to handle any adverse situation.
Rating of the project was done using the Risk Assessment model of CRISIL.
The company obtained a score of SME4/CR4.
Finally the Schedule of repayment and security valuation is done.

Case Details:
Schedule Of Drawal And Repayment Of The Loan:
The entire term loan of Rs 1230 lakh shall be paid in 108 monthly
installments after a moratorium of 36 months.
No. of Installments
107
1
Amount
of
installment
11,39,000
11,27,000
Total
each Amount of repayment

12,18,73,000
11,27,000
12,30,00,000
Security:
Primary Security:
First Charge by way of mortgage of all immovable properties.

Value:- 251.30 lakh (Land) + 956.25 Lakh (Site development + Civil)
= 1207.55 Lakh
44
First charge by hypothecation of all moveable (except book debt)

assets including plant, machinery, furniture and fixtures, office
equipment, computers, tools and accessories.
Value:- 381.79 Lakh
Total Value of primary security = 1589.34 Lakh

Collateral Security:
First charge by the way of mortgage of all the property of the two
promoters.
Value: 227.70 Lakh as per valuation report.
Total Security = 1817.04 Lakh

Guarantee: Irrevocable and unconditional personal guarantee of the
promoters should be taken. The guarantee shall be joint and several and no
guarantee commission shall be payable to the guarantors.
In the end come the recommendation and terms and conditions of the
loan. Recommendation summarizes the key areas/ concern of the DAN
and recommends steps to be taken.
Case Details:
Recommendation:
ACR and FACR for the proposed assistance is 1.48 and 1.40
respectively which is satisfactory.
Ratio of equity and interest free unsecured loan for the project is 2:1.
As per norms, it should be 3:1 but relaxation has been sought from
sanctioning authority.
The proposed repayment period for the assistance of 1230 Lakh would
be 12 years including 3 years moratorium period from the date of first
disbursement.
The company has scored RAM rating of SER4/ CR4 an the applicable
ROI for the same is at PLR+1% i.e 13..75%, further term premium of
0.15% for loans having repayment period more than 10 years is
applicable. Recommended rate of interest for the term loan is PLR+1%
+0.15% i.e 13.90%.
45
3.4.2 Conclusion:
Term Loan is the most common type of loan availed by most borrowers. The
main profit of a Term Loan is its long tenure and no burden of immediate
repayment. This type of loan is mostly taken by businesses planning
expansion.
Due to its long tenure, the credit appraisal of a term loan also focuses on the
long term factors while checking the credit worthiness of the borrower.
Management is given a lot of importance as level of expertise of the people
involved is necessary for the project to be successful. For financial appraisal,
long term ratios like ACR, FACR, DER and DSCR are given more importance
as they determine the sustainability of a project in the long term as well as
the ability of the borrower to repay the loan in the long term using available
resources. This is a secured loan and is backed by assets of the borrower
kept as security.
46
3.5 Working Capital Loan

Working capital is defined, as the funds required for carrying the required
levels of current assets to enable the unit to carry on its operations at the
expected levels uninterruptedly. It is utilized for operating purposes, resulting
in creation of current assets (such as inventories and receivables). This is in
contrast to term loans which are utilized for establishing or expanding of
fixed assets.
Gross Working Capital refers to the fund required for financing total current
assets of a business unit. Net working capital no other hand is the difference
between current assets and current liabilities (including bank borrowings)
that is nothing but the surplus of long term sources over long term uses as
such it is known as the liquid surplus available in a unit that can be either
positive or negative. A positive NWC is always desirable because of the fact
that it provides not only margin for the working capital requirement but also
improves ability of the borrower to meet its short term liabilities.
Every business unit has an operating cycle which indicates that a unit
procures raw material from its funds, convert into stock in process which
again is converted into finished goods which can be sold for cash and thus
transformed into fund. Alternatively it can be sold on credit and on
realization thereof gets converted into fund.
Thus every rupee invested in current assets at the beginning of the cycle
comes back to the promoter with the profit element added, after the lapse of
a specific period of time. This length of time is known as operating cycle or
working capital cycle.
SIDBI offers working capital loans for financing the COMPOSITE LOAN
SCHEME as assistance for equipment and/ or working capital as also for work
sheds, with a loan limit of maximum 25Lakh.
It also offers the SINGLE WINDOW SCHEME to provide both term loan for
fixed assets and loan for working capital through a single agency. The total
working capital requirements of such units, inclusive of all fund based
facilities are to be taken into account for determining the working capital
facility eligible for refinance. Entrepreneurs setting up new projects in the
MSE sector, new promoters acquiring unencumbered fixed assets of existing
MSE concerns from PLIs and also
existing well run units undertake
modernization/ technology up -gradation and potentially viable sick units
47
undertaking rehabilitation schemes are eligible for this Single window

scheme. The loan amount under this scheme does not exceed Rs. 200lac.
Credit Appraisal of Working Capital Loans

The appraisal of working capital loans is done in the same way as the term
loans, except the norms/ benchmark for sanction applicable to working
capital loans are different, so is the calculation of the sanction limit of
working capital.
The working capital limit is assessed by two methods:
As per Turnover Method (Nayak Committee)
As per Second Method of Lending
The Nayak Committee Method

The Nayak Committee method is where the limit of working capital to be
sanctioned is calculated on the basis of the gross sales, i.e., 25% of gross
sales is the working capital requirement of that company. The turnover
method is used for companies with a turnover up to 5crore. There is a
minimum stipulated margin for working capital, which is the minimum
amount necessary for the business (which has to be present in the business).
The minimum stipulated margin money for working capital is calculated at
the rate of 5% of gross sales. Then, the actual or the projected net working
capital is calculated, wherein the proposed loan amount is added to the
liabilities of the company, as wound be the case when the loan would be
sanctioned. This is done to come to the projected net working capital that
would be needed. Hence, the net working capital would then be decided from
among the minimum stipulated margin money for working capital or the
actual/projected net working capital, whichever is higher. Ideally, the actual
or the projected net working capital always has to be more than the
minimum stipulated margin money for working capital. In cases where the
actual net working capital falls short of the minimum stipulated margin, the
promoter/ borrower is expected to raise the deficit amount through
unsecured loans or through equity. After the calculation of the net working
capital, the permissible bank borrowing is calculated which is the difference
48
between the working capital requirement of the company and the net
working capital.
The Second Method Of Lending

This method is applicable to companies with a higher turnover than 5crore.
As per the second method of lending, the difference between the total
current assets and the current liabilities (other than bank borrowings) gives
us the working capital gap. The minimum stipulated margin for money in this
method is calculated as 25% of the total current assets. The actual or the
projected net working capital is again calculated after adding the loan
amount to the future liabilities of the company to come down the projected
working capital gap. The net working capital is thus either the minimum
stipulated margin money for working capital or the projected net working
capital, whichever is higher. The permissible bank borrowing is thus the
difference between the working capital gap and the net working capital.
A short fall in net working capital shows excess borrowing. In case, actual /
projected net working capital is less than the minimum stipulated amount, a
condition should be stipulated that the borrower shall raise the deficit
amount by increasing the capital or unsecured loans. Arrangements made /
proposed to be made for deficit in net working capital may be mentioned.The
working capital limit formed after taking into account he projected future
assets and liabilities, the deficit to be raised in case the actual/projected net
working capital is less than the minimums stipulated margin money for
working capital (case of short fall of net working capital), in both the
methods, the method in which the MBPF meets the working capital
requirement of the company is considered.
3.5.1 Case Study: Working Capital Loan

A proposal for working capital loan through the SINGLE WINDOW SCHEME
was received by CLPC, Lucknow. The loan proposal was from XYZ Poly
Industries for a term loan of 150 lakh and working capital loan of 50 lakh.
The project envisages modernization of existing unit by installation of new
machines for manufacturing of Printed / plane laminated Rolls and pouches
at Agra (U.P). The premises are leased from UPSIDC for period of 85 years.
49
The company is enjoying the CC limit `40 lakh with Bank of India and credit
summation/ debit summation are satisfactory. The leased premises of
UPSIDC are mortgaged to Bank of India for securing CC limit of `40 lakh.
The company has approached SIDBI for purchase of plant and Machinery,
MFA and working capital assistance. On sanction of assistance from SIDBI,
company proposes to close all accounts including WCL with BOI. The reason
behind the borrower switching from BOI to SIDBI is that with SIDBI, the
borrower can get loan at subsidized rates due to its JICA Scheme. Also, BOI
has failed to provide the borrower with the CLCSS subsidy for which they are
eligible.
XYZ Poly Industries is a private limited company incorporated on 29/04/1991
and running satisfactorily for the last 22 years. The company is engaged in
the manufacturing and trading of the printed and plane laminated rolls and
pouches. Prateek Saxena, Pranshu Saxena and Surabhi Saxena are the 3
directors in the company having a combined experience of 40 years in the
line of business.
Appraisal was done using the standard format. The important factors for
appraisal of a working capital loan are discussed below.
INTRODUCTION:
1.1
Name of the Unit
ABC poly Industries Pvt.

Limited
1.2
Constitution
Private Limited
1.3
Date of SSI Registration/No.
20/01/012867/PMT/SSI/0
1 dated 06/11/1993
1.4
Date
of 29.04.1991 / 06.11.1993
incorporation/commencement
of the business
Address
xxxxx
1.5
50
Existing products and installed Manufacturing

of
capacity of each product
printed/plane laminated
Rolls and pouches/150
MT p.a.
1.6
Factory
xxxxx
Distance from Branch office
10 kms.
Industry Status
Industry
Products
Installed
Capacity
Manufacturing
Rolls and 300 MT p.a
of
Printed
/ Pouches
plane laminated
Rolls
and
pouches
No
of End uses
days
/
Shifts
Export
orientat
ion
300/1
shifts
N.A.
Printing
and
Packaging
Industry
Bio-data of the existing and proposed promoters/Directors is given

below:
1
Name
of
director
Dob/Age
the Shri
Saxena
59 years
Father/ Husband Shri

Name
Saxena
Address
xxxx
2
Prateek Shri
Saxena
32 years
Prem Shri
Saxena
xxxx
3
Pranshu Smt.
Saxena
Surabhi
30 years
Prateek Shri
Deepak
Kachhawah
xxxx
51
Educational
Qualification
BA
Relationship with Self

chief promoter
B.com
Post
graduate
diploma
in
fashion
designing
Son
Daughter in Law
Experiencein More than 30

More than 10
what
capacity/ years experience years experience
industry/years
in similar line of in similar line of
activity.
activity.
Net worth
`138.50 lakh
`52.25lakh
(As
on31/03/2013)
Smt.
Surabhi
Saxena recently
joined
the
company.
`14.12 lakh
IT /Wealth
status
IT assessee
IT assessee
xxxx
Xxxx
Tax IT assessee
PAN Card No.
xxxx
Like in every other appraisal process, the first thing that is done is
checking of willful defaulter/ caution list to find matches. Company, its
promoters and associates are looked up in the list for matches. This is
done to find out about the character of the borrower.
Case Details: No matches were found. Also, facilities enjoyed by the
company with other banks were scrutinized for discrepancies. The dealing
of the accounts were found to be satisfactory.
After the character of the borrower is established, the proposal is
checked for eligibility under various schemes offered by SIDBI.
Case Details:
ELIGIBILITY UNDER VARIOUS SCHEMES
Schemes
Eligibility
52
1. Eligibility for assistance as It has complied

per our norms/SSI status
conditions.
2. Eligibility
Energy
with
all
the
under
Saving
Credit (Phase-2)
JICA As per the extant guidelines of JICA

