A

PROJECT REPORT
AT

ABHYUDAY CO-OPERATIVE BANK LTD.

(SCHEDULED BANK)

ON

“INDUSTRIAL FINANCE”

SUBMITTED
BY
--------------------------
MMS – FINANCE
2009-2011

College name

1
 CERTIFICATE

To whom so ever it may concern

This is to certify that Mr.----------------- student of first year MMS

from---------------------------------------- has successfully completed his project on
“Industrial Finance” under the guidance of Mr.------------- Sr. Manager, Industrial
Finance Department from 03.05.2010 to 30.06.10.

During the project he was found sincere, diligent, punctual and dedicated towards work.

We wish him all the success in his future.

2
 INDEX

Chapter Contents Page

No. No.
1 Research Design
1.1 Introduction 1
1.2 Objectives of study 2
1.3 Limitations of study 3
1.4 Methodology 3
2 Organizational Profile
2.1 About the Bank: A success story 4
2.2 Bank Chronicle 7
2.3 Organization Chart 9
3 Conceptual Background of study
3.1 Analysis of Financial Statement 10
3.2 Ratio Analysis 10
3.3 Working Capital Management 15
3.4 Loan Process 19
3.5 Industrial Finance Department Scrutiny Note 33
3.6 Zonal Office report 36
3.7 Guidelines for Credit Rating 42
3.8 Time Frame for disposal of loan proposal 49
4 Analysis and Representation of Data 53
5 Findings and Suggestions
5.1 Findings 59
5.2 Suggestions 60
Bibliography 62
Annexure 63

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 ACKNOWLEDGEMENT

I have immense pleasure in presenting the synopsis report for my

project entitled--------------------------------------------. I would like to take this
opportunity to express my gratitude to a number of people who have been
sources of help and encouragement during the course of this project.

I am very grateful & indebted to my project guide “Prof.-------------------”

for providing his enduring patience, guidance and invaluable suggestions.
He was the one who never let my moral down and always supported me. He
was a constant source of inspiration for us and took utmost interest in our
project.
I express my sincere thanks to our Director --------------------. I would also
like to thank all the Staff members for their invaluable co-operation.
Without their willing support this work would not have been possible.

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 CHAPTER NO. 1

RESEARCH DESIGN

1.1 Introduction

Abhyudaya Co-op. Bank Ltd., one of the leading co-operative banks in India, in its
outlook and approach, has the objective of progress and prosperity of all. From a humble
beginning in January 1964 as a Co-operative Credit society with a share capital of a
merely Rs.5,000/- held by 83 members, today Abhyudaya Co-op bank has become one of
the largest urban co-operative banks with a "Scheduled Bank" status in Maharashtra.

The Bank has launched different loan schemes tailor-made to suit the needs of various
customers. The schemes aim at providing loans for purchase or construction of residential
premises, repair/renovation of house property, purchase of car, seeking higher education
and for purchase of household consumer durable. One of the loan schemes, viz. "Udyog
Vikas Yojana" is specially designed for the benefit of small entrepreneurs and
businessmen. The procedure for sanctioning of loans under the schemes has been
simplified and relaxed with a view to attract new customers and facilitating speedy
sanction of loans.
1.2 Objective of Study

• To study the concept of Industrial Finance.

• To study the loan procedure and scrutiny procedure of the bank.
• To study the ways to reduce the risk of bad debts
• To study the analysis of financial statement for different loan proposals.

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1.3 Limitation of study

• Many records related to my project is very confedential and hence bank records are
not fully disclosed.
• Some of the records regarding my project were available at branches, so that records
were not available to me for refernce.
• Data availability according to time was infrequent.
• Though some data was provided to me, but due o company secrecy policy I am
unable to put it in my project.

1.4 Methodology:
Various fact finding technique used in system are:
1. Primary Source:

2. Secondary Source:
• Library: Various project related books were referred especially to analyze the
system. Also various books from college library referred.
• Company in-house documents such as branch scrutiny, credit rating report, zonal
office report were referred.
• Visted the site: http://www.abhyudaya.com/
• Credit Policy, and Rules & procedure of year 2010-11

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 CHAPTER NO. 2

Achievements since 1964

2.3 Organization Chart:

Organization Chart

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 CHAPTER NO. 3

CONCEPTUAL BACKGROUND OF STUDY

3.1 Analysis of financial statement:

A basic limitation of the traditional statements comprising the Balance sheet and the
profit and loss account is that they do not give all the information related to financial
operation of the firm. Neverthless, they provide some extremely useful information to the
extent that the balance sheet mirrors the financial statementon a particular date in terms
of structure of assets, liablities and owner,s equity, and so on and the profit and loss
account shows the resultsof operations during a certain period of time in terms of the
revenues obtained and the cost incurred during the year. Thus, financial statements
provide a summarized view of the financial position and operations of a firm. Therefore,
much can be learnt about a firm from a careful examination of of its financial statements
as invaluable documents/ performance reports. The analysis of financial statements is,
thus, an important aid to financial analysis.

The focus of financial analysis is on key figures in the financial statementsand the
significant relationship that exists betwee them.The analysis of financial statements is a
process of evaluating the relationship between component parts of financial statements to
obtain better understanding of the firm’s position and performance. The first task of the
financial analyst is to select the information relevant to the decision under consideration
from the total informationcontained in the financial statements. The second step is to
arrange the information in a way to highlight significant relationships. The fnal step is
interpretation and drawing of infernces and conclusions, In brief, financial analysis is the
process of selection,relation and evaluation.

3.2 Ratio Analysis:

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3.3 Working Capital Management
Working Capital Management is concerned with the problems that arise in attempting to
amnage the current assets, the current liabilities and the interrelationship that exists
between them. The term, current asset, refer to thse asset which in ordinary course of
business can be, or will be, converted into cash within one year without undergoing a
dimunition in value and without disrupting the operations of the firm. The major current
assets are cash, marketable securities, accounts receivable & inventory. Current
Liabilities are those liabilities which are intended, at their inception, to be paid in the
ordinary course of business, within ayear, out of the currnt asstes or earnings of the
concern. The basic current liabilities are accounts payaable, bills payable, bank overdraft
and outstanding expenses. The goal of working capital management is to manage the
firm’s current assets and liabilities in such a way that a satisfactory level of
Working Capital is maintained. This is so because if the firm cannot maintain a
satisfactory level of working capital, it is likely to become insolvent may even forced into
bankruptcy.

There are two concepts of Working Capital : gross and net

The term gross working capital means the total current assts and the term net working
capital means the differnce between current assets and current liabilities.

Calculation of Working Capital requirements/ Term Loan above Rs. 10.00 lacs

Branches should calculate all types of Working Capital requirements for next one year. It
should be based on projected Profit and Loss account and Balance submitted by the
applicant. The projected figures should be compared with the actual figures based on
Audited Balance sheets submitted by the party. The projection to be acceptable to the
Bank must be realistic/ achievable. If there is major deviation on Sundry Debtors,
Creditors, stock etc., proper explanation should be obtained from the applicant and
branches should satisfy themselves about the genuineness of the projections. If the
branch/ Zonal office are not satisfied with the given projections, they should recalculate

9
the projections based on past trend and their perception and decide actual working capital
requirement. The requirements of CC, bills facility, against clearing and cheque
discounting should be within the projected the projected maximum permissible Bank
finance limit. Normally, no separate Against clearing and Cheque Discounting facility to
be sanctioned and this should be part of working capital facility sanctioned to the
borrower. As per RBI guidelines, Bank may consider the total working capital limit to a
borrower up to 20% of the projected Sales Turnover. However, the bank to allow
operations always within Drawing Power based on the monthly stock and Book Debts
less Credit Purchases (Creditors for goods) after maintaining a margin of 40%/25% for
traders and manufacturers respectively. To make the facilities sanctioned under “Against
Clearing” and “Cheque Discounting” secured it should be ensured that the borrower
should have sufficient Drawing Power to cover them alongwith the Cash Credit and DBD
limits. It shall be noted that all credit limits for working capital purpose like Cash Credit,
Bills Discounting, Letter of Credit for purchase of raw material on continuous basis etc.
will form a part of MPBF.

I. Working Capital:
For Traders and Manufacturers:
a. Under Method-I

Working Capital Gap (WCG)= Current Assets – Current Liabilities

Eligible MPBF = WCG – 25% of WCG

b. Turnover Method
For SSI, SMEs and Industrial Units enjoying total limits above Rs. 50.00 lacs and for
new accounts with existing business applying for total limits above Rs. 50.00 lacs, in
addition to Method-I above, working capital will be calculated under Turnover Method.

