Final Sip Report

A REPORT
ON
“TO UNDERSTAND AND ANALYZE THE SYSTEM OF

CREDIT APPRAISAL AND RISK ASSESSMENT AT
STATE BANK OF INDIA”
By
Neelam S. Mandowara
10BSPHH010444
IBS Hyderabad
IBS Hyderabad 2010-2011
A REPORT
ON
“TO UNDERSTAND AND ANALYZE THE SYSTEM OF

CREDIT APPRAISAL AND RISK ASSESSMENT AT
STATE BANK OF INDIA”
By
Neelam S. Mandowara
10BSPHH010444
A report submitted in the partial fulfillment of

The requirement of
MBA Program of
IBS Hyderabad
Beneficiary:
STATE BANK OF INDIA
MID-Corporate Group
Regional Office, Ahmedabad
Date of submission 13 May 2011
AUTHORIZATION
This project was undertaken at State Bank of India, MID-Corporate Group, Regional Office
(MCGRO), and Ahmedabad from February 14th to May 21th, 2011 as a Special Assignment for
summer internship project in management for the partial fulfillment of the MBA Program at
ICFAI Business School, Hyderabad
Date: 13 May 2011
Beneficiary:
1. Mr. J. Karthikeyan , DGM(Sales Hub),SBI MID-Corporate Group, Regional Office,

Ahmedabad
2. Mr. Anand Singh, chief manager (CPC), SBI MID-Corporate Group, Regional Office,
Ahmedabad
3. SBI MID-Corporate Group, Regional Office, Ahmedabad
STATEMENT OF PRIVACY
This report is prepared as a part of the academic curriculum of MBA course offered by ICFAI
Business School, Hyderabad and is solely intended for the purpose of serving as a reference to
the officials of SBI- MCG Regional office, Ahmedabad. The same should not be used by anyone
for any other technical/legal/commercial purpose.
No part of the report should be either made accessible to or used by any official out side the
SBI-MCG Regional Office, Ahmedabad, without prior authorization by the person in-charge of
the report.
ACKNOWLEDGEMENT
I take this opportunity to humbly express my sincere thanks to all those concerned with my
project titled “To Understand and Analyze the System of Credit Appraisal and Risk Assessment
at State Bank of India”.
I express my deep sense of gratitude to Mr. Kaushik Bagchi, General Manager, MCGRO and
Mr. J. Karthikeyan, DGM (SH), SBI MID-Corporate Group, Regional Office, Ahmedabad for
providing me the opportunity to work at State Bank of India- MID-Corporate Group for my
Summer Internship Program.
I am obliged to Mr. Anand Singh, Chief Manager (CPC), and my company guide, without his help
I may well have not completed the project satisfactorily. His invaluable guidance has proved to
be a key to my success in overcoming difficulties faced during the course of project work.
I am also indebted to Miss. Nidhi Lakahni, Credit Analyst (CPC), who has always encouraged me
to carry out innovative tasks, to critically analyze the cases and gave her valuable inputs as and
when required.
I would also like to show my appreciation to whole staff of State Bank of India, MID-Corporate
Group, Ahmedabad for this their help and support.
I express my deep feelings of gratitude to Prof. D.S. Chary, ICFAI Business School, Hyderabad
and my faculty guide for motivating me at every step of the project and guiding me the right
direction.
With Regards
Neelam S. Mandowara
10BSPHH010444
EXECUTIVE SUMMARY
I Neelam S. Mandowara pursuing my MBA at ICFAI Business School, Hyderabad and as a part
of academic curriculum, I have done my 14-week summer internship at State Bank of India
MID-Corporate Group, Ahmedabad Region.
The project instructed was to “Understand and Analyze the System of Credit Appraisal and Risk
Assessment at State Bank of India”; the task was accomplished by practical exposure of the
process followed by the Bank.
Objective of the Project

1. To understand the process of Credit Appraisal followed at State Bank of India.
2. The project report can be used by State Bank of India MID-Corporate Group as guide for
novice.
3. Evaluation of the Credit Appraisal Process and thereby giving Recommendations to the bank
for improving it.
Background
 India being a country with wide array of resources has great business opportunities owing to
that business flourished in India somewhere in 17th century with the growth in industries fund
requirements of enterprises were increasing and hence lead to the invention of a proper
banking system in year 1786 since than banks are backbone to the growth and expansion of
industries.
 State Bank of India came to existence in year 1955 and since than it is the largest bank of the
country with present asset base of $352 billion and $285 billion in deposits, it is a regional
banking behemoth and is one of the largest financial institutions in the world. It has a
market share of about 20% among Indian commercial banks in deposits and loans.
 The MID-Corporate Group of SBI was formed as a part of business process reengineering ,
bank provides both fund based and non fund based credit to its customers by effectively
scrutinizing the borrower and hence, deciding upon the limits to be sanctioned
 Facilities given by bank to its customers includes working capital loans, term loans, letter of
credit, bank guarantee, export packing credit , foreign bill discounting etc. hence covering
both inland and export finance requirements of the enterprise.
 Hence the whole project report is concentrating mainly on domestic finance owing to the
short span of internship.
Methodology
1. Understanding and Evaluation of the Credit Appraisal Process is done by working on live
projects and hence based on the analysis and daily observations the whole project report is
drafted.
2. The credit requirements of the company are assessed using the Balance Sheet & Income
Statement, Ratio analysis (Leverage, Liquidity & Profitability ratios). Apart from this, various
articles from journals, magazines, newspapers, etc have been referred to understand the
prospects of the Industry in which the company is operating.
3. A number of research articles by various scholars have been studied to understand and get
more knowledge about the topic.
Limitations of the Study
1. The project is dependent upon primary data provided by the bank. Since most of it is
confidential in nature, trainees are not allowed to use it for the report. Hence,
hypothecated values are mentioned in the project.
2. The use of secondary research is less since the project is based more on the primary
research and the observations made on day to day activities of the Bank (Mid Corporate
Group).
3. Wide ranges of products are provided to customers at MCGRO but owing to the tenor of
internship export finance is not discussed and analyzed in detail.
Table of contents
Cover Page………………………………………………………………………………………….. I
Title Page…………………………………………………………………………………………….. II
Authorization………………………………………………………………………………………. III
Statement of Privacy…………………………………………………………………………… IV
Acknowledgements…………………………………………………………………………..... V
Executive Summary…………………………………………………………………………….. VI
1. Introduction……………………………………………………………………………. 01
1.1 Objectives…………………………………………………………………………… 01
1.2 Limitations………………………………………………………………………….. 02
1.3 Methodology………………………………………………………………………. 02
2. Banking Industry in India………………………………………………………… 03
3. Company Profile…………………………………………………………………….. 06
 About State Bank of India……………………………………………………. 06
 SBI MID-Corporate Group……………………………………………………. 07
4. Theoretical background of credit appraisal……………………………… 10
 Credit………………………………………………………………………………….. 10
 Why Credit from Banks……………………………………………………….. 10
 Cardinal Principles of Lending……………………………………………… 10
 Credit Appraisal ………………………………………………………………….. 11
 Loan Policy of State Bank of India………………………………………… 12
 Steps of Credit Appraisal Followed State Bank of India………… 13
5. Types of Facilities……………………………………………………………………. 14
 Working Capital Loan…………………………………………………………… 15
 Term Loan Financing……………………………………………………………. 18

 Letter of Credit……………………………………………………………………. 21
 Bank Guarantee………………………………………………………………….. 26
 Stand By Line of Credit………………………………………………………… 28
6. Credit Monitoring Arrangement……………………………………………… 29
7. Credit Risk Assessment…………………………………………………………… 35
 What is Risk…………………………………………………………………………. 35
 Types of Risk and Risk Management…………………………………… 35
 Credit Risk Assessment Model at State Bank of India………….. 38
8. Pricing…………………………………………………………………………………….. 49
9. Proposal Writing…………………………………………………………………….. 51
 AS Format……………………………………………………………………………. 51
10.Sanctioning Authorities …………………………………………………………. 66
11.Findings & Conclusion…………….………………………………………………. 68
 Findings………………………………………………………………………………… 68
 Conclusion……………………………………………………………………………. 69
12.Recommendation…………………………………………………………………… 70
13.References……………………………………………………………………………… 71
INTRODUCTION
The project is all about the process of credit appraisal that is right from the time when
enterprises come for the request of loan to final disbursement of loan. The process of Credit
Appraisal passes through various stages which includes analysis of financial statements,
preparation of Credit Monitoring Arrangement (CMA followed by ratio analysis and then risk
rating is done known as Credit Risk Assessment (CRA) at SBI, after scrutinizing the credibility of
the borrower and success of the project proposed a loan sanctioning report known as Proposal
is drafted and passed on to the appropriate authorities for sanction and approval.
At MID-Corporate group of State Bank of India, projects having fund based requirement of
above 10 crores or the turnover of the enterprise is above 50crores, any of the two parameters
should be satisfied in order to qualify the loan sanctioning process under the governing powers
of MID-Corporate group.
The main focus of the project is to study about the system adopted by State Bank of India,
Being the largest bank of India the method and structure adopted by the bank is unique and
credible, as many private and public sector banks have adopted this model for appraisal
especially the risk assessment model of bank is very efficient and effective such a system has
protected bank from major defaulting and financial crisis.
Objectives of the Project

1. To understand the process of Credit Appraisal followed at State Bank of India.
2. Assessing the Short Term and Long Term finance requirements (both fund based and non-
fund based) of enterprises.
3. The project report can be used by State Bank of India MID-Corporate Group as guide for
novice.
4. To understand the rationale behind various guidelines and policies of State Bank of India.
5. To understand the organization culture and get familiar with the corporate world.
6. Evaluation of the Credit Appraisal Process and thereby giving Recommendations to the bank
for improving it.
Limitations of the Study

1. The project is dependent upon primary data provided by the bank. Since most of it is
confidential in nature, trainees are not allowed to use it for the report. Hence,
hypothecated values are mentioned in the project.
2. The use of secondary research is less since the project is based more on the primary
research and the observations made on day to day activities of the Bank (Mid Corporate
Group).
3. While preparing CMA various assumptions are made for the estimations and projections
which depend upon the person doing the calculations and hence can lead to slight
variations in results.
4. In Credit Risk Assessment there are various subjective criteria’s so it depends upon the
person doing the analysis how he rates these subjective parameters so it can lead to some
discrepancy in the ratings.
5. The process of appraisal slightly defers from the type of loans hence it will be difficult to
standardize the whole process.
6. Industry analysis is done by individuals hence the way an individual perceives a particular
sector the other one may not perceive in the same way hence it is also a kind of limitation.
7. Wide ranges of products are provided to customers at MCGRO but owing to the tenor of
internship export finance is not discussed and analyzed in detail.
Methodology
1. Understanding and Evaluation of the Credit Appraisal Process is done by working on live
projects and hence based on the analysis and daily observations the whole project report is
drafted.
2. The credit requirements of the company are assessed using the Balance Sheet & Income
Statement, Ratio analysis (Leverage, Liquidity & Profitability ratios). Apart from this, various
articles from journals, magazines, newspapers, etc have been referred to understand the
prospects of the Industry in which the company is operating.
3. A number of research articles by various scholars have been studied to understand and get
more knowledge about the topic.
Banking Industry in India

