Description
the project is to be done in SBI
Chapter 1
INTRODUCTION
1.1 HISTORY & DEVELOPMENT OF SBI 1.2 HISTORY & DEVELOPMENT OF SBI 1.3 THE ORGANISATIONAL CHART 1.4 PRODUCT & SERVICES OF THE BANK
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Chapter 1.1 – HISTORY & DEVELOPMENT OF SBI
Bank of Calcutta (2nd June 1806 Bank of Bombay (15th April 1840) ) Bank of Madras (1st July 1843)
Bank of Bengal (2nd June 1809 )
Amalgamation
Imperial Bank (27th January 1921) Recommendation of Rural Credit Survey Committee State Bank of India (1st July 1955) Approval of State Bank of India (Associate Banks) Act 7 Associates Banks of SBI (In the year 1959)
SBI was nationalized. (In the year 1969) Amendment in State Bank of India Act SBI was enabled to have access to capital market. (In the year 1993)
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CHAPTER 1.2
THE ORGANISATION SET – UP OF SBI
Type of the Bank Number of SBI Branches all over India Number of Associate Banks The Corporate Centre Local Head Offices Zonal Offices Number of ATM centers all over India Number of Foreign Branches Chairman of SBI MD of SBI Public Sector Bank 21,500 7 Mumbai 14 57 25,000 137 in 32 countries Mr. Pratip chaudhuri Mr. Hemant G. Contractor
7 ASSOCIATE BANKS OF SBI
State Bank of Bikaner & Jaipur State Bank of Hyderabad State Bank of Mysore State Bank of Indore State Bank of Patiala State Bank of Saurashtra State Bank of Tranvancore
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OUTSTANDING ACHIEVEMENTS OF SBI
? ? Only Indian Bank to find a place in Fortune global 500 list on 380th place. “Best home loan provider” as well as “Best bank of year” by Outlook money award 2008. ? SBI Chairman Mr. O. P. Bhatt has been awarded the Transformational Leader Award 2007. ? SBI has bagged the awards for ‘Most Preferred Bank’ & ‘Most Preferred Branch for Home Loans’ in CNBC Awaz Consumer Awards of August 2007.
THE VISION OF SBI
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With 4 National level Apex Training Colleges & 54 Learning Centers spread all over the country, the bank is continuously engaged in skill enhancement of its employees.
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SBI is entering into many new businesses with strategic tie-ups – Pension Funds, General Insurance, Custodial Services, Private Equity, Mobile Banking, Advisory Services, Structured Products, etc.
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“It's a vision to make SBI a truly global bank.”
THE LOGO OF SBI
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Chapter 1.3
THE ORGANISATIONAL CHART
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Chapter 1.4
PRODUCT & SERVICES OF THE BANK
Depository Products:SBI is now offering following types of depository products for mobilizing the savings of the general people:? ? ? ? ? Current Account Savings Account Fixed Deposit SBI Recurring Deposits Foreign Currency Deposit Account
Loan Products:SBI is offering the following loan & advance products to the client that provide good return to the investment as well as to satisfy the client:? ? ? ? ? ? ? ? SBI Housing Loan SBI Personal Loan SBI Education Loan SBI Car Loan SBI Loan for Pensioners Loan Against Mortgage of Property Loan Against Shares & Debentures Loan Schemes like Rent plus Scheme, Modi-Plus Scheme.
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Corporate Banking:? ? Assistance extended both as Fund based and Non-Fund based facilities to Corporates, Partnership firms, Proprietary concerns. Working Capital financing to all segments of industries and services sector such as IT.
Personal Banking Products:? ? ? ? ? ? ATM Card Service Credit Card Services Demat Account Statement Bill Payment Demand Draft Transaction Enquiry
Government Business:? ? ? ? Centralised Pension Processing Centre (CPPC). Government Accounts. Public Provident Fund. Senior citizens savings scheme.
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INTERNET BANKING FACILITIES PROVIDED BY SBI
The Internet banking portal of SBI, enables its retail banking customers to operate their accounts all across India, removing the restrictions imposed by geography and time. It's a platform that enables the customers to carry out their banking activities from their desktop, aided by the power and convenience of the Internet. Availing the Internet banking services, the following normal banking transactions can be done online:? ? ? ? ? Self-account funds transfer across India. Third party transfers in the same branch New account opening Demand Draft requests New Cheque-book request and much more.
Apart from these, the other salient value-added features available are:? ? ? ? ? ? ? Railway tickets booking Utility bill payments LIC and other insurance premium payments SBI Mutual funds Investments Credit card dues payments Depositing taxes Donations to Red Cross and such other organisations
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All this is at no cost - It's free! And most important - the site www.onlinesbi.com is 'VeriSign' certified, indicating that it's absolutely safe and secure to transact online.
STATE BANK NETWORKED ATM SERVICES
State Bank offers the convenience of over 8500 ATMs in India, the largest network in the country and continuing to expand fast! It means, we can transact free of cost at the ATMs of State Bank Group (This includes the ATMs of State Bank of India as well as the Associate Banks) and wholly owned subsidiary viz. SBI Commercial and International Bank Ltd., using the State Bank ATM-cumDebit (Cash Plus) card.
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Kinds of Cards accepted at SBI ATMs
State Bank ATM-Cum-Debit Card o State Bank International ATM-Cum-Debit Card o State Bank Credit Card o Cards displaying Maestro, Master Card, Cirrus, VISA & VISA Electron Logos.
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Chapter 2
TOPIC OF PROJECT
2.1 INTRODUCTION OF TOPIC 2.2 OBJECTIVES OF THE STUDY 2.3 SCOPE OF THE STUDY
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Chapter 2.1
INTRODUCTION OF TOPIC
WHAT IS CREDIT APPRAISAL?
It is the process by which a lender appraises the creditworthiness of the prospective borrower. This normally involves appraising the borrower’s payment history and establishing the quality and sustainability of his income. Factors like age, income, number of dependents, nature of employment, continuity of employment, repayment capacity, previous loans, credit cards, etc. are taken into account while appraising the credit worthiness of a person. Every bank or lending institution has its own panel of officials for this purpose.
CREDITWORTHINESS OF BORROWERS
The business of sanctioning unsecured loans & advances is comparatively more risky & needs special care & attention on the part of the banker. The ‘Creditworthiness’ of a person means that he deserves a certain amount of credit, which may safely be granted to him. Such creditworthiness is judged by the banker on the basis of his Character, Capacity & Capital (3‘C’s):-
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1) CHARACTER:In assessing the creditworthiness of a person, the first consideration is ‘Character’ of the person concerned. The word ‘Character’ implies & includes a number of personal characteristics of a person, e.g. his honesty, integrity, regularity & promptness in fulfilling his promises & repaying his dues, sense of responsibility, good habits & reputation & goodwill which he enjoys in the eyes of others. If a person possesses all these qualities, without any doubt or suspicion in minds of others, he possesses an excellent character & will be considered creditworthy by the banker.
2) CAPACITY:The success of an enterprise largely depends upon the ability, competence & experience of the entrepreneur. If the borrower possesses necessary technical skill, managerial ability & experience to run a particular industry or trade, success of such unit may be taken for granted (barring some unforeseen circumstances) & the banker will consider him a deserving case for granting a loan. The significance of this factor is now growing as the banks are willing to grant unsecured loans to technicians & competent persons on the basis of soundness of their business projects, irrespective of their own capital.
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3) CAPITAL:The banker also gives importance to the adequacy of capital of the borrower. Banks are the repositories of the public money & lend the borrowed money. The banker, therefore, does not lend money to an entrepreneur who does not have adequate funds of his own. In case of the failure of the business enterprise, the banker will be able to realise if the borrower’s own capital is sufficient. Apart from the above mentioned C’s, there are some more criteria which should be examined, before sanctioning the loan. These criteria are as follows:1) CASH FLOW: - Cash flow is the vital factor that is used to identify whether the borrower will have enough cash to repay the loan or advance. Cash keeps the liquidity to ensure repayment. The banker tries to identify the annual cash flow from the submitted statements. 2) CONDITIONS: - The business & economic conditions may change after the loan is sanctioned. So these changes should be taken into consideration. 3) CAREFULNESS: Documentation, follow-up & consistent
monitoring are essential to high quality loan portfolios.
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IMPORTANCE OF CREDIT APPRAISAL SYSTEM
The function of commercial banks is to collect deposit from the common people and to invest deposited money in different sectors for overall development of the economy of the country. So the banks have to be very much careful in credit appraisal. Commercial banks and financial institutions are intermediate between lenders and borrowers. These financial intermediaries collect deposit and disburse it as loan and advance to the individual people, business, commercial, industrial entity. The loan and advance should be given to them who have the certain and predicted cash flow to repay the credit. If the bank manager fails to analyze the client’s viability of repaying the loan, possibility of default may arise due to the fact. So the importance of APPRAISAL, in sanctioning the loan, is the key to identify the borrower’s ability, expertise, efficiency, industrial analysis & business performance.
RECOVERY OF CREDIT: - Appraisal is done to ensure the recovery of
the credit along with the good supervision, monitoring and the relationship. In other words, the purpose of appraisal is to be sure that the proposed advance will be safe, liquid, and profitable and for acceptable purpose covered by adequate security.
SAFETY: - The most important measure of appraising a loan proposal is safety
of the project. Safety means the assurance of repayment of distributed loans. Bank is in business to make money but safety should never be sacrificed for profitability. To ensure the safety of loan, the borrower should be chosen carefully. He should be a person of good character & capacity.
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LIQUIDITY: - The banker must ensure that the borrower is able to repay the
loan on demand or within a short period. This depends upon the nature of assets owned by the borrower & pledged to the banker. E.g. goods & commodities are easily marketable while fixed assets like land & buildings can be liquidated after a time interval. Thus, the banker regards liquidity as important as safety of the funds & grants loans on the security of assets which are easily marketable without much loss.
PROFIT:-‘Profit’ is the blood for any commercial institution. Before approval
of any loan project, the bank authority has to be sure that the proposed project will be a profitable venture.
SECURITY:-.Security serves as a safety value for an unexpected emergency.
Since risk factors are involved, security coverage has to be taken before a lending.
DIVERSIFICATION OF RISK:-During sanctioning any loan, bank has to
be attentive about diversification of risk. All money must not be disbursed amongst a small number of people.
NATIONAL INTEREST & GROWTH: - Banking industry has
significant role to play in the economic development of a country. The bank would lend if the purpose of the advances can contribute more to the overall economic development of the country.
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CREDIT RISK ASSESSMENT (CRA)
The CRA models adopted by the Bank take into account the factors which go into appraising the risks associated with a loan. These have been broadly categorised into Financial, Industrial & Management risks & are rated separately. To arrive at the overall risk rating, the factors duly weighted are aggregated & calibrated to arrive at “a single point indicator of risk” associated with the credit decision. 1) Financial Parameters: The assessment of financial risk involves appraisal of the financial strength of the borrower based on performance & financial indicators. The overall financial risk is assessed in terms of static ratios, future prospects & risk mitigation (Collateral security / financial standing).
2) Industry Parameters: The following characteristics of an industry which pose varying degrees of risk are built into the Bank’s CRA model:? Competition ? Industry outlook ? Regulatory risk ? Contemporary issues like WTO, etc.