Line of LoC, the majority of the equipment
under the project is to be as per the
JICA equipment list. The equipments
mentioned above having value of
`199.35 lakh, and features in JICA
List (release 7.4). Hence, it is
proposed that entire term loan of
`150 lakh may be covered under
JICA LoC.
After the eligibility of the proposal is checked, the appraisal process

continues with analyzing the competency of the management of the
project.
Case Details:
The directors of the company have a combined experience of 40 years in the
line of business. Also, the company has been operating successfully for the
past 22 years. Hence, the management of the company can be deemed fit
and competent for the project.
Technical appraisal is done next where the technical feasibility of the

proposed project is checked. The scope if the project, location of the
project, availability of the resources, and the level of expertise
employed for success of this product is studied to check feasibility of
the product.
Case Details:
The site is located in an industrial area which would offer advantage to the
unit in terms of infrastructural facilities, availability of labor etc. The project
envisages acquisition of plant & machinery for modernization of existing unit
53
for manufacturing of printed / plane laminated rolls and pouches. The

proposal also envisages sanction of working capital limit of `50 lakh. The
capacity of the unit is proposed to be increased from 150 MT p.a. to 300 MT
p.a after the modernization. All resources are easily available since it is
located in industrial area and has been operating for the last 22 years.
and means of financing of the project to understand the monetary
requirement of the borrower and prevent under or over financing.
The broad break-up of cost of project is as under:
(`Lakh)
S. No
Particulars
Plant & Machinery

installation)
Amount
(Including 230.00
Indigenous2
Miscellaneous Fixed Assets
13.00
Margin Money for working capital
12.50
Total
255.50
Margin Money for Working Capital

The company is presently enjoying the working capital limit `40 lakh with
bank of India. The present proposal, inter alia, involves considering sanction
of working capital limit of `50 lakh. The MPBF works out at `51.80 lakh based
on Nayak Committee Method , we recommend the sanction of working
capital limit up to `50 lakh. The margin money required for WCL limit of `50
lakh works out to `12.50 lakh which is included in the project cost.
Means of finance:
The proposed means of finance is as under:
Particulars
Amount in ` Lakh
54
Already incurred
40
unsecured 0.00
Share Capital
Interest free
loans
Term Loan from SIDBI
Total
Promoters'
Contribution (%)
DER
0.00
0.00
40
41.29%
To be incurred
65.50
0
Total
105.50
0
0
150
215.50
0
150
255.50
1.42 For the project and 1.13 for the

company as a whole.
Term loan from SIDBI (`150 lakh):

The project is proposed to be part financed by way of term loan of `150
lakh, constitutes 58.70% of total project cost. The entire term loan of `150
lakh is proposed to be covered under JICA LoC.
Working Capital
Arrangement.
`50
lakh
under
SIDBI-IDBI
Working
Capital
Assessment of Working Capital Limits:

a) As per turnover method (Nayak Committee)
55
S.N
o
Particulars
For FY
(Prov.)
2013 For Projected

Year ended as
on 31.03.2014
ended as on
31.03.2013
Gross Sales
259
Working Capital Requirement 64.75

(@ 25 % of Gross Sales)
Minimum stipulated Margin 12.95

Money for Working Capital (@
5 % of Gross Sales)
Actual net working capital
Permissible Bank Borrowing (2 51.80

-3)
67.99
390.25
97.56
19.51
126.85
78.05
b) As per Second Method of Lending:

(` Lakh)
Sr.
No.
Particulars
For FY 2013
For Estimated/
Projected Year
ended as on
ended as on
31.03.2013
31.03.2014
Total Current Assets
172.67
169.91
Total Current Liabilities
104.68
43.06
Working Capital Gap(1-2)
67.99
Minimum stipulated Margin 43.16

Money for Working Capital
(25% of Total Current Assets)
42.48
Permissible Bank Borrowing 24.83

(3-4)
84.37
126.85
56
Comments on projected sales:

The company has recorded total income of `238.29 lakh in FY 2012 and as
per provisional financials of FY 2013 the company has earned total income of
`259 lakh in FY 2013. Further, the company has recorded sales of `104 lakh
as on August 31, 2013. Commercial operation of the expansion project is
expected from November 2013. In view of the modernization by installation
of new equipment in the unit a growth of 50 % for FY 2014 and 17% for FY
2015 and 10% for 2016 have been assumed and stabilized at that level
thereafter.

as in the coming future. Also, the industry analysis is done to
understand the various risks involved. These risks are then rated and
an overall risk rating of the company is obtained.
Case Details:
FINANCIAL / OTHER PARAMETERS:
The financial/other parameters for term loan assistance:
(i)
Promoters' Contribution for the `105.50lakh (41.29% of project

project
cost)
(ii)
Facilities
project
(iv)
DER (for the proposed project) 1.42:1
proposed
for
the TL: `150 lakh + WCL: `50 lakh
DER (for the company as a 1.13:1

whole)
(v)
Primary Security Value
` 305.50 lakh
(vi)
Collateral Security Value
107.45
(vii)
Total exposure
`200 lakh
57
(vii)
Overall security value / Margin
57.20%
(viii) Overall Asset coverage
2.34 times
(ix)
DSCR - Maximum
1.96:1
- Minimum
1.29:1
- Average
1.57:1
Breakeven point (%)
49.96%
Cash BEP (%)
40.53%
(x)
(xi)
Return on capital employed (in 21.10%

the optimum year)
(xii)
Internal Rate of Return (Pre-tax) 21.00%

Internal Rate of Return (Post- 17.72%
tax)
(xiii) Cost of capital

(xiv) Employment
proposed)
(xv)
11.46%
(existing
Capital cost per job
+ 22 (16+6)
`11.05 lakh
Eligibility assistance (term loan and/or working capital) as per our

norms of the scheme/ Bank:
Financial Norm
as
per
/
Other guidelines
vide
Paramet Policy -2012
ers
TOL/
TNW
bank Actual
Project Comme
Loan FY 2013 ed
FY nts
(prov.)
2014
Not to exceed 4:1. (can be 1.31

accepted upto 5:1 on case to
case basis by respective
sanctioning authority or 6:1
for
existing
customers
subject
to
satisfactory
1.06
Complie
d with
58
conduct of the account)

Current
Ratio
1.33 (can be relaxed to 1.10 1.65

on merits by
1.87
Complie
d with
*Relaxa
tion
sought
sanctioning
authority)
(Extent of relaxation: - 0.90)
Interest
Coverag
e
Minimum interest coverage 1.29

(projected) of 1.5 times
(relaxable up to 1.25 times)
1.34*
Combine
d Rating
Proposals with internal risk -rating between CR1 to CR5

(RAAA to RA- in CART) are
considered as investment
grade
i.e.
suitable
for
extending credit facilities.
CR 4 / Complie
SME4 / d with
SIDBI5
Overall
asset
coverag
e
Minimum 1.3 for existing
2.34
Margin
on
stocks of
Normally should not be less

than 30% but may be
relaxed
upto
25%
on
selective
basis
by
sanctioning authority.
raw
material,
receivab
les/ book
Complie
d with
entities companies and

1.4 for new projects
Stocks Complie
30%
d with
Book
Debts
30%
(Can be relaxed upto 20%)
debts,
WIP,
finished
goods,
etc.
Debtor
days
Not to exceed 90 days

[May be relaxed upto 180
115 days
45 days
Complie
d with
59
days on case to case basis]
Sensitivity Analysis
DSCR
IRR
tax)
(post BEP
Cash
BEP
Base case
1.57
17.72%
49.96%
40.53%
21.10
%
55.56%
12.28
%
50.08%
14.89
%
40.87%
18.93
%
Sales
(Decreasing by 5%)
1.02
9.75%
68.48%
Raw Material
(Increasing by 5%)
1.19
12.32%
61.72%
Capacity Utilization
(Decreasing by 5%)
1.42
15.55%
Variations (5%)
50.38%
ROCE
Impact
1. Variations in sales
With a variation of 5% in the sales

price the profitability position of the
company gets impacted, resulting
DSCR at 1.02, IRR (post tax) at
9.75%, BEP level increase to
68.48%, Cash BEP to 55.56% and
ROCE to 12.28%. However, it is
expected that the sale price would
decrease may gets adjusted with
decrease in input cost.
2. Variation in Raw materials
With a variation of 5% in the Raw

material cost there would be
moderate impact on the profitability
position of the company. However
60
3. Variation
utilization
in
increase in raw material cost is

generally
passed
on
to
the
consumers, and it is expected that
sale price would increase in the
same tandem
capacity With a variation of 5% in capacity
utilization, there is not much
impact. With decrease in capacity
utilization by 5%, DSCR comes
down to 1.42. However, overall the
position would remain at acceptable
level.
Next the valuation of the security and collateral is done. This is an

important step in the appraisal process as it helps in safeguarding the
money of the bank in case the borrower defaults.
Case Details:
Security:
`
(Lakhs)
Sl. Security particulars
No
.
Value
243.00
Primary:
(i) First charge by way of hypothecation in favor of

SIDBI of all the Borrower's movables, including the
movables, plant, machinery, machinery spares, tools
& accessories, office equipments, computers,
furniture and fixtures, both present and future,
acquired/to be acquired under the Scheme.
( Value- `243 lakhs-value of plant & machinery
and MFA proposed to be acquired under the
61
project)]
(ii) First charge by way of hypothecation of whole of

current assets, of the borrower, both present and
future and including but not limiting to, all stocks of
raw material, work-in process. semi finished goods,
finished goods, packing materials , stores etc.
62.50
(iii) First charge by way of hypothecation of all the

present and future book-debts and other actionable
claims arising out of genuine trade transactions.
[Combined Value of Stock & Debtors: `62.50
lakh (Assumed on the full availment of `50
lakh WC Limit with margin @30% of the availed
limit)
Total value of Primary Security
305.
50
Collateral:
107.45
(i)
First charge in favour of SIDBI of leasehold

rights of the immovable properties.
[Value considered as `107.45lakh]

Total value of Security
412.9
5
Guarantee:
Guarantee
Personal Guarantee: The company shall procure and furnish unconditional

irrevocable personal guarantee(s) of all the major
62
shareholders in the company.
Next comes the repayment schedule of the loan that is drawn for the
borrower. This is the detailed plan of repayment with details of the
duration and the amount of installments to be paid by the borrower.
Case Details:
Schedule Of Drawl And Repayment Of The Loan

The loan shall be repaid in 84 monthly installments after a moratorium of 6
months from the date of first disbursement of the loan i.e. total repayment
period would be of 90 months including the moratorium period of 6 months.
The repayment schedule is given as under:
Month No.
Monthly
Repayment
No.
Months
of Total
in `
amount
(in `)
1st month to 1,79,000/83rd month
83
84th and last 1,43,000/month
Grand Total
1,48,57,000/1,43,000/1,50,00,000/-
Case Details:
XYZ Poly Industries Pvt Ltd is private ltd. company engaged in
manufacturing and trading of Printed / plane laminated rolls and
pouches for last 22 years.
63
The project envisages modernization of existing unit by installation of

new machines at Foundry Nagar, and Hathras Road, Agra with total
project cost of `255.50 lakh.
The promoters are well experienced and have developed good
contacts in the market.
The project is found to be technically feasible, economically viable and
financially sound.
In view of the above it is recommended that the authority may
kindly approve the following:
Sanction term loan of `150 lakh (Rupees One Crore fifty lakh only) under
Direct Credit Scheme covered under JICA LoC,
Working Capital Limit of `50 lakh (Fifty lakh only) under SIDBI-IDBI
Working capital arrangement.
CLCSS Subsidy of `15 lakh.
Relaxation in Interest Coverage Ratio for projected FY 2014 at 1.34 to
ABC Poly industries on some specific terms and conditions.
3.5.2 Conclusion:
Working capital loan ensures that the day-to-day operations of a company
keep running smoothly during a liquidity crunch in an existing firm or kick
start operations in a Greenfield project. This is a secured loan and the most
important factors taken into consideration during appraisal process of this
loan is the conversion period of the company. Debtor and creditor days are
taken into consideration to see if the company can operate smoothly while
maintaining healthy level of liquidity.
The current ratio, interest coverage ratio and TOL/TNW ratio of the project
are checked. TOL/TNW gives a clear picture of the companys reliance on
debt. Higher ratio means less stake of the promoter in the company, which is
considered risky. Current ratio gives a clear picture of whether the company
has enough resources to pay off its short term liabilities whereas interest
coverage ratio determines how easily the company can pay interests on its
outstanding debt. This is important because a company should be able to
64
pay at least the interest, otherwise the company is considered stressed and
probability of it becoming an NPA rises significantly.
65
3.6 Risk Capital