 Bank is a financial organization that has functions like to borrow money from the people
and pays interest to them on their deposit, to lend money to the enterprises for productive
purposes and charge interest from them.
 According to Indian Banking Regulation Act of 1949 the term function of a bank is defined
as “Accepting for the purpose of lending all investment of deposits, of money from the
public, repayable on demand or otherwise and withdrawal by cheque, draft or otherwise"
and the term Banking Organization is defined as "Any company which transacts banking
business in India."
 Banking in India took its birth somewhere in the first decade of 18th century with the
establishment of The General Bank of India in 1786, which was followed by Bank of
Hindustan. But due to some reasons both of them didn’t flourished well and hence are no
more in existence.
 The oldest bank which still exists in India is ‘The State Bank of India’ which was initially
established as "The Bank of Bengal" in Calcutta in June 1806. A couple of decades later, i.e.
in 1805 foreign banks like Credit Lyonnais started their Calcutta operations. At that point of
time, Calcutta was the most active trading port, chiefly due to the trade with the British
Empire, and due to which banking activity took roots there and prospered well.
 The first fully India owned bank was Allahabad Bank, which was established in 1865. By the
1900s, the market expanded with the establishment of banks such as Punjab National Bank
in Lahore and Bank of India in Mumbai, both of these banks were founded by private
owners.
 The Reserve Bank of India formally took the responsibility of regulating the Indian banking
sector from 1935 and after India's independence in 1947; The Reserve Bank was
nationalized and given broader powers.
 The Reserve Bank of India is the supreme monetary and banking authority in the country
and has the responsibility to control the banking system in the country.
 On July 19th 1969, 14 Major Banks of the Country were nationalized and on 15th April 1980
six more commercial private sector banks were also taken over by the government.
 The Indian Banking industry is governed by the Banking Regulation Act of India 1949. The
industry can be classified into two major categories, non-scheduled banks and scheduled
banks.
 Schedule Banks are those, which are referred to Second Schedule of RBI Act, 1934. These
are the banks which have paid-up capital and reserves of an aggregate value not less than 5
lacks and Non-Schedule Banks are those, which are not mentioned in Second Schedule of
RBI Act, 1934.
 The figure below shows the structure of Scheduled Banks in India.
(6)
 The pace of development for the Indian banking industry has been tremendous over the
past decade. As the world reels from the global financial meltdown, India’s banking sector
has been one of the very few to actually maintain resilience while continuing to provide
growth opportunities, a feat unlikely to be matched by other developed markets around the
world.
Company Profile of State Bank of India
About State Bank of India
 The origin of State Bank of India set its roots in year 1806 when Bank of Calcutta (also
known as Bank of Bengal) was established. In 1921, the Bank of Bengal and two other
presidency banks (Bank of madras and Bank of Bombay) were amalgamated to form the
Imperial Bank of India.
 In 1955, in controlling interest the Imperial Bank of India was acquired by the RBI and State
Bank of India came into existence by an act of parliament, as a successor to the Imperial
Bank of India.
 Today, State Bank of India (SBI) has spread its arms around the world and has a network of
branches spanning all time zones. SBI’s International Banking Group delivers the full range
of cross border finance solutions through it four wings:
Domestic Division
Foreign Offices Division
Foreign Department
International Services division
 SBI provides a range of banking products through its vast network of branches in India and
overseas, including products aimed at non-resident Indians (NRIs). The State Bank Group,
with over 16,000 branches, has the largest banking branch network in India. It also has
around 130 branches overseas. With an asset base of $352 billion and $285 billion in
deposits, it is a regional banking behemoth and is one of the largest financial institutions in
the world. It has a market share of about 20% among Indian commercial banks in deposits
and loans.
 The Bank is also in the process of providing complete payment solution to its clientele with
its over 21000 ATMs, and other electronic channels such as Internet banking, debit cards,
mobile banking, etc.
 The State Bank of India Group includes a network of 5 baking subsidiaries and several non-
banking subsidiaries offering merchant banking services, fund management, factoring
services, primary dealership in government securities, credit cards and insurance.
 The Bank is forging ahead with cutting edge technology and innovative new banking
models, to expand its Rural Banking base, looking at the vast untapped potential in the
hinterland and proposes to cover 100,000 villages in the next two years.
 SBI is also focusing at the top end of the market, on whole sale banking capabilities to
provide India’s growing mid / large Corporate with a complete array of products and
services. Bank is consolidating its global treasury operations and entering into structured
products and derivative instruments.
 Today, the Bank is the largest provider of infrastructure debt and the largest arranger of
external commercial borrowings in the country. It is the only Indian bank to feature in the
Fortune 500 list.
SBI MID-Corporate Group
 Mid Corporate Group is a Strategic Business Unit (SBU), created as part of Business Process
Re-engineering (BPR) within the Bank to focus and aggressively market in the Mid Corporate
sector.
 Mid Corporate Group was incorporated in the year 2004 and has 8 Regional offices all over
India (known as MCGRO).
 Following are the eligibility criteria for a customer to avail services for loan under the
governing power of SBI-MCG:
Turnover of the enterprise should be between `50 crores and `350crores.
The amount of fund based and non fund based exposure should be at least `10crore
 The Bank’s Mid Corporate Group offers a wide array of client focused products and services
to take care of overall banking requirements of the Mid-Corporate clients.
 The Mid Corporate Group is headed by Dy. Managing Director (DGM) and Group Executive
(MC). The Chief General Manager (MCG) is in charge of Mid Corporate Regional Offices
(MCROs) which are all headed by General Managers under whom the Branches of the
Group function.
 Organizational Structure at SBI MID-Corporate Group
GM and DGM are at the top of pyramid and they are the main decision making
authorities. DGM also administers the whole functioning of the credit processing cell.
AGMs have administrative as well as credit appraisal tasks such as examination of
proposals submitted by team leaders, CRA validation, handling restructuring issues etc.
CMs are team leaders and there task is to facilitate the process of credit appraisal by
guiding and motivating the credit analysts to accomplish the task effectively.
Bottom of pyramid consists of the credit analyst, who carries out the whole process of
credit appraisal.
 The following are some of the major facilities provided by bank:

1) Working Capital loan (Cash Credit)
2) Term Loan (Project Finance)
3) Export Packing Credit/Pre shipment credit in Foreign Currency/Foreign Bill discount
Limits
4) Bank Guarantee (Non-Fund Based)
5) LC (Non-Fund Based)
6) Stand by Limit of Credit (SLC)
 At SBI MID-Corporate the Pre-Sanction Process involves following:

Appraisal & Recommendations
Assessment
Sanction
 At SBI MID-Corporate the Post-Sanction Process involves following:

Follow up
Supervision
Monitoring & Control
Theoretical Background of Credit Appraisal
CREDIT
The word ‘credit’ comes from the Latin word ‘credere’, meaning ‘trust’. When lender transfers
his wealth to a borrower who has agreed to pay later, there is a clear implication of trust that
the payment will be made at the agreed date. The credit period and the amount of credit
depend upon the degree of trust.
Why Credit From Banks

 The most important variables of an economy are the consumption demands of the vast
population and the supply of machinery to meet this demand and also the modern
economy is driven by technology. Hence, in present scenario the total output by industrial
and non-industrial sectors is very huge and the finance requirement of which cannot be met
by an industrialist all alone so comes the role of commercial banks as credit provider to the
industry.
 Augment of resources to set-up a manufacturing facility i.e. term credit repayable over a
specified period of time and the working capital loan which is required to finance the
working capital cycle
Cardinal Principles of Lending
1. Safety
The borrower must repay the loan amount with interest as per the loan agreement;
the ability to repay the loan depends upon the borrower’s capacity and willingness
repay.
The lending banker ensures this by satisfying himself about the adequacy and quality
of the asset charged, and also whether the business is viable enough to earn
sufficient margins to pay the interest and generate profits to repay the debt.
2. Liquidity
Commercial banks lend funds to the borrowers through long term and short term
deposits made by the customers of the bank which are repayable on demand or
over short to long periods.
So, an unusual proportion of long-term loans in a bank’s books may lead to an asset-
liability mismatch and a liquidity crisis. Generally to avoid such situations banks are
restricting long term lending to the extent of one third of their advances portfolio.
3. Profitability
Banks lend funds to earn interest out of which they pay interest on deposits, incur
staff cost, other operational expenses and distribute dividends to the shareholders.
Hence, spread over borrowing rate and lending rate should be adequate.
So, the rate of interest on lending varies according to the degree of risk involved in
lending to various classes of borrowers. This is mainly based on internal rating
factors derived from business and industry risk factors, financial risk and
management risk etc.
These three principles are pillars for success and smooth functioning for any bank and hence a
balance between all these has to be maintained.
Credit Appraisal
 It is the process through which banks decides on various issues before lending money to the
corporate, it can be defined as the process in which the decision maker makes an attempt
to find answers to some basic questions like:
1. Whether the need by the entrepreneur is justified
2. Whether the requirement of funds estimated will be serviced
3. Whether the product of the bank supports the requirement
 Lending bankers usually compute the credit requirements after undertaking a structural
analysis of the business and nature of business by applying various tools like audited and
projected financials, ratio analysis, margin assessment etc. having decided on that the
proposal, as a reasonable and acceptable business risk, is a bankable proposition.
 The next step involves assessing the nature and extent of the proposed exposure. The bank
provides a range of debt instruments including all types of term and working capital
facilities, which can be structured either as fund based or non-fund based or a combination
of both.
Loan Policy of State Bank of India

 SBI’s Loan Policy is directed towards fulfilling the Bank’s vision “Customer first and first in
customer satisfaction”. Loan Policy is aimed at accomplishing Bank’s mission to create
products and services that help their customers to achieve their goals. Loan Policy applies to
all domestic lending. SBI’s Loan Policy is reviewed once in a year and is aligned with the
chairman’s Policy Guidelines.
 The Policy establishes a commonality of approach regarding credit basics, appraisal skills,
documentation standards and awareness of institutional concerns and strategies, while at
the same time leaving enough room for flexibility and innovation.
Steps of Credit Appraisal at State Bank of India
Receipt of application for loan from the client
Submission of project report and required financial details
Thorough study of the documents submitted by the client
Collecting information about the company & the promoters
Preparation of Credit Monitoring Arrangement (CMA)
Ratio Analysis
Credit Risk Assessment (CRA)
Drafting of final project proposal
Proposal is submitted to concerned authorities for sanction
Conveying sanction of credit limits and acceptance of term and conditions of sanction.
Suitable documentation
Disbursement of loan
 The above chart shows the whole process of credit delivery carried out at SBI; however, this
flow varies from banks to banks. Different banks have their own formats and may differ
marginally in credit delivery.
 SBI which is country’s largest lender, this is the normal flow which is followed. The process
may vary marginally for the type of facilities involved, but more or less this is the standard
set for credit delivery.
 In the above chart first and last two steps are carried out at branch level with the help of
relationship manager while other than this all the steps are carried out by MCGRO.
TYPES OF FACILITIES
 There are basically two heads under which a loan sanctioned to any corporate entity can be
classified as shown below with the subdivisions:
1. Fund Based
Working Capital loan
Term Loan
Stand By Line of Credit
2. Non-Fund Based
Letter of Credit
Bank Guarantee
 Fund based requirements supports the industry/corporate to meet their funding

requirements for working capital finance or towards acquiring fixed assets etc. Hence,
Funds deployed in a business enterprise can be broadly classified into two components viz.
fixed capital and working capital.
 Fixed capital is invested in fixed assets (capital assets), through which enterprises engages
for manufacturing of goods/ products for sale /acquire assets for providing services and
generate profits. To meet such requirement banks offer the product called Term loans,
which are available for a period not less than 3 years whereas the loans provided for a
period of one to three years, are classified as Demand Loan.
 On the other hand, working capital is deployed in purchasing the items, which are
transformed into saleable goods by the production process so to meet this day to day
requirement banks offer working capital loan which is considered to be a short-term loan
and has to be renewed every year.
 Hence, we can say that the assets representing working capital rapidly convert from one
form to another in short period of time (max. one year)while this is not the case with the
fixed capital, the cash conversion time in case of fixed assets is quite large.
 Besides meeting the credit requirement of the borrowing enterprise by way of fund based
credit facilities, banks also cater to the non-fund based requirements of their clients.
 The fund based facilities provided by banks require immediate outlay of funds which must
be provided beforehand whereas the non-fund based facilities are essentially in the nature
of promise made by banks in favour of a third party to provide funds on behalf of their
clients if certain situations emerge or certain conditions are fulfilled. These non-fund based
facilities may be in the nature of bank guarantee or letter of credit issued by banks.
Working Capital Loan
The term working capital refers to the current assets holding of an enterprise. For
manufacturing enterprise therefore, the average levels of holding of raw materials, goods in
process, finished goods, receivables, cash and other current assets together constitute the
working capital.
Operating Cycle Concept of Working Capital

