Description
This is a presentation describes the assessment of credit proposal.
ASSESSMENT OF CREDIT PROPOSALS
TYPES OF CREDIT FACILITIES Funded Facilities • Cash Credit
– Financing of working capital – A limit is sanctioned wherein operation is allowed within the limit as per the Drawing Power (DP)
• Term Loan
– For financing acquisition of fixed assets
TYPES OF CREDIT FACILITIES Non-Fund facilities • Letter of Credit (LC)
– A method of settlement of payment of trade transaction
• Bank Guarantee (BG)
– Guarantees issued by bank in favour of the beneficiary on behalf of the client of the bank.
Letter of Credit (LC)
• It contains a written undertaking given by the bank on behalf of purchaser to the seller to make payment of a stated amount on presentation of stipulated documents and fulfillment of terms & conditions incorporated therein. • All foreign LCs are subject to provisions of the Uniform Customs & Practice for Documentary Credit (UCPDC) issued by the International Chamber of Commerce. (Currently applicable -UCP 600 ICC Publication No. 600 - UCPDC 2007 Revision effective 01.07.07)
Parties to an LC
• Applicant / Opener: – The person on whose behalf and under whose instructions the LC is issued. • Opening Bank / Issuing Bank: – The bank issuing the LC • Advising Bank: – Notification regarding issuing an LC may be directly sent to the beneficiary by the opening bank. However, it is customary to advise the LC through some other bank operating at the place / country of seller. The bank which advises the LC to the beneficiary is known as Advising Bank.
Parties to an LC
• Confirming Bank: It may happen that the issuing bank is not widely known in the exporter’s country and the exporter is not prepared to rely on the LC opened by that bank. In such cases, opening bank requests other bank in the country of exporter to add its confirmation which amounts to an additional undertaking being given by that bank to the beneficiary. The bank adding the confirmation is known as the confirming bank and has the same liability towards the beneficiary as that of the opening bank. • Negotiating Bank: The bank which negotiates the document drawn under the LC and makes payment to the beneficiary.
Types of LC
Broadly two categories • Revocable LC: – May be amended / cancelled without prior notification to the beneficiary. Not accepted as no protection. • Irrevocable LC: – Can not be amended / cancelled without agreement of all parties thereto.
Special types of LC
• Revolving LC – Amount of LC is reinstated after original LC amount has been utilised. • Transferable LC: – Which can be transferred by the original (first) beneficiary to one or more second beneficiaries. Normally used first beneficiary does not supply the merchandise himself but is a middleman and transfers part or all of his right and obligations to the actual suppliers as second beneficiaries. It should be specially stated in the LC as ‘Transferable’.
Special types of LC
• Back to Back LC:
– Arrangement in which one irrevocable L/C serves as the collateral for another; the advising bank of the first L/C becomes the issuing bank of the second L/C. In contrast to a 'transferable letter of credit, permission of the ultimate buyer (the applicant of the first L/C) or that of the issuing bank, is not required in a backto-back L/C. It is used mainly by middlemen (intermediaries) to hide the identity of the actual supplier or manufacturer. Also called counter credit or reciprocal letter of credit.
• Red Clause LC:
– Red Clause LC authorises the advising bank to grant advance to the beneficiary at the pre-shipment stage itself. The advance by the advising bank is recovered at the time of negotiation of documents under LC. In case no shipment is done by the beneficiary and he fails to present the documents under LC, the bank making the advance under red clause LC will claim the reimbursement of advance made from the issuing bank.
Appraisal of Credit facilities
• • • • • • Appraisal ofFinancial Risk Business Risk Management Risk Industry Risk BORROWER RISK:
– Knowing a borrower means knowing him vis-à-vis his business. – It is a combination of five Cs – Character, Capacity, Capital, Condition & Collateral. – The most important of the Cs is Character. Real Test -how the borrower would respond to a real emergency when all the other Cs have turned bad.
Most difficult to assess as it is predominantly judgemental.