MPBF = 20% of realistic projected Sales Turnover.

Turnover method is not applicable to Trading Accounts.

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c. Production/Processing Cycle Method
Sr. Manager/ Manager Industrial Finance Dept. will visit the industrial unit and work
out requirement of working capital based on the existing production/ processing cycle.
He will take into account credits received on purchase of raw material, credits
allowed on sales, inventory levels of raw materials, work in process, finished goods etc.

In order to arrive at the future requirements of the unit, he will scrutinize the projected
sales for next two years and work out the requirement of the working capital. It is
necessary for him to discuss with the loanee/ officials of the unit and ascertain need
based working capital limit. He will also compare the working capital ascertained under
Method-I and Turnover method and give his recommendations.

d. For New Projects:

Working Capital for new projects will be worked out on the basis of projections,
production/ processing cycle. Hence, DGM and IF Dept. will take into account realistic
projections, industry standards etc.

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3.4 Loan Process:
The following flow chart shows the process of loan:

Loan Proposal from the borrower

Acceptance, Scrutiny and Recommendation of Loan Proposal

Sanction of credit facilities

Documentation & Release

Monitoring, Review and Post Sanction follo-up

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Let us discussed it in detail:
I. Loan Proposal

The first step in the loan proposal is borrower will approach the bank and he has to
submit preliminary documents to branch. Branch will scrutinize that the borrower
provides following documents for CC/TL/WCTL facilities: -

1. Check List / Index.

2. Cash Credit security note.
3. Visit report of Branch Manager.
4. Liability Information sheet of Applicant.
5. Liability Information sheet of Surety.
6. Account Information of Applicant.
7. Account Information of Surety.
8. CC Sanction sheet/ Scrutiny note of previous year.
9. Copy to previous year Disbursement Advice.
10. Copy to insurance policy.
11. Cash Credit Application form duly filled in and signed by all
Partners/Directors/Proprietor of the firm/company.
12. Proof of business place- office /go down/ factory:
Copy of Agreement for sale/lease and license. Agreement/ Rent Receipt/ electricity
bill etc.
13. Proof of residence. Proprietor/partner/Director:
Ration card/ electricity bill / Rent Receipt.
14. Trade Licenses: -
A) Shop and establishment
B) SSI Registration Certificate.
15. Copy of Partnership Deed/ Memorandum and Articles of Association etc.
16. Board Resolution for availing credit facility from bank in case of Private and
Public Limited companies.
17. Bio-Data of Proprietor/ Partner/Director. In case of new application.
18. Statements of Collateral Securities Certified by manager.
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 19. Mortgaged Registration receipt/ Mortgage Deed, if property is already mortgaged.
20. Original documents of property; if offered for mortgaged.
21. ROC change registration certificate (in case of Private and Public Limited
companies).
22. Stock statement and age wise Book Debt statement of latest visit date.
23. Statement of account for current year and previous year Audited Statement of
account; if
• Sales /turnover is more than Rs. 40.00 lacs.
• Facility applied is more than Rs. 10.00 Lacs.
• In case of Private and Public Limited companies.
24. Up-to-date sales and purchase figures subsequent to last balance sheet on record.
25. Sale tax challan copy / assessment order copy.
26. Income tax challan for current year and previous year assessment order or
acknowledged copy of return.
27. Computation of Income/TDS Certificate.
28. Copy of professional tax challan.
29. Credit from other bankers
30. Any other documents as per the proposal.

Documents of Surety: -
1. Surety consent letter duly filled in and signed by all partner/proprietor of surety
firm /company.
2. Board resolution to stand as surety (if surety firm is ltd./private ltd. companies).
3. Proof of business place.
4. Proof of residence.
5. Copy of Partnership Deed/ Memorandum and Articles of Association etc.
6. Shop establishment license/ SSI registration certificate.
7. Statement of account for current year.
8. Sales tax / Income tax papers.
9. Credit from the bank if surety is operating account with some other bank.
10. Any other documents as per the proposal.

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Borrower should provide at least one surety for loan proposal upto Rs. 5 lacs and two
sureties above R. 5 lacs with their documents mentioned above.

I] Primary Documents

These determine our rights to recover the amount lent by us together with interest
thereon.
1. Demand Promissory Note
2. Loan Agreement.
3. Letter of guarantee.
4. Counter guarantee.

II] Security Documents

These are obtained for changing the property of the borrower to the bank as security.
1. Hypothecation Deed.
2. Bills Agreement.
3. Letter of Lien.
4. Mortgaged Deed and its original registration receipt/ Memorandum of equitable
mortgage.

III] Auxiliary Documents

These are supplementary to the primary and security documents.

1. Application for facility.
2. Consent letter of surety.
3. Partnership Deed, duly registered/ Memorandum and Articles of Association/
Trust Deed.
4. Irrevocable power of attorney.
5. Resolution of company/trust.
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 6. Permission from charity commissioner etc.

Attestation
The following documents are to be compulsorily witnessed by at least two witnesses.
1. Assignment on the instrument itself (e.g. LIC policy)
2. Assignment on separate instrument.
3. Sale Deed.
4. Mortgage Deed.
5. Any other documents requiring Ad-valorem stamp duty.
6. A gift Deed of immovable property.
7. A will.

Following documents do not require to be witnessed:

1. Demand Promissory Note.
2. Letter of Lien.
3. Agreement for hypothecation of goods and book debts, vehicles, plant and
machineries etc.
4. Letter of guarantor.
5. NSC/ Gold loan agreement.
6. B.D./B.P. Agreement.

After scrutinizing the documents branch will make the visit and submit scrutiny note.

II. Acceptance Scrutiny and Recommendations of loan proposal

1. All the loan proposals continue to be accepted by the branches and scrutinized at
branch level except loans and advances application from new applicants of above
Rs.50.00 lacs.

2. Whenever prospective borrowers ask for loan application, they should be properly
guided and correct set of application forms/Annexure be given to them and properly
briefed/guided about the documents to be submitted along with the application.
16
3. On receipt of the application duly filled-up, the loan receipt should be fully
scrutinized and required documents to be obtained and file to be sent to next higher
authorities within 30 days from the receipt of the file in the branch. In case, the file is
kept pending for more than 30 days, the reasons for doing so along with the detailed
explanation giving reason for keeping the file pending be sent to next higher
authorities. Existing guidelines for scrutinizing be followed like required documents
and compulsory visit to the applicants residence and business places etc. as advised
from time to time. Inordinate delay in file processing will not be tolerated. Details of
requirements to be informed within 3 working days. On receipt of the application
duly filled-up, branch should inform all details of requirements to the loanee in
writing within 3 working days.

4. Whenever the file is received with incomplete documents, the file should be
accepted and requirements of documents should be informed to the applicant in
writing giving time limit of 7 days within which they should be submitted. In case the
documents are not received within 7 days, reminder should be sent giving further time
of 7 days. Thus loanee will be given period of 14 days for submission of documents
from the date of receipt of loan application. If loanee fails to submit the same, the file
should be forwarded to next higher authority for rejection within 20 days from the
receipt of application with detailed reasons. It should be our endeavor to also contact
loanee over telephone, guide him and ensure that loan is granted to applicants on the
basis of repayment capacity.

5. Proposals upto the delegated power of the branch-in-charge be sanctioned at

branches. Proposals beyond branch-in-charge delegation but upto delegated powers of
DGM (Zones) be sent to zonal offices for sanction. The loans and advances proposals
beyond the delegated powers of DGM and upto Rs.10.00 lacs would continue to be
sent to Head Office directly. The proposals above Rs. 10.00 lacs would be routed
through Zonal offices for scrutiny and recommendations of the Dy. General Manager.

17
6. The Zonal offices should scrutinize the loans and advances proposals with limits
of above Rs. 10.00 lacs, and forward the same to Head office along with their
scrutiny, recommendations and grading of the accounts.

7. Branches should use the proper application forms as well as scrutiny forms for
different types of advances. There are different forms for loans upto Rs. 10.00 lacs,
CC facility upto Rs. 10.00 lacs and facility above Rs. 10.00 lacs. In the form for the
facilities above Rs. 10.00 lacs, there are separate forms of fund based limits, for Term
Loan, loans for contractors and manufacturing units. Branches should fill-up the
appropriate scrutiny forms while scrutinizing the application.