 The operating cycle concept of working capital envisages measurement of the average time
taken by an enterprise in manufacturing the goods and selling them for cash so that the
funds can be deployed for starting other batch of production.
 The figure below shows the operating cycle or working capital cycle
RM
Cash SFG
Operating
Cycle
Rec. FG
Cash is required to purchase the raw materials, a manufacturing enterprise ensures that
there should always be a minimum level of stock of raw material, which takes care of
regular demand as well as any abrupt discontinuity in demand or supply; these raw
materials are then pressed into production.
The processing time depends on the nature and specification of the final product. In the
course of processing, the enterprise may generate stock of semi-finished goods in the
course of production now, when semi finished goods finally rolled out as finished goods
these are stored till sale of goods as well as the process of delivery takes sometime, the
enterprise may have to ensure that a minimum level of finished goods always remains
available to meet the unforeseen demand.
A portion of sale proceeds may remain locked for sometime in form of receivables and
on expiry of credit period they are realized. Thus, every rupee invested in current assets
at the beginning of the cycle comes back to the promoter with the profit element added
after a lapse of specific time period and this length is known as working capital cycle.
Hence, as the funds are locked in the cycle the enterprise requires funding from banks
for smooth functioning of their day to day activities.
Assessment of working capital loan
Fixed Assets
Long-Term Liabilities
Current Assets
Current Liabilities
 The above figure is showing the block diagram of balance sheet where the left hand side
represents the liabilities/sources of funds and right hand side represents Assets/Application
of Funds. Long-term liabilities include equity capital, retained profits, term loans and
unsecured loans while current liabilities include creditors, working capital bank finance and
other current liabilities.
 All the short-term sources are used to fund the current assets and the difference between
current assets and current liabilities known as net working capital is funded by long-term
sources which can be through internal cash accruals etc. as depicted clearly from the figure
above.
 It is believed that bank credit should be the last resort which should be tapped only after all
internal and external sources of funding working capital requirements of the enterprise are
exhausted, Hence, banks lend only a portion of working capital gap (WCG), which is the
value of the acceptable level of current assets after netting off the other sources of funding
working capital requirements.
 Hence, method of computation Assessed Bank Finance (ABF) is adopted by the banks, there
are various methods for the computation of the same as proposed by Tandom and Nayak
committee out of which the method adopted by State Bank of India is given as
ABF = WCG – (actual/projected) NWC
Where,
ABF= Assessed Bank Finance
WCG= Working Capital Gap = Current Assets - Other Current Liabilities
NWC= Net Working Capital = Current Assets - Current Liabilities
This is calculated in the CMA itself which will be discussed later.
 The financing of Working capital also depends upon some set benchmark for the ratios that
is current ratio should at least be 1.2 for trading companies and 1.33 for rest and gearing
ratio (TOL/TNW) should not exceed 5 for trading and 3 for others. In absence of the same
deviation has to be approved by the appropriate authority
Term Loan Financing
 A term loan is provided for acquisition of Long Term assets such fixed assets, Long Term
Working Capital Margin as well as to acquire capital goods; which are required to be repaid
out of cash generations from operations over a period of time. Repayment of term loans is,
therefore, required as per schedule planned beforehand.
 The scope and approach in providing term credit by lending bankers are, thus different from
working capital credit or other conventional form of advances. Term loan is a form of a
participation loan as the lending institution has a stake in the unit covering a fairly long
period of time and longer the period of repayment, the riskier is the proposition. Hence, any
appraisal of term loan has an inbuilt method of assessment of the risk contained therein.
 The basic purpose of appraisal of proposal for providing term credit requirements is to
ensure that the borrower acquires the proposed fixed assets, puts them to use in producing
merchandise which would have a market, and generate enough cash from operations to
repay the term loan and service the interest commitments thereon over the stipulated
period of repayment. The appraisal process, therefore, visualize a meticulous examination
of all the relevant aspects of the economics of the project.
 Points to been seen while term loan appraisal

Prima facie Acceptability
The analyzer should inspect the MOA & AOA of the borrower organization, should
check the RBI and SBI policy guidelines, government regulations, exposure norms,
the credit history of the borrower is checked with the help of CIBIL, ECGC etc and
finally the debt to equity ratio of the borrower organization, Once these all are
under the satisfactory level the credit analyst will move further with the appraisal
process.
Technical Feasibility
To check the viability of the project proposed which includes examination of
suitability, adequacy, design, accessibility, production process, factors of production,
and cost of production etc. of the project.
This is analysis is done in order to see whether the loan taken from the bank will be
deployed for a profitable purpose or not, for this there are various methods like Net
Present Value (NPV), Project Evaluation and Review Technique (PERT) etc.
Economic Viability
Once the technical feasibility of the project is examined and if found to be
satisfactory, the part of economic feasibility of the project where the market
analysis is done to see whether the raw materials and all other requirements are
easily available or not and whether the final product of this project will be successful
or not in the market for which demand and supply gap is studied.
Financial Feasibility
Data from the borrower should be analyzed to ensure that the project meets the
minimum financial criteria. Thus the data can be broadly grouped as:
 Cost of the project including working capital margin
A comprehensive and critical review of the project cost is necessary to ascertain,
the reasonability and flexibility of estimates of cost, arrangement for raising
funds for financing of the project, acceptability of the project and the
modifications required.
 Cost of Production and Estimates of Profitability:
A complete and vital assessment of the production cost is necessary to
determine, the quality of product, the true production cost, demand gap-
reasonableness of price in competition, Break-Even analysis to ascertain profit
margin. The estimate of profitability enables the banker to draw up the
repayment programme, start-up time, etc.
Break Even Point:
In a manufacturing unit, if at a particular level of production, the total
manufacturing cost equals the sales revenue, this point of no profit/no loss is
known as the break-even point
The Break-even point is worked out as under:
BEP = Fixed Cost

---------------------------
Contribution
Where, contribution is give as unit selling price minus variable cost per unit.
Break even point is expressed as a percentage of full capacity. A good project
should have break-even point of at least 75%
Commercial Viability
Once all other aspects of project success has been analyzed, for a lending bank most
important part is to check the implementation period of the project, moratorium
required , check the projected profitability, breakeven analysis, Debt Service
coverage Ratio (DSCR) etc. all this is done to examine in how many years the
borrower would be able to pay back the debt.
Managerial Competence
This is done to know and understand the proficiency of the management in making
the project a success for this the experience, integrity, track record of the directors
is studied.
 All the points covered so far are very core points and is not the core competency of a credit
analyst and hence, for such kind of sensitive analysis for term loans especially for Greenfield
projects bank has to employ experts from external agencies or technically reputed
consultants who have a sound knowledge about the industry or products as discussed in
this section and the report submitted by such consultants is known as TEV (Techno
Economic Viability) report.
 For term loan appraisal some cut-off of ratios should be achieved i.e. Gross DSCR should be
at least 1.75, gearing ratio(TOL/TNW) should not be more than 3 and repayment schedule
should not be more than 8 years this will also include the moratorium. In absence of the
same deviation has to be approved by the appropriate authority
Note: The calculation and study of ratios will be discussed later under the section of CMA
Letter Of Credit
Letter of credit is issued by banks to facilitate trade between two parties, whether domestic or
international level. It is an undertaking issued by a bank, on behalf of the buyer to the seller, to
pay for the goods and services as per agreed terms, provided that the seller presents
documents which comply with the terms and conditions stipulated in the letter of credit.
Parties in an LC Transaction
A transaction in a letter of credit may involve several parties at different stages. The various
parties with different rights and responsibilities are the following:
Courtesy: www.googleimages.com
Applicant
The buyer finalises the terms and conditions of a purchase transaction and on receipt of the
confirmed offer from the Seller, submits a request to his bank for issuing a letter of credit in
favour of the seller.
Beneficiary
The beneficiary of the letter of credit is the person in whose favour the credit has been
issued. Generally, the credit is issued favouring the seller of goods and services.
Issuing Bank
On the receipt of request from its customer, the applicant’s (purchaser’s) bank examines
the proposal and opens a letter of credit in favour of beneficiary with the stipulated terms
and condition hence this bank is known as issuing bank.
Advising Bank
In case the seller resides in a distant place or in a foreign country where the issuing bank do
not have a branch, it may contact some other bank in the beneficiary’s country. The
identified bank in the beneficiary’s country may agree to advice the credit to the beneficiary
and thus play the role of advising bank.
Negotiating Bank
The issuing bank may nominate another bank in the beneficiary’s country to which the
beneficiary presents its documents and from which it obtains payment of the sum against
the letter of credit.
Types of Letter of Credit
Revocable
A revocable credit issued by a bank could be amended or cancelled by the issuing bank at
any point of time however; such type of credit has been withdrawn under the latest
revisions.
Irrevocable
LOC which can neither be amended nor cancelled without an express agreement of all the
parties concerned, the conformation of an irrevocable LC also helps the process of
verification of the documents in a conclusive manner. This is also a measure to effectively
counter the commercial or country risks emanating from the status of the issuing bank.
Sight Credit
In such a credit the beneficiary gets the benefit of immediate payment upon presentation of
the proper documents laid down as per the terms of LC at paying bank. Though the banks
are allowed reasonable time to examine the documents. Such time does not exceed seven
banking days following the day of receipt of the documents.
Acceptance
In such a credit the beneficiary decides to grant a period of credit to the importer after
sight, the period of credit granted is known as Usance.
Red Clause
The issuing bank authorizes the advising bank to advance a part of the LC amount to the
seller to meet pre-shipment expenses. The advising bank releases the advance payment
against submission of receipt and an undertaking to present the documents by the
beneficiary before the LC expires. The amount paid in advance is recovered with interest
from the final payments to be made against submission of supply documents
Green Clause
It is an extension of red clause LC, in this the applicant also provides for storage facilities at
the port of shipment in addition to the pre-shipment advance to the beneficiary.
Revolving
A buyer may need a specific type of merchandise on a regular basis and the supply may also
be required to replenish regularly in such cases a revolving LC is issued in the favour of
seller guaranteeing payment against individual consignments.
Standby
Such credits require a simple statement of claim or proof of delivery of goods or certificate
of non-performance or an improper performance of the other party to the underlying
contract.
From all the types of LCs discussed above SBI issues sight and acceptance (Usance) credit,
revolving LC is not preferred because it increases the liability of the bank and monitoring of the
same is quite difficult but if insisted by the client, bank may consider such request on case to
case basis.
Assessment of LC Limit at State Bank of India
 When customer approaches to SBI for LC, based on the nature of transactions and business,
the requirement of LC limit is examined.
 LC Limit is given both for the domestic as well as Import purchase. Sometimes, based on the
requirement of the customer, CAPEX LC (LC issued in favour of the supplier of capital
goods/fixed assets) facility is also provided.
 The assessment of required of LC limit is based on various parameters like estimated annual
purchase and out of which how much purchase will be made based on LC, credit availed
from the suppliers, lead time etc.
 Following table shows how requirement of LC limit is assessed. The figures are taken
hypothetically for the understanding of assessment of LC.
Computation for Inland LC limits: (` in Crores)
Annual Purchase of Raw Material Estimated for 2011-12 276.39
Annual RM Purchase under LC (10%) 27.64
Monthly Purchases 2.30
Average Usance Period 3.00 months
Lead time including Transit Period 0.30 month
Max. LC Limit (2.30x3.30) 7.60
Recommended LC Limit 7.00