Project Appraisal for Term Loan
• • • •
Technical Feasibility Managerial Competence Financial & Commercial viability Environment & Economic viability
Assessment of Term Loan
• Technical Feasibility
Main points to be examined – Availability of basic infrastructure – Land, building, water, power, labour – Licensing / Registration requirements – Selection of technology / technical process – Availability of suitable machinery / raw material / skilled labour
• Managerial Competence
– Experience, Track record of promoter, succession policy, availability of competent personnel for managing production, finance, marketing & personnel.
• Financial & Commercial Viability
– – – – Assessment of Project Cost – sources of finance Profitability Analysis Break-Even analysis DSCR
• Environmental & Economic viability
• Employment potential • Utilisation of domestically available raw materials & other facilities. • Development of industrially backward area as per Govt. Policy. • Effect of project on environment (pollution control measures), effective disposal of effluent. • Energy conservation device employed for the project.
Financial Viability
Assessment of Project Cost – sources of finance
Project Cost Particulars Land & site Development Building Plant & Machinery Amount Sources of Finance Particulars Amount 60 240 10 100 Promoter’s contribution 50 Secured Loans from Bank 100 Unsecured loans
Preliminary expenses
Pre-operative expenses Provisions for contingencies TOTAL
20 Capital Subsidy
30 20 320
10
320
Financial Viability
Profitability Analysis • Projection of sales and profit for the period covering the life of the term loan. Analyse the same and arrive at the acceptable level. • Fixing rate of interest and repayment period.
Break-Even Analysis • Minimum level of sale at which the unit will run on ‘no profit no loss’ • Fixed Costs – Costs not related to the volume of production and remain constant over a period of time.
– Rent, depreciation, interest on TL, salaries of permanent employees
• Variable Costs - raw material, fuel, power, wages, packaging
Break-Even Analysis
Installed Capacity Total Fixed Costs Sale price Variable Costs : 100000 units : Rs. 4.00 lakh per year : Rs. 20 per unit : Rs. 12 per unit
• Contribution per unit ( C) = Sale price – Variable costs = 20-12 = Rs. 8 per unit • BEP in terms of volume of production= Total FC / C =400000/8 = 50000 units • BEP in terms of plant capacity = (50000/100000) * 100 = 50%
Break-Even Analysis
Margin of Safety • Actual Sales: Rs. 50000 • BEP Sales: Rs. 40000 • Margin of Safety = [(5000040000)/50000]*100 = [10000/50000]*100 = 20%
Break-Even Analysis
• • • • • •
BEP in terms of Sales Profit : Rs. 5.00 lakh Sales : Rs. 60.00 lakh Fixed Costs : Rs. 15.00 lakh Contribution= FC+Profit = 5+15 = Rs. 20 lakh P/V ratio = C/S = 20/60 = 1/3 BEP = F / P/V Ratio = 15 / 1/3 = Rs. 45 lakh
DSCR
• DSCR = (Net profit + Depreciation + Interest) / (Repayment during the year + Interest) • Average DSCR • Normal level? • Margin stipulation: effect of moratorium with funding of interest
Balance Sheet Spread
Liabilities • Current Liabilities
– – – – – – – – – – Short-tem borrowings from bank & from others Deposits maturing within 1 year Sundry Creditors Unsecured loans Advances from customers, deposit from dealers Interest accrued but not due for payment Provision for taxation Dividend payable Other statutory liabilities due within one year Instalments of term loan / debentures / redeemable preference shares (due within 1 year) – Other current liabilities & provisions (due within 1 year)
• Term Liabilities – Debentures not maturing within 1 year – Portion of term loan due after 1 year – Redeemable preference shares (not maturing within 1 year but of maturity not exceeding 12 years)
• Net worth
• • • • Ordinary share capital Preference share capital (maturing after 12 years) General reserves & other reserves Balance in P/L A/C
Assets
• Current Assets – Cash & bank balance – Investments (quoted) other than long-term investments – Receivables (other than deferred receivables) – Instalments of deferred receivables (due within 1 year) – Inventory
• Raw materials, Stock-in-process, Finished goods & Other consumable goods
– Advance to suppliers of raw materials – Advance payment of tax – Other current assets
• Fixed Assets – Net Block (Gross Block less depreciation) • Misc. Assets (Non-current Assets) – Investments /book debts/advances/deposits which are not current assets – Non-consumable stores & spares – Other misc. assets • Intangible Assets – Goodwill, patents, preliminary & pre-operative expenses
Balance Sheet Analysis • The applicant submits past financial statements along with projections. • Regrouping of assets and liabilities after receipt of financial statements. • Analysis of the past financials and the projections with ratio analysis.