8. Normally the bank to discourage financing new units located outside the control
area of the branches (located outside Mumbai, Thane, Raigad and Pune districts at
this juncture). This taking into account bad experience of the bank in controlling the
units, which require constant monitoring particularly in case of working capital
requirements. However, Zonal Office should place before the board submission in the
matter seeking approval for acceptance of such proposals. The above conditions do
not apply to the existing borrowers of the Bank with good track record.

9. A borrower enjoying fund based limit above Rs. 100.00 lacs and fund plus non-
fund based limit of Rs. 200.00 lacs have to be a Private Ltd./ Ltd. Company. Hence
Proprietary/Partnership firms should take necessary steps to convert them into Pvt.
Ltd./Ltd. Companies in due course.

10. For obtaining credit information of party and CR from other banks, verification of
Audited Balance Sheet, Income Tax Returns etc. for new proposals above Rs. 2.00
Crore, Bank may take the help of Professionals by fixing the fees if any and as
decided by the Managing Director.

11. If it is observed from the balance sheet that the finance given by the bank is
diversified for any purpose other than for business purpose or the capital is withdrawn
18
 substantially affecting the debt equity ratio adversely, enhancement of facility should
not be considered unless the said diversion or withdrawn funds are restored.

The loans and advances proposals above Rs. 50.00 lacs from associate firm of our
existing borrower account will be accepted and scrutinized at branches and forwarded to
zonal offices for further scrutiny and onward submission to Head Office. Thus, these
proposals will not require in principle scrutiny.

III. Sanction of Credit Facilities

1. All the applications for credit facilities above Rs. 15.00 Lacs will be sanctioned/
rejected by the Board as per the existing practice.

2. Delegation of Powers: The board has delegated the powers to sanction facilities
upto Rs. 15.00 lacs to the Managing Director, Rs. 10.00 lacs to the General
Manager/Addl. General Manager, Rs. 7.00 lacs to the DGMs of Western, Central and
Navi Mumbai Zones. Similarly, Board has delegated the powers to the branch AGM,
Sr. Managers and Managers to sanction surety loans upto Rs. 2.00 lacs Cash Credit
limit and Secured Loans upto Rs. 4.00 lacs, Rs. 3.00 lacs, Rs. 2.00 lacs respectively
including housing loans, vehicles, consumer durables, furniture/ fixtures, repairs and
maintenance etc.

3. The statement of the loans and advances sanctioned by the Branch Managers
should be sent to Zonal Office on monthly basis, which in turn will consolidate the
same and send to Head Office for placing the same before the Board. Zonal Offices
should also send monthly statement of loans/CC facilities/ other facilities sanctioned
by them to Head Office for placing the same before the Board. Head office will also
place the statement of credit facilities sanctioned by Addl. General Manager/ General
Manager / Managing Director on monthly basis before the Board.

4. The practice of Noting of sanction of loans was done away with from August
2005. Instead, it was decided to report the sanction made by officials in exercise of
19
delegated powers during the month to the next higher authority in the form of a
monthly report. Zonal Offices will check the sanction of loans by In-charge of
Branches. They would do random checking of 10% of loans sanctioned upto Rs.2.00
lacs and 20% of the loans above Rs. 2.00 lacs. Zonal offices to submit report of
exercise of powers by them together with consolidated statement of loans and cash
credit sanctioned and cash credit accounts reviewed by the branches in their zone to
Loans and Advances Dept., Head Office.

5. If the sanctioning authority sanctions amount mare than the recommendation,

specific reasons for the same should be mentioned in the sanction note.

6. Sanctioning authority is responsible for sanction of loans and advances based on

the facts given by the scrutinizing and recommending authorities. The scrutinizing
officials are responsible for giving full facts in the Scrutiny note. Any hiding of the
facts in scrutiny and subsequent loss to the Bank will attract disciplinary action
against the concerned recommending officials.

7. The sanctioning authorities are also authorized to make subsequent alterations in

the sanction within sanctioning power like change of sureties, change of quotations,
suppliers, exchange of securities etc. as per prevailing practice.

8. The Addl. General Manager/ General Manager / Managing Director at the Head
Office are authorized to make deviations even for the loans sanctioned by the Board
considering the urgency of situation, but it should be later ratified by the Board.

9. The sanction and renewal of fund based and non-fund based Working Capital
limits are valid for a period of 1 year.

10. The applications for reconsideration for sanction or enhancement of facilities are
normally to be entertained after a period of six months from documentation.

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 11. Branch Managers are authorized to exchange the collateral securities of
equivalent amount. The decision shall be noted by the Zonal DGMs. Other cases
should be referred to Head Office where Addl. General Manager/ General Manager /
Managing Director are authorized to take decision based on merit of each case.

IV. Documentation and Release

1. The sanction letter should be prepared and sent by the disbursement authorities
giving all the Terms and Conditions of sanction. The borrower and the sureties should
give a letter accepting unconditionally all the terms and conditions of sanction and it
should be kept alongwith other documents. The copy of sanction letter should be sent
to all sureties.

2. All documents should be executed as per the manual of documentation. It should

be ensured that proper documents are executed with right amount of stamp duty as
per H.O. guidelines issued from time to time. It should be ensured that loanee fulfills
all terms and conditions stipulated by the Board/ sanctioning authorities.

3. All the credit facilities upto Rs. 50.00 lacs will be disbursed at he branches.
Documentation of Pvt. Ltd./Ltd. companies/ Trusts will also be done at branches with
limit upto Rs. 50.00 lacs. Branches shall submit copies of documents for creating
charge with ROC to loans and Advances Dept. within 5 days of execution of
documents.

4. All other facilities will be documented and released at Head office after
compliance of terms and conditions of sanction and adhering to the guidelines issued
from time to time.

5. The releasing of loan should be after the borrower brings the proportionate margin
in the account.

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6. The releasing officials should make the payment directly to the suppliers and
obtain the stamped receipts for the same. Wherever the borrowers have already paid
to the suppliers, the details of such payment should be verified like whether cheque is
debited in the account etc. and satisfy themselves that suppliers have already received
the payment against the order for supply of articles/machinery etc. Cash payment
above Rs. 50,000/- to the supplier cannot normally be treated as payment to the
supplier unless their Chartered Accountant certifies that such payment is made and it
will be accounted in the Books of account of the borrower to be prepared for the year.

The Pay Order should be drawn in favor of “ Bank, Branch name of the supplier
Account No.”.

The pay Order of payment to the supplier should not be given to the loanee. It should
be sent by Regd. A.D./ Speed Post or By deputing staff. The copy of Pay Order be
handed over to the loanee.

7. For Vehicle/Shop/Gala/Machinery loan, reimbursement is allowed if application

is made within one year from the date of purchase only to the extent of payment made
by cheque/ eligible amount. No reimbursement against cash payment is allowed.

8. Normally no payment shall be made to the borrower directly. If the Bank is fully
satisfied that they have made payment to the supplier and the supplier and the
suppliers have already supplied the goods in good condition, the Bank may consider
reimbursement to the borrower after verification of the above.

9. All the Documentation done at Head office will be verified by the Legal Dept. at
Head Office. However, in case of complications, the documentation be prepared and
approved by the Bank’s approved Advocates and Solicitors.

10. The branches and disbursement staff at Head Office should prepare and keep a
certificate in the file duly signed by the Documentation clerk, In-charge of
Disbursement Section as well as the Manager/Sr. Manager/ Asst. General Manager
22
 certifying that all the documents are executed as per the terms of sanctionand specify
if any further compliance is required to be done in this regard. Such further
compliance should be done within reasonable time to ensure that Documentation is
complete and up-to-date in all respect.

11. Branches should at the time of renewal / reviews verify the security documents
and confirm themselves that all security documents are available in the branch.

12. Branches should obtain Letter of Acknowledgement of Debt for all the facilities
including Term Loans atleast once in a year. If only Term Loan is availed, LAD
should be obtained every year preferably for 31st March of the year during the month
of April.

The Legal Dept. shall make necessary changes in the Documentation in consultation
with Bank’s Advocates considering the changes in the Loan Policy.

V. Monitoring, Review and Post Sanction Follow-up:

1. The branches are prime centers for monitoring, review and post sanction follow-
up of all the loans. They will be guided and supported by respective zonal offices.

2. For CC accounts, the branches should obtain the Stock and Debtor statement on
monthly basis and workout DP for all borrower accounts and allow withdrawal in the
account within DP.