Bank Guarantee
A guarantee is defined as “a contract to perform the promise or discharge the liability of a third
person in case of his default”. Thus there are three parties involved in a contract of guarantee
which are as follows:
Applicant
The client on whose behalf the guarantee is being issued.
Beneficiary
To whom the guarantee is issued.
Guarantor
It is the issuing bank who gives the guarantee on behalf of applicant.
In case of bank guarantee, the liability of the issuing bank begins only after the default is
committed by the principal debtor (applicant) and such default is brought to the notice of the
issuing bank by the beneficiary with in the stipulated time, thereby demanding the
compensation for the consequential loss suffered by the latter, the demand made in this
manner by the beneficiary is called invocation in banking parlance.
Types of Bank Guarantee
Financial Guarantee
It may be seen as a certificate issued by the bank regarding the financial ability/worth of its
client (applicant) to meet certain financial obligations, making payment and satisfying the
dues as per contract terms etc. Generally, at State Bank of India does not issue BG more
than 18 months and if required to be issued it is being considered after due approval from
the controllers.
Performance Guarantee
The issuing bank provides a guarantee to the beneficiary to make good the monetary loss in
the event of non-performance or short-performance of a contract by the client (applicant),
thus the issue of performance guarantee involves an assessment of the technical
competency, managerial ability or vocational experience to execute a contract successfully,
also the issue of such guarantees should be backed by adequate securities
Both the types of guarantee is issued by SBI, it is the Credit Conversion Factor (CCF) which is
different while calculating the limit, CCF for Financial BG is 100% and for Performance BG is 50%
This is required for the purpose of capital charge in terms of BASEL norms.
Assessment of Bank Guarantee at State Bank of India

 When customer approaches to SBI for BG, based on the nature of transactions and
business, the requirement of BG limit is examined.
 The assessment of required of BG limit is based on various parameters like outstanding for
last financial year, due during current year, additional requirement during the current year
etc.
 Following table shows how requirement of BG limit is assessed. The figures are taken
hypothetically for the understanding of assessment of BG.
Computation of BG Limit (` in Crore)
Outstanding BGs for Last Financial Year 0.23
Add: BGs Required During Current Year 1.77
Due During Current Year 0.00
Less: Estimated Maturity/Cancellation of BGs during the current year 0.00
Required BG Limit 2.00
Recommended BG Limit 2.00


 A stand-by Line of Credit is issued to the clients in order to meet their emergent and
unforeseen needs while carrying out their operations.
 The facility may be made available as Fund Based or Non-Fund Based limits ensuring that
the aggregate exposure does not exceed the overall SLC limit.
 The SLC issued for emergent working capital requirements is termed as SLC (WC). The
facility is available for a maximum period of 2 months at any one instance; however no
restriction has been placed for number of times the facility can be used by the borrower.
The quantum of finance under SLC is calculated as 15% of (FB+NFB) WC Limit and should
not exceed `5Cr.
 The SLC issued for term loan requirements is termed as SLC (TL), this is given to facilitate the
borrower for expeditious implementation of expansion/modernization plan and firming up
capital expenditure to avoid time/cost overrun. The validity of sanction of SLC (TL) will be 12
months from the date of sanction. The quantum of finance under SLC (TL) is calculated as 2
times the residual cash accruals and should not exceed `5 Cr for corporate borrower and `2
Cr for non-Corporate.
Assessment of SLC at State Bank of India

 Though both term and working capital SLC is permitted at SBI but generally working capital
SLC is demanded by the clients.
 Following table shows how requirement of SLC (WC) limit is assessed. The figures are taken
hypothetically for the understanding of assessment of SLC
Computation of SLC Limit (` in Crore)
FB WC limit (Proposed) 21.00
NFB WC limit (Proposed) 7.40
Maximum SLC limit eligible (15% of FB WC and NFB WC) 4.26
Recommended Limit 3.00

CREDIT MONITORING ARRANGEMENT
Credit Monitoring Arrangement also known as CMA, its format is as prescribed by RBI.
RBI decided to monitor each high value WC credit facility and advised the lending banks to
report the details of such sanctioned credit facilities in prescribed format and hence,
introduced Credit Monitoring Arrangement (CMA) after discontinuing Credit Authorisation
Scheme (CAS) in 1988.
The lending banks, while sending the details to RBI in this manner, observed that these forms
served well the purpose of analysis as well as the financial appraisal of the WC credit.
In CMA Financials of three year audited figures, current year estimates and next year
projections for working capital and in case of term loans projections are made till the
repayment of the long-term loan is done are examined in a CMA. The estimated and projected
figures are calculated according to past trends and future expectations.
CMA Format and Analysis of CMA
Form I: Particulars of existing/proposed Limits from the banking system
This form basically shows the limits from all banks and financial institutes, the limits include
existing limits, shows the extent to which the limits has been utilized and the requested limits
for the current year.
Form II: Operating Statement
 The P&L statement prepared by a company may serve well the purpose of all shareholders,
the government and the tax authorities, but a rearrangement of the various items of
income and expenses is necessary for the purpose of undertaking a meaningful analysis and
taking a credit decision.
 While analyzing the operating statements, various factors such as growth in sales over
previous year as well as estimated growth as per industry trend is examined. Also the
various operating and other costs like interest and depreciation etc. is compared with the
past trends and based on the future expectation, cost estimates are made for the purpose
of arriving at the profit of the enterprise. Any abnormal costs or losses are separately
examined and analyzed accordingly.
Form III: Analysis of Balance Sheet
 It is necessary to restructure various items of financial statements submitted by an

enterprise in a format meaningful for the purpose of credit analysis. The initial step in an
exercise of restructuring the balance sheet is to classify the various assets into current, non-
current, fixed and intangible assets. Similarly, the liabilities also need to be classified into
various categories viz. current, deferred, net worth etc.
 Classification of items in this manner helps rearrange them in the order of priority from the
point of view of a lending banker.
 Balance sheet shows the position of assets and liabilities of an entity as on the date of
balance sheet. There are various types of assets like tangible, intangible, fixed, current etc
and similarly various liabilities like short term loans, long term loans, current liabilities and
provisions etc.
 Each of such assets and liabilities are examined and analyzed for source, purpose and
application of the same. Moreover, the amount and duration of existence of such assets
and liabilities are also taken into consideration to arrive at the regular funding position of
the entity.
 Based on past trends, requirement of the entity and future funding pattern, positions of the
assets and liabilities at the future dates are estimated and set accordingly for deciding the
finance requirement of the organization.
Form IV: Comparative Statement of Current Assets and Current Liabilities
 This form is used to understand the holding levels of the enterprise as it is the main source
to study the actual working capital requirement of the enterprise; it also shows the cover
period of receivables.
 Based on the holding period or say requirement of amount of fund to be invested in current
assets, and availability of the credit to the company for paying the current liabilities,
working capital requirement of the entity is assessed and further, after adjusting the long
term surplus available for the same and internal accruals contributing to the same, the CC
limit is arrived at.
 The extent of limit is also dependent upon the overall funding pattern of the entity and the
fact is also to be assured that promoters also contribute towards the working capital
requirement and contribution from bank finance is at acceptable level.
 Generally all the corporate will wish to show high holding levels and fewer creditors hence
it is the responsibility of the analyzer to understand the actual requirements and assess the
same.
Form V: Calculation for Assessed Bank Finance
In this form the maximum working capital limit which is known assessed bank finance is
calculated.
Form VI: Fund Flow Statement
 The change in position of an item in the balance sheet is known as flow, the statement of
changes is known as fund flow statement or as the statement of sources and application of
funds.
 The inflow and outflow of funds is represented by a change in the assets and liability items
of the balance sheet of an enterprise. While analyzing the inflow and outflow of the fund of
an enterprise, separate analysis is made for long term sources and uses as well as short
term sources and uses.
 Increase in long term liabilities and decrease in long term assets denotes long term source
of the fund and decrease in long term liabilities and increase in long term assets denotes
long term application/use of fund. The difference of the source and uses of long term fund
is known as long term surplus or deficit as the case may be.
 When long term surplus is generated, it is used towards the short term application or say
working capital finance. Whenever there is deficit in fund flow i.e. long term uses exceed
long term sources, it is called diversion of fund from short term sources to long term usage.
In general, diversion of fund is not desirable as it indicates that fund created/availed for the
working capital are not used for the purpose for which they have been availed. The
diversion may be accepted based on examining the genuineness in special cases with
proper and satisfactory justification for the same.
Summary of Ratios
Various ratios are calculated as a part of analysis; among them the most important ones are as
discussed below:
Current Ratio
This is the most important ratio indicative of the liquidity position of an enterprise and is
widely used by credit analyst in assessing the degree of liquidity enjoyed by an
enterprise.
The ratio is expressed as:
Current Ratio = Current Assets Current Liabilities
A current ratio of 2:1 thus implies that the value of current assets of the enterprise is
double the amount of current liabilities, higher the current ratio better is the liquidity of
the enterprise as it shows that enterprise has enough funds to meet its current
liabilities.
As a part of analysis this ratio should clear some cut-off value so that loan requirement
of the enterprise can be made permissible that is for working capital loan this ratio
should be 1.2 and 1.33 for trading and non-trading firms respectively, studying this ratio
for the purpose of term loan does not have much significance.
Gearing Ratio
This ratio is expressed as given below:
Gearing Ratio = TOL/TNW
Where,
TOL = Total Outside Liabilities
TNW = Tangible Net Worth
This ratio shows how much debt an enterprise has with respect to the tangible net
worth it possess, smaller the value better it is its gearing.
This ratio provides information on the position of owned funds compared to the total
outside liabilities of the enterprise and is also termed as capitalization ratio. This ratio is
generally used in analyze the position of external funding position vis-à-vis the owned
funds of an enterprise.
of the enterprise can be made permissible that is for working capital loan and term loan
this ratio should be not more than 5 and 3 for trading and non-trading firms respectively
Profitability Ratio
This ratio is expressed as given below:
Profitability Ratio = PBT/ Net Sales
Where,
PBT = Profit before Tax
Net Sales = Gross Sales – Excise Duty
This ratio shows how much profit the enterprise is earning out of the annual sales;
larger the value better is the operations of the enterprise.
It measures the overall efficiency of production, administration, selling, financing, and
pricing, value greater than 1 is appreciable.
Interest Coverage Ratio

This ratio is given as
Interest Coverage Ratio = PBDIT/ Interest
Where,
PBDIT = Profit before depreciation and interest
This ratio indicates the leverage enjoyed by the enterprise in paying the interest
obligations. This ratio is calculated to check how credible is the enterprise to make its
interest payments, higher the value it is better for the lending banker, this ratio is
studied in case of loans in which only interest is received i.e. working capital loans.
DSCR (Debt Service Coverage Ratio)

This ratio is given as,
DSCR = (PAT + Depreciation + interest on TL)/ (Annual Principal Installments +
Interest on TL)
This ratio indicates the capability of an enterprise for servicing both the interest and
principal installments of a debt, this ratio is studied in case of term loans only as in term
loan repayment of installment and interest both has to be received on time.
of the enterprise can be made permissible that is for term loan this ratio should not be
less than 1.75 for trading firms.
Debt to Equity Ratio

This ratio is given as,
Debt to Equity Ratio = Total Long Term Liabilities/Shareholder’s Equity
This ratio is studied to measure the financial leverage of the enterprise, it indicates what
proportion of equity and debt the enterprise is deploying to finance its assets.
A high debt/equity ratio generally means that the enterprise has been aggressive in
financing its growth with debt. This can result in volatile earnings as a result of the
additional interest expense.
Lending bankers always prefer some margin while financing the borrowers that are
generally 65% is financed by bank and 35% should come from the promoters it may be
through equity.
Credit Risk assessment
What is RISK
 Risk is defined as any situation involving exposure to danger. In terms of finance, risk can be
defined as: “he that the expected or prospective advantage, gain, profit or return may not
materialize;it means that the actual outcome of investment may be less than the expected
outcome.
 Greater the variability or dispersion in the possible outcomes, or the broader the range of
possible outcomes, the greater the risk. The measure of risk is Standard Deviation.
Types of Risk and Risk Management