Ratio Analysis
• • Leverage Ratio Debt Equity Ratio = Long term liabilities / Net worth Total Indebtedness Ratio= Total Outside Liabilities / Tangible Net Worth (TNW) Liquidity Ratio Current Ratio= Current Assets / Current Liabilities Quick ratio = Quick assets / Current Liabilities Quick assets = Current assets excluding stock and prepaid expenses Because stock is not immediately realizable and prepaid expenses cannot be realized in cash
• •
Ratio Analysis
Activity Ratio • Debtors Velocity= Debtors*365 / Sales • Creditors Velocity= Creditors*365/Purchases • Inventory Holding = (Average level of inventory/Cost of Sales)*365
Yr. ending 31.03. i) Raw materials (including (including stores and other items used in the process of manufacture) – Imported + Indigenous ii) Other spares -Imported + Indigenous iii) Power & Fuel iv) Labour charges v) Other manufacturing expenses vi) Depreciation Sub total ( i to vi) viii) Add: Opening stocks-in-process Sub total ix) Deduct: Closing stocks-in-process x) Cost of Production xi) Add: Opening stock of finished goods
xii) Deduct: Closing stock of finished goods
Cost of Sales
Ratio Analysis
Profitability Ratio • Gross profit Ratio = GP / Sales
• Net profit ratio = NP / Sales
• Return on proprietor’s fund = (Net profit / Net worth)*100
Some Balance sheet items
• Unsecured Loans: Should they be considered as quasi-capital • Fixed Assets - Items of fixed assets, method of depreciation • Depreciation:
– Change in method of depreciation – WDV method changed to Straight Line Method with retrospective effect. Company would be in a position to write back excess depreciation resulting in higher profit – No depreciation on certain assets, no declaration of dividend, no charging of remuneration by promoters & declaration of profit—shows that company is in a state of urgency to show profit (perhaps to seek new / enhanced credit facility from bank.
NET WORKING CAPITAL
• Concept of NWC Liabilities Capital Long Term Liabilities
Working capital Current Assets from bank
Assets Fixed Assets
Current Liabilities
Assessment of Working Capital Limit
Current Liabilities Creditors for purchases Current Assets 100 Raw material 200
Other Current liabilities
Sub-total Bank borrowing
50 Stock-inprocess
150 Finished goods 180 Receivables Other current assets
20
90 50 10 370
Total
330 Total
Assessment of Working Capital Limit
1st Method 1 2 TCA 370 2nd Method 370 150
Less: CL excl 150 Bank borrowing WCG 25% of WCG 220 55 25% of TCA
3=(1-2) 4 5
220 92 40
Projected NWC 40
6=3-4
7=3-5 MPBF Excess Borrowing Lower of 6 & 7
165
180 165 15
128
180 128 52
Assessment of Working Capital Limit
• Turnover Method: Projected Sales : Rs. 100 lakh Working Capital Gap : Rs. 25 lakh (25% of Projected sales) Margin requirement : Rs. 5 lakh (5% of Projected sales) NWC available : Rs. 7 lakh PBF : Rs. 18 lakh In case there is shortfall in NWC, PBF is to be sanctioned and released in stages as per Drawing Power available.