3. Where the client has been sanctioned sub limit against FDR within the overall
cash credit limit then branch should add the sub limit against FDR to the DP to
ascertain total DP available to the borrower. It may be noted that when the bank
considers sub limit against FDR, the later becomes a Prime Security for Cash Credit.

23
4. While executing cheque discounting/ against clearing and allowing withdrawals
in the account, the DP shall be observed by the branches so that the facilities does not
go unsecured.

5. The branches should restrict cash transactions in the account as much as possible
as per various guidelines issued in this regard.

6. The branches should renew all the CC accounts atleast one month before expiry
of limit.

7. Branches should visit all loans and CC accounts atleast once in a quarter and
identify the problem areas if any and keep the record in the file/report to higher
authorities.

8. If any of the account going bad is observed immediate steps should be taken in
consultation with the zonal office to rectify the problems in time.

9. In case, stock/debtors statements are not submitted, the branches should visit to
the borrower and get the stock/ book debt statements from the borrower prepared and
work out DP accordingly.

10. The Branches will prepare NPA statements as required by the R.B.I. and advised
by Legal and Recovery Department from time to time.

11. After disbursement of the Term Loan, the branches should visit and verify
whether the machinery/equipment for which the loans are sanctioned are installed and
as per the specification given by them within three months from the date of last
disbursement and keep a certificate in the file. If there is discrepancy immediate
corrective action should be taken. Such visit report should be available in each file
duly signed by the person visited and the In-charge of the Loan Dept. alongwith
Branch Manager.

24
 12. The branches should also closely watch the gradation of standard accounts and
movement of the accounts from one grade to another in the branch and try to have
maximum higher-grade accounts.

13. The present system of review of borrower accounts above Rs. 5.00 lacs will
continue to be done by Zonal Office atleast twice a year.

14. The present system of review of borrower accounts above Rs. 100.00 lacs will
continue to be done Head Office level by Industrial Finance Dept. on quarterly basis.

15. All the accounts outstanding above Rs. 10.00 Lacs at Recovery Dept. shall be
reviewed atleast twice a year and a report should be placed before the Board.

The Board shall constitute a “Loan Monitoring Committee” consisting of some members
of Board and/or all Sr. Executives of the bank who should meet twice a month at the
Head Office, preferably after 2.00 p.m. on alternate Saturdays at the Head Office and
review all such problematic accounts both at recovery dept. and branches and initiate
necessary corrective action. In addition to total review of each account, the committee
would ensure regular submission of stock and book debt statement, drawings within DP
limits, verification of securities by periodical inspection etc.

25
3.5 Industrial Finance Department Scrutiny Note

Industrial Finance Department at head office is taken care of by senior manager/

managers. Their duties in brief in respect of the report and monitoring of loans and
advance are as under: -

A) Determination of working capital for SSI and other manufacturing units –new
proposals with limits above Rs.25.00 lacs and renewal/enhancement above 50.00 lacs.

B) For all Term Loans above Rs.10.00 lacs, projected cash flow statement should be
obtained to ensure generation of adequate funds for repaying the loans and interest
thereon. In case of new term loan in addition to existing term loans, average DSCR to
be calculated to confirm satisfactory repayment as per schedule.

C) For loans for purchase of machineries above Rs.15.00 lacs, Industrial Finance
Department will verify the genuineness of quotation, competitive rates and available
better alternate machineries at cheaper rate as well as better qualities.

D) The eligibility Term Loan for the project/machineries etc. should be calculated as per
the margins prescribed by the Bank and proper scrutiny by the Industrial Finance
Department independently.

E) Genuineness of supplies and reasonable rates quoted by them shall be certified by the
Industrial Finance Department. Industrial Finance Department should also check
infrastructure facilities like electricity, water etc. available with the factory, all
government dues are paid or not etc.

F) Industrial Finance Department shall always update themselves in respect of various

types of supplies of machineries/equipments, pricelist through market
contacts/internet.

26
G) Technical report by Industrial Finance Department is to be given before
branch/zonal offices recommendations in all term loan accounts with limit above
Rs.10.00 lacs.

H) Industrial Finance Department should also give list of machinery observed during
visit. If required, valuation report may be obtained from approval valuer. In case of
new large proposal /existing large borrower, the valuer should accompany the zonal
office DGM/ Industrial Finance manager during the visit.

I) Industrial Finance Department should mention the current market position,

competition to the borrower and his products.

J) Industrial Finance Department should given recommendations based on eligibility,

technical viability, security, project viability, etc.

K) At the time of each disbursement of Term Loan/CC facility above 10.00 lacs,
Industrial Finance Department has to visit site of the borrower for assessment of
progress of work done along with photographs of the site and how much amount to be
disbursed accordingly.

L) In respect of determination of working capital, he will study the production process

cycle of the industrial unit and decide working capital limit based on credit purchases,
credit allowed on sales, minimum inventory levels, raw material, work in progress,
finished goods, etc.

M) Industrial Finance Manager should work out the working capital requirement based
on the production/processing cycle of the SSI and manufacturing units
enjoying/applying limit above Rs. 50 lacs. He should also arrange for photographs of
the unit/machineries.

N) Monitor loans and advances above Rs. 1.00 crore independently by visit on half
yearly basis (twice in a year) and to submit detailed report.
27
O) Analytical study of each sector of the industry in respect of the following:
• Sanction of Industry-wise new loans and advances.
• Movement of NPAs and overdue in each industrial sector and the reasons for
increasing NPAs/overdue in particular sector.
• Similarly, industry-wise reduction in NPAs and overdue report is prepared and if
there is revival of any particular sector/industry, then it should be highlighted.
• Sectorial deployment of credit during the year as well as position as on 31.03.06.

General report highlighting revival/better prospects in some industrial sectors for the
current year so that bank may take necessary steps for deployment of more funds in those
sectors.

28
3.6 Zonal Office report

Zonal office should comment in respect of the following as per the guidelines given in
Annexure-I
1. Capital
Increase: over last year-whether plough back of profit? Addition by introduction of
fresh capital by proprietor/ partner-CA’s certificate- Source of capital (additional).
How they intend to increase it to certain level to make debt equity ratio favorable.
Reduction: whether by main partner-reasons for withdrawal-discrete enquiry to be
made.
2. Reserves
Whether increased or decreased with details.
3. Unsecured Loans
a) Long term loans by family members / relatives / directors and
associates, undertaking from them not to withdraw these loans without
written permission from the bank. These loans would be treated as Quasi
Capital and excluded from current liabilities.
b) Other short term unsecured loans- Repayable on demand to form
current liabilities.
4. Other Liabilities
Whether they include Government dues payable.
5. Fixed Assets
Whether Fixed Asset are finance through working Capital (Diversion of Funds).
6. Current Asset
Command on quality of assets- stock and book debts upto 90 days will only qualify
for Drawing Power (DP).
7. Losses
Reasons for Losses – whether chances of profit making –Is net worth affected.

29
 8. Diversion of Funds
Whether funds transferred to associate accounts for genuine business/ commercial
purpose or utilization for business of associate Account. When these funds were
bought back, If not, whether they would be bought beck or chances for the same are
remote due to siphoning off. CA’s Certificate of bringing funds back to business to be
obtained.
9.
• Performance of the borrower/individual unit compared to past
achievement and projected sales, Gross Profit, Net Profit, Profitability, etc.
State about achievement of past year with previous year- performance till current year
till review- whether they would be in a position to achieve projected sales, gross
profit, net profit, etc.- new work orders, new products, increase in capacity of output/
product-new technology- cost reduction measure, government policies, import
substitutes, of another unit, etc.
• Sales and Purchase from the date of last balance sheet till last month.
Certified by the borrower and also their Chartered Accountant. Whether current year
sales indicate improvement in performance of the unit and tentative sales they would
achieve by the current year-end.
10. Analysis of Balance sheet and Profit and Loss account and interpretation
of ratios
• Current Ratio
Current Asset
Current Ratio =
Current Liabilities
The ratio 2:1 shows excellent liqudity position.
The ratio between 1:1 to 2:1 shows satisfactory liqudity position.
The ratio less than 1:1 shows no liqudity at all.
For Ssi units it should be atleast 1.33:1.

30
 • Debt Equity Ratio
All outside borrower funds
Debt equity Ratio =
Net Worth – Intangible Assets
The follwing benchmark denotes good solvency
2 : 1 ----> Manufacturing units.
3 : 1 ----> Trading units.
3 : 1 ----> SSI units.