Small Industries Development Bank of India (SIDBI) has come out with Risk
Capital Scheme which envisages extension of structured finance for growth
oriented SMEs.
The risk capital assistance is in the nature of growth capital and should result
in positive impact on sales/ profits of the unit. Assistance could be used for
any bonafide business purpose like bridging the gap in project funding (i.e
gap between CBI term loan and available promoters contribution), WC
margin, intangible expenditure (e.g marketing/ brand building, R&D, quality
control expenditure, energy efficiency equipments), etc. Assistance is not
meant for normal WC requirements of the unit.
3.6.1 Case Study: Risk Capital Loan

A proposal for sanction of term loan of `50 lakh under DCS-RR-TUFs and
Subordinated Debt (Risk Capital Debt) of `100 lakh under GEMs was received
by CLPC, Lucknow. The company is PJC Pvt. Ltd. The proposed project is for
acquisition of additional equipment and margin money for working capital.
PJC Private Ltd. established in 1995 specializes in the field of Narrow Woven
Fabrics & Braided Cords/Ropes, Fall Protection equipments, Material handling
& Load Restraint Systems and Equestrian Product. In India, PJC Pvt. Ltd. is
one of the leading suppliers of Narrow woven fabrics used in Parachuites and
other safety equipments used by Indian Defense organization.
PJC Pvt. Ltd. was promoted by Shri Sandarbh Goyal in the year 1994 for
manufacturing of technical textiles and narrow woven fabrics. He has been
engaged in the same line of business for more than 21 years. Over the years
company has expanded its product base and specialises in narrow woven
Fabrics & braided cords / ropes, Fall protection equipments, material handling
& load restraint systems etc. He is assited by his wife Smt. Ruchi Goyal who
looks after day to day administration of the company.
Introductory, promoters and management:
1
1.1
1.2
1.3
Particulars of the unit:

Name of the unit
PJC Pvt. Ltd.
Constitution
Private Limited Company.
No. and Date of SSI xxxx
66
1.4
1.5
1.7
1.8
1.9
1.1
0
1.1
2
registration
Date of incorporation/
06/09/1994
commencement
of
business
Address
Registered
Office
/ Registered & Administrative office:
Administrative Office / Kanpur -208000.
Sales Office / Factory
Factory Address : -Kanpur 208001( Unit
-1) & Kanpur (Unit-2)
Products and installed
capacity / shifts
Manufacturing of technical Textiles and

narrow woven fabrics. /650 tons
No. of working days in a 300

year
1
No. of shifts in a day
08
No. of hours per shift
End Uses
Safety wears to be used as fall
protection
equipments,
material
handling & load restraint system etc. .
Whether
Export The company exports a portion of its
Oriented
final product. However, it may not be
termed as export oriented.
Distance of the unit
Registered office - Approx 3 K.m. from
SIDBI Kanpur office.
Unit I Approx 17 Km from SIDBI office.
Unit-II -Approx 25 Km from SIDBI office.
Whether the unit has got Yes, as per memorandum of association
borrowing powers as per point number 8 on page number 2.
Articles
of
Association/
partnership deed:
67
Bio-data of the existing and proposed promoters is given below:

Name of the
promoter/
Guarantors
DoB / Age
Father / Husband
name
(Relationship)
Address
Educational Qly.
Relationship with
Chief Promoter
Experiencein
what
capacity/
industry/yeaRs
Net worth as on
10/03/2015.
IT
/Wealth
Tax
status
PAN Card No.
Other concerns /
interests/
capacity
Shareholding
in
the company
Shri Sandarbh Goyal
Smt. Ruchi Goyal
09/07/1970 //45 years

23/09/1975 // 31 years
Shri
Prakash
Goyal Shri Sandarbh Goyal
(Father)
XXXX
B com
Self
XXXX
Graduate
Spouse
21 years
9 years
`422.80 lakh
`137.74 lakh.
IT assessee
IT assessee
XXXXXX
Raja International /
Partner / 50%
XXXXXX
Raja International /
Partner / 50%
73.27%
16.47%
First thing that is done is checking of willful defaulter/ caution list to find
matches. Company, its promoters and associates are looked up in the list for
matches. This is done to find out about the character of the borrower. This is
the most important step of the appraisal process of Sub-ordinated lending
because this is a collateral free lending and is not backed by any security.
Hence character of the borrower is the most important factor in this case. It
is important to find if the borrowers willingness to repay the loan.
Case Details:
CIBIL Commercial and Consumer Credit Information Reports:
CIBIL consumer:S.N
Name
of Cibil Score
68
the
promoter/
guarantors
Smt.
Goyal
Ruchi
CIBIL Transunion Score
727
Scoring Factors
1: Number of active trades with a balance too high in
proportion to total trades
2: Length of time accounts have been established is
too short.
Shri
Sandarbh
Goyal
733
Scoring Factors
1: Number of Active Trades with a Balance too high in
proportion to total trades.
2: Presence of account delinquency in the past.
CIBIL transunion score are numbers between 300 and 900 which is
representative of an individuals credit behavior. The higher the numerical
value of the score, the lower the risk profile of the individual. In the instant
case the CIBIL Transunion scores of the promoter may be considered,
satisfactory.
CIBIL commercial:S.No
Name
of
the CIBIL category
borrower/associate concern
1.
PJC Pvt. Ltd.
Not availaible
2.
M/Raja International
Not availaible.
3.
Swaroop Pvt Ltd.
Not availaible.
69
Share-holding Pattern:
Shareholding in the company as underS.No Name of the director
.
%
shareholding
1.
Shri Sandarbh Goyal
59.43%
2.
Smt. Ruchi Goyal
13.36%
3.
Others
27.21%
The total shareholding of the two promoter directors is aggregating to

72.79%, i.e. the promoters would be having controlling shares in the
company.
The details of facilities enjoyed by the borrower company and its
associates are given below:Nature
facility
(bankwise)
of Name
of
bank/
institut
ion
(a) Fund Based

Limit
Term Loan
Term Loan
Punjab
National
Bank.
Punjab
National
Amount
lakh)
(` Rate
of
inter
est
in %
San
c.
O/s
as
on
01/04/2
015
82.8
9
71.55
13.75
%
27.0
0
24.60
13.75
%
Nature
Security
value
of
and
Exclusive
and
first charge on
entire
current
assets,
present
as well as future
including
entire
stocks,
book
debts, loan and
advances etc.
Hypothecation of
70
Vehicle Loan
CC (H)
Packing credit
Bank.
Punjab
National
Bank.
Punjab
National
Bank.
FOBP/FOUBP/FABC
3.63
3.63
13%
400
400
13.25
%
100
100
11%
50
50
11%
Total fund based

Non fund Based:
ILC/FLC
ILG/FLG
Total non fund

based
Total
banking exposure
with
PNB.
663.
52
649.78
80
50
80
50
130
130
793.
52
779.78
entire stock of
Raw
material,
stock in process,
finished
goods,
stock in transit,
or
any
other
security required
for the purpose of
execution
of
export
orders
received of/ to be
received by the
company. Deposit
of
confirmed
orders
and/or
original
irrevocable LCs of
approved foreign
banks.
First
exclusive
charge by way of
hypothecation of
all the movables
(save and except
book debts and
stock) including,
plant, machinery,
spares, tools and
accessories,
office
equipments,
computers,
furnitures
and
fixtures acquired/
to be acquired
under the project/
scheme, of PJC
(P) Ltd. situated
at site III Kanpur
and
Rooma
Kanpur.
First charge by
way of equitable
mortgage
of
71
freehold rights of
the
immovable
property
(land
and
building)
situated at site III
Kanpur,
admeasuring
1000 sq mts in
the name of PJC
(P) Ltd. Value:
`340
lakh
(realisable value
as
per
PNB
empanelled
valuer
report
dated
24/07/2014.
First charge by
way of equitable
mortgage
of
freehold rights of
the
immovable
property
(land
and
building)
situated situated
at
Rooma
Kanpur,
admeasuring
2800 sq. mts in
the name of PJC
(P) Ltd. Value:
`80
lakh
(realisable value
as
per
PNB
empanelled
valuer
report
dated
18/07/2012.
72
Past Performance:
The performance of PJC Pvt. Ltd. for last three years is as below:(` Lakh)
Particulars
FY2012
FY2013
FY201
4
FY2015
(Prov)
Net Sales
933.71
1470.31
1761.7
4
1854.92
Interest Paid
39.98
49.38
62.91
85.23
Depreciation
49.37
50.50
48.43
49.55
Net Profit
30.28
1.25
32.78
40.65
Share Capital
75.00
75.00
96.15
96.15
Reserves and Surplus
177.37
178.62
233.26
273.90
Unsecured Loan
53.58
70.90
103.58
221.22
Current Liabilities
482.24
731.83
972.51
1030.09
Total Liabilities
888.30
1223.90
1740.3
0
1760.84
Net Block
331.26
359.85
457.22
575.50
Current assets
543.92
867.03
1283.0
8
1185.34
Current Ratio
1.13
1.18
1.32
1.15
DER
0.59
0.60
1.34
0.97
NPM
3.24
0.09
1.28
2.19
Net Cash accrual
81.36
52.99
71.01
90.19
1.86
1.53
1.76
Working Cap Turnover 8.05

ratio (Times)
73
Debtors Days
2 116
165
143
3
Creditors Days
26
135
139
135
TOL/TNW
2.48
2.99
4.28
3.76
Interest Coverage
3.63
2.53
2.29
2.08
The company has registered rise in the sales over the last three years.
It has registered the increase in sales around 56.93% in the year 2013
over 2012 and 20.33% in the year 2014 over 2013.
The company recorded marginal growth rate of approximately 4.85% in

the year 2015 (provisional).
The Interest amount is increasing on account of increase the borrowing

exposure year by year.
There has been a significant increase in capital from `75 lakhs in 2013
to `96.15 lakhs in 2014 which implies the business growth. The
company increased share capital by way of issue of 21150 shares @
`100 each.
The current ratio of the company increased has rose from 1.18 in 2013
to 1.31 in 2014, indicating satisfactory liquidity position.
The net profit of the company has witnessed a significant fall from
`30.28 lakhs to `1.25 lakhs in the year 2013 on account of the increase
the indirect expenses. However the company has recovered and
registered the profit to `32.78 lakhs in 2014 due to increase in sales
and manage to purchase raw materials at low price.
Though the sales of the company are increasing significantly but still
company has recorded the lower NPM because of the high cost of raw
materials and stiff competition. However, NPM has improved to 1.28%
in FY 2014.
74
The debtors days of the company has been increased because

company is taking more time in realizing cash from its debtors.
Similarly creditors days of the company also increased as company is
taking more time in paying its creditors. The increase in creditors and
debtors, both has resulted in increase in current ratio.
Financials of the associates was also checked and was found to be

satisfactory.
Next the eligibility of the borrower is checked for eligibility under any
scheme of SIDBI. If found eligible, suitable factors are taken into
consideration.
Case Details:
The unit is eligible for TUFS subsidy under RR-TUFS for capital subsidy@10%
and reimbursement of interest up to maximum extent of 5% vide ministry of
textile circular.
The unit is also eligible under Growth Capital and Equity Assistance Scheme
for MSMEs (GEMs ). The proposal is for financing the companys Margin
money for working capital. The company is having working capital facilities
from Punjab National Bank. The proposed assistance would be first sub-debt
assistance to the company.
After the eligibility of the proposal is checked, the appraisal process

continues with analyzing the competency of the management of the
project. The structure of the management, its experience and expertise
is taken into consideration to understand the competency of the
management employed for the project.
Case Details:
The company has been operational for more than 20 years with its chief
promoter having experience of 21 years in the same line of activity.
The company is being run professionally with individual departments for
manufacturing, marketing, production and administration and being handled
by separate spearheads.
75
The company employs around 150 people in production staffs including

skilled /un-skilled labor, supervisor and technical people on roll of the
company. Company shall require around 10 additional semi skilled /skilled
workers after operationalisation of proposed machineries. Being an industrial
area, labor is readily available in the market.
After going through the management of the company, Technical