Current Ratio
Period 1 Bank Borrowing Other CL TCL TCA Bank borrowing / TCA % Other CL/TCA % Current Ratio NWC • 500 250 750 1000 50% 25% 1.33 250 Period 2 500 167 667 900 55.55% 18.55% 1.35 233 Period 3 575 348 923 1200 47.92% 29% 1.30 277 Period 4 725 370 1095 1500 48.33% 24.67% 1.37 405
•
Period 2 – Current Ratio improved, NWC deteriorated Enterprise has managed to reduce other current liabilities at the cost of bank borrowing Period 3 Current ratio reduced. However, the position may not be viewed with serious concern as bank borrowings have gone down. Lower current ratio is due to higher level of other current liabilities
Current Ratio
Steady level of current assets & current liabilities Total Current Liabilities Current Assets: Inventory Receivables Cash 600 250 150 500 350 150 450 450 100 Period 1 750 Period 2 750 Period 3 750
Total Current Assets
Current Ratio Inventory / CL Receivables / CL Cash / CL Total • • •
1000
1.33 0.80 0.33 0.20 1.33
1000
1.33 0.67 0.46 0.20 1.33
1000
1.33 0.60 0.60 0.13 1.33
Period 2 – Realization of receivables gone down Period 3 – Receivable accumulating, cash realization slow Current Ratio alone does not say everything
RETAIL CREDIT
Appraisal of borrower and guarantor: • Credit history of the borrower – payment behaviour • Availability and acceptability of guarantor • Other personal factors – Age, number of dependents, other sources of income • Consistency of income- worker in unorganized private sector company / Govt. Employee / MNC • Nature of employment – position held • Social status • Income Tax assessment • Income – Net surplus available • EMI requirement- EMI / Net Income =>3 indicates reasonably good repayment capacity • Appraisal of property (Housing Loan) – Legal scrutiny of title, age of property, conveyance deed, valuation, mortgagibility
Thank You
doc_937785785.ppt
This is a presentation describes the assessment of credit proposal.
ASSESSMENT OF CREDIT PROPOSALS
TYPES OF CREDIT FACILITIES Funded Facilities • Cash Credit
– Financing of working capital – A limit is sanctioned wherein operation is allowed within the limit as per the Drawing Power (DP)
• Term Loan
– For financing acquisition of fixed assets
TYPES OF CREDIT FACILITIES Non-Fund facilities • Letter of Credit (LC)
– A method of settlement of payment of trade transaction
• Bank Guarantee (BG)
– Guarantees issued by bank in favour of the beneficiary on behalf of the client of the bank.
Letter of Credit (LC)
• It contains a written undertaking given by the bank on behalf of purchaser to the seller to make payment of a stated amount on presentation of stipulated documents and fulfillment of terms & conditions incorporated therein. • All foreign LCs are subject to provisions of the Uniform Customs & Practice for Documentary Credit (UCPDC) issued by the International Chamber of Commerce. (Currently applicable -UCP 600 ICC Publication No. 600 - UCPDC 2007 Revision effective 01.07.07)
Parties to an LC
• Applicant / Opener: – The person on whose behalf and under whose instructions the LC is issued. • Opening Bank / Issuing Bank: – The bank issuing the LC • Advising Bank: – Notification regarding issuing an LC may be directly sent to the beneficiary by the opening bank. However, it is customary to advise the LC through some other bank operating at the place / country of seller. The bank which advises the LC to the beneficiary is known as Advising Bank.
Parties to an LC
• Confirming Bank: It may happen that the issuing bank is not widely known in the exporter’s country and the exporter is not prepared to rely on the LC opened by that bank. In such cases, opening bank requests other bank in the country of exporter to add its confirmation which amounts to an additional undertaking being given by that bank to the beneficiary. The bank adding the confirmation is known as the confirming bank and has the same liability towards the beneficiary as that of the opening bank. • Negotiating Bank: The bank which negotiates the document drawn under the LC and makes payment to the beneficiary.