• Credit availed on Purchases or Creditors’ Ratio

Creditors X 365
Creditors Ratio =
Purchase

• Credit allowed on sales or Debtors’ Ratio

Debtors X 365
Debtors Ratio =
Sales
Sundry debtors beyond 90 days should not be reckoned for calculation of Drawing Power
(DP).

11. Payment of Statutory Dues

Whether audit report to Balance sheet and Profit and Loss account contains
information about non-payment of dues like sales tax, Income Tax, Excise duty,
electricity charges and other statutory dues etc. Branches should make reference to
various authorities on quarterly basis in this matter and ascertain position by visits to
take authorities.

12. Utilization of cash credit limits

• DBD/SBD Limits

31
No. of bills drawn- Amount during last 12 months. Whether bills are returned/
dishonored. If yes, give details-whether bills drawn on such partner are further
discounted? Are payments of these bills received from drawee?
• Utilization of BG Limit
No. of BGs issued- Amount of BGs. Details of invoked BGs- payment made by
borrower and details of outstanding invoked BG.
• Utilization of Letter of credit Limit (Import/Inland)
No. of L/C developed (payment made by debiting to forced loan under L/C). Payment
made by borrower-Details of outstanding forced loan under L/C.
• Repayment of existing Term Loan

13. RBI Inspection report observation and compliance thereof (if applicable)
• Compliance of deficiencies by client
• Compliance of deficiencies by Branch/Zonal office.
• Reasons for non-compliance.
• Progress/latest position in compliance.

14. Internal and concurrent audit observation and compliance thereof (if
applicable)
• Compliance of deficiencies by client
• Compliance of deficiencies by Branch/Zonal office.
• Reasons for non-compliance.
• Progress/latest position in compliance.
15. Non-compliance of sanction stipulations of board
• Reasons for non-compliance by client.
• Non-compliance by staff/official – reasons for deviations by staff/ officials
and what action zonal office / Head office initiates in the matter.
16. Insurance of stock/machineries hypothecated etc.
Whether adequate insurance is obtained? Whether place of storage of goods is the
same incorporated in insurance policy.
17. Credit Rating/Gradation
32
On the basis of Audited Balance Sheet and Profit and Loss account as on ____
What are the reasons for upward/ downward gradation? What steps the borrower has
promised to take to improve the gradation.
18. Reconstitution of partnership
Whether there is a dispute among partners. Whether the remaining partners are all
family members/ close relatives- whether main partner has retired/ resigned – what
would be impact on business- whether our finance is secured? What is change in
capital- whether retiring partner is willing to stand as surety at least for 2/3 years?
Whether he would continue his capital as unsecured loan on long-term basis?
19. Mortgage of Immovable properties
Full details like flat/gala etc. No. in building/ society- area- market value – by
(valuer) Branch In charge / by whom it is occupied- mortgaged on _______. Whether
mortgage change is recorded with society builder- to affix/ paste mortgage poster-
Present market value as per O.C. No. 66- The description and area should be based on
title Deeds and it should be correctly reported in branch scrutiny note, Branch visit
report and zonal office report.
20. Group Exposure
Enclose combined group Balance sheet to loan policy- 2004-06 and work out
Maximum Permissible Bank Finance (MPBF) of the group to detect diversion of inter
firm / company funds to ensure that bank’s total credit limit to all group accounts are
within group M.P.B.F.
21. Special request of the borrower (if any)

22. Need of working capital Term Loan

23. DSC ratio (for Loans)

Brief particulars of weak financial deviations/deficiencies/ irregularities in the
proposal.
24. Zonal Office Recommendations with justification in details
Justification of each funded and non-funded limits.

25. In view of the above, we recommend following credit limits/ we do not

recommend following credit limits.
33
 Amount Margin
Rs. %
1. Cash Credit ___________________ _______________
2. DBD/ SBD ___________________ _______________
3. Bank Guarantee ___________________ _______________
4. Letter of credit
5. (Import/ Inland) ___________________ _______________
6. Term Loan ___________________ _______________
7. W.C.T.L. ___________________ _______________

Note: - The DGM should not omit any one of the above 1 to 24 points. There must be
specific comment saying that this point is not applicable to borrower or specific comment
be given. Report of all zonal office should be identical and there should not be any
change as far as the standard format of this report. The manner of reporting should be
strictly in conformity with the guidelines given in annexure. Though observations will
differ from case to case, the method of reporting has to be identical. Hence annexure
should be strictly adhered to.

34
3.7 Guidelines for Credit Rating
The weight ages for different parameter are given as under
S.No. Marks
1 Financial Parameters 36
2 Security Prime and Collateral 15
3 Conduct of Account 28
4 Management 10
5 Business and Other Parameters 11
Total 100

A] Financial Parameters
For the reference and Clarifications of financial ratios following clarifications are given

Current Asset
a) Current Ratio =
Current Liabilities

Current Asset - Stock

b) Quick Ratio =
Current Liabilities

All outside borrower funds

c) Debt equity Ratio =
Net Worth – Intangible Assets

d) Net Worth = Capital + Reserves + Accumulated profit – Revaluation Reserves.

e) Capital = Fixed Capital + Current capital + Quasi capital

f) Quasi Capital = that portion of long term loan taken from Directors/Partners and their
family members where undertaking is given that they will not withdraw
the same without the consent of the bank.

35
g) Diversion of funds = Loans and advances given to Directors, their family members,
sister concerns and others for any purpose other than for business purpose out of Bank’s
borrowers funds.

h) Debt Services Coverage ratio (DSCR)

Net profit + Depreciation + Payment towards interest

(Including CC/TL/BD etc.)
DSCR =
Installments + Interest on the loan CC/TL/BD etc. in the year

i) Retention of Profit = Net Profit after Tax – Drawings and dividends

1. For Companies:
Retained Profit = NPAT – Drawings and Dividends
2. For proprietorship & Partnership Concerns:
Retained Profit = Closing Capital – Opening Capital – I.T. of firms and
partners
3. Retention of Profit ( %)
Retained Profit X 100
Net PAT

Debtors X 365
j) Debtors Ratio =
Sales

Creditors X 365
Creditors Ratio =
Purchase

36
 Marks
Financial Parameters (maximum marks 40)
1 Current Ratio 1.33 or above 4
1.17-1.32 3
1.10-1.17 2
Less than 1.10 0
2 Debt Equity Ratio Less than 2.00 4
2.01-3.00 3
3.01-4.00 2
4.01-5.00 1
5.01 or above 0
3 Total Liabilities/ Less than 3.00 4
3.01-4.00 3
TNW
4.01-5.00 2
5.01 or above 0
4 Sales achieved Net or exceeded 4
Upto 90% 3
(compare with targets
80%-89% 2
accepted by bank as 70% - 79% 1
per projections) Less than 70% 0