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3) Management Parameters: The management of enterprise / group is rated on following parameters:? Integrity (Corporate governance) ? Managerial Competence / Commitment ? Expertise ? Structure & systems ? Credibility: ability to meet sales projections Credibility: ability to meet profit (PAT) projections ? Payment Record ? Strategic initiatives ? Length of relationship with Bank
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Chapter 2.2
OBJECTIVES OF THE STUDY
? To understand the meaning & importance of Credit Appraisal System. ? To study the eligibility criteria for sanctioning working capital loans to Commercial & Agriculture Sector. ? To analyse the procedure followed by the bank for sanctioning loans. ? To study the documentation required for credit appraisal. ? To know the authorities & committees involved in Credit Appraisal System. ? To determine the efficiency of Credit Appraisal System of SBI. ? To identify & suggest the scope for improvement in Credit Appraisal System of the bank.
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Chapter 2.3
SCOPE OF THE STUDY
The project work would focus on the following areas of “State Bank of India”, Aurangabad:1. Importance of the Credit Appraisal System.
2. Credit Appraisal Standards of SBI.
3. SBI’s procedure & criteria for different credit facilities viz. working capital financing to Commercial & Agriculture Sector.
Each of the above areas would be critically analysed in order to determine the Efficiency of Credit Appraisal System of “State Bank of India, Aurangabad.”
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Chapter 3
METHODOLOGY OF THE STUDY
3.1 3.2 SBI 3.3
COLLECTION OF DATA CREDIT APPRAISAL STANDARDS OF
PROCEDURE FOR SANCTION OF
LOAN 3.4 DOCUMENTATION FOR SANCTION
OF LOAN
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METHODOLOGY OF THE STUDY
‘Project Methodology’ is the procedure followed by the students for collecting the required data for project. The necessary information is collected by following two types of sources:-
Chapter 3.1
COLLECTION OF DATA PRIMARY SOURCES OF DATA COLLECTION
rimary Data is the first hand data collected by following ways:1. Personal Interview: - By interviewing the Deputy Manager of the bank, essentials for loan sanctioning were understood.
2. Observation: - By observing the working of manager as well as employees in a bank, the actual procedure of loan sanctioning was understood.
SECONDARY SOURCES OF DATA COLLECTION:Secondary Data is the readymade or readily available data obtained from following sources:1. Internet: - The use of internet was beneficial for knowing the history & functioning of SBI as well as theory of Credit Appraisal System.
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Chapter 3.2
CREDIT APPRAISAL STANDARDS OF SBI
QUALITATIVE:At the outset, the proposition is examined from the angle of viability & also from the Bank’s prudential levels of exposure to the borrower, group & industry. Thereafter, a view is taken about Bank’s past experience with the promoters, if there is a track record to go by. Where it is new connection for the Bank but the entrepreneurs are already in business, opinion reports from existing bankers & published data if available are carefully perused.
QUANTITATIVE:The basic quantitative parameters underpinning the Bank’s credit appraisal are as follows:1) Liquidity:Current Ratio (CR) of 1.33 is generally considered as a benchmark level of liquidity. However, the approach has to be flexible. CR of 1.33 is only indicative & may not be deemed mandatory. In cases, where the CR is projected at a level lower than the benchmark or a slippage in the CR is proposed, it alone will not be a reason for rejection of the loan proposal or for a sanction of the loan at a lower level. In such cases, the reasons for low CR or slippage are carefully examined & in deserving cases, the CR as projected may be accepted. Where it is felt that the projected CR is not acceptable but the borrower deserves assistance subject to certain conditions, suitable written commitment is obtained from the borrower to the effect that he would be bringing in required amounts within a mutually agreed time frame.
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2) Net Working Capital:Although this is a corollary of current ratio, the movements in Net Working Capital are watched to ascertain whether there is a mismatch of long term sources vis-à-vis long term uses for purposes which may not be readily acceptable to the Bank so that corrective measures can be suggested.
3) Financial Soundness:This will be dependent upon the owner’s stake or the leverage. Here again the benchmark will be different for manufacturing, trading, hire purchase & leasing concerns. For industrial ventures, a Total outside Liability (TOL) / Tangible Net worth (TNW) ratio of 3.0 is reasonable but deviations in selective cases for understandable reasons may be accepted by the sanctioning authority. 4) Turn-Over:The trend in turnover is carefully gone into both in terms of quantity & value. 5) Profits:While Net Profit is the ultimate yardstick, cash accruals i.e. profit before depreciation & taxation conveys the more comparable picture in view of changes in rate of depreciation & taxation which may have taken place in the intervening years. However, for the sake of proper assessment, the non-operating incomes are excluded as these are usually one time or extraordinary incomes. Companies incurring net losses consistently over 2 or more years will be given special attention, their accounts will be closely monitored & if necessary, exit options will be explored.
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6) Credit Rating:Wherever the company has been rated by a Credit Rating Agency for any instrument such as Commercial Paper, this will be taken into account while arriving at a final decision. However, as the credit rating involves additional expenditure, the Bank would not normally insist on this & only use this tool, if such an agency had already looked into the company finances. 7) Capital Markets:Where the company’s shares are listed on stock exchanges, the movement of the price of its share, the Market Value of shares vis-à-vis those of competitors in the same industry, response to public / rights issues are also kept in view as these are reflective of the corporate image in the eyes of the investor’s community.
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Chapter 3.3
PROCEDURE FOR SANCTION OF LOAN
LOAN ANALYSIS LOAN APPROVAL
DISBURSEMENT
(1) Loan Analysis:a) Receipt of proposal from the borrower at the branch. b) Acknowledging the application. c) Perusal & calling for additional details of any. d) Obtaining additional details & analysing thereon for technical feasibility (by industrial development officers, engineers) & financial viability of the project. e) The financial viability is assessed through current ratio, leverage ratio, etc.
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(2) Loan Approval:a) After a careful analysis of ratios, profitability, technical competence, etc. of the project, the proposal is either sanctioned at branch level or forwarded to controlling offices, depending upon the quantum of loan sought. b) The proposal is approved by the competent authority & sanction is communicated to the borrower.
(3) Disbursement:a) The documents concerned are obtained from the borrower. b) Pre-release audit is conducted. c) Loan amount is disbursed in stages or in full based on type of loan.
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DELEGATION OF POWERS FOR CREDIT APPRAISAL AT SBI
1. The Executive Committee of the Central Board (ECCB) has full powers for sanctioning all credit facilities.
2. The sanctioning powers have been delegated down the line to committees of officials at various administrative offices & individual line functionaries.
3. An appropriate control system is also in operation in tune with the delegation structure. The powers exercised by various functionaries are required to be reported to the next higher authority as laid down in the Scheme of Delegation of Financial Powers.
4. A system of loan review styled ‘Credit Audit’ which inter alia covers audit of credit sanction decisions at various levels has been implemented. Presently all accounts with total fund based indebtness of Rs.5 Cr. & above are subjected to ‘Credit Audit’. The audit system serves as an effective control on the system of sanction of loans in the Bank through widely delegated powers.
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Chapter 3.4
DOCUMENTATION FOR SANCTION OF LOAN
Documentation is obtaining such agreement where all the terms and conditions and securities are written and signed by the borrower. It specifies rights and liabilities of both the banker and the borrower. In documentation, each type of advances requires a different set of documents. It also differs with the nature of securities. The documents should be stamped according to the ‘Stamp Act’. There are no hard & fast rules of documentation & it varies from bank to bank.
DOCUMENTATION STANDARDS OF SBI
The systems & procedures for documentation have been laid down keeping in view the ultimate objective of documentation which is to serve as primary evidence in any dispute between the bank & the borrower & for enforcing the Bank’s right to recover the loan amount together with interest thereon. In order to achieve this objective, the Bank’s documentation process attempts to ensure that:1. The owing of the debt to the Bank by the borrower is clearly established by the documents.
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2. The charge created on the borrower’s assets as security for the debt is maintained & enforceable. 3. The Bank’s right to enforce the recovery of the debt through court of law is not allowed to become time-barred under the Law of Limitation. Documentation is not confined to mere obtention of security documents at the outset. It is a continuous & ongoing process covering the entire duration of an advance.
CHECK LIST (DOCUMENTS) FOR HIGH VALUE PROPOSALS
While sanctioning the high amount of loan, SBI asks for the following documents to the loan applicant:1) Feedback form: - This form is for the existing unit & it gives the details about percentage utilization of the present limit, interest, exchange, commission earned in the previous financial year & for the current year. 2) Application / Request letter for credit facilities. 3) Partnership Deed / Memorandum & Articles of Association. 4) CMA Data in Bank’s prescribed format. (CMA should cover past 3 years data & estimated data of 2 years for working capital & if TL – till the repayment is over). 5) Audited financial statements of the company for last 3years along with all schedules / auditor’s notes.
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6) List of sundry creditors, sundry debtors (age-wise) & unsecured creditors / depositors, etc. 7) Name of the present bankers / branch. Copy of sanction letter along with terms & conditions received from the present bankers. 8) Facilities enjoyed / present position of the account as on a recent date. 10) Information of Associate Companies, if any in standard format. 11) Audited financial statements of all associate companies, their present bankers, credit facilities, securities offered, etc. 12) Statement of personal assets & liabilities of Directors / Partners (where personal guarantee is being offered). 13) Bio data of all the partners / directors on the Bank’s standard format. 14) Copies of latest Income Tax Assessment Order & PAN No., Sales Tax, and Assessment Order. 15) Details of collateral security offered. 16) Project Report & Details of expansion program. 17) Details of orders on hand. 18) Staff / Labor strength, Installed Capacity, Production in quantity. 19) Copies of ISO Certification, ratings by any external agencies like ICRA / CRISIL.
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FINANCIAL STATEMENT ANALYSIS
Analysis of financial statements constitutes the ‘Back-bone of good lending’. Basically, the funds used by a banker for his loaning operations are provided by depositors & consequently, the interests of the latter should be the major factor to determine the criteria for good lending. The principles of good lending are stated as:? ? ? ? Yield Liquidity Safety of Funds Purpose. Analysis of financial statements is done for finding the answers of following two questions:1) How the liquidity of the enterprise is to be measured? 2) What financial & other criteria are to be used to judge the safety of loans?
Analysis of financial statement is thus important to the banker for following two reasons:1) To decide on whether to extend the advance or not. 2) If the advance is to be extended, what the quantum of advance should be?
To assess the working capital limits required, financial statement analysis is used in the Projected Balance Sheet method in large value advances, i.e. above Rs.25lacs for industrial units in C & I segment & above Rs.5 Crore in the SSI segment. Also, even where Projected Balance Sheet method is not used for
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assessing the credit requirements, analysis of financial statement is still necessary to determine the safety of advance. The Credit Risk Assessment (CRA) process requires an analysis of financial statements of the units & calculation of various ratios, before scoring under the Bank’s CRA rating.
RATIO ANALYSIS:Basically, the Balance Sheet & Profit & Loss Account provides information which helps us to assess 3 main aspects of an organisation’s position viz. its solvency, liquidity & profitability. Instead of studying an item in isolation, it should be studied in comparison with industry average or with a similar type of unit in the same areas and / or the trend for the same enterprise for a period of 3-4 years.