As per the Reserve Bank of India guidelines issued in Oct. 1999, there are three major types of
risks encountered by the banks and these are Credit Risk, Market Risk & Operational Risk.
1. Credit Risk
Credit risk is defined as the possibility that a borrower or counterparty will fail to meet
its obligations in accordance with agreed terms, the degree of credit risk is the
probability that a loan lent to a borrower may not be repaid.
The extent of repayment and the time taken in the process are the important factors in
the computation of probability of default.
2. Market Risk
Market risk gives rise to the possibility of loss to a bank caused by changes in the market
variables.
The Bank for International Settlements defines market risk as “the risk that value of on
and off balance sheet positions will be adversely affected by movements in equity and
interest rate in markets, currency exchange rates and commodity prices.”
Thus, Market Risk is the risk to the bank’s earnings and capital due to changes in the
market level of the interest rates or prices of securities, foreign exchange and equities,
as well as the volatilities of those changes. It is sub-classified as:
Interest Rate Risk
Interest Rate Risk is the potential negative impact on the Net Interest Income and it
refers to the vulnerability of an institution’s financial condition to the movement in
interest rates. Changes in interest rate affect earnings, value of assets, liability off-
balance sheet items and cash flow. Hence, the objective of interest rate risk
management is to maintain earnings, improve the capability, ability to absorb
potential loss and to ensure the adequacy of the compensation received for the risk
taken.
Liquidity Risk
Bank Deposits generally have a much shorter contractual maturity than loans and
liquidity management needs to provide a cushion to cover anticipated as well as
sudden deposit withdrawals. Liquidity is the ability to efficiently accommodate
deposit as also reduction in liabilities and to fund the loan growth and possible
funding of the off-balance sheet claims. The cash flows are placed in different time
buckets based on future likely behaviour of assets, liabilities and off-balance sheet
items. Liquidity risk consists of Funding Risk, Time Risk & Call Risk.
 Funding Risk: It is the need to replace net out flows due to unanticipated
withdrawal/nonrenewal of deposit.
 Time risk: It is the need to compensate for non-receipt of expected inflows of
funds i.e. performing assets turning into nonperforming assets.
 Call risk: It happens on account of crystallization of contingent liabilities and

inability to undertake profitable business opportunities when desired.
The Asset Liability Management (ALM) is a part of the overall liquidity risk
management system in the banks. It implies examination of all the assets and
liabilities simultaneously on a continuous basis with a view to ensuring a proper
balance between funds mobilization and their deployment with respect to their
maturity profiles, cost, yield, risk exposure, etc. It includes product pricing for
deposits as well as advances, and the desired balanced maturity profile of assets and
liabilities.
Foreign Exchange Risk
Forex risk is the risk that a bank may suffer as a result of adverse exchange rate
movements during a period in which it has an open position, either spot or forward, or a
combination of the two, in an individual foreign currency. The banks are also exposed to
interest rate risk, which arises from the maturity mismatching of foreign currency
positions. Even in cases where spot and forward positions in individual currencies are
balanced, the maturity pattern of forward transactions may produce mismatches. As a
result, banks may suffer losses as a result of changes in premia/discounts of the
currencies concerned. In country like India which is pegged to single currency viz. USD,
cross currency transaction also sometimes involves Forex risk.
3. Operational Risk
According to Basel Committee operational risk is defined as “the risk of loss resulting
from inadequate or failed internal processes, people and system or from external
events.”
The key to management of operational risk lies in the bank’s ability to assess its process
for vulnerability and establish controls as well as safeguards while providing for
unanticipated worst-case scenarios.
Credit Risk Assessment Model at State Bank of India

 Credit risk management encompasses identification, assessment, measurement, monitoring
and control of the credit exposure. The bank has well defined Credit Risk Management
Policy and this has been in practice since 1996.
 Over the years, bank’s policy and procedures in this regard have been enunciated, practiced
and refined based on evolving concepts and bank’s actual experience. The risk assessment
policy and procedure of SBI has been aligned to ‘Standardized Approach’ under Basel II from
1.4.08 and the bank is gearing itself to adopt ‘Foundation Internal Rating Based Approach’
 The bank undertakes the following functions in the process of identifying and assessing the
credit risk underlying a proposal:
Developing and refining the credit risk assessment models used for taking ‘Commercial
Banking’ and ‘Retail Banking’ exposures.
Conducting industry research, which is integral to assessing the risk associated with any
loan proposal of corporate.
CRA Process for Commercial Advances

 Before a credit facility is sanctioned to a client/obligor, the risk level is measured, as per the
credit risk assessment framework developed by Credit Risk Management Department
(CRMD).
 The credit risk rating is worked out by Credit Processing Cell on the audited balance sheets
(projected financials in case of a new unit) and data collected by the credit analyst about
the management, industry etc. of the enterprise.
 The internal rating thus obtained is validated and approved by a separate committee,
specially set up for this purpose. The process of validation and approval is made prior to
sanction/renewal/enhancement of the credit facilities.
 The CRA model is divided in two sectors viz. trading (applicable for enterprises engaged in
services and trading activities) and non-trading sectors (applicable for enterprise engaged in
manufacturing activities) these two sectors are examined differently because trading and
non-trading industries have different way of functioning and different requirements
Therefore different parameters have been set for trading and non-trading business and
accordingly scores are defined.
 For a credit proposal, a credit rating is based on audited financials as validated by CRA
validation committee. The bank now has a unified Credit Risk Assessment System, which is
used for assessing the credit risk of borrowers as well as facilities viz., working capital, term
loan and non-fund based exposure etc., to commercial and institutional borrowers, MSME’s
(Micro, Small and Medium Enterprise) ), SSI (Small Scale Industries), SBF (Small Business
Finance) and agriculture segment for exposure of 25lakhs and above.
 Their are two models for the each of the two sectors, the models are classified as shown
below:
Sr. No. Exposure Level Non-Trading Trading Sector

(FB+NFB) Sector
1 Over 5 Crore Regular Model Regular Model
2 Rs 0.25 to 5 Crore Simplified Model Simplified Model
 The rating process reflects the risk involved in the facility/borrower and would be an
evaluation of the borrower’s intrinsic strength.
 The type of ratings is different depending upon the type of model this is as shown in table
below:
Sr. No. Model Type of Rating
(i) Borrower Rating

1 Regular
(ii) Facility Rating
(i) Borrower Rating

2 Simplified
 In the CRA model of SBI depending upon the extent of risk involved scores are given for
each type of parameter on which risk has to be studied and depending upon the total score
the final ratings are given and hence depending upon the risk score the pricing is decided.
Borrower Rating
This rating is done to see the risk which may be faced because of the credibility of the
borrower, the scale for borrower’s rating is SB1 to SB16 depending upon the scores obtained by
the enterprise under various heads as discussed hereinafter. In this rating process, various risks
are studied with regard to the borrower mentioned below:
 Financial Risk
Various financial parameters are studied in this section this includes:
Gearing Ratio (TOL/TNW)
Current Ratio
PBDIT/Total Assets
Retained Profits/Total Assets
PBDIT/Interest
PAT/Operating Income
Net Cash Accruals
Growth in Net Sales
Factors Influencing Financial Flexibility
Group Risk
Forex Risk
Future Prospects
Gross average DSCR, etc.
For all these financial indicators based on the latest audited financials (projected in case of
new unit) scores are assigned and each factor has weightage of its own in the risk
assessment and depending upon that final score is calculated. For each indicator moving
average of last three years and industry comparison (in case of manufacturing) is also
carried out.
 Qualitative Factors
If there are any qualitative remarks like Contingent Liabilities, Auditors Qualifying Remarks,
and Accounting Policies etc. affecting the business, negative scoring is also defined based on
the extent and effect of such qualitative factors on the overall functioning and credibility of
the enterprise.
 Business and Industry Risk

Some risk is always associated with the type of business the borrower enterprise is in, the
parameters examined in this section are:
Competition and Market Risk

Industry Outlook
Industry Cyclicality
Regulatory Risk
Business Environment
Technology and Vulnerability to Microeconomic Environment
Access to Resources
Product Profile
R&D
Distribution Network
Restructuring
Level of Integration, etc.
These all parameters are very subjective hence study of all the factors to be considered
is done by the credit analyst and then rating is done depending upon the analysis.
 Management Risk
Risk is well associated with the way management is running the day to day functions of the
borrower enterprise and hence it becomes a very important part of borrower ratings. This
column covers points like:
Integrity
Corporate Governance
Conduct of Account
Managerial Competence
Commitment
Payment Record
Experience in the Industry
Length of Relationship with Bank
Credibility
Adherence to the Covenants of Sanction
Ability to meet changes, etc.
 External Rating
Solicited Rating by a recognized External Credit Rating Agency (ECRA) translates to
additional Score. External Credit Rating Agencies assign Bank Loan Rating on long term and
short term rating scales of various credit rating facilities. So with each the ECRA rating some
risk weight is given and the scores are calculated. Following ECRAs recognized by RBI are
considered for this purpose:
Sr. No. Type ECRA

(a) Credit Analysis & Research Limited
1 Domestic (b) CRISIL Limited
(c) FITCH India
(d) ICRA Limited
(a) FITCH
2 International (b) Moodys
(c) Standard and Poor’s
 Country Risk
This is the risk that a borrower will not be able to service the obligation to pay because of
cross-border restrictions on the convertibility or availability of a given currency. Applicable
to Borrowers for whom 25% or more of their cash flow or assets are located outside India.
 Financial Statement Quality

The credit analyst is to comment on the quality, adequacy and reliability of the financial
statements/information irrespective of the risk rating. The quality is to be indicated as
Excellent/good/satisfactory/poor.
 Rating Transition Matrix

In this section comparison of risk ratings done over a period of three years, Comments on
the Movement of Rating /Risk Scores are furnished. Any major fluctuation in scores
resulting in up-gradation or deterioration in rating by more than one stage, is commented
upon, Up-gradation in rating only on account of higher score in parameters other than
Financial Risk, is to be examined and commented upon.
Maximum Score that is assigned to all these types of risks is as shown in table below
Risk Type Regular Model Simplified Model

Existing New Existing New
Company Company Company Company
Financial Risk 65 25 70 35
(65 X 0.39) (70/2)
Qualitative Factor (-ve) (-10) (-10) (-10) (-10)
Business & Industry Risk 20 30 20 40
(20 X 1.5) (20 X 2)
Management Risk 15 45 10 25
(15 X 3) (10 X 2.5)
External Rating +5 +5 +5 +5
Total 100 100 100 100
The scores obtained from all the parameters above has to clear the hurdle score to classify the
enterprise acceptable for sanctioning of loan, the hurdle rates under Borrower’s Rating is as
shown in table below:
Hurdle Score
Risk Type Regular Model Simplified Model
Existing New Existing New
Company Company Company Company
Financial Risk 25 10 30 15
Business & Industry Risk 12 16 10 20
Management Risk 8 22 5 13
Aggregate hurdle Score 15 48 45 48
Overall Hurdle Score SB10 SB10 SB10 SB10
Facility Rating
A borrowing company may be availing either one or more of Fund Based Facilities such as
Working Capital (WC)/Term Loan (TL) or Non-Fund Based Facilities like Letter of Credit
(LC)/Bank Guarantee (BG), all the facilities are to be rated separately viz. if a borrowing
company has both WC and TL and Bank Guarantee and LC, in total the company would have
one Borrower Rating and four Facility Rating (i.e. 1+1+1+1 = 4)
Loss Given Default (LGD)
Facility Rating would reflects the degree of severity of loss in the event of default on the
obligation. Facility Rating Grade thus translates on a LGD scale, indicating loss percentage, LGD
is calculated on a sample basis in CRMD (Credit Risk Management Department) from the data
available with them.
 Risk Drivers for LGD