OR Above 25% 4
(compared with Above 15% upto 25 % 3
increase over Above 5% to 15% 2
previous year if no
Upto 5% 1
projections given )
Constant or Negative 0
5 Net Profit as % of Above 5% 4
Above 3% to 5% 3
sales (projected and
Above 2% to 3% 2
actual) Upto 2% 1
Loss 0
7 Retention of profit 70%-100% 4
40%- 69% 2
(Avg. 2 years)
20%- 39% 1
Less than 20% 0
8 Greater than 2.00 4
1.50 to 1.99 3
37
 a)DSCR(Every 1.25 to 1.49 1
Less than 1.25 0
projected year for
project finance)
b) Diversion of funds No Diversion 4
Minor Diversion 1
(For working Capital
Huge Diversion 0
facilities)
Note: If both are applicable, avg. Marks be given
9 Trend in sales Consistently increasing 4
More or less stable 2
Decreasing 0
1 Trends in Profits Increasing Profits 4
Stable Profits 3
0 (Amount)
Decreasing 1
Losses 0
Security Prime and Collateral (Maximum Marks-15)
1 Security Prime (in More than D.P. 8
Just adequate=D.P. 6
relation to DP)
Upto 10% Below DP 4
Below DP 0
2 Collateral Cover (As 100% and above 7
50%- 99% 5
per the present
20% - 49% 3
market value) Less than 20% 1
No Collateral 0
Conduct of Account (Maximum Marks-27)
1 Submission of Prompt/Regular 4
Late but not less than 1 month 3
monthly security
Late but > 1 month to 3 months 1
statements (last12
Late but > 3 months 0
months)
2 Repayment of Timely- on or before due date (15th of 4
Installment and succeeding Month)
Within 15 days from due date(Last day 3
Interest
of succeeding month)
(CC/TL/WCTLetc.)
After last date of succeeding month 0
3 Overall Operation of Excellent 4
Good 3
the A/c(like regular
Satisfactory 2
overdrawing against Poor 0
clearing, cheque
returns, etc.)
4 Sales greater than 90% 4
38
 Sales and other Sales 80%-89% 3
Sales 70% to 79 % 2
business routed
Sales routed below 70% 0
through us
Note : If CD A/c with other Bank is permitted , the turnover with other
banks to be clubbed with turnover in our Bank.
5 Recoveries of bills No overdue 4
Overdue regularized within 10 days 3
purchased/LC Bills/
from due date
others/ guarantees
Overdue regularized within 1 month 2
Invoked
from due date
Overdue regularized beyond 1 month 1
from due date
Overdue not regularized 0
6 Compliance of Audit No compliance required 4
Major Items Complied 2
and inspection
Compilance Pending 0
requirement/Statutory
Auditors
observations
7 Security Complete and in order 4
Documents incomplete due to valid 3
Documentation
reason
(Mortgage, Noting,
Incomplete or pending 0
Power of Attorney
etc.)
Management (Maximum Marks-10)
1 Promoters Professionally/Technically 5
competent/experienced
Professionally/Technically competent 3
persons employed
Absence of Professionally/Technically 1
competent persons
Active Management Stable-no change in past 3 years (except 5
within family)
Stable-but not more than one change in 3
last 3 years
Frequent change in recent past 1
Business and other parameters (Maximum Marks-11)
1 Business parameters Core/ Approved sectors 2
39
 Sensitive sectors 1
2 Satisfactory Account Above 5 Years 3
3 to 5 years 2
relationship
1 to 3 years 1
New or less than 1 year 0
3 Ind./business Excellent 4
Good 3
prospects
Poor 1
4 Irregular Direct/ No Irregular Direct/ Indirect Liabilities 2
Irregular Indirect Liabilities 1
Indirect Liabilities
Irregular Direct Liabilities 0

Note:
1. The above grades are on liberal terms and will be improved upon in future.
2. If any of the item is not applicable, then mark NA and total marks should be
calculated on proportionate basis i.e. actual marks given have to be divided by
maximum total marks applicable multiplied by 100.

The account shall be graded as under

Grade Marks
AAA Above 90
AA 81 – 90
A 71 – 80
BB 61 – 70
B Upto 60

Secured loans/ cash credit facilities upto Rs. 10.00 lacs

a. Priority Sector Advances 11.00 % p.a.
b. Non-Priority Sector Advances 12.00 % p.a.

Secured Loans/ Cash Credit facilities (above Rs. 10.00 lacs):

The applicable interest rate will depend on the credit rating given to the borrower/
account as indicated in the table given below
Grades SSI and other Builders and Other ( including
40
 manufacturing units Developers/contractors traders)
(% p.a.) (% p.a.) (% p.a.)
AAA 10.5 11.00 11.00
AA 10.75 11.50 11.50
A 11.00 12.00 12.00
BB 12.50 13.00 12.50
B 13.00 14.00 13.00

Notes: -

a. The interest rate for CC and TL will be the same on the basis of gradation.

b. The new clients will be charged interest at 12% p.a. for the first year for both cash
credit and Loan Facilities. Normal gradation will be applicable for the account from the
second year, based on final year balance sheet and profit and Loss Account, etc.

c. In case of default, interest will be charged 14% p.a. till the default continues.

d. For Defaulters in builders/developers/contractors category with “B” grade rating, the

interest chargeable for the period of default will be 15% p.a.

3.8 Time Frame for disposal of loan proposal

The prospective borrower approaching the branch should be advised in detail the
procedural formalities required to be completed by him at the time of issuing the loan
application itself. A list of documents required alongwith loan application form should be
handover to him.

Branch should accept all loan/cash credit application and issue receipt of
acknowledgement immediately. Advise staff not to issue on-dated receipt. Further no
loan file should be returned back to the applicant even though it is not complete in all
respects.

The Timeframe for disposal of proposals is as under:

41
1. After receipt of application, branch should write to the applicant about the
requirements within 3 days of receipt of the application giving him a period of 10
days for completing the requirements.
2. In case of non-receipt of documents within 10 days from despatch of the first letter, a
further period of 10 days be given to complete all the requirements. Thus, a total
period of 23 days will be available to the branch and the applicant. The last date for
compliance by the applicant should be syated specifically in the letters to the
applicant instead of mentioning only 10 days.
3. If the loan could not be sanctioned or rejected by the branch by 23rd day, file should
be forwarded to the zonal office for further action on 24th day.The zonal office will
examine scrutiny notes etc. of the branch and ensure that only genuineand minimum
requiremnts are raised. If found necessary the zonal office will advise the concerned
branch to delete/waive some of the requirements, provided that in the latter’s view
such deletion/waiver may not have material importance from the point of safety and
security of the bank’s advance.
4. After verification of the loan proposal file in respect of the actions initiated by the
branch and response of the applicant, zonal office will write to the borrower to
comply with all the remaining requiremnts within period of 7 days. The zonal office
will thereafter return the file back to the branch for further compliance within 10 days
of receipt.
5. After receipt of the file from the zonal office, the in-charge of the branch will arrange
for further follow-up with the applicantand ensure that all requirements as advisedby
the zonal office are compiled with by the applicantat the earliest. He will thereafter
recommend sanction or rejection of the proposal and send the loan proposal file to
zonal office. Thus, loan proposal fallimg within the delegated powers of the branch-
in-charge. I.e. upto Rs. 4.00 lacs as also upto Rs. 10.00 lacs and falling within the
powers delegated to the zonal Dy. General Manager which have remained pending
beyond the prescribed time limit of 23 days from the receipt of application and in
respect of which the aforesaid procedure has been followed will be sanctioned/
rejected by the zonal Dy. General Manager.

42
6. A similar procedure as to the timeframe for disposal of loan application, will be
followed by branches and the Loans and advances Dept. In respect of proposal for
amount above Rs. 7.00 lacs and upto Rs. 10.00 lacs.
7. The applications/proposals for facilities of higher amounts will continue to be
approved/ rejected at appropriate higher levels i.e. Addl. General Manager/ Managing
Director as at present.
8. Sanctioing of Loans and Advances proposals pending beyond 23 days at branch level
will be viewed as violation of delegated authorities attracting disciplinary action
against the in-charge of the branch.
9. If it is found by the zonal office that branches are not complying even with the
relaxed time schedule as above and there is delay on the part of any branch, the DGM
should write to concerned branch-in-charge and seek his explanation by issuing
memo / showcause.

Benchmark parameter for the purpose of scrutiny/ recommendations and sanction of CC,
TL etc. above Rs. 10.00 lacs.

For Core and For sensitive Category

For Builders and For Civil
General Sector
Developers contractors,iron
and steel traders
etc.
43
Current Ratio 1.33 1.33
Quick Ratio 1.00 1.00 1.00
Debt Equity Ratio 4:1 2:1 3:1
Total Liabilities/TNW 5:1 3:1 4:1
Act.sales/ proj.sales Minimum 90%
DSCR 1.5 or above but not less than 1.25
Margin on prime security As given 50% 40%
Total security 160% 300% 200%
Debtors ratio Maximum 90 days
Creditors ratio Should be less than Debtors ratio
Profit sale > 10% > 10% > 5%

The existing margins as under should continue:-

I. Stock and Book Debts
(Older than 3 months do not qualify for DP stock should be paid
stocks.)
a. For Ssi and Manufacturing and other Priority 25
Sector including retailers and commission
Agents. 40
b. For others
II. a.New machineries and Imported Reconditioned Machineries not 25
used in India ( Import documents required for assessing the value for
TL)

b.Secomd Hand Indian Machines/ Second hand imported machines 50

used in India (Valuation Report by contract engineer is required giving
present value)

c. Big host moulds 40

d.New Contract Equipments 25

III. Gold/Jewellery ornaments 25

IV. Purchase of real estate
a. Shop/ Gala/ Commercial/ Factory 25
b. Land and Building ( Construction) ( In case of 25
44
 manufacturing project only.)
c. Renovation/ repairs of shop/ factory 25

45
 CHAPTER NO. 4

ANALYSIS AND REPRESENTATION OF DATA

Cost of Project and Means of Finance

Cost of Project Rs. Lacs

Land and building development 600.00

Equipment and vehicles 252.50
Furniture and Fitting 45.20
Muncipal Taxes and deposit 18.00