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Chapter 4
DATA ANALYSIS AND INTERPRETATION
4.1 SBI’s WORKING CAPITAL FINANCING TO COMMERCIAL SECTOR
4.2 SBI’s WORKING CAPITAL FINANCING TO AGRICULTURE SECTOR
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Chapter 4.1
SBI’s WORKING CAPITAL FINANCING TO COMMERCIAL SECTOR
An industry requires funds to acquire ‘Fixed Assets’ like land, building, plant, machinery, equipments, vehicles, tools, etc. & also to run the business i.e. its day to day operations. Funds required for day-to-day working will be to finance production & sales. Funds are needed for purchase of raw material, stores, fuel, for employment of labor, for power charges, for storing finished goods till they are sold out & for financing the sales by way of sundry debtors / receivables. ‘Working Capital’ is defined as the funds necessary to carry the required levels of current assets to enable the unit to carry on its operations at the expected levels uninterruptedly. Thus, working capital required is dependent on:a) The volume of activity (viz. level of operations i.e. production & sales). b) The activity carried on (viz. manufacturing process, product, production program, the materials & marketing mix). Though there are various methods used by the Bank for assessing the quantum of working capital requirement for an industry, the following are commonly used
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Methods & Application:Segment SSI Limits Up to Rs.5 Crore Method Traditional Method & Nayak Committee Method Above Rs. 5 Crore Projected Balance Sheet Method SBF All loans Traditional / Turnover Method C & I Trade & Services Up to Rs.1 Crore Traditional Method for Trade & Projected Turnover Method Above Rs.1 Crore & up to Rs.5 Crore Projected Balance Sheet Method & Projected Turnover Method Above Rs.5 Crore Projected Balance Sheet Method C & I Industrial Units Below Rs.25 lacs Rs.25 lacs & over up to Rs.5 Crore Traditional Method Projected Balance Sheet Method & Projected Turnover Method Above Rs.5 Crore Projected Balance Sheet Method
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OPERATING CYCLE METHOD
Any manufacturing activity is characterised by a cycle of operations consisting of purchase of materials for cash, converting these into finished goods & realising cash by sale of these finished goods.
Fig.:- Operating Cycle The time that lapses between cash outlay & cash realisation by sale of finished goods & realisation of sundry debtors is known as length of operating cycle. The length of operating cycle is different from industry to industry. E.g.:The operating cycle of pharmaceutical unit would be quite different from one engaged in the manufacture of machine tools. That is, operating cycle consists of:a) Time taken to acquire raw materials & average period for which they are in store. b) Conversion process time. c) Average period for which finished goods are in store. d) Average collection period of receivables (Sundry debtors)
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The length of operating cycle = a + b + c + d. E.g.:- a = 60 days b = 10 days c = 20 days d = 30 days, The operating cycle is 120 days (nearly 4 months). This means, there are 365/120 = 3 cycles of operations in a year. ASSESSMENT PERMISSIBLE CONCEPT:Let us consider a case of a unit where:Sales Raw Material Wages Other manufacturing expenses Total Expenditure Profit Rs.20,000 p.m. (A) Rs.14,000 p.m. Rs.2,000 p.m. Rs.3,000 p.m. Rs.19,000 p.m. (B) Rs.1000 p.m. OF WORKING FINANCE CAPITAL USING REQUIREMENT OPERATING &
BANK
CYCLE
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The operating cycle is:Raw material Stock in process Finished goods Sundry debtors 15 days 2 days 3 days 15 days
The total length of operating cycle = 35 days (D) Working Capital Requirement = B * D / 30 = 19000 * 35 / 30 = Rs.22166 (approx.)
TRADITIONAL METHOD OF ASSESSMENT OF WORKING CAPITAL REQUIREMENT (WCR)
The operating cycle concept serves to identify the areas requiring improvement for the purpose of control & performance review. But the bankers require more detailed analysis to assess the various components of WCR viz. finance for stocks, bills, etc. Bankers provide working capital finance for holding an acceptable level of current asset viz. Raw Material, Stock-in-Process, Finished Goods & Sundry Debtors for achieving a predetermined level of production & sales. Quantification of these funds required to be blocked in each of these items of current asset at any time will therefore provide measure of the WCR of an industry.
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While computing the WCR of a unit, it is necessary to take into account two other factors:1) Credit received on purchases 2) Advance received against orders placed for the products for industry. Thus, WCR can be computed as:Raw Material Months Requirement Stock-in-Process (for period of processing) Months cost of Rs.B Production Finished Goods Months cost of Rs.C Production required stocked Sundry Debtors Months cost of Rs.D Production (Outstanding Credits) Expenses One month (say) Rs.E A+B+C+D+E Credit received on purchases Advance Payment on Order Received
Working Capital Requirement (WCR)
Rs.A
to
be
Rs.F Rs.G
(A+B+C+D+E) (F+G)
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The unit starts with a certain amount of capital which will not normally be sufficient even to meet the cost of Fixed Assets. The unit thus arranges for a long term loan from a financial institution or a bank towards a part of the cost of fixed assets. From these two sources, after meeting the cost of fixed assets, some funds remain to be used for working capital. This amount is ‘Net Working Capital’ or ‘Liquid Surplus’ & will be one of the sources of meeting working capital requirement. The remaining funds for working capital have to be raised from Banks. Banks normally provide working capital finance by way of advances against stocks & sundry debtors. However, banks do not finance the full amount of funds required for carrying inventories & receivables & normally insist on the stake of the enterprise at every stage, by way of margins. Margins are imposed with a view to have adequate stake of the promoter in the business both to ensure his adequate interest in the business & to act as a bulwark against any stocks that the business may sustain. The margins stipulated will depend on various factors like saleability, quality, durability, price fluctuations in the market for the commodity, etc. Taking into account the total working capital requirement as assessed earlier, the permissible limit, up to which the bank finance can be granted is arrived at as shown below:-
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Permissible Limit
Raw Material Less : % margin Rs.A Rs.B Rs.A – Rs.B = Rs.P
Stock-in-process Less : % margin
Rs.C Rs.D Rs.C – Rs.D = Rs.Q
Finished Goods Less : % margin
Rs.E Rs.F Rs.E – Rs.F = Rs.R
Sundry Debtors (at sale value) Less : % margin
Rs.G Rs.H Rs.G – Rs.H = Rs.S
Total Permissible Limit
P+Q+R+S=T
‘P + Q + R’ will indicate the total limit against stock & ‘S’ the limit against sundry debtors or receivables in the form of bills. The difference between the Working Capital Requirement (WCR) & the total permissible bank borrowing (T) should be met from the Liquid Surplus or Net Working Capital. When the liquid surplus is not sufficient to meet the long term working capital requirements, there will be a ‘deficit’ in meeting the unit’s working capital requirement.
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The format in which the Bank assesses the WCR & the permissible limit of bank finance under Traditional Method is shown below:-
Assessment of WCR
Name of the Unit: - M/s ABC Ltd. (Rs. in 000’s) Anticipated monthly sales Cost of production per month Cost of Raw Material Rs.100 Rs.90 Rs.80
Item
Stocking / Payment period
Working capital required
Margin %
Amount
Permissible limit
Imported Raw Material
---
---
---
---
---
Indigenous Raw Material
1 month
80
25
20.00
60.00
Work in Process
2 weeks
45
25
11.00
34.00
Finished Goods
2 weeks
45
25
11.00
34.00
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Receivables sales value)
(at
1 month
90
33
23.00
67.00
Expenses
1 month
10
100
10.00
---
Total
270
75.00
195.00
Advance payment received 10.00 Credit on purchase 40.00 Working Capital Required (WCR) 270 – (10 + 40) = 220
Sources:Liquid surplus in Balance Sheet as at the end of last year Limits from Bank 195 20
Total
215
Net deficit
220 – 215 = 5
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How the deficit will be met?
Deficit will have to be met by plough back of profits or unsecured loans. Deficit should be reasonably small when compared to the WCR / Bank Finance / Profitability of the unit. Note:1. Sales are to be computed at the maximum level of anticipated production during the next 12 months. 2. Cost of production includes cost of raw material plus all expenses. 3. Work In Process (WIP) & Finished Goods are to be calculated on the basis of Cost of Production. 4. Net deficit, if any, in the balance sheet is to be added to WCR.
Since the limits will be arrived on the projections given by the unit, the assumptions & presumptions made by the unit should be properly analysed before sanction of the limit.
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PROJECTED ANNUAL TURNOVER METHOD FOR SSI UNITS (NAYAK COMMITTEE)
For SSI units which enjoy fund based working capital limits up to Rs.5 Crore, the minimum working capital should be fixed on the basis of projected annual turnover. 25% of the output or annual turnover value should be computed as the quantum of working capital required by such unit. The unit should be required to bring in 5% of their annual turnover as margin money & the Bank shall provide 20% of the turnover as working capital finance. Nayak committee guidelines correspond to working capital limits as per the operating cycle method, where the average production or processing cycle is taken to be 3 months. (i.e. working capital would be turned over 4 times in a year.)
Example: Anticipated annual output WCR @ 25% of A Less: Liquid surplus or 5% of A, whichever is higher. (Liquid surplus, say, is Rs.20,000) Minimum Permissible Bank Finance (B-C)
(Rs. in 000’s) 1200 (A) 300 (B) 60
240
46
APPRAISAL
1. It is to be ensured that the projected annual turnover is reasonable & achievable by the unit & further, the estimated growth if any over the previous year is realistic.
2. Date of actual sales pertaining to the last 5 years, estimated for the current year & projected for the next year, together with the trend analysis of the industry to which the unit belongs, would also be useful while appraising the sales projections.
3. Other information regarding modernisation, expansion of the existing manufacturing capacity, government policies, taxation & other relevant internal & external factors also need to be taken into account.
47
PROJECTED ANNUAL TURNOVER METHOD FOR BUSINESS ENTERPRISES IN TRADE & SERVICES SECTOR
For working capital limits up to Rs.5 Crore to C & I Trade Sector, the assessment of credit limit is to be based upon annual turnover. The credit limit equal to 15% of projected annual turnover is offered to business enterprises in the T & S Sector. It would be available for utilisation generally as a cash credit limit.
PROJECTED BALANCE SHEET (PBS) METHOD
This method is applicable to all C & I borrowers who are engaged in manufacturing, services & trading activities, including merchant exports & who require fund based working capital finance of Rs.25 lacs & above. In the case of SSI borrowers, who require working capital credit limit up to Rs.5 Crore, the limit shall be computed on the basis of Nayak Committee formula as well as that based on production & operating cycle of the unit & the higher of two may be sanctioned. Fund based working capital limits beyond Rs.5 Crore for SSI units shall be computed in the same way as for C & I units. For business enterprises in T & S sector, where the projected turnover method is not applicable, PBS method shall be followed. In PBS method, the borrower’s total business operations, financial position, management capabilities, etc. are analysed in detail to assess the working capital finance required & to evaluate the overall risk of the exposure.
48
Collection of Financial Data:For working capital assessment, the required financial data are obtained from the borrower in the following forms:Form I Form II Form III Form IV Form VI Particulars of existing / proposed limits from the banking system Operating Statement Analysis of Balance Sheet Comparative Statement of CA / CL Funds Flow Statement
Information provided in the forms II, III, IV & VI serves the detailed financial analysis. In form I, in addition to information relating to working capital & TL borrowings (existing & proposed) information regarding borrowings from NBFCs, borrowings from term lending institutions for working capital purposes, inter corporate deposits taken, lease finance availed will also be collected.
49
Chapter 4.2
SBI’s WORKING CAPITAL FINANCING TO AGRICULTURE SECTOR
The appraisal is always to be made in the field & only desk studies are not enough for sanctioning agriculture loan. Appraisal should generally cover following 7 aspects:-
1) Technical Aspects:a) Various inputs – Technical & Material that would go into the project. b) Choice of technology – its adaptability. c) Technical relationship between soil, water, rainfall &
temperature & their implication on the project.