Types of LC
Broadly two categories • Revocable LC: – May be amended / cancelled without prior notification to the beneficiary. Not accepted as no protection. • Irrevocable LC: – Can not be amended / cancelled without agreement of all parties thereto.
Special types of LC
• Revolving LC – Amount of LC is reinstated after original LC amount has been utilised. • Transferable LC: – Which can be transferred by the original (first) beneficiary to one or more second beneficiaries. Normally used first beneficiary does not supply the merchandise himself but is a middleman and transfers part or all of his right and obligations to the actual suppliers as second beneficiaries. It should be specially stated in the LC as ‘Transferable’.
Special types of LC
• Back to Back LC:
– Arrangement in which one irrevocable L/C serves as the collateral for another; the advising bank of the first L/C becomes the issuing bank of the second L/C. In contrast to a 'transferable letter of credit, permission of the ultimate buyer (the applicant of the first L/C) or that of the issuing bank, is not required in a backto-back L/C. It is used mainly by middlemen (intermediaries) to hide the identity of the actual supplier or manufacturer. Also called counter credit or reciprocal letter of credit.
• Red Clause LC:
– Red Clause LC authorises the advising bank to grant advance to the beneficiary at the pre-shipment stage itself. The advance by the advising bank is recovered at the time of negotiation of documents under LC. In case no shipment is done by the beneficiary and he fails to present the documents under LC, the bank making the advance under red clause LC will claim the reimbursement of advance made from the issuing bank.
Appraisal of Credit facilities
• • • • • • Appraisal ofFinancial Risk Business Risk Management Risk Industry Risk BORROWER RISK:
– Knowing a borrower means knowing him vis-à-vis his business. – It is a combination of five Cs – Character, Capacity, Capital, Condition & Collateral. – The most important of the Cs is Character. Real Test -how the borrower would respond to a real emergency when all the other Cs have turned bad.
Most difficult to assess as it is predominantly judgemental.
Project Appraisal for Term Loan
• • • •
Technical Feasibility Managerial Competence Financial & Commercial viability Environment & Economic viability
Assessment of Term Loan
• Technical Feasibility
Main points to be examined – Availability of basic infrastructure – Land, building, water, power, labour – Licensing / Registration requirements – Selection of technology / technical process – Availability of suitable machinery / raw material / skilled labour
• Managerial Competence
– Experience, Track record of promoter, succession policy, availability of competent personnel for managing production, finance, marketing & personnel.
• Financial & Commercial Viability
– – – – Assessment of Project Cost – sources of finance Profitability Analysis Break-Even analysis DSCR
• Environmental & Economic viability
• Employment potential • Utilisation of domestically available raw materials & other facilities. • Development of industrially backward area as per Govt. Policy. • Effect of project on environment (pollution control measures), effective disposal of effluent. • Energy conservation device employed for the project.
Financial Viability
Assessment of Project Cost – sources of finance
Project Cost Particulars Land & site Development Building Plant & Machinery Amount Sources of Finance Particulars Amount 60 240 10 100 Promoter’s contribution 50 Secured Loans from Bank 100 Unsecured loans
Preliminary expenses
Pre-operative expenses Provisions for contingencies TOTAL
20 Capital Subsidy
30 20 320
10
320
Financial Viability
Profitability Analysis • Projection of sales and profit for the period covering the life of the term loan. Analyse the same and arrive at the acceptable level. • Fixing rate of interest and repayment period.
Break-Even Analysis • Minimum level of sale at which the unit will run on ‘no profit no loss’ • Fixed Costs – Costs not related to the volume of production and remain constant over a period of time.