915.70

Means of Finance

Promoter's Contribution 25% 228.93

Loan 75% 686.78

915.70

46
Projected Profit & Loss For the year ended
Rs. In lacs
Year 1 Year 2 Year 3 Year 4 Year 5

Pecent Capacity Utlilization 30 60 65 70 80

Income
Sales & Other Income 2750.00 5000.00 6000.00 6500.00 6800.00

Less:Expenses
Material purchases 1045.00 1900.00 2280.00 2470.00 2584.00
Wages 660.00 1200.00 1440.00 1560.00 1632.00
Factiry overheads 302.50 550.00 660.00 715.00 748.00
Selling & Distribution Expenses 275.00 500.00 600.00 650.00 680.00
Administration Expenses 302.50 550.00 660.00 715.00 748.00

Profit Before Interest &

Depriciation and Tax 165.00 300.00 360.00 390.00 408.00
Less:
Interest 47.30 47.30 47.30 47.30 47.30
Depriciation 119.54 101.63 86.71 74.22 63.75

Profit Before Tax -1.84 151.07 225.99 268.48 296.95

Less: Tax 0.00 45.32 67.80 80.54 89.09

Profit after Tax -1.84 105.75 158.19 187.94 207.87

Balance Forward from last year 0.00 -1.84 53.13 119.06 170.59

Profit available for appropriation -1.84 103.91 211.32 306.99 378.46

Appropriations
Dividend 0.00 20.78 42.26 61.40 113.54
Transfer to reseves 0.00 30.00 50.00 75.00 75.00
Total Appropriations 0.00 50.78 92.26 136.40 188.54
Balance carry forward -1.84 53.13 119.06 170.59 189.92

Balance sheet as on Rs. In lacs

Year 1 Year 2 Year 3 Year 4 Year 5
47
Sources of Funds
Share capital 228.88 228.88 228.88 228.88 228.88
Reserves 0.00 30.00 80.00 155.00 230.00
Net Profit -1.84 53.13 119.06 170.59 189.92
Secured Loans 686.78 549.42 412.07 274.71 137.36
Total 913.82 861.43 840.00 829.19 786.16

Application of funds
Fixed Asset 897.70 778.16 676.53 589.82 515.60
Less: Depriciation 119.54 101.63 86.71 74.22 63.75
Net Fixed Asset a> 778.16 676.53 589.82 515.60 451.85

Current Asset
Sundry Debtors 220.00 350.00 432.00 525.00 561.00
Stock 275.00 484.90 598.18 647.39 657.31
Cash 137.50 250.00 300.00 311.20 340.00
i> 632.50 1084.90 1330.18 1483.59 1558.31
Less:Current Liabilities
Sundry Creditors 166.84 300.00 360.00 390.00 408.00
Bills payable 220.00 400.00 480.00 520.00 544.00
Other Current Liabilities 110.00 200.00 240.00 260.00 272.00
ii> 496.84 900.00 1080.00 1170.00 1224.00

Net Current Asset (b=i-ii) 135.66 184.90 250.18 313.59 334.31

Total (a+b) 913.82 861.43 840.00 829.19 786.16

48
DSCR Calculation Rs. In lacs
Year 1 Year 2 Year 3 Year 4 Year 5

Profit after tax (1) N.A. 105.75 158.19 187.94 207.87

Depriciation (2) N.A. 101.63 86.71 74.22 63.75
Interest on Term Loan (3) N.A. 47.30 47.30 47.30 47.30
Cash Accruals (4) = (1+2+3) N.A. 254.68 292.20 309.46 318.92
Term Loan Installment (5) N.A. 137.36 137.36 137.36 137.36
Interest on Term Loan (6) N.A. 47.30 47.30 47.30 47.30
Total Repayment (7)= (5+6) N.A. 184.66 184.66 184.66 184.66
DSCR (4/7) N.A. 1.38 1.58 1.68 1.73
Average DSCR 1.59

Remark: DSCR is above 1.5. It is acceptable.

49
Ratio Calculation
Year 1 Year 2 Year 3 Year 4 Year 5 Remark
Net Profit Ratio=
N.A. 2.11 2.64 2.89 3.06 Increasing
(PAT / sales)*100
Return on Capital
Employed = Net
N.A. 0.12 0.19 0.23 0.26 Increasing
profit/ capital
employed
Return on
Proprietors' capital = More or less
N.A. 0.34 0.37 0.34 0.32
Net profit/ (capital stable
+Reserves)
Total Liabilities/
5.21 4.65 3.49 2.61 2.10 Decreasing
Total Net Worth
Debt Equity Ratio 3.02 1.76 0.96 0.50 0.21 Decreasing
Debtors Ratio Less than
29 26 26 29 30
90 days
Creditors Ratio Less than
24 23 23 23 23
DTR

50
Working Capital Eligibility Rs. In Lacs
Year 1 Year 2 Year 3 Year 4 Year 5

a. Under Method I
Current Asstes 632.50 1084.90 1330.18 1483.59 1558.31
Less: Current Liabilities 496.84 900.00 1080.00 1170.00 1224.00
Net Current Asstes 135.66 184.90 250.18 313.59 334.31
Less: 25% Net current assets 33.92 46.23 62.55 78.40 83.58
Eligible MPBF 101.75 138.68 187.64 235.19 250.73

b. Under Method II
Current Asstes 632.50 1084.90 1330.18 1483.59 1558.31
Less: Current Liabilities 496.84 900.00 1080.00 1170.00 1224.00
Net Current Asstes 135.66 184.90 250.18 313.59 334.31
Less: 25% current assets 158.13 271.23 332.55 370.90 389.58
Eligible MPBF -22.47 -86.32 -82.37 -57.31 -55.27

c. Under Method III

Sales 2750.00 5000.00 6000.00 6500.00 6800.00
20% of the realisic projeted
sales turnover 550.00 1000.00 1200.00 1300.00 1360.00

Remarks:
The decision of choosing the method is taken by the bank depending on the sector. The
method II is not applicable in this case.

51
 CHAPTER NO. 5

FINDINGS AND SUGGESTIONS

5.1 Findings:

1. The credit rating is not done for new proposals, as there is no financial statements are
available for the same.

2. If the party is constently achieving the highest grade say, ‘AAA’ grade for
continuosly 3-4 years, there is no benefit available for the party apart from the lower
rate of interest.

3. The margin taken for CC,TL is different for different loan proposals. In the branch, it
is printed as 25% only as a general. There is no reference of margin to ensure that it is
taken correctly.

4. In the analysis of financial statement, it is found that the ratio “ Return on capital
employed” is not included in the analysis. This ratio shows the overall profitability of
the firm.

5. In some cases it is found that the method of depriciation and rate of depriciation is
different for same item in different proposals by the different party.e.g. for copmuter
the rate and method of depriciation varies from customer to customer. Due to this, the
customer is manupulating the projected figures in their projected financial statements.
Also it is found in some cases that the item depriciated is not realistic.

6. It is found that, all the documents related to particular loan proposal is kept in one
file. But this may find difficult to access the reports to top management.

52
7. It was found in some cases that the figures of projected sales shown are not realistic
without any investment. The borrower exaggerate the sales figure without any
additional investment for the only purpose of manupulating the figures.

5.2 Suggestions:

1. The bank should done gradation for new proposals also. If the financial statements are
not available, the bank can give rating on the basis of other parameters like security
prime and collateral, Management, business and other parameters etc. This rating may
not be useful for fixation of rate of interest. But on the basis of this the bank can keep
records of the party and can judge these parameters for the next gradation for any
deviation.

2. As the party is consistently achieving highest grade, it reduces the risk of bankruptcy.
This, in turn, reduces the bad debts of the bank. The bank should provide some
concessions to the party apart from the lower rate of interest like some gift vouchers
at the end of last installment, some concessions for next loan etc. This will help the
bank to increase the value of the bank in the minds of cutomers. This may act as a
marketing tool.

3. The magin for CC,TL proposals is different for different proposals. There should be
provided some reference for the margin to ensure that the particular margin is taken
from policy no._______ under the clause no._______. This will help both i.e. top
management to ensure that the paricular margin taken by the executive is correct and
junior management who actully take from the correct source.

4. The ratio “Return on capital employed” is one of the important ratio which shows the
overall profitability of the firm. This also indicates that how efficiently the firm
utilizes its capital. This ratio should give some weightage in the analyisis of financial
statement.