2) Financial Aspects:a) Investment needed – outlay, unit cost, number of units, margin, loan, refinance, repayment. b) Working Capital needed – whether to be met by the Bank or other agencies or the borrower himself. c) Time Value of Money. d) Cash flow – time frame for generation of benefits.
50
e) Benefits Cost ratio (B.C. ratio) – Present worth of benefits over present worth of cost should be more than 1. f) Internal Rate of Return. g) Earning Power of Project. h) Financial impact on individual participant, incentive, etc. i) Opportunity Cost. j) Sources of funds for investment & working capital – Loan component & subsidy available.
3) Commercial Aspects:a) Revenue earning enterprises – how attractive. b) Arrangement for supply of raw materials required to build up the projects. c) Supply of labour required. d) Marketing arrangement for outputs – location of market, its capacity to absorb new / increased production, likely effect on price, etc.
4) Managerial Aspects:a) Ability of implementing agency (staff) to manage the project – their expertise & experience as well as that of the participating farmers. b) The necessary arrangements like training support & extension service, if new managerial skills are required by the implementing agency’s staff or the farmers.
51
5) Organisational Aspects:a) Suitability of organisational structure of the implementing agency & its capacity to implement the project. b) Organisation of other concerned agencies, their efficiency & ability to co-ordinate with the project plan.
6) Social Aspects:a) Social structure of the project area, custom & culture, attitude towards change, facilities available to hasten change in process. b) Social implication of the project effect on income distribution, impact on different groups, impact on quality of life & environmental impact. c) Impact on employment opportunity & potential.
7) Economic Aspects:a) Project’s contribution from the society’s point of view. b) Whether high priority is accorded by the government? c) Economic analysis is generally done in respect of the projects submitted by banks to NABARD.
52
GENERAL CONSIDERATIONS FOR APPRAISAL OF AGRICULTURE LOAN
1. The appraisal exercise commences after first determining the primafacie eligibility of a particular proposal. The appraisal exercise should conclude with a decision on – i. ii. What quantum of loan should be given & On what terms (security, margin, interest,
documentation, disbursal, repayment).
2. Loan applications should be sanctioned / declined as soon as possible, but in any case within the following limits (in weeks from the date of receipt of completed applications) : Those sanctioned at a branch Crop loans New Renewal / increase in limit Term Loans For agricultural activities Loans for allied agricultural activities 6 8 New Renewal / increase in limit 4 2 6 4 2 1 Those referred To controlling authorities 4 3
53
3. The credit-worthiness of applicants, market prices, risk, competitive conditions, quality & location of land, technical feasibility, etc. can only be ascertained by independent field enquiries. Pre-sanction inspections are one of the sources of such information.
4. All working capital loans should be renewed each year with the exception of crop limits of regular borrowers up to Rs.5000. While term loans need not be renewed, they should nevertheless be reviewed each year.
CHECK LIST (DOCUMENTS) FOR AGRICULTURE LOAN
1. No dues certificate from other banks & title investigation report are required to obtain. 2. Report from groundwater surveys & development agency are needed to obtain regarding availability of groundwater. 3. Cost estimates for the proposed investment are reasonable & are supported by estimates / invoices given by suppliers. 4. If irrigated crops are to be taken up, then it is required to ensure that whether adequate irrigation facilities are available. If river water is utilised for irrigation, then it is necessary to confirm that whether permission has been obtained from the government department.
54
5. In case where irrigated crops are raised for the first time, the suitability of land for irrigation, the likely response from the land, availability of skilled labour, etc. are ensured. 6. The pre-sanction / post-sanction inspection reports are to be obtained from the concerned official & kept record.
DUTIES OF SPECIAL STAFF
TECHNICAL OFFICER: - He is a personnel trained in various disciplines of
agriculture. He lends support to the Bank both in planning new strategies as well as in assessing the various agriculture business proposals. He performs the following duties:i. ii. He prepares schemes for agricultural development in the area chosen. He determines whether the village selected for financing is suitable for extending loans.
55
iii. iv.
He organises village meetings for explaining the bank’s schemes. Wherever necessary, he ensures that the farmers do not experience any difficulty in getting application forms, filling & submitting them to the Bank.
v.
He examines the technical feasibility & economic viability of the proposals, makes pre-sanction inspection & submits recommendations on the proposals to the appropriate authority.
FIELD OFFICER: - The role of field officer has 3 important dimensions as
follows:i.
Appraisal of Agriculture Loans :From the moment a demand for Bank credit is received until a credit decision is taken or the demand is rejected by the appropriate authority,
all that is required to be done in the nature of scrutiny & processing of the loan application devolves on the field officer.
ii.
Obtention of appropriate documents & registration of the Bank’s charge wherever required.
iii.
Supervising disbursement of the loan amount :Since the loan is disbursed in phases and / or direct payments made there from to the suppliers of inputs or equipments, it is for the field payments from the sanctioned limit is made in sanction on record with him.
officer to ensure that
accordance with the terms of
56
SCALE OF FINANCE FOR CROPS 2007–08
(Provided By NABARD)
Name of the Crop
Total finance per Acre
Kharif Crops :
Bajra (Irrigated / Hybrid) Bajra (Rain fed) Jowar (Irrigated / Hybrid) Jowar (Rain fed) Paddy (Irrigated / Hybrid) Paddy (Rain fed) Maize 3000 2000 3100 2100 6000 4000 3500
Rabbi :
Wheat (Hybrid / irrigated) Wheat (Dry) 4000 2700
Oil Seeds & Pulses :
Soya bean Sunflower Ground Nut (Irrigated) Ground Nut (Rain fed) Ground Nut (Summer) Cash Crops : Cotton (Irrigated) 5000 3500 3000 5500 4000 550
57
Onion (Late Kharif) Onion (Summer) Potato Tomato (Hybrid) Turmeric
10000 10000 12000 15000 35000
Horticultural Plants :
Grapes (Export) Grapes (Improved) Mango (Improved) Coconut Cashew 90000 70000 5000 3000 2000
Sugarcane :
Adsali Suru (Seasonal) Adsali (Tissue Culture) Suru (Tissue Culture) 22000 20000 25000 25000
Floriculture :
Rose Gladiola Gerbera 21000 30000 32000
58
CHAPTER 5
DIGRAMICALLY REPRESENTATION
59
CHAPTER 5
EFFICIENCY OF CREDIT APPRAISAL SYSTEM OF SBI
The level of Non – Performing Assets (NPA) can be one of the parameters to judge the efficiency of Credit Appraisal System. Because when the borrower fails to repay the loan, it becomes a Non – Performing Asset for the Bank. But the low level of Bank NPA indicates that before sanctioning loan, the creditworthiness & repaying capacity of the loan applicants were judged properly by the Bank. Following table contains the year-wise data of Working Capital financed by SBI to Commercial & Agriculture Sector. It also contains the data of SBI’s NPA formed out of Working Capital financed by it. Amount of Working Year Capital financed (in Crore) 2008 2009 2010 2011 65.63 87.11 108.06 180.94 NPA formed out of Working Capital financed (in Crore) 7.76 5.48 6.42 10.30 Table 1.1 % NPA against amount of Working Capital financed 11.82 6.29 5.94 5.69
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Amount of Working Capital financed (in Crore)
200 150 100 50 0 2008 2009 2010 2011 Amount of Working Capital financed (in Crore)
Fig. I
NPA formed out of Working Capital financed (in Crore)
12 10 8 6 4 2 0 2008 2009 2010 2011 NPA formed out of Working Capital financed (in Crore)
Fig. II
61
Fig. III
62
Remarks: Fig. I shows that the amount of Working Capital financed by the Bank increases from year 2008 to year 2011. Fig. II NPA formed out of Working Capital financed (in Crore).But Fig.III shows that the % NPA level goes down from year 2008 to year 2011, which indicates that the maximum amount of loan is repaid by the customers. This in turn indicates that the creditworthiness of most of the borrowers was judged properly by the bank. Hence, it is proved that the efficiency of SBI’s Credit Appraisal System is improving in subsequent years. Table 1.1 shows that the amount of Working Capital financed by SBI has increased in subsequent years. In year 2011, that amount has gone up to 180.94Crores. But the NPA formed out of it has also increased up to 10.30Crores. The reason behind it is:While announcing this year’s budget, the Finance declared debt relief for farmers. So this year (2011), the Bank could not recover the interest & the whole amount of Working Capital loan sanctioned to Agriculture Sector.
63
Chapter 6
LIMITATIONS IN THE STUDY
64
Chapter 6
LIMITATIONS OF THE STUDY
1. This project report considers Credit Appraisal System followed by “State Bank of India” only & not that of the other banks. 2. This project report considers the Credit Appraisal System for Working Capital financing to Commercial & Agriculture Sector. It does not consider the following areas:a) Home loan b) Car loan c) Personal loan d) Education loan
3. The people to be interviewed at SBI were working people & somewhere responsible persons & hence it was difficult to get their time. 4. The time period for the study was short due to which deep study of the concept was not possible to carry out. 5. The study is based on past data & may not be true indicator of future performance. 6. Confidential data was not used.
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Chapter 7
CONCLUSION
66
Chapter 7
CONCLUSION
? In order to assure the recovery of credit as well as the safety & profitability of the organisation, the bank must follow the Credit Appraisal System, very strictly. ? Though it is a lengthy & critical procedure, SBI is paying special attention to verify the credit worthiness of loan applicants, to avoid any risks in future. ? A study of past data reveals that the percentage of NPA is going down in SBI, though the Working Capital is being financed on large scale by it. This fact proves that the efficiency of Credit Appraisal System of SBI is improving in subsequent years. ? During the project work, some drawbacks in the SBI’s process of credit appraisal are pointed out as follows:-
a) More Time Consumption & More Paper Work: For estimating the financial position of the loan applicant as well as for deciding the Maximum Permissible Bank Finance (MPBF) for him, the documents showing his assets & liabilities are required to be collected. In case of High Value proposals, the applicant’s income, his loan repaying capacity, his property, etc. are primarily verified at SBI branch & then at SBI’s Regional Business Office. Thus, it takes more time for a delivery of credit to customers & it requires a lot of paper work also.
67
b) No use of Internet facility: Though internet services are the means for easy & fast data collection, it cannot be used in this Credit Appraisal System. Because the information collected about the borrower through internet may not be authentic. This fact prohibits the use of internet.