Current Ratio / Project Debt to Equity
Current ratio is studied in case of working capital loan and project debt to equity is
studied as a risk driver in case of term loan.
Nature of Charge
Scoring is done only for 1st charge, the quantum of Collateral vis-à-vis the total
Exposure i.e., Exposure at Default (EAD) is the basis of scoring.
EAD = for Fund Based Exposure: outstanding+ 75% of unutilized limits and for Non-
Fund Based Exposure it is the total limit to be sanctioned
Industry
Recovery Rates /Default Rates vary from Industry to Industry, industry specific
factors determine the current position of an industry in an Economic Cycle.
Some of the factors which impacts recovery are the state of growth of that particular
industry, the financial strength of the unit as well as the quality of the Asset.
Units belonging to an industry under positive growth phase, and with better
financial strength and asset quality stand a better chance of being sold as a going
concern than the one under a recessionary phase having depressed financials /asset
quality.
In a highly favourable phase, the Default Point (DP) is far away while in a highly
unfavorable position, the industry’s susceptibility to be pushed into DP goes up
substantially.
The Scoring under the parameter is divided into the following two sub-heads:
(a) Industry Characteristics & Distance to Default
In this clause the scoring is done according to CRMD norms.
(b) Industry Recovery Score
The recovery score is calculated as given below:
Score = {(100-LGD) X3}/100 in case if the industry of the enterprise is not listed
than the industry score is taken as 0.72 on an average.
Geography
In this clause scoring is done depending upon the region, in which the enterprise is
functioning, risk varies form place to place depending upon the availability of resources
etc.
Unit Characteristics
The Scoring under the parameter is divided in the following sub-heads:
(a) Leverage/Enforcement of Collateral
Leverage is a measure of the extent of claimants for an Asset in the event of
default of a Borrowing Company i.e., it is inversely proportional to the
enforcement of claim.
Even for senior stake holders, higher leverage impacts the enforcement of
collateral and recovery there from, as in many cases consent may have to be
obtained from smaller claimants before disposal of Assets to affect recovery.
The enforcement of Collateral for recovery therefore becomes a challenge. The
assessment under the parameter is to be made in this section.
(b) Safety, Value & Existence of assets
Once a default occurs with no sign of reversing the process in sight (including
restructuring of debt), the Bank needs to explore ways for disposal of assets for
satisfaction of its dues. For such reasons, examination of the quality of Collateral
& its useful life becomes important at the time of each successive review of the
credit facility.
This aspect is necessary to determine the quality of upkeep of the assets and
their degree of deterioration (once default occurs), the likelihood of its
disappearance, decline in its market value compared to Book Value. A borrowing
concern under financial strain cuts back on maintenance of Collateral. The Risk
assessment under the parameter needs to consider all such factors.
Macroeconomic Conditions
Economic downturn impacts LGD as all retarding economic variables impact the
Demand-Supply Paradigm. It affects production/trade, recession sets in which in
turn accelerate the loan default rate. Asset value deteriorates with few buyers, and
distress sale at a depressed price becomes the only option to reduce the loss to
some extent.
Normally, assets need to be valued both in the up & down scenario of the economy.
Accounting for this scenario is complex. Basel–II Document has advocated a
conservative approach to be adopted – Pillar I Capital calculations must reflect

economic downturn condition, where necessary, to capture relevant risks. The other
parameters under Macro-Economic Conditions are an offshoot of such a situation.
The risk assessment under the parameter is to be done in this section.
The scoring under the parameter is divided in the following sub-heads:
(a) GDP Growth Rate : Impact of Business Cycle

(b) Insolvency Legislation in the Jurisdiction
(c) Impact of Systemic/Legal Factors on Recovery
(d) Time Period for Recovery
Total Security (Primary + Collateral)

The collaterals are an important ingredient of facility rating design; their quality and
depth affects the severity of LGD for any facility. As an element of risk is involved,
prudence is required in assessing the value of the collateral offered for obtaining credit
facility. Scoring is done depending upon the type and amount of security to be given by
the client on account of the loan taken.
 Risk Drivers for EAD
Credit Quality of Borrowers
The Score obtained by a unit under Borrower Rating reflects not only its financial
strength but it is also an indicator as to how far it is away from Default stage/Point.
In some cases, the deterioration in Rating may be a gradual affair while there would
be isolated instances of a steep decline also in the event of any unexpected event
resulting in Unexpected Losses.
Measuring the position of a unit from the Default Point then assumes importance
from the Default and the consequent Loss Severity angle.
Tenor of Facility
Risk is involved with the time period for which the loan is sanctioned because it cannot
be assured that the performance of an enterprise will be the same or will be better over
a longer span of time and hence risk weights are assigned depending upon the tenor of
facility
Pricing
 Pricing of loans in the bank cover interest income as well as fee income. Bank has quoted a
single Base Rate (BR) which is the reference rate below which the bank will not undertake
any lending activity except some permitted categories of advances like Staff Advances,
Crop. Loans upto 3 lakhs, metal gold scheme etc.
 Pricing of Bank’s funds and services while being basically market driven, is also determined
by two important considerations:
Minimum desired profitability
Risk inherent in the transactions
 The Base Rate is reviewed by the Asset Liability Management Committee (ALCO) with
periodicity of at least once in a quarter; the present base rate for the bank is fixed at 8.50%
p.a.
 Credit Risk Premia (spreads) as per the existing Credit Risk Assessment (CRA) model of the
bank is added to the base rate as per Credit Rating of the borrower.
 Since CRA rating takes into account the inherent risks in the business based on financial,
industry, segment and management risks, the pricing for rated borrowers is uniform
irrespective of segments (viz: C&I,SIB and AGRI)
 For long term exposures, the factors that weigh are the rate charged by the financial
institutions/ other banks, the period of exposure, the pattern of volatility in interest rates
and the expected movement of rates in the long term perspective.
 Bank can price loans at fixed and floating rate basis linked to the base rate. However, the
effective to be charged is equal to or above the Base Rate.
 The Bank has adopted an appropriate authority structure to facilitate competitive pricing of
loan products. The authority concerned while exercising the discretion takes into
consideration the risk rating of the loan assets, the trends in movement of interest rates,
market competition and overall business consideration.
 for working capital and loans upto 3 years and limits between `25 Lakhs to `100 Crores the
spread is as shown in table below:
Rating Base Rate Spread Effective Rates

SB 1 to SB 2 9.25 4.75 14.00
SB 3 to SB 5 9.25 6.00 15.25
SB 6 to SB 7 9.25 6.50 15.75
SB 8 to SB 9 9.25 6.75 16.00
SB10 9.25 7.25 16.50
SB11 to SB15 9.25 7.50 16.75
 Appropriate tenor premium is built in the pricing for Term loans of various maturities
beyond 3 years as shown in table below:
Sr. No. Term Term Premia (%)
1 >3 yrs less than 5 yrs 0.50
2 From 5 yrs to less than 7 yrs 0.75
3 From 7 yrs to less than 10 yrs 1.00
4 10 yrs and above 1.25
Proposal writing
 A project proposal is the final draft of the whole process of credit appraisal and is referred
to team leader; it contains all the information regarding the enterprise, analysis done by the
credit analyst at each stage of appraisal. The proposal is prepared as credentials to
sanctioning authority for approval.
 There are two formats for drafting a project proposal that is as shown:
S-Format: this format is prepared in case of sanction or renewal
AS-Format: this format is prepared for continuation of limits, sanction of Ad-hoc
facilities, and all sort non-business proposals.
S-Format
 First page of proposal is Date Chart for Disposal of Credit Facilities
1. Name of Branch
This clause has name of the branch from which the project has came to MCRO for
appraisal.
2. Module
Each region has various divisions and hence, that is mentioned in this section for
example: Sales Hub, Ahmedabad.
3. Circle
Regional office of MID-Corporate Group of SBI is defined as various circle depending
upon the region it covers, hence the circle within which the branch which has brought
the project falls in, has to be mentioned here for example: MID-Corporate, Ahmedabad
region.
4. Name of Unit
This clause has name of the enterprise which has applied for the loan from SBI
E.g. XYZ Private Limited (XPL)
5. Nature of facilities applied for

This clause is in form of a table showing the existing and proposed limits of fund based
and non-fund based facilities, from SBI and other banks under consortium or multiple
banking Arrangement (MBA), this table also shows the percentage exposure of SBI as
compared to total outlay under consortium or MBA.
6. Date of receipt of the proposal at CPC
The date on which the project came to MCRO for appraisal e.g. 12.03.2011
7. Proposal withdrawn by sanctioning authority
If in case the proposal has been withdrawn by the sanctioning authority on demand of
team leader or credit analyst based on various issues that date has to be mentioned in
this clause.
8. Date of making reference to bank’s consultant
Bank has its own consultancy cell, if in any case the appraisal of loan is referred to the
consultancy cell that date is mentioned in this section.
9. Date of receipt of report from bank’s consultant
If any report is received by the Bank’s consultancy cell that date is mentioned here.
10. Queries raised on
The date on which some queries has been raised to the client or his consultant is
mentioned here.
11. Date of receipt of complete information
The date on which all the information required from the client is met, that date is
mentioned in this section.
12.
a. Date of submission to sanctioning authority
This clause has dates that when the proposal was submitted to team leader and to
next higher authority respectively.
b. Authentication of the official submitting the proposal to the next higher authority
This clause has the signature of credit analyst and the team leader.
 Next page of the proposal is Executive Summary which contains table of contents which has
detail about the name of section and page number of the same, the sections of proposal is
as discussed in a chronological order.
 Section 1 : Memorandum for the MID-Corporate Credit Committee
This section contains information regarding the borrower and the industry as shown below:
A. Borrower’s Profile
This section contains details about the borrower i.e. name of the company, address of
registered office, type of industry and activity of the enterprise, this section also has
information about since how long the enterprise id banking with SBI.
All this information is gathered by the credit analyst in order to understand and examine
how has been the relationship of the entrepreneur with SBI and whether he is credible
or not.
In this section there is a clause of IRAC status i.e. Income Reorganization and Asset
Classification; The IRAC norms serve two primary purposes i.e. to depict the true
position of a bank's loan portfolio and to help arrest its deterioration. This clause is
taken into consideration only when an existing client comes with new requirements.
According to IRAC norms loan assets are classified in the following categories:
Standard
If the IRAC status is standard that means that the enterprise has paid all its debt on
time i.e. both interest and installment in case of term loan and interest and loan
repayment in case of working capital or any irregularity which falls within a period of
90days. Or we can say that these are the assets, which do not disclose any problem
and do not carry more than the normal risk attached to the business.
Sub-Standard
Assets are classified sub-standard if they remain non-performing for less than or
equal to 12 months. They have well defined credit weaknesses and are characterized
by the distinct possibility that the bank will sustain some loss if the deficiencies are
not rectified.
Doubtful
Assets are classified doubtful if they remain non-performing for more than 12
months. They have all the weaknesses inherent in sub-standard assets with the
added characteristic that collection or liquidation of the dues is highly improbable.
Once an asset is classified doubtful than bank has to make some provisions, the
percentage of provision to be made is as given below:
For the first year of default provision made by bank is 20% of the total exposure
For the second year of default provision made by bank is 30% of the total
exposure
For the third year of default provision made by bank is 50% of the total exposure
Loss
These are assets where loss has been identified by the bank or internal / external
auditors or RBI inspection, but the amount has not been written off, wholly or in
part. Such assets are considered uncollectible and of so little value that their
continuance as bankable assets is not warranted, even though there may be some
salvage or recovery value. Once an asset is classified loss than 100% provision has to
be made by the bank and the account is categorized as a bad debt.
B. Brief Background( company/group/promoters/management including shareholding

pattern)
This section has brief history about the enterprise related to date of incorporation;
products manufactured or traded, details about the background of the directors i.e.
their qualification, experience in industry etc. , shareholding pattern is also mentioned
in this part to see how much money is brought in by the promoters. This section is very
useful in studying about the industry and promoters and hence their credit worthiness.
C. Brief write-up on industry/sector and company’s standing in the industry