Aspects of the project is studied to check the feasibility of the project.
Factors like availability of raw material, essential resources like water,
electricity, manpower etc. are checked to see if the project can be
successfully started without any problems.
Case Details:
The proposed projects location is in an industrial area and all the needed
resources are easily available. The project should not face any difficulty in
availing required resources for the project.
and means of financing of the project. This is an important step in
every appraisal as this helps in estimating the cost of the project and
the actual loan requirement of the borrower. It ensures that no underfinancing or over-financing takes place.
Case Details:
Broad break up of cost of project :
Total cost of the project is estimated at `73.60 lakh as given below :
Particulars
Plant & machinery
Margin money for working capital
Total project cost
Amount in ` Lakh
73.60
100
173.60
Means of finance:
Particulars
Internal Accruals
Amt ` in lakh
23.60
76
Term Loan from SIDBI under DCS
under TUFS
Sub Ordinate Debt from SIDBI
Total
23.60
50
100
173.60
Internal Accrual (`23.60 lakh)

The promoters contribution to be raised by way of internal accruals of
`23.60 lakh for the pruchase of Plant and machinery.
6.5
Sub-ordinate debt (`100 lakh) and Term loan under DCS

covered under TUFS (`50 lakh)
The project is proposed to be part funded by way of sub-debt of `100 lakh
and Term Loan of `50 lakh covered under Tufs.
6.6
Working capital arrangement:

The company is already availing CC limit of `400 lakh, packing credit
`100 lakh and FOBP limit `50 lakh from Punjab National Bank, Mall Road
Branch, Kanpur. .
As per the CMA submitted by the company which is also accepted by

the Punjab National Bank Mall road branch Kanpur, the MPBF is
workouts `500 lakh for FY 2016, FY 2017 onwards.
As per the last there year audited balance sheet of the company and
provisional balance sheet of FY 2015, the total margin, as per second
method of lending works out to `349.03 lakh
based on projected
financials for FY 2016. The company has applied for Sub debt of `100
lakh which works out to 28.65% of the total MMWC.
The proposed assistance would help the company in augmenting its

operations.

77

as in the coming future. Also, the industry analysis is done to
understand the various risks involved. These risks are then rated and
an overall risk rating of the company is obtained.
Case Details:
Sl.
No.
Particulars
Parameter - Ratio / percentage
Promoters'
contribution
(as % of total
project cost)
For term loan: `23.60 lakh i.e. 32.06 %

( for project cost of `73.60 lakh)
ii
Debt
ratio :
Iii
Total Value
Security
iv
Total Loan
For sub-debt: Nil
equity 1.54:1
of
`117.12 lakh
Term Loan under DCS : `50 lakh

Sub Debt
:`100 lakh
Overall
Asset [73.60 (proposed assets) + 43.52(existing
Coverage
machinery ]/(50 (proposed assistance) +
32.32 (o/s of existing term loan)]=
Security Margin
117.12/82.32=1.42
Security margin : (117.12-82.32)/117.12

=29.71%
Sub-debt has not been considered as part

of debt for asset coverage calculation)
vi
DSCR :
Minimum
1st
0.96
78
yr operation
Maximum:
2nd 2.85
yr operation
Average
vii
1.85
Break
point
even 57.17 %
(% of installed
capacity)
Vii
Cash
even
break 52.111%
ix
IRR (Post tax)
13.59%
IRR (Pre tax)
14.83%
xi
Return
capital
employed:
on
16.21%
(in
the
optimum year)
The company scored RAM rating of SME3/CR3.
Next the valuation of the security and collateral is done. This is an

important step in the appraisal process as it helps in safeguarding the
money of the bank in case the borrower defaults.
Case Details:
B.Security (For TL)
A
Primary
Security
(1) First charge by way of hypothecation of plant,

machinery, spares, tools and accessories, office
equipments, computers, furnitures and fixtures acquired/
to be acquired under the project/ scheme, of Viraj Syntex
Pvt. Ltd. situated at Site III, Kanpur 208022(Unit -1) and
79
Rooma Industrial Area, Kanpur (Unit-2) .

Value: `73.60 lakh (Value of machinery as envisaged in
the proposed project)
(2) Extension of first charge by way of hypothication of

plant, machinery, spares, tools and accessories, office
equipments, computers, furnitures and fixtures already
acquired out of first term loan availed from SIDBI.
Book Value of the same `60.24 lakhs as on 30/06/2013
further depreciation charged @15 % for two
years=`43.52 lakh
Total value of Primary Security :`(73.60 + 43.52) lakh =
`117.12 lakh
B
Collateral
security
The assistance would

Guarantee Cover.
Guarantee:
Personal Guarantee: -
be
covered
under
CGTMSE
The Borrower shall procure and furnish unconditional and

irrevocable personal guarantees of - Shri Sandarbh
Goyal and Smt. Ruchi Goyal. The guarantee shall be
joint and several and no guarantee commission shall be
payable to the guarantors.
Combined Networth as on 10/03/2015 = `560.54 lakh

8
Promoters
Contributio
n
` 23.60 lakh i.e. 32.06% of the project cost
Sub-debt under GEMS

80
Amount
recommend
ed
Rate
interest
`100 lakh Sub debt
of 14.75% p.a. payable monthly (Fixed)
Upfront fee
1.% of the Sub-debt assistance + applicable taxes
Penal
Interest
2% p.a. over and above the applicable rate on the defaulted

amount of principal and interest installments for the period
of default.
Repayment
period
The assisatnce shall be repaid in 48 monthly installments

comprising of first 47 monthly installments of `2.08 lakh
each and 48th installment `2.24 lakhs commencing after a
moratorium of 36 months from the date of first
disbursement.
Security
The assistance, together with interest, costs, expenses,

penal interest and all other monies dues and payable by the
borrower shall be secured by the immovables and movable
assets of the company (including current assets) as under:
a) Residual charge by way of mortgage of all immovable
properties owned by PJC (P) Ltd factory Land and
building situated at Site III, Kanpur Nagar together
with all the civil structure created or to be created
thereon, area 1000 sq.mts. already charged to existing
bankers -Punjab National Bank .
Market Value `395 lakh and realizable value `340 lakh as per
valuation report.
b) Residual charge by way of mortgage of all immovable

properties owned by PJC (P) Ltd- Factory Land and
building situated at Rooma, Kanpur Nagar together
with all the civil structure created or to be created
thereon, area 2800 sq. mt., already charged to
existing bankers (Punjab National Bank ).
81
Realizable value `80 lakh as per valuation report.
c) Residual charge by way of hypothecation of whole of

current assets, of the borrower, both present and
future and including but not limiting to, all stocks of
raw material, work-in process. semi finished goods,
finished goods, packing materials , stores etc., already
charged to existing bankers (Punjab national Bank ).
d) Residual charge by way of hypothecation of all the
present and future book-debts and other actionable
claims arising out of genuine trade transactions,
already charged to existing bankers (Punjab national
Bank ).
e) Extension of first charge by way of hypothication of

plant , machinery, spares, tools and accessories, office
equipments, computers, furnitures and fixtures
already acquired out of first term loan of `43.50 lakh
availed from SIDBI.
Book Value of the same `60.24 lakhs as on 30/06/2013
further dep charge @15 % for two years= `43.52 lakh.
f) Extension of first charge by way of hypothecation of

plant, machinery, spares, tools and accessories, office
equipments, computers, furnitures and fixtures
acquired/ to be acquired under the project/ scheme, of
PJC Pvt Ltd. situated at- Site III, Kanpur (Unit -1) &
Rooma Industrial Area,Kanpur (Unit-2) .
Value: `73.60 lakh (Value of machinery as envisaged in the
proposed project)
Guarantee
The Borrower shall procure and furnish unconditional and

irrevocable personal guarantees of - Shri Rahul Kohli and
Smt. Ruchi Kohli,. The guarantee shall be joint and several
and no guarantee commission shall be payable to the
82
guarantors.
Combined Networth as on 10/03/2015 = `560.54 lakh.
Next comes the repayment schedule of the loan that is drawn for the
borrower. This is the detailed plan of repayment with details of the
duration and the amount of installments to be paid by the borrower.
Case Details:
Schedule of drawal and repayment of the loan:
The project involves acquisition of plant & machinery, for which the
foundation is reported to be almost ready. As such the implementation
schedule for the project is of a short period. The loan is expected to be
availed during June 2015 itself.
For the financial assistance under DCS, the company had applied for a
repayment period of 60 months including 06 month moratorium period and
the same is also recommended by KPBO. However, considering the
projection and business requirement, the repayment is proposed for 60
months excluding the moratorium period of 06 month as per the below table.
No
months
of Monthly Repayment (in No.

of Total amt in `
Rs )
months
1st
to
59h 83000/monthly
installment
59
4897000/
60th monthly 103000/

installment
103000
Grand Total
5000000/
The repayment schedule for assistance under GEMs:

The loan will be paid in 48 monthly installments of `2.08 lakh each, starting
after a moratorium of 36 months from the date of first disbursement of the
loan.
83
No
months
of Monthly Repayment (in No.

of Total amt in `
`)
months
1st
47th 208000/monthly
installment
47
9776000
48th
installment
48
224000
224000/-
Grand Total
10000000/-
Case Details:
The proposal is for term loan of 50 Lakh under TUFS and Sub debt of
100 Lakh under GEMs.
The net profit of the company has witnessed a significant fall from
`30.28 lakhs to `1.25 lakhs in the year 2013 on account of the increase
the indirect expenses. But the company has recovered well in the year
2014 and 2015 registering Net profit of 32.78 Lakh and 40.65 Lakh
respectively.
PJC PP. Ltd. is banking with Punjab National Bank and has availed fund
based facilities aggregating to `6.49 crore and non fund based
facilities `1.30 crore, with satisfactory conduct of account.
The applicant is also an existing customer of SIDBI, availed term loan

of `43.50lakh in FY 2014, with satisfactory repayment track record.
84
The company has already achieved turnover of `18.44 crore as on

31.03.2015 (prov.) and expected to cross turnover of `21 crore in FY
2016.
The company scored RAM rating of SME3/CR3.
It is proposed to charge rate of interest as per rating. Consequently the

applicable RoI for term loan under DCS RR-TUFS of `50 lakh would be
PLR+0.25% i.a. 12.50% p.a. and for sub-debt of `100 lakh the
proposed ROI is PLR+2.50% i.e. 14.75% (fixed) (presently PLR being at
12.25%).
The proposal envisage purchase of additional equipment and the unit

eligible for RR-TUFs subsidy of `41.31 lakh.
The proposal is support-worthy and recommended for sanction of term

loan of `50 lakh under DCS-RR-TUFS for purchase of additional
equipment, Sub-Debt of `100 lakh toward margin money for working
capital under GEMS and RR-TUFS subsidy of `41.31 lakh to PJC Pvt. Ltd.
3.6.2 Conclusion:
Risk Capital Loan, as the name suggests, is a risky loan and is considered
quasi-equity as this loan has the features of both equity and debt. This is a
debt but is collateral free which mean that there is no security backing this
loan.
The most important factor that is taken into consideration during the
appraisal of this loan is the reputation and character of the borrower and his
willingness to repay the loan. Since this is a collateral free loan, only
borrowers reputation is taken as the security of the money.
Other than that, financials of the company is closely studied to check if the
business is using funds efficiently and effectively. Ratios like Debt to Equity
ratio and DSCR are taken into consideration along with the net profit margin,
IRR and cost of capital to check the long term sustainability of the project
and the ability of the firm to earn profits out of the money employed.
85
3.7 Micro Finance Loan