68
Chapter 8
BIBLOGRAPHY
69
Chapter 8
BIBLIOGRAPHY
? Internet Websites:-
? www.statebankofindia.com ? www.google.com ? www.wikipedia.org ? www.nabard.org
70
ANNEXURE 1 LIST OF ABBREVIATIONS Commonly Used Abbreviations
CRA CARE ICRA CRISIL CMA ECCB FBWC DCC CIR IRAC Status C & I Sector SBF SSI WCR MPBF NPA NWC TNW CRA CR SME Credit Rating Agency Credit Analysis & Research Ltd. Investment Information & Credit Rating Agency of India Ltd. Credit Rating Information Services of India Ltd. Credit Monitoring Arrangement Executive Committee of the Central Board Fund Based Working Capital Demand Cash Credit Credit Information Report Income Recognition & Asset Classification Status Commercial & Industrial Sector Small Business Finance Small Scale Industry Working Capital Requirement Maximum Permissible Bank Finance Non – Performing Assets Net Working Capital Total Net Worth Credit Risk Assessment Current Ratio Small Medium Enterprises
Long Form / Meaning
71
NABARD DSCR BC Ratio IRR
National Bank for Agriculture & Rural development Debt Service Coverage Ratio Benefit Cost Ratio Internal Rate of Return
72
doc_425485097.pdf
the project is to be done in SBI
Chapter 1
INTRODUCTION
1.1 HISTORY & DEVELOPMENT OF SBI 1.2 HISTORY & DEVELOPMENT OF SBI 1.3 THE ORGANISATIONAL CHART 1.4 PRODUCT & SERVICES OF THE BANK
1
Chapter 1.1 – HISTORY & DEVELOPMENT OF SBI
Bank of Calcutta (2nd June 1806 Bank of Bombay (15th April 1840) ) Bank of Madras (1st July 1843)
Bank of Bengal (2nd June 1809 )
Amalgamation
Imperial Bank (27th January 1921) Recommendation of Rural Credit Survey Committee State Bank of India (1st July 1955) Approval of State Bank of India (Associate Banks) Act 7 Associates Banks of SBI (In the year 1959)
SBI was nationalized. (In the year 1969) Amendment in State Bank of India Act SBI was enabled to have access to capital market. (In the year 1993)
2
CHAPTER 1.2
THE ORGANISATION SET – UP OF SBI
Type of the Bank Number of SBI Branches all over India Number of Associate Banks The Corporate Centre Local Head Offices Zonal Offices Number of ATM centers all over India Number of Foreign Branches Chairman of SBI MD of SBI Public Sector Bank 21,500 7 Mumbai 14 57 25,000 137 in 32 countries Mr. Pratip chaudhuri Mr. Hemant G. Contractor
7 ASSOCIATE BANKS OF SBI
State Bank of Bikaner & Jaipur State Bank of Hyderabad State Bank of Mysore State Bank of Indore State Bank of Patiala State Bank of Saurashtra State Bank of Tranvancore
3
OUTSTANDING ACHIEVEMENTS OF SBI
? ? Only Indian Bank to find a place in Fortune global 500 list on 380th place. “Best home loan provider” as well as “Best bank of year” by Outlook money award 2008. ? SBI Chairman Mr. O. P. Bhatt has been awarded the Transformational Leader Award 2007. ? SBI has bagged the awards for ‘Most Preferred Bank’ & ‘Most Preferred Branch for Home Loans’ in CNBC Awaz Consumer Awards of August 2007.
THE VISION OF SBI
?
With 4 National level Apex Training Colleges & 54 Learning Centers spread all over the country, the bank is continuously engaged in skill enhancement of its employees.
?
SBI is entering into many new businesses with strategic tie-ups – Pension Funds, General Insurance, Custodial Services, Private Equity, Mobile Banking, Advisory Services, Structured Products, etc.
?
“It's a vision to make SBI a truly global bank.”
THE LOGO OF SBI
4
Chapter 1.3
THE ORGANISATIONAL CHART
5
Chapter 1.4
PRODUCT & SERVICES OF THE BANK
Depository Products:SBI is now offering following types of depository products for mobilizing the savings of the general people:? ? ? ? ? Current Account Savings Account Fixed Deposit SBI Recurring Deposits Foreign Currency Deposit Account
Loan Products:SBI is offering the following loan & advance products to the client that provide good return to the investment as well as to satisfy the client:? ? ? ? ? ? ? ? SBI Housing Loan SBI Personal Loan SBI Education Loan SBI Car Loan SBI Loan for Pensioners Loan Against Mortgage of Property Loan Against Shares & Debentures Loan Schemes like Rent plus Scheme, Modi-Plus Scheme.
6
Corporate Banking:? ? Assistance extended both as Fund based and Non-Fund based facilities to Corporates, Partnership firms, Proprietary concerns. Working Capital financing to all segments of industries and services sector such as IT.
Personal Banking Products:? ? ? ? ? ? ATM Card Service Credit Card Services Demat Account Statement Bill Payment Demand Draft Transaction Enquiry
Government Business:? ? ? ? Centralised Pension Processing Centre (CPPC). Government Accounts. Public Provident Fund. Senior citizens savings scheme.
7
INTERNET BANKING FACILITIES PROVIDED BY SBI
The Internet banking portal of SBI, enables its retail banking customers to operate their accounts all across India, removing the restrictions imposed by geography and time. It's a platform that enables the customers to carry out their banking activities from their desktop, aided by the power and convenience of the Internet. Availing the Internet banking services, the following normal banking transactions can be done online:? ? ? ? ? Self-account funds transfer across India. Third party transfers in the same branch New account opening Demand Draft requests New Cheque-book request and much more.
Apart from these, the other salient value-added features available are:? ? ? ? ? ? ? Railway tickets booking Utility bill payments LIC and other insurance premium payments SBI Mutual funds Investments Credit card dues payments Depositing taxes Donations to Red Cross and such other organisations
8
All this is at no cost - It's free! And most important - the site www.onlinesbi.com is 'VeriSign' certified, indicating that it's absolutely safe and secure to transact online.
STATE BANK NETWORKED ATM SERVICES
State Bank offers the convenience of over 8500 ATMs in India, the largest network in the country and continuing to expand fast! It means, we can transact free of cost at the ATMs of State Bank Group (This includes the ATMs of State Bank of India as well as the Associate Banks) and wholly owned subsidiary viz. SBI Commercial and International Bank Ltd., using the State Bank ATM-cumDebit (Cash Plus) card.
9
Kinds of Cards accepted at SBI ATMs
State Bank ATM-Cum-Debit Card o State Bank International ATM-Cum-Debit Card o State Bank Credit Card o Cards displaying Maestro, Master Card, Cirrus, VISA & VISA Electron Logos.10
Chapter 2
TOPIC OF PROJECT
2.1 INTRODUCTION OF TOPIC 2.2 OBJECTIVES OF THE STUDY 2.3 SCOPE OF THE STUDY
11
Chapter 2.1
INTRODUCTION OF TOPIC
WHAT IS CREDIT APPRAISAL?
It is the process by which a lender appraises the creditworthiness of the prospective borrower. This normally involves appraising the borrower’s payment history and establishing the quality and sustainability of his income. Factors like age, income, number of dependents, nature of employment, continuity of employment, repayment capacity, previous loans, credit cards, etc. are taken into account while appraising the credit worthiness of a person. Every bank or lending institution has its own panel of officials for this purpose.
CREDITWORTHINESS OF BORROWERS
The business of sanctioning unsecured loans & advances is comparatively more risky & needs special care & attention on the part of the banker. The ‘Creditworthiness’ of a person means that he deserves a certain amount of credit, which may safely be granted to him. Such creditworthiness is judged by the banker on the basis of his Character, Capacity & Capital (3‘C’s):-
12
1) CHARACTER:In assessing the creditworthiness of a person, the first consideration is ‘Character’ of the person concerned. The word ‘Character’ implies & includes a number of personal characteristics of a person, e.g. his honesty, integrity, regularity & promptness in fulfilling his promises & repaying his dues, sense of responsibility, good habits & reputation & goodwill which he enjoys in the eyes of others. If a person possesses all these qualities, without any doubt or suspicion in minds of others, he possesses an excellent character & will be considered creditworthy by the banker.
2) CAPACITY:The success of an enterprise largely depends upon the ability, competence & experience of the entrepreneur. If the borrower possesses necessary technical skill, managerial ability & experience to run a particular industry or trade, success of such unit may be taken for granted (barring some unforeseen circumstances) & the banker will consider him a deserving case for granting a loan. The significance of this factor is now growing as the banks are willing to grant unsecured loans to technicians & competent persons on the basis of soundness of their business projects, irrespective of their own capital.
13
3) CAPITAL:The banker also gives importance to the adequacy of capital of the borrower. Banks are the repositories of the public money & lend the borrowed money. The banker, therefore, does not lend money to an entrepreneur who does not have adequate funds of his own. In case of the failure of the business enterprise, the banker will be able to realise if the borrower’s own capital is sufficient. Apart from the above mentioned C’s, there are some more criteria which should be examined, before sanctioning the loan. These criteria are as follows:1) CASH FLOW: - Cash flow is the vital factor that is used to identify whether the borrower will have enough cash to repay the loan or advance. Cash keeps the liquidity to ensure repayment. The banker tries to identify the annual cash flow from the submitted statements. 2) CONDITIONS: - The business & economic conditions may change after the loan is sanctioned. So these changes should be taken into consideration. 3) CAREFULNESS: Documentation, follow-up & consistent
monitoring are essential to high quality loan portfolios.
14
IMPORTANCE OF CREDIT APPRAISAL SYSTEM
The function of commercial banks is to collect deposit from the common people and to invest deposited money in different sectors for overall development of the economy of the country. So the banks have to be very much careful in credit appraisal. Commercial banks and financial institutions are intermediate between lenders and borrowers. These financial intermediaries collect deposit and disburse it as loan and advance to the individual people, business, commercial, industrial entity. The loan and advance should be given to them who have the certain and predicted cash flow to repay the credit. If the bank manager fails to analyze the client’s viability of repaying the loan, possibility of default may arise due to the fact. So the importance of APPRAISAL, in sanctioning the loan, is the key to identify the borrower’s ability, expertise, efficiency, industrial analysis & business performance.
RECOVERY OF CREDIT: - Appraisal is done to ensure the recovery of
the credit along with the good supervision, monitoring and the relationship. In other words, the purpose of appraisal is to be sure that the proposed advance will be safe, liquid, and profitable and for acceptable purpose covered by adequate security.
SAFETY: - The most important measure of appraising a loan proposal is safety
of the project. Safety means the assurance of repayment of distributed loans. Bank is in business to make money but safety should never be sacrificed for profitability. To ensure the safety of loan, the borrower should be chosen carefully. He should be a person of good character & capacity.
15
LIQUIDITY: - The banker must ensure that the borrower is able to repay the
loan on demand or within a short period. This depends upon the nature of assets owned by the borrower & pledged to the banker. E.g. goods & commodities are easily marketable while fixed assets like land & buildings can be liquidated after a time interval. Thus, the banker regards liquidity as important as safety of the funds & grants loans on the security of assets which are easily marketable without much loss.
PROFIT:-‘Profit’ is the blood for any commercial institution. Before approval
of any loan project, the bank authority has to be sure that the proposed project will be a profitable venture.
SECURITY:-.Security serves as a safety value for an unexpected emergency.
Since risk factors are involved, security coverage has to be taken before a lending.
DIVERSIFICATION OF RISK:-During sanctioning any loan, bank has to
be attentive about diversification of risk. All money must not be disbursed amongst a small number of people.
NATIONAL INTEREST & GROWTH: - Banking industry has
significant role to play in the economic development of a country. The bank would lend if the purpose of the advances can contribute more to the overall economic development of the country.
16
CREDIT RISK ASSESSMENT (CRA)
The CRA models adopted by the Bank take into account the factors which go into appraising the risks associated with a loan. These have been broadly categorised into Financial, Industrial & Management risks & are rated separately. To arrive at the overall risk rating, the factors duly weighted are aggregated & calibrated to arrive at “a single point indicator of risk” associated with the credit decision. 1) Financial Parameters: The assessment of financial risk involves appraisal of the financial strength of the borrower based on performance & financial indicators. The overall financial risk is assessed in terms of static ratios, future prospects & risk mitigation (Collateral security / financial standing).
2) Industry Parameters: The following characteristics of an industry which pose varying degrees of risk are built into the Bank’s CRA model:? Competition ? Industry outlook ? Regulatory risk ? Contemporary issues like WTO, etc.