This section has the write-up on industry as a whole, this done to see whether the
exposure to be made in this sector by the bank is fruitful or not. In case of
manufacturing companies the whole manufacturing process is also discussed in this
section.
D. CRMD Exposure norms

CRMD stands for Credit Risk Management Department of SBI, it undertakes reviews of
industry/sector exposure for select industries at periodic intervals, and CRMD issues
advisories on the general outlook in near terms for industry from time to time.
The norms are classified as qualitative and quantitative approach as given below:
Qualitative approach
This approach measures that whether the industry outlook is positive, neutral or
negative, this helps in deciding whether to finance this particular industry or not.
Quantitative approach
This approach measures the fund based exposure in this sector as a percentage of
bank’s total fund based exposure. This gives a clear picture about the exposure in
this sector and helps in decision making.
E. Indebtedness/Exposure and capital charge

Indebtedness
This column shows the existing and proposed fund based and non-fund based outlay
of SBI to the enterprise.
Exposure
Indebtedness plus the investment and leasing done by SBI in the enterprise and is
nothing but the exposure of the bank in the enterprise.
External Rating
A table showing the details about the rating done by the External Credit Rating
Agency i.e. name of the agency, rating and the outlook of the given rating.
Capital Charge
The capital charge is the capital that will be blocked because of the exposure made
in the enterprise, it is given by
For Fund Based Facilities
Capital Charge = Proposed Exposure X Risk Weight X 11%
For Non-Fund Based Facilities

Capital Charge = Proposed Exposure X Risk Weight X CCF X 11%
Here risk weight of facilities depends upon the external rating of the company, the
figure below shows the various risk rates associated with different external ratings:
Long Term Short Term Rating Risk Weight

Rating CARE CRISIL FITCH ICRA
AAA PR1+ P1+ F1+ A1+ 20%
AA PR1 P1 F1 A1 30%
A PR2 P2 F2 A2 50%
BBB PR3 P3 F3 A3 100%
BB & Below PR4 & P4 & B,C,D A4 & 150%
PR5 P5 A5
CCF signifies the factor used to convert non fund based limit to funded limit, on
which the bank provides applicable capital charge, it varies depending upon the type
of facility i.e. for documentary LC it is 20%, for Financial BG it is 100%, performance
BG it is 50% etc.
ROCE of bank is also calculated in this clause it is the amount that bank require each
year in return for providing financing to a business. It is essentially a theoretical
number which is supposed to reflect the return bank expects for the amount of risk
in the business, it is given by:
ROCE (%) =
 Section 2: Present Proposal

A. Sanction and Approval for
In this column the information about the limits that is to be sanctioned is mentioned
and if some recommendations are to be approved by the committee is mentioned for
example some changes in pricing, some concession in processing charges etc.
B. Credit Limits(Existing and Proposed)

This is the same table that is on the first page of the proposal showing all the existing
and proposed limits of fund based and non-fund based facilities from SBI and total limits
from MBA (Multiple Banking Arrangement) or Consortium, also showing the % share of
SBI.
C. Sharing Pattern
In this column all the banks under MBA or consortium are mentioned with existing and
proposed limits and percentage share of each of the banks. A separate table is made for
both working capital limits (FB and NFB) and term loan (FB and NFB).
This whole section is concentrating on the limits required and how the financing is done for
the same through MBA or Consortium and how much is the exposure of SBI. This section
also has a brief description about why the loan or enhancement in existing limits is required
by the enterprise.
 Section 3: Performance and financial indicators

This section is of great importance as it contains the analysis from CMA hence, all financial
justification and description is given in this section.
A. Financial indicators
This section is taken from the CMA showing the two year audited, present year
estimates and next year’s projections of the financial indicators. These financial
indicators include Net Sales, Operating Profit, PBT, PBT/Net Sales, PAT, Cash Accruals
,PBDIT,PUC(Paid Up Capital),TNW(Tangible Net Worth), Adj. TNW,TOL/TNW,TOL/adj.
TNW, Total CA, Current Ratio and NWC(Net Working Capital), any slump or spurt is
these indicators is justified in this section.
B. Movement in TNW (Tangible Net Worth)

The following is the formula for calculating Net Worth of a company:
TNW = Net Worth – Intangible Assets – Revaluation reserve
Opening TNW
Add:
Profit / (-) Loss after tax
Increase in Share Capital
Decrease / (-) Increase in intangible assets
Increase/ (-) Decrease in Reserves
Adjust prior year expenses
Increase in deferred tax liability
Less:
Dividend paid / Withdrawals
Equals:
Closing TNW
The basic reason to study this is to get a clear image about the increase or decrease in
net worth i.e. to understand among cash accrual, equity or application money which
element is contributing to the change in overall TNW.
C. Synopsis of Balance Sheet

Two year audited figures of balance sheet are mentioned in this section with analysis on
the elements of balance sheet.
 Section 4: Risk Assessment

This section contains the gist of the whole Credit Risk Assessment done by the credit
analyst; this is of great importance for the Bank as depending upon this pricing is decided.
A. Credit Rating
This section contains the table having synopsis of borrower’s rating and facility rating
obtained by the enterprise while CRA(Credit Risk Assessment) and also the rating
obtained by ECRA(External Credit Rating Agency).In case of enhancement or renewal
both existing and proposed ratings are shown so as to make the ground for comparison.
B. Risks and Mitigation Factors

This section shows threat and various risks which may be faced by the company and
how capable are the company and its promoters to mitigate the same.
C. Warning Signals/Major irregularities in Inspection report/Credit Audit/other reports

In credit audit report, I/A report, statutory reports or qualification in Auditors Report if
in any case some irregularity or any adverse feature which may affect the appraisal and
assessment of credit or which may hinder the decision making are mentioned and
justified in this section.
D. Security
This section has brief detail about the primary and collateral given by the enterprise as
security against the loan taken is shown. This section also has the guarantee column
which shows the personal guarantee of the directors.
E. Changes if any, Justification

In case of renewal or enhancement if there are some changes made in the collaterals or
personal guarantee is mentioned in this section with the justification of the same.
 Section 5: Pricing
This section concentrates on the pricing i.e. interest rate to be charged on the loan to be
given taking in consideration all the required factors.
A. Conduct of the Account
If any irregularity is observed in WC or TL that is mentioned in this section with specific
description of the same, also the utilization of fund based and non-fund based limits is
mentioned.
B. Income Analysis
In this section actual, estimated and projected ROCE is studied in order to analyze the
income expected to be earned by the bank due to this outlay.
C. Other Bank’s /FI(Financial Institutions) Pricing

This section shows the details about the pricing of other banks which are associated
with the enterprise; this is checked in order to study the competitive pricing.
D. Proposed Pricing
Pricing that is interest rate to be charged to the enterprise on the outlay depends upon
the CRA rating, the present base rate charged by SBI is 9.25% and depending upon risk
rating spread above base rate is charged.
Proposed pricing of an enterprise can be on card rate (i.e. the actual rate calculated
according to the risk rating of the enterprise) or some other proposed rate(i.e. some
concessional rate) depending upon various factors like competition and threat of loss of
business, overall earnings from the enterprise, additional business potential, cross
selling etc. Hence, this section contains the details about pricing for each type of facility
availed by the client.
E. Justification for concessions already extended/proposed

If loan is sanctioned on proposed rate (concessional rate) other than card rate the same
has to be justified with valid and convincing reasons, showing both benefit and loss to
the bank.
 Section 6: Loan Policy and compliance

A. Whether names of promoters, directors, company, group concerns figure in
defaulter/willful defaulter list
RBI Defaulters’ list, Willful defaulters’ list, ECGC caution list and CIBIL is checked to see
whether any personal related to the enterprise has its name on it and if yes it has to be
justified. In case if the name appears in the list of willful defaulters than loan is not
sanctioned to such a party.
B. Deviation in Loan Policy

Some norms has been set by bank regarding the cut-off of ratios, contribution from
promoters, prudential norms, fund based exposure to the industry etc. any deviation
form the norms is mentioned and justified in this section.
C. Deviation in Take Over norms and comments

Any deviation from the take over norms is to be justified and approved by appropriate
authority and detail about that is mentioned in this section.
D. Directors of the borrower company are relatives of any of the Bank’s Board/Senior
Officer of the Bank/Member of any other Bank’s Board
This has to be mentioned explicitly as if such a thing happens or comes in notice will not
be acceptable for sanctioning of loan.
E. Compliance with section 20 of the Banking Regulation Act: whether any of the directors
of the bank is director of the borrower company or is having any interest in the same
This has to be mentioned explicitly as if such a thing happens or comes in notice will not
be acceptable for sanctioning of loan.
 Section 7: Future Plans and Business Potential

A. Future Plans and Business Potential including cross selling/retail marketing based on
Co/group’s future plans
This is studied to see the future growth plans of the company and how this could be
beneficial to the bank and what other relationship or facility the client is utilizing from
SBI from its vast product portfolio.
B. Environmental and Sustainability Implications

Some manufacturing firms are required to take environmental clearance, that is
checked in this section i.e. whether the clearance is taken or not and if taken validity
and expiry of the same.
C. Earlier terms of Sanction: Compliance status

Whatever stipulations and observation are made in last resolution is mentioned in this
section with compliance status.
D. Statutory dues/other contingent liabilities

Any contingent liability has to be mentioned in this section and has to be seen whether
they can affect the bank.
 Section 8: Justification for the Proposal

Justification of the whole proposal is summarized in a single page in this section.
 Section C: Assessment of fund based and non-fund based limits

This whole section shows the details of how the limits of fund based and non-fund based
facilities is assessed and calculated, the calculation of each of them has been discussed
earlier in the project report where all the facilities are discussed discretely. Below is the
order in which the calculations are represented in this section.
A. Assessment of Working Capital Limits
Inventory and Receivable levels(months)
Assessed Bank Finance

B. Assessment of LC Limit
Requirement and calculation of recommended LC Limit is assessed in this section
C. Assessment of BG Limit
Requirement and calculation of recommended BG Limit is assessed in this section
D. Calculation of SLC Limit

Requirement and calculation of recommended SLC Limit is assessed in this section,
terms and conditions governing SLC and compliance of the same is also mentioned in
this section.
E. Credit Exposure Limit (CEL)

CEL is calculated only in cases where Forex risk is involved. Assessment of CEL is done as
shown below:
1. Past Performance Method
In this method average of past three year actual figures of export and import is
taken, than it is compared with the latest figure and higher the value out of these
two is considered.
2. Documentary Evidence Method
Current estimations are compared with the values considered in step 1 and the
value which is higher is considered.
3. Final CEL calculation
(a) CEL = 2% of the value considered in step 2 above
(b) CEL= 2% of total FB exposure in case of FCNRB
F. Fund Flow Analysis

In this section long term sources, uses and surplus/deficit for audited, estimated and
projected financials is examined to see whether the overall fund flow pattern of the
company is satisfactory or not.
 Section D: Terms and Conditions

A. Security: as mentioned in section 4
B. Change in security if any, Justification: as mentioned in section 4
C. ECGC (Export Credit Guarantee Corporation) Cover

In case of EPC(Export Packing Credit) and FBD(Foreign Bill Discounting) ECGC Policy and
ECGC Guarantee is to be taken by the client and bank respectively, and brief of same is
mentioned in this section.
D. Margins
Margin for each facility is mentioned in this section, in case of working capital margin for
various elements of working capital is calculated i.e. for raw material and finished goods
is fixed to 25%, while in case of stock in process, receivables margin depends upon the
period in which they will be realized as cash. While in case of LC and BG the margin
depends upon various factors like Usance in case LC, amount of BG etc.
E. Rate of Interest: interest rate charged for each facility is mentioned in this section in a
tabular format.
F. Insurance
Stocks/properties/machinery charged/hypothecated to the Bank is to be insured for the
full value or 10% over the sanctioned limit, whichever is higher in the joint names of the
bank and the borrower with an insurance Co. approved by the Bank at the borrower’s
expenses and the policy to be lodged with the Bank.
G. Processing Charges/Upfront Fee