Micro Finance Loan is a loan given to micro finance institutions to so as to
facilitate their development into financially sustainable entities, besides
developing a network of service providers for the sector. Credit appraisal
process of micro finance lending is very different from other products since
the borrower is a lender himself. Their line of activity does not involve plants
and machinery and hence, this loan is risky in nature. Generally, FDs of total
value of 2% to 5% of the total loan amount is kept as security. The entire
loan is based on the financial strength and reputation of the MFI.
3.7.1 Case Study: Micro Credit Loan

CLPC, Lucknow received a proposal of term loan of `20 crore (Rupees twenty
crore) and Subordinated Debt of `10 crore (Rupees ten crore) under Micro
Credit Scheme to Akash Micro Finance Pvt. Ltd. [AMFPL].
Introduction and management:MFI details
i.
Constitution
Non-Banking Finance Company (NBFCMFI).
The company has been re-assigned the
constitution
as
NBFC-MFI
vide
modification dated Jaunary 21, 2014,
prior to which it was NBFC-ND.
ii.
Location
(Regd. xxxx
Office)
iii.
Area of operation
Operates in 8 States / Union Territories
namely
Uttar
Pradesh,
Bihar,
Uttarakhand, Madhya Pradesh, Delhi,
Himachal
Pradesh,
Haryana
and
Maharashtra.
iv.
Name
of
Chief Shri Parmeet Singh, MD & CEO - has over
Functionary,
22 years of banking experience at ABCD
Qualification
& Bank. He was previously the Business
Experience
Head for Rural and Agri Liabilities and the
Trust, Societies, Associations and Clubs
(TASC) segment at the bank. He was
looking after the banks microfinance
86
v.
vi.
vii.
funding
portfolio
and
Business
Correspondent Model. He was also part of
RBIs
working
group
on
business
correspondence.
Name of Statutory C S R and Company,
Auditors
Chartered Accountants,
Chennai 600 000
Group concern, if Nil
any
Nominee Director, if Nil.
any
Shareholding pattern as on March 31, 2014

Shareholder Name
Number
Shares
Promoters
2,895,940
28,959,400
11.20%
Individual Shareholders
3,471,905
34,719,050
13.42%
450,000
0.17%
Intellofund
Micro
Network Co.Pvt.Ltd.
of Face value Percentag

` 10
e of share
holding
Fin. 45,000
Akash ESOP Welfare Trust
1,136,000
11,360,000
4.39%
Aavar Goodwell
7,954,056
79,540,560
30.75%
International
Finance 3,757,824
Corporation (IFC)
37,578,240
14.53%
NMI (NMI Frontier Fund 6,602,978

KS)
66,029,780
25.53%
Total :
258,637,03 100.00%
0
25,863,703
Note:
As on September 30, 2014 SIDBIs outstanding exposure to AMFPL was

`12.02 crore, which is 2.41% of the MFI total borrowings of `499.40 crore.
87
Besides SIDBI, 21 lending institutions including public sector banks like

Andhra Bank, Bank of Maharashtra, Dena Bank, Indian Overseas Bank,
IDBI Bank, State Bank of Patiala, UCO Bank, Union Bank of India, Vijaya
Bank, etc., and private sector / foreign banks like Axis Bank, Dhanlaxmi
Bank, Development Credit Bank, HDFC Bank, ING Vysya Bank, ICICI Bank,
Ratnakar Bank, South Indian Bank, Yes Bank, HSBC, Standard Chartered
Bank, etc., have sanctioned and disbursed loans to AMFPL.
The loan utilization and the repayment track record of AMFPL has been
satisfactory.
In the appraisal process of this loan, due to stipulated RB guidelines,

the first thing that is checked is the financial products of this MFI to
make sure that the unit is adhering to the prescribed guidelines of RBI.
Ratings of the firm is checked to assess the code of conduct of the firm
and other criteria are checked to see if the firm is operating in a fair
manner.
Case Details:
Particulars
No. of Branches
MFI operational highlights

FY 2012
FY 2013
(Audite
(Audited)
d)
75
102
FY 2014
(Audited)
151
No. of Members
110886
200066
339958
No. of Borrowers
106369
197874
320315
Loan disbursed during the

year (` crore)
Outstanding
portfolio
(on
balance sheet) (` crore)
Outstanding
portfolio
(off
balance sheet) (` crore)
Total
asset
under
management
Portfolio
growth
rate
%
(Annualized)
Portfolio at risk >30 days (%
of
on-balance
sheet
113.88
256.25
469.76
38.34
137.57
284.60
36.96
40.68
71.06
97.05
261.74
465.80
62.73
258.82
106.87
0.0%
0.00%
0.00%
88
Particulars
FY 2012
(Audite
d)
FY 2013
(Audited)
FY 2014
(Audited)
portfolio), where repayments

are weekly or fortnightly
Requi
red
Benc
h
Mark
MFIs
Position
as on
June 30,
2014
Qualifying Asset (as described in RBI circular dated

December 02, 2011) (%) (C.A. certificate dated
September 18, 2014)
85%
96%
Aggregate amount of loan extended to Income Generating

Activity as on June 30, 2014 (C.A. certificate dated
September 18, 2014)
70%
100%
Sector-wise Exposure as on June 30, 2014

Particulars
Farm based
49.70
Non-farm based
35.66
Others
15.00
Total
100.00
Observations and comments:

KYC norms are followed in respect of borrowers before disbursement of
loan
It was observed that the group members having availed borrowings
from other MFIs like SKS, Bandhan & Cashpor. However, the overindebtedness in such cases was not observed on the basis of response
received from them.
The main operations of the MFI are looked by Shri Govind Singh, MD and
Shri Trilok Nath Shukla alongwith active support of professional team.
The MFI is following a five-member group lending methodology under
89
Joint Liability Group model. JLGs congregate at centres consisting of

members not exceeding 30 and group lending technique is used to
extend loans to women members.
AMFPL is having Grievance Redressal Mechanism, which is also posted
on its website.
7. Comments on compliance with Fair Practices in Lending
guidelines of RBI and tenets of Responsible Lending Practices
AMFPL has been observed to be complying with the responsible lending
practices, viz., grievance redressal mechanism, cashflow/ repayment
capacity analysis of the borrowers, disclosure of all inclusive cost to the
beneficiaries etc. (details given at Annexure IV).
8. Details of Code of Conduct Assessment undergone, if any.
AMFPL had undergone COCA in December 2012. ICRA Management
Consulting Services Ltd. extended a composite score of 7.8 out of 10 (High
level of adherence) to AMFPL. Which given its strong focus on articulating
and implementing processes and policies that adequately reflects the
firms focus on achieving its dual objectives : financial and social from its
operations. Further, the company has been fairly successful in
disseminating and ensuring adherence to its documented processes and
policies at the ground level.
90
9.Interest rate to end user as certified by a CA:

Interest Rate (reducing balance)
25% for Micro Finance
Loan & 29% for Micro
Enterprise Loan.
Processing fee, if any
1% +applicable service
tax
On actual basis
Nil
8.12%
No
Insurance Charges, if any (Actual basis)

Other charges, if any
Interest margin
Prepayment / delayed penalty being
levied
Security Deposit / Margin being taken
No
Comments:
Above charges are in compliance with RBIs stipulation on interest rate,
processing fee, insurance charges, security deposit, etc. for the
qualifying assets.
In terms of RBI guidelines issued vide notification dated May 31, 2013,
margin cap for all NBFCs irrespective of their size was to be 12% till
March 31, 2014. However, with effect from 1st April, 2014, margin caps
as defined by Malegam Committee are not to exceed 10 per cent for
large MFIs (loans portfolios exceeding `100 crore) and 12 per cent for
the others.
As per the CA certificate dated September 18, 2014, MFI is charging
25% to 29% per annum. (25% for Micro Finance Loan and 29% for Micro
Enterprise Loan). It has been clarified by AMFPL that Micro Enterprise
Loan is outside the microfinance scope and is under 15% non micro
finance portfolio allowed for NBFC-MFI. The above charges are in
compliance with the pricing guidelines of RBI.
Next, Financial appraisal is done to check the financial health of the
MFI and to see if the firm will be able to repay the loan amount. This is
a very important step as this loan is a collateral free one and the firm
must be financially stable to be able to repay.
Case Details:
Brief summary of financials:
i. Income from operations has increased from `27.88 crore during FY 2013
to `63.46 crore during FY 2014, i.e., an increase of 127.61% over the
91
previous year. The companys total income has also reached at `51.66 crore
upto September 30, 2014.
ii. Loan portfolio has grown from `137.57 crore in FY 2013 to `284.60 crore
in FY 2014, registering growth of 106.88%. The loan portfolio of the company
was `450.88 crore as on September 30, 2014, registering growth of 58.42%
over FY 2014. Networth has increased from ` 64.23 crore in FY 2013 to
`74.18 crore in FY 2014, registering growth of 15.49%. The networth of
AMFPL has also increased to `79.37 crore as on September 30, 2014,
registering growth of 7%.
iii. Other assets of `179.75 crore at the end of FY2014 include cash and bank
balance of `105.70 crore and `26.27 crore as deposits with maturity more
than 3 months but less than 12 months.
iv. Though loan loss provision & write off has increased in absolute terms, it
is at about the same level in terms of percentage of loan portfolio.
v. Auditors have not indicated any adverse comments regarding AMFPL.
b)
Sustainability Analysis (Achievements of last 1 year vis-a-vis
Projections and Future Projections for the tenor of the loan)
The projections and achievements over the last three financial years are as
under:
Projections
Financial
Details
No of borrowers
FY 2014
(` in crore)
Achievement
FY 2014
320315
Net portfolio
308.85
284.60
Total Assets
418.07
465.80
69.85
74.18
339.74
374.65
418.07
465.80
Networth
External
Borrowings
Total liabilities
Income from
operations
Total Income
59.59
63.46
67.30
70.33
Financial Costs
34.25
34.99
92
Operating costs
Loan loss
provision
Total
Expenditure
PBT/ Deficit
PAT
18.72
19.26
2.27
2.17
55.24
56.74
12.06
13.59
8.01
8.22
The operational ratios given in the projections are based on the achievement
of FY 2014.
MFI has achieved the projections at each areas, except the net portfolio.
It may be observed there from that the MFI was able to better the projected
figures.
Given the past performance of the MFI, experienced Board, the projections
appear to be achievable, provided the MFI is able to tie up the expected level
of borrowings.
Since there are norms prescribed for this kind of loan, eligibility of the
borrower is checked. This is very important as the norms are designed
to make sure that the funds are used properly to help the needful.
Case Details:
Eligibility Norms / Parameters under MCS
Parameter
Norm
Status
Compliance
DER
6:1
5.68 : 1
Yes
CRAR
15%
22.45%
Yes
PAR > 30 days
5%
0.00%
Yes
OSS
100%
108%
Yes
93
MFI Rating
mfR4
M2+
Yes
SIDBI share of Overall

Borrowings of the MFI
20%
11.24%
Yes
Eligibility Norms / Parameters For Subordinated debt