– Rent, depreciation, interest on TL, salaries of permanent employees
• Variable Costs - raw material, fuel, power, wages, packaging
Break-Even Analysis
Installed Capacity Total Fixed Costs Sale price Variable Costs : 100000 units : Rs. 4.00 lakh per year : Rs. 20 per unit : Rs. 12 per unit
• Contribution per unit ( C) = Sale price – Variable costs = 20-12 = Rs. 8 per unit • BEP in terms of volume of production= Total FC / C =400000/8 = 50000 units • BEP in terms of plant capacity = (50000/100000) * 100 = 50%
Break-Even Analysis
Margin of Safety • Actual Sales: Rs. 50000 • BEP Sales: Rs. 40000 • Margin of Safety = [(5000040000)/50000]*100 = [10000/50000]*100 = 20%
Break-Even Analysis
• • • • • •
BEP in terms of Sales Profit : Rs. 5.00 lakh Sales : Rs. 60.00 lakh Fixed Costs : Rs. 15.00 lakh Contribution= FC+Profit = 5+15 = Rs. 20 lakh P/V ratio = C/S = 20/60 = 1/3 BEP = F / P/V Ratio = 15 / 1/3 = Rs. 45 lakh
DSCR
• DSCR = (Net profit + Depreciation + Interest) / (Repayment during the year + Interest) • Average DSCR • Normal level? • Margin stipulation: effect of moratorium with funding of interest
Balance Sheet Spread
Liabilities • Current Liabilities
– – – – – – – – – – Short-tem borrowings from bank & from others Deposits maturing within 1 year Sundry Creditors Unsecured loans Advances from customers, deposit from dealers Interest accrued but not due for payment Provision for taxation Dividend payable Other statutory liabilities due within one year Instalments of term loan / debentures / redeemable preference shares (due within 1 year) – Other current liabilities & provisions (due within 1 year)
• Term Liabilities – Debentures not maturing within 1 year – Portion of term loan due after 1 year – Redeemable preference shares (not maturing within 1 year but of maturity not exceeding 12 years)
• Net worth
• • • • Ordinary share capital Preference share capital (maturing after 12 years) General reserves & other reserves Balance in P/L A/C
Assets
• Current Assets – Cash & bank balance – Investments (quoted) other than long-term investments – Receivables (other than deferred receivables) – Instalments of deferred receivables (due within 1 year) – Inventory
• Raw materials, Stock-in-process, Finished goods & Other consumable goods
– Advance to suppliers of raw materials – Advance payment of tax – Other current assets
• Fixed Assets – Net Block (Gross Block less depreciation) • Misc. Assets (Non-current Assets) – Investments /book debts/advances/deposits which are not current assets – Non-consumable stores & spares – Other misc. assets • Intangible Assets – Goodwill, patents, preliminary & pre-operative expenses
Balance Sheet Analysis • The applicant submits past financial statements along with projections. • Regrouping of assets and liabilities after receipt of financial statements. • Analysis of the past financials and the projections with ratio analysis.
Ratio Analysis
• • Leverage Ratio Debt Equity Ratio = Long term liabilities / Net worth Total Indebtedness Ratio= Total Outside Liabilities / Tangible Net Worth (TNW) Liquidity Ratio Current Ratio= Current Assets / Current Liabilities Quick ratio = Quick assets / Current Liabilities Quick assets = Current assets excluding stock and prepaid expenses Because stock is not immediately realizable and prepaid expenses cannot be realized in cash
• •
Ratio Analysis
Activity Ratio • Debtors Velocity= Debtors*365 / Sales • Creditors Velocity= Creditors*365/Purchases • Inventory Holding = (Average level of inventory/Cost of Sales)*365
Yr. ending 31.03. i) Raw materials (including (including stores and other items used in the process of manufacture) – Imported + Indigenous ii) Other spares -Imported + Indigenous iii) Power & Fuel iv) Labour charges v) Other manufacturing expenses vi) Depreciation Sub total ( i to vi) viii) Add: Opening stocks-in-process Sub total ix) Deduct: Closing stocks-in-process x) Cost of Production xi) Add: Opening stock of finished goods
xii) Deduct: Closing stock of finished goods
Cost of Sales
Ratio Analysis
Profitability Ratio • Gross profit Ratio = GP / Sales
• Net profit ratio = NP / Sales
• Return on proprietor’s fund = (Net profit / Net worth)*100
Some Balance sheet items
• Unsecured Loans: Should they be considered as quasi-capital • Fixed Assets - Items of fixed assets, method of depreciation • Depreciation:
– Change in method of depreciation – WDV method changed to Straight Line Method with retrospective effect. Company would be in a position to write back excess depreciation resulting in higher profit – No depreciation on certain assets, no declaration of dividend, no charging of remuneration by promoters & declaration of profit—shows that company is in a state of urgency to show profit (perhaps to seek new / enhanced credit facility from bank.