In case of working capital loan the fee charged by bank is known as processing charges
which is `400 per lakh and in case of term loan the fee charged is known as upfront fee
and that depends upon the period and amount of term loan. Though the charges are
fixed but concession can be given subjected to the approval from higher authorities.
H. Inspection
As per the extant information a regular post sanction inspection is to be carried out by
Bank Official/Asset verification team or any other agency appointed by the bank.
I. Repayment Schedule
In case of term loan the whole repayment schedule is mentioned in this section
J. Validity of Sanction
The period after the approval of limits within which the customer should respond back
by way of documentation or by availing a part of limits and if not done revalidation is
done.
K. Validity of Pricing
The period for which the pricing is valid, is mentioned here and if the limit is not utilized
at least once in that duration than new pricing is to be done by the bank.
L. Mortgage Charges
Mortgage charges of SBI are `20,000 per Equitable Mortgage (EM) and these charges
are fixed irrespective of the asset worth.
M. Commitment Charges
If the average utilization of limits sanctioned is equal to or less than 60% than bank
charges some penalty to its customer and that is commitment charges.
N. Commission on LC/BG Charges

Commission charges on LC and BG depends upon various factors like Usance period,
sanctioned amount etc. for example in case of domestic BG below 5 crores the
commission charge is 2.75% of the total outlay.
O. Financial Covenant
According to bank norms TOL/TNW should not exceed a value of three; current ratio
should be equal to or more than 1.33 etc. any adverse deviation by more than 20% from
the stipulated levels would attract penal interest of 1% and 2% in case of default
payment of interest/installment. Hence, this section mentions such deviations and penal
charges.
P. Other Special Conditions

Any other special conditions specific to the enterprise or industry is mentioned in this
section.
 Section E: Group/Associate profile

Brief details about the group and associate firms are studied in this section.
Sanctioning Authorities
 The two significant principles around which the scheme of delegation of financial powers
revolve are:
Powers are exercisable only in relation to duties and responsibilities specially entrusted
to a functionary
All sanctions are subject to report to the next higher authority
 The scheme of delegation of financial powers for advances and allied matters in the bank
has a graded authority structure as depicted from the pyramid.
 Higher discretionary powers have been made available in case of top rated borrowers
(usually SB1 to SB5) and functionaries across the hierarchy are vested with such dual
powers depending on the rating of the borrower.
 The powers for sanctioning credit facilities by various authorities are vested with them of
total indebtedness of the borrower. As seen in the following figure that higher the authority
higher is the power.
ECCB
CCCC
WBCC-I
WBCC-II
MCCC
SMECC
 The Executive Committee of Central Board(ECCB) has full powers for sanctioning credit
facilities. The sacnctioning powers are delegated down the line to ‘Committees of officials’
at various administrative offices and to individual line functionaries.following table shows
the members of the various committees in hirearchy:
Name of the Committee Members of the Committee

ECCB: Executive Committee of Central Headed by Chairman
Board BOD are committee members
CCCC: Corporate Centre Credit Committee Two DMDs and One MD
WBCC-I: Wholesale Banking Credit Two CGMs and One DMD
Committee –I
WBCC-II: Wholesale Banking Credit Two GMs and One CGM
Committee –II
MCCC: MID-Corporate Credit Committee Two DGMs and One GM
SMECC: Small and Medium Enterprise Two AGMs and One DGM
Credit Committee
Findings & Conclusion
Findings
 I have gained practical knowledge for 3 months at SBI as a part of my summer internship
and learnt the process of credit appraisal carried out at State Bank of India for sanctioning
the credit facilities and in due course I came across following practical problems/issues
regarding the appraisal, which are taken care accordingly by the credit analysts.
 Every loan request made by the clients were found to be unique by the nature of facility
demanded, type of industry, volume of operations, funding pattern and experience of the
businessmen hence, each and every loan request has some or the other issues which are
distinctive.
 In my project tenure I worked for three companies’ viz. one textile and other two were
hospitality industry and here is the critical findings out of the work done at the organization.
 When there is a request from the enterprise that additional bank finance is required, the
overall funding pattern is examined. Moreover, sometimes the client demands an increase
in bank borrowings by diverting the accruals of the business to the other businesses instead
of investing in the same business as observed in the appraisal of enterprise carrying
operations in textile industry such a demand is not acceptable. In such cases, genuineness
of the requirement is assessed and accordingly bank finance is arrived at.
 Change in Industry scenario affects the profitability of the company. As observed in the
enterprise dealing in textile industry, prices of raw material were rising and hence
profitability was tumbling than the expected projections all because the burden of cost cant
be immediately passed on to the customers. Moreover, in case of increasing prices of raw
material, the client was interested in holding much stock and thereby demands for increase
in working capital limit. In such case genuineness of the requirement is examined upon and
finance is made available accordingly.
 As explained earlier, benchmark current ratio for non trading unit is 1.33 and for trading
unit is 1.20. But in certain industries like hospitality industries, current ratio was observed to
be around at 1.00. In such type of industries, funding pattern and requirement of limits
differ from other normal business operations as happened in the case of one hospitality
company appraised. Such cases are analyzed accordingly and bank finance is decided based
on such analysis.
 In one of the enterprise dealing in hospitality industry, short term funds were diverted
towards long term application and thereby deficit was arising in the enterprise and in such
case, reason for the diversion is examined and the same is accepted if genuineness is
justified.
Conclusion
From the above project titled “To Understand and Analyze the System of Credit Appraisal
and Risk Assessment at State Bank of India”, I conclude that the project has been completed
successfully at State Bank of India MID-Corporate Group, Ahmedabad as a requisite of the
MBA course at ICFAI Business School, Hyderabad.
This project has helped me to understand the corporate world, and has given me a good
exposure of Credit Appraisal. Learning form the project includes understanding the types of
credit facilities and assessment of the same, financial statement analysis, preparation and
analysis of Credit Monitoring Arrangement (CMA), carrying out ratio analysis and
implication of each ratio depending upon the type of industry, carrying out Credit Risk
Assessment and hence deciding the pricing i.e. interest rate to be charges to the enterprise
and finally drafting the project proposal.
Lastly the project has helped me to understand that every loan application is unique by the
nature of facility demanded, type of industry, volume of operations, funding pattern and
experience of the businessmen hence, each and every loan request has some or the other
issues and have distinctive ways to find the solution.
RECOMMENDATION
 In all the system of credit appraisal adopted by State Bank of India is robust and very well
maintained but during the tenure of internship I found some minute pitfalls which if
improved upon can build a more efficient system.
 A proper filing of the documents of all the previous appraisals should be maintained.
Though binders are prepared but are not arranged in a proper manner hence tracing them
becomes a tedious and time consuming task for the credit analyst. Hence, arrangement of
all the binder should be done in alphabetical order or branch wise.
 Internet access should be made available to the credit analysts so as to keep them in touch
with changes in industry, government reforms etc., also lot of things mentioned in the
proposal are very subjective and varies from time to time hence an accesses to internet will
help the credit analyst in carrying the process of credit appraisal effectively.
 Latest books and magazines should be made available at CPC as a reference material for
credit appraisal.
 Feedback form submitted by Relationship Manager to CPC team should be drafted very
carefully according to the bank’s instructions with all the information about the
performance of the borrower account from the date of sanction to the due date of next
renewal. This will help the team to take more informed decision for the sanction of credit
facilities, keeping in view the conduct of the account in the past.
 Some basic documents are required from all the clients irrespective of the amount and type
of loan requirement. Hence, a checklist of such documents should be made available at the
branch. So that when client’s request for loan is forwarded to CPC for appraisal, it should
have all the requisite documents to save time of the CPC cell.
 The team leaders should make a point that in any case whether existing or new connection
pre-sanction visits should be done as it will give a clear picture of functioning of the
enterprise and hence a better analysis can be carried out.
REFERENCES
Books
 MUKHERJEE D.D., 2010, Credit Appraisal, Risk Analysis and Decision Making Mumbai: Snow
White Publication Pvt. Ltd.
 Pandey I.M, 2007, Financial Management
 Khan M.Y. and Jain P.K., Fourth Edition, Financial Management, Tata McGraw Hill.
Circulars and other Print Material

 Loan Policy of the State Bank of India
 Instruction Guides given by State Bank of India to the employees
 Internal resources especially available for the employees
 Circulars and guidelines published by State Bank of India on regular intervals
 Annual Reports of State bank Of India (2008-2010)
Websites
 www.investopedia.com
 www.statebankofindia.com
 www.rbi.org.in
 www.scrib.com
 www.wikipedia.com
 www.bankersacademy.com
 www.riskglossary.com
 www.googleimages.com
 www.banknet.com

Final Sip Report

Încărcat de

Informații document

Descriere originală:

Drepturi de autor

Formate disponibile

Partajați acest document

Partajați sau inserați document

Opțiuni de partajare

Vi se pare util acest document?

Este necorespunzător acest conținut?

Drepturi de autor:

Formate disponibile

Final Sip Report

Încărcat de

Drepturi de autor:

Formate disponibile

A REPORT

“TO UNDERSTAND AND ANALYZE THE SYSTEM OF

STATE BANK OF INDIA”

“TO UNDERSTAND AND ANALYZE THE SYSTEM OF

A report submitted in the partial fulfillment of

1. Mr. J. Karthikeyan , DGM(Sales Hub),SBI MID-Corporate Group, Regional Office,

Objective of the Project

Limitations of the Study

 Term Loan Financing……………………………………………………………. 18

Objectives of the Project

Limitations of the Study

Banking Industry in India

Company Profile of State Bank of India

About State Bank of India

SBI MID-Corporate Group

 The following are some of the major facilities provided by bank:

 At SBI MID-Corporate the Pre-Sanction Process involves following:

 At SBI MID-Corporate the Post-Sanction Process involves following:

Theoretical Background of Credit Appraisal

Why Credit From Banks

Cardinal Principles of Lending

Loan Policy of State Bank of India

Steps of Credit Appraisal at State Bank of India

Receipt of application for loan from the client

Submission of project report and required financial details

Thorough study of the documents submitted by the client

Collecting information about the company & the promoters

Preparation of Credit Monitoring Arrangement (CMA)

Credit Risk Assessment (CRA)

Drafting of final project proposal

Proposal is submitted to concerned authorities for sanction

 Fund based requirements supports the industry/corporate to meet their funding

Working Capital Loan

Operating Cycle Concept of Working Capital

Assessment of working capital loan

Term Loan Financing

 Points to been seen while term loan appraisal

BEP = Fixed Cost

Types of Letter of Credit

Assessment of LC Limit at State Bank of India

Computation for Inland LC limits: (` in Crores)

Annual Purchase of Raw Material Estimated for 2011-12 276.39

Annual RM Purchase under LC (10%) 27.64

Monthly Purchases 2.30

Average Usance Period 3.00 months

Lead time including Transit Period 0.30 month

Max. LC Limit (2.30x3.30) 7.60

Recommended LC Limit 7.00

Types of Bank Guarantee

Assessment of Bank Guarantee at State Bank of India

Computation of BG Limit (` in Crore)

Outstanding BGs for Last Financial Year 0.23

Add: BGs Required During Current Year 1.77

Due During Current Year 0.00

Less: Estimated Maturity/Cancellation of BGs during the current year 0.00

Required BG Limit 2.00

Recommended BG Limit 2.00

Stand By Line of Credit

Assessment of SLC at State Bank of India

Computation of SLC Limit (` in Crore)

FB WC limit (Proposed) 21.00

NFB WC limit (Proposed) 7.40

Maximum SLC limit eligible (15% of FB WC and NFB WC) 4.26