Eligibility Criteria
Compliance
Remarks
Corporate Structure
Complied with
AMFPL is registered as
Generally NBFCs having
an NBFC-MFI having
a valid registration as
asset size more than
NBFC-MFI and having
`450 crore and meets
asset size above `100
all
RBI
prescribed
crore i.e. Systemically
criteria for NBFC-MFIs.
Important. Should meet
all
RBI
prescribed
criteria for NBFC-MFIs.
Complied with
Portfolio [on and off
Portfolio [on and off
balance sheet] as per
balance sheet] as per
last
audited
annual
audited
annual
accounts
should
be
accounts as on March
more than `100 crore.
31, 2014 was `355.66
crore.
Complied with
Already
assisted
by
AMFPL
has
been
SIDBI with a satisfactory
associated with SIDBI
repayment track record.
since year 2013 and
the repayment track
record is satisfactory.
94
Other formats generally

ineligible
with
the
exception of large sized
well run MFIs having a
minimum of Portfolio [on
and off balance sheet]
as per last audited
annual accounts more
than `250 crore
Product Exposure
Minimum - `5 crore
Maximum - `50 crore
(maximum
assistance
under this product to a MFI
to be capped at 25% of the
last audited networth of
the MFI).
In exceptional cases the
maximum assistance up to
`75
crore
may
be
considered in case of
deserving MFIs, subject to
assistance not exceeding
25% of the last audited
networth of the MFI
Not to be extended on
standalone basis, i.e. the
assistance
should
be
coupled with existing or
proposed assistance under
MCS.
Complied with
Complied with
Capacity
Assessment
Rating - Minimum rating
Complied with
AMFPL is an NBFC-MFI
and
hence
not
applicable
AMFPL is associated
with SIDBI since 2013
with
satisfactory
repayment
track
record. The MFI is
having
financial
discipline, satisfactory
track record, sound
business
plan,
etc.
AMFPL is having good
financial position and
corporate governance
systems. There are 27
lending
institutions
which have sanctioned
the
assistance
to
AMFPL. Considering the
above, `10 crore is
proposed under sub
ordinate
debt.
Further,
as
per
networth as on March
31, 2014 of AMFPL at
`74.18
crore,
total
exposure under sub
debt would be around
13.48%, which is below
25%,
as
prescribed
under the scheme.
UMFPL
obtained
M2+
rating grade of ICRA,
95
grade
of
equivalent
mfR3
or
Operating
Self
Sufficiency - Minimum
100% for the last 2 years
Complied with
PAR >30 days - Below 3%
Complied with
Capital Adequacy Ratio

Complied with
- Minimum 15% for NBFCMFIs or as prescribed by
RBI from time to time.
Security - Unsecured if
Complied with
provided for Tier II capital
support.
Otherwise,
exclusive first charge by
way of hypothecation of
book debts/ receivables
created
out
of
the
assistance availed from
SIDBI
/
any
other
prescribed security.
While appraising the MFIs Complied with
under this product, special
attention should be paid to
the concentration of the
MFIs
in
different
geographical regions and
wherever
rather
large
sized MFIs still do not have
a credible plan to address
this
concentration
risk
over a medium term,
reduced support may be
considered
from
the
maximum eligible levels.
Higher level of support Complied with
may be considered only in
indicating MFIs ability to

manage its microfinance
activities in a sustainable
manner is high.
OSS of UMFPL in FY 2014
was 108%. The OSS of
the company in FY 2013
was 101%.
PAR as in March 31, 2014
> 30 was 0.00 %
CRAR as on March 31,
2014 was 22.45%
Unsecured to provide Tier

II support as per RBI
guidelines.
AMFPL
is
presently
operating in 8 states with
its 166 branches.
AMFPL has rating grade of

M2+ by ICRA, valid till July
96
case of those MFIs which

enjoy top 2/3 notches of
Credit Assessment Rating
(CAR).
2014, which is an eligible

investment grade as per
SIDBIs guidelines
Need for Subordinated Debt

It may be mentioned that post AP crisis, various steps have been taken
by the stake holders and there is resurgence in the MFI sector on account
of regulatory framework put in place by Reserve Bank of India (RBI).
UMFPL raised `25 crore within one year of Andhra Pradesh crisis,
including investment by a new investor. Sub-ordinated debt would be
beneficial for AMFPL to increase the capital base through tier II support
and help it to leverage more lending for its diversification as well as to
maintain a healthy asset liability management.
Introduction of the above product would also help address the concerns
of World Bank and Government of India who want SIDBIs engagement in
the sector scaled up.
Upfront Fee, Interest Rate and Personal Guarantee
(i)
For Term Loan of ` 20 crore
UMFPL has scored 77.05 under the score chart corresponding to an
interest rate of 13% p.a.
Considering the interest rate charged by other banks / FIIs and the recent
association with MFIs of one year, it is proposed to charge interest rate at
13.50% p.a. for the term loan assistance.
In addition, non-refundable upfront fee of 1.00% of term loan along with
applicable service tax, cess, etc., is proposed. It may be mentioned that
several banks are charging the upfront fee upto 1.25% of the sanctioned
amount.
It is also proposed to stipulate a repayment tenure of 30 months including
a moratorium of 3 months for the term loan of `20 crore.
(ii) Subordinated debt
Considering the longer tenor, it is proposed that the assistance shall carry
fixed interest rate of 15% p.a
In addition, non-refundable upfront fee of 1.00% of sub debt along with
applicable service tax, cess, etc. is proposed.
97
It is also proposed to stipulate a repayment tenure of 5 years for the

subordinateddebt of `10 crore. Thereafter, the assistance would be
repayable in one installment.
Brief details of the security that are collected from the borrower
against the loan, are mentioned and their value assessed.
Case Details:
Collateral security by way of FDs
As per extant guidelines, TDRs equivalent to 5% of the term loan is
proposed as collateral security for the proposed term loan of `20 crore.
In case of availability of Portfolio Risk Fund (PRF), TDR equivalent to 2.5%
shall be applicable.
Security /FDs for subordinated debt is Nil (being unsecured)
Personal guarantee
It is proposed that the Chief Promoter / Director, holding significant
shareholding in the company will give in written, personal guarantee for
the term loan and sub-ordinate debt.
Finally the main points of the appraisal are highlighted and conclusion
is drawn. Based on these points, recommendations for the loan are
also given.
Case Details:
Conclusion and Recommendations
AMFPL has been associated with SIDBI for the past 1 year with
satisfactory conduct of account and satisfactory repayment record.
The company is adequately capitalized, governed by an experienced
Board
and
management
and
demonstrated
commitment
to
implementation of strong processes and systems.
It has demonstrated its ability to raise adequate private capital to meet its
capital requirements.
It has consistently recorded surpluses.
There are 21 other reputed Lenders to AMFPL,
The proposed term loan of `20 crore will enable AMFPL in expanding and
strengthening its operations in the underserved States, besides
98
diversifying its portfolio and the Subordinated Debt of `10 crore would
increase the capital base of the company to leverage more lending in the
larger measure.
3.7.2 Conclusion:
The process of appraisal for Micro Credit loans is different from other
appraisal processes. Since these loans are extended to MFIs, there is no
technical appraisal in this appraisal process. Also, the appraisal process is
tailor-made to cover all the required aspects. The appraisal process includes
steps like understanding the products of the MFI and their business practices
to make sure that the MFI adheres to the code of conduct and operates in a
fair manner.
This is a collateral free loan and the security collected is FDs with total value
of just 5% of the loan amount. The entire loan is given to the MFI based on
the reputation and the financial soundness of the MFI.
99
3.8 Findings And Recommendations

One of the biggest concerns of every lender is the safety of his/her money.
While a lender lends money to the needful in the expectation of earning
profits, there is a chance that the lender may never see his money again.
There is risk involved in every loan that a lender provides. Credit and risk
actually go hand in hand. And higher the risk, higher is the chance of lender
losing his money. But the reward of taking that risk is also high as the lender
charges higher interest rate for riskier loan.
Credit appraisal has helped lenders understand the various risks involved in
lending to a particular borrower. Just like every borrower is different, so is
their business and the needs of the business. Hence, appraisal process for
each kind of loan is also different. The appraisal process, by taking into
consideration the various aspects of a proposed loan, draws a clear picture of
the various risks and possible threats to the security of the lent money and
gives the lender a good idea of the credit worthiness of a borrower.
Credit appraisal is a powerful tool in the hands of a lender using which has
been helping the banks and other financial institutions in determining
accurately, the credit worthiness of a borrower and making the whole
process of borrowing and lending a lot more easier and safer.
Recommendations:
Sensitivity Analysis should be done on the basis of the Industry

average values. For eg: if the profit margin for an industry is 2% and if
the sensitivity base (on parameters like raw materials, sales etc) is 5
% , then it will give the wrong picture. And also the price volatility
should be taken into account during sensitivity analysis.
There should be a standard rating process to remove the subjectivity

and different perceptions of the rater (person who does credit rating
process for a borrower company). It will remove the human biasness in
the process.
More focus should be on the social cost and benefits of the project.
These tend to differ from the monetary cost and benefits of the project.
This helps in evaluating the individual project within the planning
100
frameworks which spells out national economic objectives and broad

allocation of resources. The social cost is quantified in terms of
employment generation, railways, road, forex etc. It is done by certain
banks like World Bank etc.
Companys operating cycle and other key financials should be

compared with that of competitors and peers in the same industry. This
is to check inefficiency on the part of company if any. For eg: the
borrower company has operating cycle of 5 months but peer
companies have that of 3 months. This shows the inefficiency of the
borrower company which can only be highlighted if we compare it with
peers. Similarly Cost comparison should be done with peers.
For working capital assessment, NWC/ Sales ratio can be added.

NWC / Sales=
Actual projected Net Working Capital

Net Sales
Ideally this ratio should be around 8% - 12%. If this ratio is low, it

indicates that the business is growing too fast without building an
adequate cushion in the form of NWC. It indicates symptom of
overtrading and undue reliance on borrowed short term funds. Falling
ratio is indicative of overtrading and serious liquidity problems and it
needs to be investigated.
Faster dispersion of credit is of paramount importance. A proposal has

to pass through various channels and none touch points, which lead to
delay in the dispersal of credit. Better tier system may be put in place
which will reduce the time taken and improve the performance of the
CLPC as well as lead to customer satisfaction.
SIDBI is the apex financial institution, responsible for providing financial

support and promoting activity in the MSME sector. MSME is an important
pillar of an economy employing millions of people and contributing
significantly to the GDP of the country. But despite its unquestionable
importance, this sector has struggled to avail credit facilities due to its highly
unorganized structure. Credit appraisal has played an important role in
determining the credit worthiness of these otherwise small enterprises.
Without credit appraisal, providing financial aids to these small enterprises
101
would have been next to impossible as these enterprises face a lot of

challenge and look a lot more risky. Credit appraisal has helped SIDBI find
potential in the otherwise troubled sector and impact the growth of the
sector in a big way
102
CHAPTER 4
IMPACT OF SIDBI ON MSME
103
4.1 Importance of MSME:

MSMEs have been globally considered as an engine of economic growth and
as key instruments for promoting equitable development. The major
advantage of the sector is its employment potential at low capital cost. The
labor intensity of the MSME sector is much higher than that of large
enterprises. MSMEs constitute more than 90% of total enterprises in most of
the economies and are credited with generating the highest rates of
employment growth and account for a major share of industrial production
and exports.
The MSME sector in India is highly heterogeneous in terms of the size of the
enterprises, variety of products and services, and levels of technology. The
sector not only plays a critical role in providing employment opportunities at
comparatively lower capital cost than large industries but also helps in
industrialization of rural and backward areas, reducing regional imbalances
and assuring more equitable distribution of national income and wealth.
MSMEs has shown constant growth rate around 11% every year till 2010-11.
The highest growth in recent time was recorded during 2011-12 (18.45%)
whereas during year 2012-13 and 2013-14 growth rate was around 14% and
12%, respectively.
Growth Rate
18.45
20
15
10
11.77
10.45
11.83
14.3
12.44
5
Percentage
Years
Source: Ministry of Micro, Small And Medium Enterprises
104
The MSME sector contributes significantly to the number of enterprises,

employment and output of the country. It has a significant contribution to the
GDP of the country. The performance of the MSME sector is summarized
below using the data sets of the third and fourth All India Census during the
year 1998 and 2005 respectively.
PERFORMANCE OF SSI / MSME: EMPLOYMENT, INVESTMENTS:

Year
II
2001-02
2002-03
2003-04
2004-05
2005-06
2006-07
2007-08#
2008-09#
2009-10#
2010-11#
2011-12#
2012-13#
-
Total Working
Enterprises
(in Lakh)
III
105.21
109.49
113.95
118.59
123.42
361.76
377.36
393.70
410.80
428.73
447.66
467.56
Employment
(in Lakh)
IV
249.33
260.21
271.42
282.57
294.91
805.23
842.00
880.84
921.79
965.15
1,011.80
1,061.52
Market Value of
Fixed Assets
(Rs. in Crore)
V
154,349.00
162,317.00
170,219.00
178,699.00
188,113.00
868,543.79
920,459.84
977,114.72
1,038,546.08
1,105,934.09
1,183,332.00
1,269,338.02
Including activities of wholesale/retail trade, legal, education & social services, hotel & restaurants, transport and storage &
warehousing
(except cold storage) for which data was extracted from Economic Census 2005, Central Statistics Office, MOSPI.
MSME Contribution to the GDP:
105
In the year 2012-13 there were about 467.56 Lakh enterprises operating in
the MSME sector employing approximately 1061.52 people. It has increased
from 105.21 Lakh enterprises employing 249.33 lakh people in the year
2001-02. There are over 6000 products ranging from traditional to high-tech
items, which are being manufactured by the MSME sector with total gross
output amounting to Rs. 1790804.67 crore in the year 2011-12 which was
around 7.28 percent of the total GDP of the country.
MSME is one of the key pillar of the Indian economy. It has been hugely
responsible for providing employment and development of the rural India.
According to the census of 2005, out of total units of 361.76 Lakh in the
MSME sector, 200.18 Lakh units operate in the rural parts of the country
employing approximately 440 Lakh people.
4.2 Problems Faced By MSME:

Despite its unquestionable importance, MSME has been facing a lot of
challenges. Enterprises operating in the MSME sector face a lot of challenges
in their day-to-day operations like production and marketing of their
products. These small and medium enterprises face stiff challenge from large
enterprises. Small budget prevents these enterprises from spending much on
106
marketing, technology upgradation or expansion. Lack of availability of credit

to this sector has also been a hurdle in the path of growth of this sector.
Some of the key challenges faced by the MSME Sector are:
Lack of availability of adequate and timely credit

High cost of credit
Collateral requirements
Limited access to equity capital
Procurement of raw material at a competitive cost
Problems of storage, designing, packaging and product display
Lack of access to global markets
Inadequate infrastructure facilities, including power, water, roads
Low technology levels and lack of access to modern technology
Lack of skilled manpower for manufacturing, services, marketing, etc
Multiplicity of labor laws and complicated procedures associated with
compliance of such laws.
4.3 Contribution of SIDBI:

Small Industries Development Bank Of India is the principle financial
institution aiming for promotion and development of the MSME sector. The
main business strategy of SIDBI has been to fill up the financial and nonfinancial gaps hindering the growth of the MSME sector. SIDBI, through its
diverse line of product, is providing direct credit assistance to fill up the
financial gaps and to meet the varied needs of the MSME sector. SIDBIs
direct finance to some of the niche areas is supplementing and
complementing the efforts of other banks. Besides, SIDBI channelizes
indirect finance to the MSME sector through commercial banks, SFCs, NBFCs,
MFIs and other sustainable intermediaries.
SIDBIs total disbursement increased from 40,520 crore
in FY 2012-13 to
52,191 crore in FY 201314; recording a growth of 29%. Outstanding portfolio
of the Bank increased by 9.3% to 61,271 crore as on March 31, 2014 from
56,060 crore during the same period. The cumulative disbursements as on
March 31, 2014 stood at `3.37 lakh crore, benefiting more than 340 lakh
units/persons.
4.4 Initiatives of SIDBI:
107
Other than the normal assistance provided to MSME sector by most banks,
some of the niche financial gaps being addressed by SIDBI are risk capital
equity assistance, sustainable finance, receivable finance, services sector
financing, etc. These are the requirements of MSMEs which are not generally
catered to by the banking system. Simultaneously, SIDBI acts as a nursery
for new financial products, which can eventually get mainstreamed in the
banking industry. Brief highlights of some of the important initiatives of SIDBI
as given below:
1. Risk Capital Fund:
One of the major problems faced by MSME entrepreneurs is lack of adequate
equity required for raising funds from banks and institutions. There is
limited
availability of venture capital for smaller companies due to a host
of factors, valuation complexities, limited exit options, corporate governance
issues, rating, transparency, etc. Thus, a large number of entrepreneurs
resort to borrowings from informal sources at a very high cost to meet their
requirements. Further, a large number
of
MSMEs
are
partnership/
proprietorship firms which do not have the
required
capital
structure to absorb external equity investments. With a view to ameliorating
the problems faced by the MSMEs in accessing capital and facilitating
extension of bank finance to MSMEs,
SIDBI had started the risk capital
operations in
FY 2008-09 under the MSME Risk Capital
Fund
(MSME- RCF) with a committed corpus of 2,000 crore. An amount of
1,500 crore has been drawn
out of MSME-RCF so far.
The risk capital assistance is offered
on the
backing of future cash
flows and prospects
of the unit rather than asset coverage/
collaterals
applicable under conventional loans. Risk capital assistance, therefore,
has significant benefits for MSMEs whose
growth
plans
get
constrained due to shortage of capital and
limitations in
offering
collaterals. The assistance has supported the growth requirements of a
number of MSMEs including leveraging of senior loans, funding intangible
requirements like expenditure for R&D, marketing/ brand building, technical
knowhow, energy efficiency, quality control,
working capital (WC) margin,
etc. where bank loans are generally not available as such investments are
non-asset creating.
2. TIFAC-SIDBI Technology Innovation Programme:

108
In order to support MSMEs towards development, up-scaling, demonstration

and commercialization of innovative technology based project, SIDBI
executed a Memorandum of Understanding (MoU) with Technology
Information, Forecasting and Assessment Council (TIFAC), Ministry
of
Science & Technology, Govt. of India for implementing the Technology
Innovation Programme (Srijan Scheme). A revolving innovation fund of 30
crore has been created by TIFAC under the scheme.
The Scheme provides developmental loan at flexible terms and interest
rate to encourage/ promote development/ innovation of new technology/
process/ product and its commercialization. Under the scheme, assistance is
provided up to 1 crore at a softer interest rate not more than 5% p.a. As on
March 31, 2014, an amount aggregating to 8.43 crore has been committed to
10 innovative units under the Scheme.
3. Sustainable Development:
Recognizing
the need for promoting Energy Efficiency (EE)
and
sustainable development in the MSME
sector for their survival and growth
in the long run, SIDBI has taken a number of initiatives to promote Energy
Efficiency/Cleaner Production in the MSME sector through loan products and
promotional activities.
SIDBI has started many concessional lending schemes out of Lines of Credit
from various multilateral/ bilateral agencies, viz.
Japan International
Cooperation
Agency (JICA) Phase
I- JPY 30 billion & Phase-II
JPY 30 billion, Agence Franaise de Dveloppement (AFD)
EUR
50 million and Kreditanstalt fur Wiederaufbau (KfW) EUR 50 million.
The main objective of these schemes is to enhance energy efficiency and
reduce CO2 emissions of the Indian MSMEs.
During the FY 2012-13, a new product, viz. Sustainable Finance Scheme
(SFS) was launched with the objective to widen the scope of
the Banks
offerings for sustainable development projects which lead to
significant
improvements in EE/CP/sustainable development,
but are
not
covered under any LoC from international agencies.
4. Receivable Finance:
109
Receivable Finance Scheme (RFS), launched in the year 1991, is one of the
lead schemes of the Bank. Under the scheme, the Bank provides assistance
to MSMEs to address their problems of delayed payment in respect of credit
sales made to purchaser companies. SIDBI offers finance to MSMEs against
the Bills of Exchange/Invoices arising out of
such sales.
In a short span of its implementation, the Bank fully utilized and drew the
facility amount of 5,000 crore from the RBI. A cumulative number of 9,718
MSMEs had been covered upto March 31, 2014 under the facility and out of
the total assistance, 89% share had been deployed to micro and small
enterprises.
Subsidies channelized through SIDBI:

During the FY 2013-14, capital subsidy claims of
754 eligible Micro and
Small Enterprises (MSEs) directly assisted by SIDBI aggregating 43.02 crore
were settled
underCLCSS. Further, subsidy claims of 2748 MSEs
amounting to 167.76 crore in respect of co-opted Primary Lending
Institutions were also settled. Since the launch of the Scheme in October
2000, capital subsidy claims of 14,833 units aggregating `829.69 crore
(cumulative)
were settled.
Similarly under TUFS, subsidy
claims (both interest incentive subsidy & capital/margin money subsidy) of
357 eligible textile units for SIDBIs directly assisted cases amounting to
`9.78 crore and subsidy claims aggregating `2.94 crore were settled in
respect
of the
co-opted PLIs for their assistance to MSEs. Since
the launch of
the TUFS in April 1999, capital subsidy and interest
incentive claims for an amount of `682.72 crore (cumulative) have been
settled. Under IDLSS, which was launched in
November 2005, cumulative
claims of
1633 units aggregating 251.78 crore were settled including 305
units amounting to
44.36
crore during FY 2013-14. Under FPTUFS,
subsequent to decentralization of the scheme from April 2007, 54 cases
(involving 82 installments) have been recommended for grant-in-aid
amounting to
12.71 crore to the Ministry, against which subsidy
aggregating `8.96 crore has been released to 38 units assisted by SIDBI.
Indirect Credit
110
Indirect credit
constitutes 80% of total credit outstanding of SIDBI. It
comprises refinancing support to banks, State Financial Corporations (SFCs),
Bills Rediscounting support to banks, assistance to Microfinance Institutions
(MFIs) and resource support to various institutions and agencies. The
outstanding of indirect credit increased by 12.5% to `49,258 crore as on
March 31, 2014 as against a growth of only 3% in 2013.
Refinance Scheme for Micro and Small Enterprises Sector (RMSE - V)

:
Out of the corpus of 10,000 crore allocated by RBI, SIDBI disbursed `2,047
crore to banks for onward lending to MSEs. SIDBI ensures that
the
refinance assistance is extended only in cases where the interest rate
charged by banks to the ultimate
borrowers is reasonable, i.e., not more
than the base rate of refinanced banks. SIDBI also ensures that the interest
rate charged
by SFCs/others to the ultimate borrowers is not more than
two percent above SIDBIs lending rate to them. This is done to make sure
that the ultimate borrower gets loan at a reasonable without getting
burdened by high interest rates.
Micro Finance:
The cumulative assistance including loans, equity and quasi-equity but
excluding India Microfinance Equity
Fund (IMEF)
&
Poorest
State
Inclusive Growth (PSIG) sanctioned under SIDBIs micro
finance initiatives
up to March 31, 2014 aggregated 9,308.01 crore, while cumulative
disbursements aggregated 8,121.57 crore. The outstanding
micro
credit
portfolio of the Bank
stood at 1,924.00 crore, as on March 31, 2014. The
number of MFIs assisted
by SIDBI and
having
loan
outstanding with the Bank as on March 31,
2014 stood at 84. The
assistance through
SIDBI has benefited
around 326 lakh (approx.)
disadvantaged people, most of them being
women.
India Microfinance Equity Fund:

Subsequent to
the announcement in the Union Budget 2011-12,
the
Indian Microfinance Equity
Fund (IMEF) was set up with the primary
111
objective of providing equity and quasi-equity to smaller MFIs to help them

maintain growth and achieve scale and efficiency in their operations. As at
the end of March 31, 2014 the outstanding under IMEF stood at `92.25 crore.
(Rs.
Crore)
Table: Business Operation of SIDBI