NET WORKING CAPITAL
• Concept of NWC Liabilities Capital Long Term Liabilities
Working capital Current Assets from bank
Assets Fixed Assets
Current Liabilities
Assessment of Working Capital Limit
Current Liabilities Creditors for purchases Current Assets 100 Raw material 200
Other Current liabilities
Sub-total Bank borrowing
50 Stock-inprocess
150 Finished goods 180 Receivables Other current assets
20
90 50 10 370
Total
330 Total
Assessment of Working Capital Limit
1st Method 1 2 TCA 370 2nd Method 370 150
Less: CL excl 150 Bank borrowing WCG 25% of WCG 220 55 25% of TCA
3=(1-2) 4 5
220 92 40
Projected NWC 40
6=3-4
7=3-5 MPBF Excess Borrowing Lower of 6 & 7
165
180 165 15
128
180 128 52
Assessment of Working Capital Limit
• Turnover Method: Projected Sales : Rs. 100 lakh Working Capital Gap : Rs. 25 lakh (25% of Projected sales) Margin requirement : Rs. 5 lakh (5% of Projected sales) NWC available : Rs. 7 lakh PBF : Rs. 18 lakh In case there is shortfall in NWC, PBF is to be sanctioned and released in stages as per Drawing Power available.
Current Ratio
Period 1 Bank Borrowing Other CL TCL TCA Bank borrowing / TCA % Other CL/TCA % Current Ratio NWC • 500 250 750 1000 50% 25% 1.33 250 Period 2 500 167 667 900 55.55% 18.55% 1.35 233 Period 3 575 348 923 1200 47.92% 29% 1.30 277 Period 4 725 370 1095 1500 48.33% 24.67% 1.37 405
•
Period 2 – Current Ratio improved, NWC deteriorated Enterprise has managed to reduce other current liabilities at the cost of bank borrowing Period 3 Current ratio reduced. However, the position may not be viewed with serious concern as bank borrowings have gone down. Lower current ratio is due to higher level of other current liabilities
Current Ratio
Steady level of current assets & current liabilities Total Current Liabilities Current Assets: Inventory Receivables Cash 600 250 150 500 350 150 450 450 100 Period 1 750 Period 2 750 Period 3 750
Total Current Assets
Current Ratio Inventory / CL Receivables / CL Cash / CL Total • • •
1000
1.33 0.80 0.33 0.20 1.33
1000
1.33 0.67 0.46 0.20 1.33
1000
1.33 0.60 0.60 0.13 1.33
Period 2 – Realization of receivables gone down Period 3 – Receivable accumulating, cash realization slow Current Ratio alone does not say everything
RETAIL CREDIT
Appraisal of borrower and guarantor: • Credit history of the borrower – payment behaviour • Availability and acceptability of guarantor • Other personal factors – Age, number of dependents, other sources of income • Consistency of income- worker in unorganized private sector company / Govt. Employee / MNC • Nature of employment – position held • Social status • Income Tax assessment • Income – Net surplus available • EMI requirement- EMI / Net Income =>3 indicates reasonably good repayment capacity • Appraisal of property (Housing Loan) – Legal scrutiny of title, age of property, conveyance deed, valuation, mortgagibility
Thank You
doc_937785785.ppt