17
3) Management Parameters: The management of enterprise / group is rated on following parameters:? Integrity (Corporate governance) ? Managerial Competence / Commitment ? Expertise ? Structure & systems ? Credibility: ability to meet sales projections Credibility: ability to meet profit (PAT) projections ? Payment Record ? Strategic initiatives ? Length of relationship with Bank
18
Chapter 2.2
OBJECTIVES OF THE STUDY
? To understand the meaning & importance of Credit Appraisal System. ? To study the eligibility criteria for sanctioning working capital loans to Commercial & Agriculture Sector. ? To analyse the procedure followed by the bank for sanctioning loans. ? To study the documentation required for credit appraisal. ? To know the authorities & committees involved in Credit Appraisal System. ? To determine the efficiency of Credit Appraisal System of SBI. ? To identify & suggest the scope for improvement in Credit Appraisal System of the bank.
19
Chapter 2.3
SCOPE OF THE STUDY
The project work would focus on the following areas of “State Bank of India”, Aurangabad:1. Importance of the Credit Appraisal System.
2. Credit Appraisal Standards of SBI.
3. SBI’s procedure & criteria for different credit facilities viz. working capital financing to Commercial & Agriculture Sector.
Each of the above areas would be critically analysed in order to determine the Efficiency of Credit Appraisal System of “State Bank of India, Aurangabad.”
20
Chapter 3
METHODOLOGY OF THE STUDY
3.1 3.2 SBI 3.3
COLLECTION OF DATA CREDIT APPRAISAL STANDARDS OF
PROCEDURE FOR SANCTION OF
LOAN 3.4 DOCUMENTATION FOR SANCTION
OF LOAN
21
METHODOLOGY OF THE STUDY
‘Project Methodology’ is the procedure followed by the students for collecting the required data for project. The necessary information is collected by following two types of sources:-
Chapter 3.1
COLLECTION OF DATA PRIMARY SOURCES OF DATA COLLECTION
rimary Data is the first hand data collected by following ways:1. Personal Interview: - By interviewing the Deputy Manager of the bank, essentials for loan sanctioning were understood.2. Observation: - By observing the working of manager as well as employees in a bank, the actual procedure of loan sanctioning was understood.
SECONDARY SOURCES OF DATA COLLECTION:Secondary Data is the readymade or readily available data obtained from following sources:1. Internet: - The use of internet was beneficial for knowing the history & functioning of SBI as well as theory of Credit Appraisal System.
22
Chapter 3.2
CREDIT APPRAISAL STANDARDS OF SBI
QUALITATIVE:At the outset, the proposition is examined from the angle of viability & also from the Bank’s prudential levels of exposure to the borrower, group & industry. Thereafter, a view is taken about Bank’s past experience with the promoters, if there is a track record to go by. Where it is new connection for the Bank but the entrepreneurs are already in business, opinion reports from existing bankers & published data if available are carefully perused.
QUANTITATIVE:The basic quantitative parameters underpinning the Bank’s credit appraisal are as follows:1) Liquidity:Current Ratio (CR) of 1.33 is generally considered as a benchmark level of liquidity. However, the approach has to be flexible. CR of 1.33 is only indicative & may not be deemed mandatory. In cases, where the CR is projected at a level lower than the benchmark or a slippage in the CR is proposed, it alone will not be a reason for rejection of the loan proposal or for a sanction of the loan at a lower level. In such cases, the reasons for low CR or slippage are carefully examined & in deserving cases, the CR as projected may be accepted. Where it is felt that the projected CR is not acceptable but the borrower deserves assistance subject to certain conditions, suitable written commitment is obtained from the borrower to the effect that he would be bringing in required amounts within a mutually agreed time frame.
23
2) Net Working Capital:Although this is a corollary of current ratio, the movements in Net Working Capital are watched to ascertain whether there is a mismatch of long term sources vis-à-vis long term uses for purposes which may not be readily acceptable to the Bank so that corrective measures can be suggested.
3) Financial Soundness:This will be dependent upon the owner’s stake or the leverage. Here again the benchmark will be different for manufacturing, trading, hire purchase & leasing concerns. For industrial ventures, a Total outside Liability (TOL) / Tangible Net worth (TNW) ratio of 3.0 is reasonable but deviations in selective cases for understandable reasons may be accepted by the sanctioning authority. 4) Turn-Over:The trend in turnover is carefully gone into both in terms of quantity & value. 5) Profits:While Net Profit is the ultimate yardstick, cash accruals i.e. profit before depreciation & taxation conveys the more comparable picture in view of changes in rate of depreciation & taxation which may have taken place in the intervening years. However, for the sake of proper assessment, the non-operating incomes are excluded as these are usually one time or extraordinary incomes. Companies incurring net losses consistently over 2 or more years will be given special attention, their accounts will be closely monitored & if necessary, exit options will be explored.
24
6) Credit Rating:Wherever the company has been rated by a Credit Rating Agency for any instrument such as Commercial Paper, this will be taken into account while arriving at a final decision. However, as the credit rating involves additional expenditure, the Bank would not normally insist on this & only use this tool, if such an agency had already looked into the company finances. 7) Capital Markets:Where the company’s shares are listed on stock exchanges, the movement of the price of its share, the Market Value of shares vis-à-vis those of competitors in the same industry, response to public / rights issues are also kept in view as these are reflective of the corporate image in the eyes of the investor’s community.
25
Chapter 3.3
PROCEDURE FOR SANCTION OF LOAN
LOAN ANALYSIS LOAN APPROVAL
DISBURSEMENT
(1) Loan Analysis:a) Receipt of proposal from the borrower at the branch. b) Acknowledging the application. c) Perusal & calling for additional details of any. d) Obtaining additional details & analysing thereon for technical feasibility (by industrial development officers, engineers) & financial viability of the project. e) The financial viability is assessed through current ratio, leverage ratio, etc.
26
(2) Loan Approval:a) After a careful analysis of ratios, profitability, technical competence, etc. of the project, the proposal is either sanctioned at branch level or forwarded to controlling offices, depending upon the quantum of loan sought. b) The proposal is approved by the competent authority & sanction is communicated to the borrower.
(3) Disbursement:a) The documents concerned are obtained from the borrower. b) Pre-release audit is conducted. c) Loan amount is disbursed in stages or in full based on type of loan.
27
DELEGATION OF POWERS FOR CREDIT APPRAISAL AT SBI
1. The Executive Committee of the Central Board (ECCB) has full powers for sanctioning all credit facilities.
2. The sanctioning powers have been delegated down the line to committees of officials at various administrative offices & individual line functionaries.
3. An appropriate control system is also in operation in tune with the delegation structure. The powers exercised by various functionaries are required to be reported to the next higher authority as laid down in the Scheme of Delegation of Financial Powers.
4. A system of loan review styled ‘Credit Audit’ which inter alia covers audit of credit sanction decisions at various levels has been implemented. Presently all accounts with total fund based indebtness of Rs.5 Cr. & above are subjected to ‘Credit Audit’. The audit system serves as an effective control on the system of sanction of loans in the Bank through widely delegated powers.
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Chapter 3.4
DOCUMENTATION FOR SANCTION OF LOAN
Documentation is obtaining such agreement where all the terms and conditions and securities are written and signed by the borrower. It specifies rights and liabilities of both the banker and the borrower. In documentation, each type of advances requires a different set of documents. It also differs with the nature of securities. The documents should be stamped according to the ‘Stamp Act’. There are no hard & fast rules of documentation & it varies from bank to bank.
DOCUMENTATION STANDARDS OF SBI
The systems & procedures for documentation have been laid down keeping in view the ultimate objective of documentation which is to serve as primary evidence in any dispute between the bank & the borrower & for enforcing the Bank’s right to recover the loan amount together with interest thereon. In order to achieve this objective, the Bank’s documentation process attempts to ensure that:1. The owing of the debt to the Bank by the borrower is clearly established by the documents.
29
2. The charge created on the borrower’s assets as security for the debt is maintained & enforceable. 3. The Bank’s right to enforce the recovery of the debt through court of law is not allowed to become time-barred under the Law of Limitation. Documentation is not confined to mere obtention of security documents at the outset. It is a continuous & ongoing process covering the entire duration of an advance.
CHECK LIST (DOCUMENTS) FOR HIGH VALUE PROPOSALS
While sanctioning the high amount of loan, SBI asks for the following documents to the loan applicant:1) Feedback form: - This form is for the existing unit & it gives the details about percentage utilization of the present limit, interest, exchange, commission earned in the previous financial year & for the current year. 2) Application / Request letter for credit facilities. 3) Partnership Deed / Memorandum & Articles of Association. 4) CMA Data in Bank’s prescribed format. (CMA should cover past 3 years data & estimated data of 2 years for working capital & if TL – till the repayment is over). 5) Audited financial statements of the company for last 3years along with all schedules / auditor’s notes.
30
6) List of sundry creditors, sundry debtors (age-wise) & unsecured creditors / depositors, etc. 7) Name of the present bankers / branch. Copy of sanction letter along with terms & conditions received from the present bankers. 8) Facilities enjoyed / present position of the account as on a recent date. 10) Information of Associate Companies, if any in standard format. 11) Audited financial statements of all associate companies, their present bankers, credit facilities, securities offered, etc. 12) Statement of personal assets & liabilities of Directors / Partners (where personal guarantee is being offered). 13) Bio data of all the partners / directors on the Bank’s standard format. 14) Copies of latest Income Tax Assessment Order & PAN No., Sales Tax, and Assessment Order. 15) Details of collateral security offered. 16) Project Report & Details of expansion program. 17) Details of orders on hand. 18) Staff / Labor strength, Installed Capacity, Production in quantity. 19) Copies of ISO Certification, ratings by any external agencies like ICRA / CRISIL.
31
FINANCIAL STATEMENT ANALYSIS
Analysis of financial statements constitutes the ‘Back-bone of good lending’. Basically, the funds used by a banker for his loaning operations are provided by depositors & consequently, the interests of the latter should be the major factor to determine the criteria for good lending. The principles of good lending are stated as:? ? ? ? Yield Liquidity Safety of Funds Purpose. Analysis of financial statements is done for finding the answers of following two questions:1) How the liquidity of the enterprise is to be measured? 2) What financial & other criteria are to be used to judge the safety of loans?
Analysis of financial statement is thus important to the banker for following two reasons:1) To decide on whether to extend the advance or not. 2) If the advance is to be extended, what the quantum of advance should be?
To assess the working capital limits required, financial statement analysis is used in the Projected Balance Sheet method in large value advances, i.e. above Rs.25lacs for industrial units in C & I segment & above Rs.5 Crore in the SSI segment. Also, even where Projected Balance Sheet method is not used for
32
assessing the credit requirements, analysis of financial statement is still necessary to determine the safety of advance. The Credit Risk Assessment (CRA) process requires an analysis of financial statements of the units & calculation of various ratios, before scoring under the Bank’s CRA rating.
RATIO ANALYSIS:Basically, the Balance Sheet & Profit & Loss Account provides information which helps us to assess 3 main aspects of an organisation’s position viz. its solvency, liquidity & profitability. Instead of studying an item in isolation, it should be studied in comparison with industry average or with a similar type of unit in the same areas and / or the trend for the same enterprise for a period of 3-4 years.