Schemes
FY 2011-12
Outstandin
Distb.
g (as on
During FY
March
31st)
In
FY 2012-13
Outstandin
Distb.
g (as on
During FY
March
31st)
A. Indirect Credit
Refinance
24,252.30
39,055.49
22,869.78
37,193.36
Micro-Finance (including
P&D Assistance)
239.42
1,575.85
323.03
1,132.49
Resource Support to
Institutes/Agencies
1,620.00
1,838.10
4,242.50
5,468.77
27,435.31
43,794.62
Sub-Total
Term Loan under Direct
Credit (Including Bulk
Credit and Venture
Capital)
26,111.72
42,469.44
B. Direct Credit
4,234.20
8,683.51
1,556.39
8,021.16
10,814.46
2,632.12
11,528.15
4,243.98
Sub-total
15,048.66
11,315.63
13,084.54
12,265.14
Total Credit (A + B)
41,160.38
53,785.07
40,519.85
56,059.76
MSME Receivable Finance
Non-Fund Based Facility:
112
The Bank also provides various non-fund based services like Letters of
Credit
(both foreign and inland), Guarantees, services for
appraisal, loan syndication, etc., in addition to services provided within the
traditional banking framework.
SIDBI has also taken

strategic initiatives for addressing various nonfinancial gaps for capacity building of the MSME sectors, as well
as
bankers. These activities include entrepreneurship promotion
through a dedicated
website
www.smallB.in,
Credit
Advisory
Services, Loan Facilitation,
capacity building of banks, particularly
Regional Rural Banks towards micro enterprise lending, etc.
Information Dissemination: With a view to address the information gap by
ensuring availability of relevant information to MSMEs, your Bank set up a
website www.smallB.in to handhold and guide new entrepreneurs on how to
set up a business, access to finance, avail benefits under government
schemes, etc.
Credit Advisory Centres: With a view to mitigate the various challenges
faced by MSMEs in Obtaining credit, SIDBI has set up Credit Advisory Centres
(CACs) guiding new
/ existing entrepreneurs regarding availability
of schemes of commercial banks, government subsidies/ benefits, provide
borrowers with debt
counseling, answering queries raised by banks
etc. The CACs have been servicing 306 clusters across the country in
partnership with Industry
Associations.
For manning the CACs, SIDBI
has appointed Knowledge Partners (KPs) who are retired Bank officials,
suitably trained for the purpose. So far more than 8200 MSMEs have
benefited through CACs.
Loan Syndication Services: SIDBI has launched the Loan Syndication
Services (LSS) with the objective of setting up an ecosystem in partnership
with Banks, Rating Agencies and Accredited Consultants to ensure timely and
adequate credit flow to the MSMEs by generating complete, rated and
113
validated proposals to be offered to banks/FIs for consideration of

assistance. The LSS has referred over 160 proposals to SIDBI and MoU Banks
during the FY 2014.
114
Chapter 5
Conclusion
115
The global scenario has opened many doors of opportunities and challenges
for the MSME sector of India. The increased per capita income and
consumerism has opened up many opportunities of growth in the sector. And
despite the various challenges it has been facing, the MSME sector has
shown admirable innovativeness, adaptability and resilience to survive the
recent economic downturn and contribute significantly to Indias industrial
growth.
SIDBI has been doing a commendable job in trying to help MSME reach its
full potential by recognizing and filling up the gaps hindering its growth.
SIDBI has played an important role in uplifting the MSME sector of India by
providing it with timely funds for smooth running of a business. Through its
diverse line of products, SIDBI has helped many enterprises expand its
capacities and level of operations. Its products have helped many financially
troubled enterprises in reviving.
The most important contribution of SIDBI to the MSME sector has been the
timely and affordable credit facilities. Due to lack of options, many
enterprises used to go for unconventional methods of raising funds. These
funds used to be very costly and used to put a lot of pressure on the
enterprise. But SIDBI makes sure that these enterprises are able to avail
credit facilities in a timely manner and at an affordable price so that the
enterprise can grow fast.
Credit appraisal has been the most important tool in the hands of SIDBI.
MSME sector is a difficult sector to lend due to its unorganized structure and
high risk factor. And while SIDBI has been coming up with tailor-made
products to cover gaps and cater different needs of the sector, security of
the money has been ensured by the different methods of credit appraisal
that SIDBI follows for each product. Security of the money is of utmost
importance for any lender and for SIDBI, Credit appraisal process has helped
it understand the different risks involved in a loan proposal and take
necessary steps to safeguard its money. Credit appraisal plays an important
role in the success of SIDBI.
SIDBI will continue to identify the gaps in the MSME clusters and address
those gaps through innovative solutions viz. loan syndication, capacity
building of MSME sector, common facility centre, cluster diagnostic studies,
credit facilitation centre, credit counseling and advisory services including
market information, supporting skill development institutes, supporting
incubation and innovation centres, setting up of website to address
116
information asymmetry for the prospective and new entrepreneurs, coming

out with various studies / reports / web-based solutions to address
information gap, etc. These developmental initiatives would not only address
the emerging needs of the sector, but also will create employment and
opportunities in this productive sector of the economy, resulting in the
overall growth of the economy and the country as a whole.
117
Appendix
ABC Hotels Pvt. Ltd.
Projected Balance Sheet of the firm
118
Projected Profit and Loss Account
119
XYZ Poly Industries

Balance Sheet
2
3
4
5
6
9
10
11
12
13
14
15
FIXED AND NON-CURRENT ASSETS

WDV of Fixed Assets at beginning of year
(a) Land
(b) Buildings
(c) Plant & Machinery
(d) Others
Sub-total
Less: Depreciation for the year
Less: Revaluation Reserves
Net Fixed Assets (1-2-3)
Capital Work-in-Progress (Incl. adv. for capex)
Non Current Assets
(a)
Sundry debtors over 6 months
(b)
Investment/ Advances to Group Cos./
Subsidiaries
(c)
Other Investments
(d)
Deferred Tax Assets
(e)
Security Deposits
(f)
Others
Sub-total
Total Fixed and Non-Current Assets (4+5+6)
CURRENT ASSETS
Inventory
a)
Raw Materials
b)
Stock-in-Process (SIP)
c)
Finished goods
d)
Consumable Stores & Spares
Total Inventory
Sundry Debtors less than 6 months
Advances to Suppliers of RM and Stores/ Spares
Investments
Cash & Bank Balances
Loans and Other Advances
Other Current Assets
Total Current Assets (8 to 14)
AS ON
31-Mar11
AUDITED
AS ON
31-Mar12
AUDITED
AS ON
31-Ma
13
PROV.
1.05
5.05
23.37
31.32
60.79
8.76
1.05
4.53
17.51
26.46
49.55
8.71
1.05
3.67
15.05
31.97
51.74
6.04
52.03
40.84
45.70
0.00
52.03
0.00
40.84
0.00
45.70
11.24
33.79
40.00
9.42
14.70
39.31
20.66
49.04
48.49
59.07
79.31
81.65
1.48
0.31
5.85
77.34
8.25
3.45
4.52
123.78
6.30
4.10
1.31
172.6
120
41
42
CURRENT LIABILITIES
Sundry Creditors
Bank Borrowings for Working Capital
Installments (Payable in one year)
(a) SIDBI Term Loan(s)
(b) Other Term Loan(s)
(c) Deferred Payment Credits
(d) Interest Bearing Unsecured Loans
(e) Interest Free Unsecured Loans
Sub-total
Advances
Provisions
Other Current Liabilities
Total Current Liabilities (16 to 21)
Net Working Capital (Surplus of CA over CL) (1522)
Net Tangible Assets (7+23)
LONG TERM LIABILITIES
SIDBI Term Loan(s)
Other Term Loan(s)
Deferred Payment Credits
Interest Bearing Unsecured Loans
Interest Free Unsecured Loans
Other Long Term Liability
Deferred Tax Liabilities
Total Long Term Liabilities (25 to 31)
Net Worth (24-32)
Networth represented by
Equity Share Capital
Equity Share Capital- SIDBI / Others
Preference Share Capital
Reserves & Surplus
Subsidies
Profit & Loss Account (only credit balance)
Less: Intangibles/ Misc. / Prelim. / Def.Rev.Exp.
not written off
Less: Accumulated Losses
Net Worth (34+35+36+37+38+39-40-41)
43
44
Contingent Liabilities (Rs. lakh)

Repayment of loan during the year (Rs. lakh)
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
38
39
40
3.96
29.67
22.40
37.01
42.36
57.88
2.65
0.00
0.00
1.76
5.07
43.11
34.23
1.58
5.64
66.63
57.15
1.17
3.27
104.6
67.99
86.26
97.99
113.6
5.82
4.03
1.68
35.83
49.81
15.27
3.23
44.88
41.38
2.24
56.08
41.91
2.24
19.19
94.50
20.35
20.35
20.35
50.00
21.03
21.56
24.15
41.38
41.91
94.50
2.65
0.00
2.65
121
Check
0.00
0.00
Profit and Loss Account of the firm
Projected Balance Sheet
122
0.00

123
PJC Private Ltd.

124
Balance Sheet
Profit and Loss Account

125

126
127
Akash Micro Finance Pvt Ltd.

128
Balance Sheet

129
130
BIBLIOGRAPHY
WEBSITES:
www.sidbi.com
www.rbi.org
www.google.com
msme.gov.in
BANKS INTERNAL RECORDS:
Annual Reports of SIDBI.

SIDBI Manuals for subsidy schemes.
Appraisal reports of proposals.
Rating reports of proposals.
Other:
MSME Annual Report

Research Papers on MSME
131

Credit Appraisal in SIDBI

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qwertyuiopasdfghjklzxcvbnmqw

Summer Internship Project

Project Under The guidance

Project Submitted ByName: Shakti Mishra

Company Project Guide

The project titled Analysis of credit appraisal System of the Products

upgradation is important for the growth of the sector. So an attempt has

1.2. Introduction To SIDBI 12

2.2. Scope Of The Project 19

3. Introduction To Credit Appraisal

3.2. Central Loan Processing Cell 28

3.5. Working Capital Loan

3.6. Risk Capital Loan

3.7. Micro Credit Loan

3.8. Findings and Recommendations

4.Impact Of SIDBI On MSME89

4.2. Problems Face By MSME

4.3. Contribution of SIDBI 92

MICRO SMALL AND MEDIUM SCALE ENTERPRISE

ASSOCIATED CHAMBER OF COMMERCE

CENTRAL LOAN PROCESSING CELL

DETAILED APPRAISAL NOTE

DEBT EQUITY RATIO

DEBST SERVICE EQUITY RATIO

ASSET COVERAGE RATIO

MICRO FINANCE INSTITUTION

JAPAN INTERNATIONAL COOPERATION AGENCY

CREDIT INFORMATION BUREAU(INDIA)LIMITED

TOTAL OUTSIDE LOANS

EXTENSION BRANCH OFICE

RATE OF CAPITAL EMPLOYED

OPERATIONAL RISK MANAGEMENT

RISK MANAGEMENT VERTICAL

KEY RISK INDICATOR

TOTAL NET WORTH

CAPITAL LINKED CREDIT SUBSIDY

Above 5 Crore up Above 2 Crore up

Different tools/Schemes used for providing credit

Credit Guarantee Fund Trust For Micro And Small Enterprises

Credit to micro and small enterprises sector is generally perceived as high

Credit Linked Capital Subsidy Scheme(CLCSS)

Maximum Ceiling of loan eligible for support

15% of the investment in eligible plant & machinery

SIDBI Financing Scheme For Energy Saving Projects:

expected to encourage MSME units to undertake energy saving investments

Promoters 25% for existing units

The interest rate is based on internal risk rating

Fixed rate :9.5-10% p.a

Minimum Assets Coverage should be 1.4:1 for

new units and 1.3: 1 for existing units.

Need based. Normally, the repayment period

Technology Upgradation Fund Scheme-Textile Sector(TUFS)

Additional option to the powerlooms units and independent

An option to SSI textile and jute sector to avail of 15% Margin

5% interest reimbursement plus 10% capital subsidy for specified

5% interest reimbursement plus 10% capital subsidy for brand new

25% capital subsidy in lieu of 5% interest reimbursement on

25% capital subsidy in lieu of 5% interest reimbursement on

300ACT OF SIDBI ON MSMEcro Credit Loan

To understand the working of SIDBI

Scope of The Study :-

Small and medium enterprises credit appraisal process as done in SIDBI,

How a borrower approaches bank for a Small Business