53
5. The depriciation is a non cash expense. Therefore, it may use to manipulate the
projected figures. There should be some restrictions for selecting the method of
depriciation as well as rate of depriciation.

6. There should be separate files for documents or reports required for top management
for easy accesibility and rapid decision-making.

7. There should be strict control on the projected sales figures by considering the factors
like future investment projected etc.

54
 BIBLIOGRAPHY

• Financial Management (4th Edition)

Authors: - Prasanna Chandra

• Credit Policy 2010-11

Abhyuday Co-op. Bank Ltd. (Scheduled Bank)

55
 ANNEXURES
I] Credit Rating:
S. Particulars Actual Marks H.O.
No. by Remarks
Zone
Financial Parameters (maximum marks 40)
1 Current Ratio
2 Quick Ratio
3 Debt Equity Ratio
4 Total Liabilities/ TNW

5 Sales achieved (compare

with targets accepted by
bank as per projections)

6 Net Profit as % of sales

(projected and actual)

7 Retention of profit
(Avg. 2 years)
8 a)DSCR(Every proj.
year for project finance)
b) Diversion of No Diversion
funds (For working Minor Diversion
Capital facilities) Huge Diversion
Note: If both are applicable, avg. marks be given
9 Trend in sales Consistently increasing
More or less stable
Decreasing
10 Trends in Profits Increasing Profits
(Amount) Stable Profits
Decreasing
Losses
Security Prime and Collateral (Maximum Marks-15)
1 Security Prime in More than adequate
relation to DP Just adequate
Inadequate
2 Collateral Cover 100% and above
(As per the present 50%- 99%
market value) 20% - 49%
Less than 20%
No Collateral
3 Collateral Cover Cash Security/FD/Bonds/Insu policy
Type Equitable Mortgage of Busi. premise
Equitable Mortgage of Resi. premise

56
 Second Charge on fixed assets/ mortgage
of open land etc.
No collaterals
Note: In case of multiple sec., give proper weight age as per present M.V.
Conduct of Account (Maximum Marks-27)
1 Sub. of monthly Prompt/Regular
security statements Late but not less than 1 month
(last12 months) Late but greater than 1 month
2 Repayment of Timely within 10 days from due date
Installment Interest Within 30 days from due date
(CC/TL/WCTL Beyond 30 days from due date
etc.)
3 Overall Operation of Excellent
the A/c(like regular Good
overdrawing against Satisfactory
clearing, cheque
Poor
returns, etc.)
4 Sales and other Sales greater than 90%
business routed Sales 80%-89%
through us Sales less than 80%
5 Recoveries of bills No overdue
purchased/LC Bills/ Overdue regularized within 10 days from
others/ guarantees due date
Overdue regularized within 1 month from
due date
Overdue regularized beyond 1 month from
due date
Overdue not regularized
6 Compliance of No compliance required
Audit and Prompt within 10 days
inspection Within 1 month
requirements After 1 month
Not complied since initiated
7 Security Complete and in order
Documentation Documents incomplete due to valid reason
(Mortgage, Noting,
Power of Attorney etc.) Incomplete or pending
Management (Maximum Marks-8)
1 Promoters Professionally/Technically
competent/experienced
Professionally/Technically competent
persons employed
Absence of Professionally/Technically
competent persons
Active Stable-no change in past 3 years
Management (except within family)
Stable-but not more than one change
in last 3 years
Frequent change in recent past
57
Business and other parameters (Maximum Marks-10)
1 Business Core/ Approved sectors
parameters Sensitive sectors
2 Satisfactory 10 years and above
Account 6 to 10 years
relationship 1 to 5 years
New or less than 1 year
3 Ind./business Excellent
prospects for and Good
effect of expected Poor
Govt. changes in
policy
4 Irregular Direct/ No Irregular Direct/ Indirect Liabilities
Indirect Liabilities Irregular Direct/ Indirect Liabilities

Prepared By Accountant/Asst. Accountant Branch Manager

For Zonal office Use
Received on ________________

S.No. Marks Marks Grade Rate of

obtained Interest
1 Financial Parameters 40
2 Security Prime and Collateral 15
3 Conduct of Account 27
4 Management 8
5 Business and Other Parameters 10
Total 100

Accountant Dy. General Manager

________________zone
sent to Head Office on_____________________

For Head Office Use

Received on:_________________
Remarks :____________________
Rate of Interest fixed: __________
Reason for deviation if any:

Asst. General Manager Addl. General Manager Managing Director

Loans and Advances
58
 II] Zonal Report

M/S Branch

Zonal Office report

1. Brief History of Proprietor / Partner / Director & Firms: _______________________

____________________________________________________________________
____________________________________________________________________
____________________________________________________________________
___
2. Details of Associate Accounts______ ______________________________________
____________________________________________________________________
____________________________________________________________________
____________________________________________________________________
___
3. Product Dealt/ Manufactured______ _______________________________________
____________________________________________________________________
____________________________________________________________________
____________________________________________________________________
___
4. Capital ______________________________________________________________
____________________________________________________________________
____________________________________________________________________
____________________________________________________________________
___
5. Reserves ____________________________________________________________
____________________________________________________________________
____________________________________________________________________
__
6. Unsecured Loans ______________________________________________________
____________________________________________________________________
____________________________________________________________________
__
7. Other Liabilities ______________________________________________________
____________________________________________________________________
____________________________________________________________________
__
8. Fixed Assets _________________________________________________________
____________________________________________________________________
____________________________________________________________________
__
9. Current Asset ________________________________________________________
____________________________________________________________________
____________________________________________________________________
__
59
10. Losses ______________________________________________________________
____________________________________________________________________
____________________________________________________________________
__
11. Diversion of Funds _____________________________________________________
____________________________________________________________________
____________________________________________________________________
__
12. Performance of the borrower _____________________________________________
____________________________________________________________________
____________________________________________________________________
__
13. Analysis of Balance sheet and Profit and Loss account and interpretation of ratios
• Current Ratio ___________________________________________________
______________________________________________________________
______________________________________________________________
__
• Debt Equity Ratio _______________________________________________
______________________________________________________________
______________________________________________________________
__
• Creditors’ Ratio _________________________________________________
______________________________________________________________
______________________________________________________________
__
• Debtors’ Ratio __________________________________________________
______________________________________________________________
______________________________________________________________
__
14. Comment on report of Industrial Finance Department _________________________
____________________________________________________________________
____________________________________________________________________
__
15. Payment of Statutory Dues ______________________________________________
____________________________________________________________________
____________________________________________________________________
__
16. Utilization of cash credit limits ___________________________________________
____________________________________________________________________
____________________________________________________________________
__
17. RBI Inspection report observation and compliance thereof ____________________
____________________________________________________________________
____________________________________________________________________
__
18. Internal and concurrent audit observation & compliance thereof _________________
____________________________________________________________________
60
 ____________________________________________________________________
__
19. Non-compliance of sanction stipulations of board ____________________________
____________________________________________________________________
____________________________________________________________________
__
20. Insurance of stock/machineries hypothecated etc. _____________________________
____________________________________________________________________
____________________________________________________________________
__
21. Credit Rating _________________________________________________________
____________________________________________________________________
____________________________________________________________________
____________________________________________________________________
___
22. Reconstitution of partnership _____________________________________________
____________________________________________________________________
____________________________________________________________________
__
23. Mortgage of Immovable properties _______________________________________
____________________________________________________________________
____________________________________________________________________
__
24. Group Exposure ______________________________________________________
____________________________________________________________________
____________________________________________________________________
__
25. Special request of the borrower (if any) ____________________________________
____________________________________________________________________
____________________________________________________________________
__
26. Need for working capital Term Loan ______________________________________
____________________________________________________________________
____________________________________________________________________
__
27. DSC ratio ___________________________________________________________
____________________________________________________________________
____________________________________________________________________
__
28. Zonal Office Recommendations with justification in details ____________________
____________________________________________________________________
____________________________________________________________________
____________________________________________________________________
____________________________________________________________________
____________________________________________________________________
____________________________________________________________________
____________________________________________________________________
61
____________________________________________________________________
____________________________________________________________________
____________________________________________________________________
____________________________________________________________________
____________________________________________________________________
____________________________________________________________________
____________________________________________________________________
____________________________________________________________________
_______________

Assistant Accountant/ Accountant Dy.General Manager

Name Name

Date Date

62