33
Chapter 4
DATA ANALYSIS AND INTERPRETATION
4.1 SBI’s WORKING CAPITAL FINANCING TO COMMERCIAL SECTOR
4.2 SBI’s WORKING CAPITAL FINANCING TO AGRICULTURE SECTOR
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Chapter 4.1
SBI’s WORKING CAPITAL FINANCING TO COMMERCIAL SECTOR
An industry requires funds to acquire ‘Fixed Assets’ like land, building, plant, machinery, equipments, vehicles, tools, etc. & also to run the business i.e. its day to day operations. Funds required for day-to-day working will be to finance production & sales. Funds are needed for purchase of raw material, stores, fuel, for employment of labor, for power charges, for storing finished goods till they are sold out & for financing the sales by way of sundry debtors / receivables. ‘Working Capital’ is defined as the funds necessary to carry the required levels of current assets to enable the unit to carry on its operations at the expected levels uninterruptedly. Thus, working capital required is dependent on:a) The volume of activity (viz. level of operations i.e. production & sales). b) The activity carried on (viz. manufacturing process, product, production program, the materials & marketing mix). Though there are various methods used by the Bank for assessing the quantum of working capital requirement for an industry, the following are commonly used
35
Methods & Application:Segment SSI Limits Up to Rs.5 Crore Method Traditional Method & Nayak Committee Method Above Rs. 5 Crore Projected Balance Sheet Method SBF All loans Traditional / Turnover Method C & I Trade & Services Up to Rs.1 Crore Traditional Method for Trade & Projected Turnover Method Above Rs.1 Crore & up to Rs.5 Crore Projected Balance Sheet Method & Projected Turnover Method Above Rs.5 Crore Projected Balance Sheet Method C & I Industrial Units Below Rs.25 lacs Rs.25 lacs & over up to Rs.5 Crore Traditional Method Projected Balance Sheet Method & Projected Turnover Method Above Rs.5 Crore Projected Balance Sheet Method
36
OPERATING CYCLE METHOD
Any manufacturing activity is characterised by a cycle of operations consisting of purchase of materials for cash, converting these into finished goods & realising cash by sale of these finished goods.
Fig.:- Operating Cycle The time that lapses between cash outlay & cash realisation by sale of finished goods & realisation of sundry debtors is known as length of operating cycle. The length of operating cycle is different from industry to industry. E.g.:The operating cycle of pharmaceutical unit would be quite different from one engaged in the manufacture of machine tools. That is, operating cycle consists of:a) Time taken to acquire raw materials & average period for which they are in store. b) Conversion process time. c) Average period for which finished goods are in store. d) Average collection period of receivables (Sundry debtors)
37
The length of operating cycle = a + b + c + d. E.g.:- a = 60 days b = 10 days c = 20 days d = 30 days, The operating cycle is 120 days (nearly 4 months). This means, there are 365/120 = 3 cycles of operations in a year. ASSESSMENT PERMISSIBLE CONCEPT:Let us consider a case of a unit where:Sales Raw Material Wages Other manufacturing expenses Total Expenditure Profit Rs.20,000 p.m. (A) Rs.14,000 p.m. Rs.2,000 p.m. Rs.3,000 p.m. Rs.19,000 p.m. (B) Rs.1000 p.m. OF WORKING FINANCE CAPITAL USING REQUIREMENT OPERATING &
BANK
CYCLE
38
The operating cycle is:Raw material Stock in process Finished goods Sundry debtors 15 days 2 days 3 days 15 days
The total length of operating cycle = 35 days (D) Working Capital Requirement = B * D / 30 = 19000 * 35 / 30 = Rs.22166 (approx.)
TRADITIONAL METHOD OF ASSESSMENT OF WORKING CAPITAL REQUIREMENT (WCR)
The operating cycle concept serves to identify the areas requiring improvement for the purpose of control & performance review. But the bankers require more detailed analysis to assess the various components of WCR viz. finance for stocks, bills, etc. Bankers provide working capital finance for holding an acceptable level of current asset viz. Raw Material, Stock-in-Process, Finished Goods & Sundry Debtors for achieving a predetermined level of production & sales. Quantification of these funds required to be blocked in each of these items of current asset at any time will therefore provide measure of the WCR of an industry.
39
While computing the WCR of a unit, it is necessary to take into account two other factors:1) Credit received on purchases 2) Advance received against orders placed for the products for industry. Thus, WCR can be computed as:Raw Material Months Requirement Stock-in-Process (for period of processing) Months cost of Rs.B Production Finished Goods Months cost of Rs.C Production required stocked Sundry Debtors Months cost of Rs.D Production (Outstanding Credits) Expenses One month (say) Rs.E A+B+C+D+E Credit received on purchases Advance Payment on Order Received
Working Capital Requirement (WCR)
Rs.A
to
be
Rs.F Rs.G
(A+B+C+D+E) (F+G)
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The unit starts with a certain amount of capital which will not normally be sufficient even to meet the cost of Fixed Assets. The unit thus arranges for a long term loan from a financial institution or a bank towards a part of the cost of fixed assets. From these two sources, after meeting the cost of fixed assets, some funds remain to be used for working capital. This amount is ‘Net Working Capital’ or ‘Liquid Surplus’ & will be one of the sources of meeting working capital requirement. The remaining funds for working capital have to be raised from Banks. Banks normally provide working capital finance by way of advances against stocks & sundry debtors. However, banks do not finance the full amount of funds required for carrying inventories & receivables & normally insist on the stake of the enterprise at every stage, by way of margins. Margins are imposed with a view to have adequate stake of the promoter in the business both to ensure his adequate interest in the business & to act as a bulwark against any stocks that the business may sustain. The margins stipulated will depend on various factors like saleability, quality, durability, price fluctuations in the market for the commodity, etc. Taking into account the total working capital requirement as assessed earlier, the permissible limit, up to which the bank finance can be granted is arrived at as shown below:-
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Permissible Limit
Raw Material Less : % margin Rs.A Rs.B Rs.A – Rs.B = Rs.P
Stock-in-process Less : % margin
Rs.C Rs.D Rs.C – Rs.D = Rs.Q
Finished Goods Less : % margin
Rs.E Rs.F Rs.E – Rs.F = Rs.R
Sundry Debtors (at sale value) Less : % margin
Rs.G Rs.H Rs.G – Rs.H = Rs.S
Total Permissible Limit
P+Q+R+S=T
‘P + Q + R’ will indicate the total limit against stock & ‘S’ the limit against sundry debtors or receivables in the form of bills. The difference between the Working Capital Requirement (WCR) & the total permissible bank borrowing (T) should be met from the Liquid Surplus or Net Working Capital. When the liquid surplus is not sufficient to meet the long term working capital requirements, there will be a ‘deficit’ in meeting the unit’s working capital requirement.
42
The format in which the Bank assesses the WCR & the permissible limit of bank finance under Traditional Method is shown below:-
Assessment of WCR
Name of the Unit: - M/s ABC Ltd. (Rs. in 000’s) Anticipated monthly sales Cost of production per month Cost of Raw Material Rs.100 Rs.90 Rs.80
Item
Stocking / Payment period
Working capital required
Margin %
Amount
Permissible limit
Imported Raw Material
---
---
---
---
---
Indigenous Raw Material
1 month
80
25
20.00
60.00
Work in Process
2 weeks
45
25
11.00
34.00
Finished Goods
2 weeks
45
25
11.00
34.00
43
Receivables sales value)
(at
1 month
90
33
23.00
67.00
Expenses
1 month
10
100
10.00
---
Total
270
75.00
195.00
Advance payment received 10.00 Credit on purchase 40.00 Working Capital Required (WCR) 270 – (10 + 40) = 220
Sources:Liquid surplus in Balance Sheet as at the end of last year Limits from Bank 195 20
Total
215
Net deficit
220 – 215 = 5
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How the deficit will be met?
Deficit will have to be met by plough back of profits or unsecured loans. Deficit should be reasonably small when compared to the WCR / Bank Finance / Profitability of the unit. Note:1. Sales are to be computed at the maximum level of anticipated production during the next 12 months. 2. Cost of production includes cost of raw material plus all expenses. 3. Work In Process (WIP) & Finished Goods are to be calculated on the basis of Cost of Production. 4. Net deficit, if any, in the balance sheet is to be added to WCR.
Since the limits will be arrived on the projections given by the unit, the assumptions & presumptions made by the unit should be properly analysed before sanction of the limit.
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PROJECTED ANNUAL TURNOVER METHOD FOR SSI UNITS (NAYAK COMMITTEE)
For SSI units which enjoy fund based working capital limits up to Rs.5 Crore, the minimum working capital should be fixed on the basis of projected annual turnover. 25% of the output or annual turnover value should be computed as the quantum of working capital required by such unit. The unit should be required to bring in 5% of their annual turnover as margin money & the Bank shall provide 20% of the turnover as working capital finance. Nayak committee guidelines correspond to working capital limits as per the operating cycle method, where the average production or processing cycle is taken to be 3 months. (i.e. working capital would be turned over 4 times in a year.)
Example: Anticipated annual output WCR @ 25% of A Less: Liquid surplus or 5% of A, whichever is higher. (Liquid surplus, say, is Rs.20,000) Minimum Permissible Bank Finance (B-C)
(Rs. in 000’s) 1200 (A) 300 (B) 60
240
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APPRAISAL
1. It is to be ensured that the projected annual turnover is reasonable & achievable by the unit & further, the estimated growth if any over the previous year is realistic.
2. Date of actual sales pertaining to the last 5 years, estimated for the current year & projected for the next year, together with the trend analysis of the industry to which the unit belongs, would also be useful while appraising the sales projections.
3. Other information regarding modernisation, expansion of the existing manufacturing capacity, government policies, taxation & other relevant internal & external factors also need to be taken into account.
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PROJECTED ANNUAL TURNOVER METHOD FOR BUSINESS ENTERPRISES IN TRADE & SERVICES SECTOR
For working capital limits up to Rs.5 Crore to C & I Trade Sector, the assessment of credit limit is to be based upon annual turnover. The credit limit equal to 15% of projected annual turnover is offered to business enterprises in the T & S Sector. It would be available for utilisation generally as a cash credit limit.
PROJECTED BALANCE SHEET (PBS) METHOD
This method is applicable to all C & I borrowers who are engaged in manufacturing, services & trading activities, including merchant exports & who require fund based working capital finance of Rs.25 lacs & above. In the case of SSI borrowers, who require working capital credit limit up to Rs.5 Crore, the limit shall be computed on the basis of Nayak Committee formula as well as that based on production & operating cycle of the unit & the higher of two may be sanctioned. Fund based working capital limits beyond Rs.5 Crore for SSI units shall be computed in the same way as for C & I units. For business enterprises in T & S sector, where the projected turnover method is not applicable, PBS method shall be followed. In PBS method, the borrower’s total business operations, financial position, management capabilities, etc. are analysed in detail to assess the working capital finance required & to evaluate the overall risk of the exposure.
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Collection of Financial Data:For working capital assessment, the required financial data are obtained from the borrower in the following forms:Form I Form II Form III Form IV Form VI Particulars of existing / proposed limits from the banking system Operating Statement Analysis of Balance Sheet Comparative Statement of CA / CL Funds Flow Statement
Information provided in the forms II, III, IV & VI serves the detailed financial analysis. In form I, in addition to information relating to working capital & TL borrowings (existing & proposed) information regarding borrowings from NBFCs, borrowings from term lending institutions for working capital purposes, inter corporate deposits taken, lease finance availed will also be collected.
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Chapter 4.2
SBI’s WORKING CAPITAL FINANCING TO AGRICULTURE SECTOR
The appraisal is always to be made in the field & only desk studies are not enough for sanctioning agriculture loan. Appraisal should generally cover following 7 aspects:-
1) Technical Aspects:a) Various inputs – Technical & Material that would go into the project. b) Choice of technology – its adaptability. c) Technical relationship between soil, water, rainfall &
temperature & their implication on the project.
2) Financial Aspects:a) Investment needed – outlay, unit cost, number of units, margin, loan, refinance, repayment. b) Working Capital needed – whether to be met by the Bank or other agencies or the borrower himself. c) Time Value of Money. d) Cash flow – time frame for generation of benefits.
50
e) Benefits Cost ratio (B.C. ratio) – Present worth of benefits over present worth of cost should be more than 1. f) Internal Rate of Return. g) Earning Power of Project. h) Financial impact on individual participant, incentive, etc. i) Opportunity Cost. j) Sources of funds for investment & working capital – Loan component & subsidy available.
3) Commercial Aspects:a) Revenue earning enterprises – how attractive. b) Arrangement for supply of raw materials required to build up the projects. c) Supply of labour required. d) Marketing arrangement for outputs – location of market, its capacity to absorb new / increased production, likely effect on price, etc.
4) Managerial Aspects:a) Ability of implementing agency (staff) to manage the project – their expertise & experience as well as that of the participating farmers. b) The necessary arrangements like training support & extension service, if new managerial skills are required by the implementing agency’s staff or the farmers.
51
5) Organisational Aspects:a) Suitability of organisational structure of the implementing agency & its capacity to implement the project. b) Organisation of other concerned agencies, their efficiency & ability to co-ordinate with the project plan.
6) Social Aspects:a) Social structure of the project area, custom & culture, attitude towards change, facilities available to hasten change in process. b) Social implication of the project effect on income distribution, impact on different groups, impact on quality of life & environmental impact. c) Impact on employment opportunity & potential.
7) Economic Aspects:a) Project’s contribution from the society’s point of view. b) Whether high priority is accorded by the government? c) Economic analysis is generally done in respect of the projects submitted by banks to NABARD.
52
GENERAL CONSIDERATIONS FOR APPRAISAL OF AGRICULTURE LOAN
1. The appraisal exercise commences after first determining the primafacie eligibility of a particular proposal. The appraisal exercise should conclude with a decision on – i. ii. What quantum of loan should be given & On what terms (security, margin, interest,
documentation, disbursal, repayment).
2. Loan applications should be sanctioned / declined as soon as possible, but in any case within the following limits (in weeks from the date of receipt of completed applications) : Those sanctioned at a branch Crop loans New Renewal / increase in limit Term Loans For agricultural activities Loans for allied agricultural activities 6 8 New Renewal / increase in limit 4 2 6 4 2 1 Those referred To controlling authorities 4 3
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3. The credit-worthiness of applicants, market prices, risk, competitive conditions, quality & location of land, technical feasibility, etc. can only be ascertained by independent field enquiries. Pre-sanction inspections are one of the sources of such information.
4. All working capital loans should be renewed each year with the exception of crop limits of regular borrowers up to Rs.5000. While term loans need not be renewed, they should nevertheless be reviewed each year.
CHECK LIST (DOCUMENTS) FOR AGRICULTURE LOAN
1. No dues certificate from other banks & title investigation report are required to obtain. 2. Report from groundwater surveys & development agency are needed to obtain regarding availability of groundwater. 3. Cost estimates for the proposed investment are reasonable & are supported by estimates / invoices given by suppliers. 4. If irrigated crops are to be taken up, then it is required to ensure that whether adequate irrigation facilities are available. If river water is utilised for irrigation, then it is necessary to confirm that whether permission has been obtained from the government department.
54
5. In case where irrigated crops are raised for the first time, the suitability of land for irrigation, the likely response from the land, availability of skilled labour, etc. are ensured. 6. The pre-sanction / post-sanction inspection reports are to be obtained from the concerned official & kept record.
DUTIES OF SPECIAL STAFF
TECHNICAL OFFICER: - He is a personnel trained in various disciplines of
agriculture. He lends support to the Bank both in planning new strategies as well as in assessing the various agriculture business proposals. He performs the following duties:i. ii. He prepares schemes for agricultural development in the area chosen. He determines whether the village selected for financing is suitable for extending loans.
55
iii. iv.
He organises village meetings for explaining the bank’s schemes. Wherever necessary, he ensures that the farmers do not experience any difficulty in getting application forms, filling & submitting them to the Bank.
v.
He examines the technical feasibility & economic viability of the proposals, makes pre-sanction inspection & submits recommendations on the proposals to the appropriate authority.
FIELD OFFICER: - The role of field officer has 3 important dimensions as
follows:i.
Appraisal of Agriculture Loans :From the moment a demand for Bank credit is received until a credit decision is taken or the demand is rejected by the appropriate authority,
all that is required to be done in the nature of scrutiny & processing of the loan application devolves on the field officer.
ii.
Obtention of appropriate documents & registration of the Bank’s charge wherever required.
iii.
Supervising disbursement of the loan amount :Since the loan is disbursed in phases and / or direct payments made there from to the suppliers of inputs or equipments, it is for the field payments from the sanctioned limit is made in sanction on record with him.
officer to ensure that
accordance with the terms of
56
SCALE OF FINANCE FOR CROPS 2007–08
(Provided By NABARD)
Name of the Crop
Total finance per Acre
Kharif Crops :
Bajra (Irrigated / Hybrid) Bajra (Rain fed) Jowar (Irrigated / Hybrid) Jowar (Rain fed) Paddy (Irrigated / Hybrid) Paddy (Rain fed) Maize 3000 2000 3100 2100 6000 4000 3500
Rabbi :
Wheat (Hybrid / irrigated) Wheat (Dry) 4000 2700
Oil Seeds & Pulses :
Soya bean Sunflower Ground Nut (Irrigated) Ground Nut (Rain fed) Ground Nut (Summer) Cash Crops : Cotton (Irrigated) 5000 3500 3000 5500 4000 550
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Onion (Late Kharif) Onion (Summer) Potato Tomato (Hybrid) Turmeric
10000 10000 12000 15000 35000
Horticultural Plants :
Grapes (Export) Grapes (Improved) Mango (Improved) Coconut Cashew 90000 70000 5000 3000 2000
Sugarcane :
Adsali Suru (Seasonal) Adsali (Tissue Culture) Suru (Tissue Culture) 22000 20000 25000 25000
Floriculture :
Rose Gladiola Gerbera 21000 30000 32000
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CHAPTER 5
DIGRAMICALLY REPRESENTATION
59
CHAPTER 5
EFFICIENCY OF CREDIT APPRAISAL SYSTEM OF SBI
The level of Non – Performing Assets (NPA) can be one of the parameters to judge the efficiency of Credit Appraisal System. Because when the borrower fails to repay the loan, it becomes a Non – Performing Asset for the Bank. But the low level of Bank NPA indicates that before sanctioning loan, the creditworthiness & repaying capacity of the loan applicants were judged properly by the Bank. Following table contains the year-wise data of Working Capital financed by SBI to Commercial & Agriculture Sector. It also contains the data of SBI’s NPA formed out of Working Capital financed by it. Amount of Working Year Capital financed (in Crore) 2008 2009 2010 2011 65.63 87.11 108.06 180.94 NPA formed out of Working Capital financed (in Crore) 7.76 5.48 6.42 10.30 Table 1.1 % NPA against amount of Working Capital financed 11.82 6.29 5.94 5.69
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Amount of Working Capital financed (in Crore)
200 150 100 50 0 2008 2009 2010 2011 Amount of Working Capital financed (in Crore)
Fig. I
NPA formed out of Working Capital financed (in Crore)
12 10 8 6 4 2 0 2008 2009 2010 2011 NPA formed out of Working Capital financed (in Crore)
Fig. II
61
Fig. III
62
Remarks: Fig. I shows that the amount of Working Capital financed by the Bank increases from year 2008 to year 2011. Fig. II NPA formed out of Working Capital financed (in Crore).But Fig.III shows that the % NPA level goes down from year 2008 to year 2011, which indicates that the maximum amount of loan is repaid by the customers. This in turn indicates that the creditworthiness of most of the borrowers was judged properly by the bank. Hence, it is proved that the efficiency of SBI’s Credit Appraisal System is improving in subsequent years. Table 1.1 shows that the amount of Working Capital financed by SBI has increased in subsequent years. In year 2011, that amount has gone up to 180.94Crores. But the NPA formed out of it has also increased up to 10.30Crores. The reason behind it is:While announcing this year’s budget, the Finance declared debt relief for farmers. So this year (2011), the Bank could not recover the interest & the whole amount of Working Capital loan sanctioned to Agriculture Sector.
63
Chapter 6
LIMITATIONS IN THE STUDY
64
Chapter 6
LIMITATIONS OF THE STUDY
1. This project report considers Credit Appraisal System followed by “State Bank of India” only & not that of the other banks. 2. This project report considers the Credit Appraisal System for Working Capital financing to Commercial & Agriculture Sector. It does not consider the following areas:a) Home loan b) Car loan c) Personal loan d) Education loan
3. The people to be interviewed at SBI were working people & somewhere responsible persons & hence it was difficult to get their time. 4. The time period for the study was short due to which deep study of the concept was not possible to carry out. 5. The study is based on past data & may not be true indicator of future performance. 6. Confidential data was not used.
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Chapter 7
CONCLUSION
66
Chapter 7
CONCLUSION
? In order to assure the recovery of credit as well as the safety & profitability of the organisation, the bank must follow the Credit Appraisal System, very strictly. ? Though it is a lengthy & critical procedure, SBI is paying special attention to verify the credit worthiness of loan applicants, to avoid any risks in future. ? A study of past data reveals that the percentage of NPA is going down in SBI, though the Working Capital is being financed on large scale by it. This fact proves that the efficiency of Credit Appraisal System of SBI is improving in subsequent years. ? During the project work, some drawbacks in the SBI’s process of credit appraisal are pointed out as follows:-
a) More Time Consumption & More Paper Work: For estimating the financial position of the loan applicant as well as for deciding the Maximum Permissible Bank Finance (MPBF) for him, the documents showing his assets & liabilities are required to be collected. In case of High Value proposals, the applicant’s income, his loan repaying capacity, his property, etc. are primarily verified at SBI branch & then at SBI’s Regional Business Office. Thus, it takes more time for a delivery of credit to customers & it requires a lot of paper work also.
67
b) No use of Internet facility: Though internet services are the means for easy & fast data collection, it cannot be used in this Credit Appraisal System. Because the information collected about the borrower through internet may not be authentic. This fact prohibits the use of internet.
68
Chapter 8
BIBLOGRAPHY
69
Chapter 8
BIBLIOGRAPHY
? Internet Websites:-
? www.statebankofindia.com ? www.google.com ? www.wikipedia.org ? www.nabard.org
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ANNEXURE 1 LIST OF ABBREVIATIONS Commonly Used Abbreviations
CRA CARE ICRA CRISIL CMA ECCB FBWC DCC CIR IRAC Status C & I Sector SBF SSI WCR MPBF NPA NWC TNW CRA CR SME Credit Rating Agency Credit Analysis & Research Ltd. Investment Information & Credit Rating Agency of India Ltd. Credit Rating Information Services of India Ltd. Credit Monitoring Arrangement Executive Committee of the Central Board Fund Based Working Capital Demand Cash Credit Credit Information Report Income Recognition & Asset Classification Status Commercial & Industrial Sector Small Business Finance Small Scale Industry Working Capital Requirement Maximum Permissible Bank Finance Non – Performing Assets Net Working Capital Total Net Worth Credit Risk Assessment Current Ratio Small Medium Enterprises
Long Form / Meaning
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NABARD DSCR BC Ratio IRR
National Bank for Agriculture & Rural development Debt Service Coverage Ratio Benefit Cost Ratio Internal Rate of Return
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