perception of bank loans among SME

Description
perception of bank loans among SME

MBA project

Perception of Unsecured Business Loans among SME

CHAPTER - 1

INTRODUCTION

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1.1 Introduction
Kotak Mahindra Bank Ltd is an Indian financial service firm established in 1985. It was previously known as Kotak Mahindra Finance Limited, a non-banking financial company. In February 2003, Kotak Mahindra Finance Ltd, the group's flagship company was given the license to carry on banking business by the Reserve Bank of India (RBI). Unsecured Business Loan, as the name explains is a type of loan that doesn't require collateral. It is typically at a higher rate of interest and is taken for a comparatively smaller tenor Many people prefer to apply for Unsecured Loans or loans without collateral, thinking that it involves much less risk and responsibility. While it is true that unsecured loans do not require the submission of collateral or the borrower's home property, a borrower must still take his/her repayment obligations seriously. Compared to secured loans, loans without collateral are expected to have higher interest rates. It is very important to make sure that the rate of your unsecured loan is based on a fixed-rate system, not a variable one. In India, small and medium enterprises (SME) are a generic term used to describe small scale industrial (SSI) units and medium-scale industrial units. Any industrial unit with a total investment in its fixed assets or leased assets or hirepurchase asset upto Rs10 million is considered as a SSI unit and investment up to Rs. 100 million is considered as a medium unit. In addition, an SSI unit should neither be a subsidiary of any other industrial unit nor can it be owned or controlled by any other industrial unit. The SME sector produces a wide range of industrial products such as food products, beverage, tobacco and tobacco products, cotton textiles, wool, silk, synthetic products, jute, hemp & jute products, wood & wood products, furniture and fixtures, paper & paper products, printing publishing and allied industries, machinery, machines, apparatus, appliances and electrical machinery. SME sector also has a large number of service industries. The small scale sector in India comprises of a diverse range of units from traditional crafts to high-tech industries. The number of SSI working units (registered & unregistered) in India totalled 11.4 million in 2003-04 80.5 per cent of which are proprietary concerns and

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16.8 per cent are partnership firms and private limited companies. SSI is one of the significant segments of the Indian economy, contributing about 7 per cent to the Indian GDP and providing employment to over 28 million people.

1.2 Background of the study
An unsecured business loan is a business loan that is not backed by collateral. In most cases, this leaves unsecured business loan lenders to rely solely on the borrower?s credit rating. Collateral serves as a means for the lender to get back the money that they have lend, should the borrower default on the loan. It is a back-up plan for lenders to make sure that they get their money back no matter what. If a borrower does not have collateral, a lender may require the borrower to have a near perfect credit score. This is because the lender can only rely on the borrower?s past borrowing and repayment habits to determine if he/she is likely to repay the loan. Consequently, it is virtually impossible for a potential borrower with a low credit score to receive an unsecured business loan, because their credit history suggests that they will not repay their loan on time, if at all. Banks and other lenders who will look over your application for an unsecured business loan would like to see positive business credit history that shows that you will pay the loan. Since the loan is unsecured they will be more cautious about who they extend credit to. So identifying the right customers is very important and also what are the respondent?s preferences while taking unsecured Business Loans. This study can be very useful for the Banks to understand how a SME?s responds for an Unsecured Business Loans and also to find out the respondents requirements while preferring an Unsecured Business Loans.

1.3 Statement of the Problem
Unsecured loans do not require the submission of collateral or the borrower's home property, and while comparing with secured loans, loans without collateral are expected to have higher interest rates .Unsecured business loan financing can be used for almost anything surrounding your business including the purchase of equipment, remodelling, or office expansion. Unsecured loans have a fixed interest rate so you

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can be assured that your monthly instalment fees will never change throughout your repayment term. Banks and other lenders who will look over your application for an unsecured business loan would like to see positive business credit history that shows that you will pay the loan. Since the loan is unsecured they will be more cautious about who they extend credit to. So identifying the right customers is very important and also what are the respondent?s preferences while taking unsecured Business Loans. This study can be very useful for the Banks to understand how a SME?s responds for an Unsecured Business Loans and also to find out the respondents requirements while preferring an Unsecured Business Loans.

1.4 Objectives of the study
1. To have a basic understandings about Unsecured Business loan requirements 2. To know the preference level of respondents in going for Unsecured Business Loans 3. To study about respondents variations while choosing Unsecured Business Loans

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CHAPTER – 2 INDUSTRY PROFILE & COMPANY PROFILE

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2.1 INDUSTRY PROFILE Global Banking Industry
Financial systems in countries throughout the world range from fairly rudimentary to quite sophisticated and from extremely fragile to relatively stable. A growing number of studies provide empirical evidence showing that well-functioning financial systems accelerate long-run economic growth by allocating funds to more productive investments than poorly-developed financial systems. Stable banking systems are an important component of well-functioning financial systems as has been vividly demonstrated by recent developments around the globe. When banking or, more generally, financial systems temporarily break down or operate ineffectively, the ability of firms to obtain funds necessary for continuing existing projects and pursuing new endeavours is curtailed. Severe

disruptions in the intermediation process can even lead to financial crises and, in some cases, undo years of economic and social progress. Since 1980 more than 130 countries have experienced banking problems that have been costly to resolve and disruptive to economic development. This troublesome situation has led to calls for banking reform by national governments and such international organizations as the World Bank and the International Monetary Fund. Apart from some fairly general proposals for reform, such as greater transparency and an international financial authority, there are relatively few proposals for specific structural, regulatory and supervisory reforms. The global banking industry has been growing rapidly in the recent period. Profitability1 of the top 1,000 banks in the world, as measured by the ratio of pre-tax profits to Tier I capital, according to the latest annual survey by The Banker, London, (released in Jul 2007 using fiscal 2006 bank results) rose by 23.4% over 22.7% reported in 2006 and 19.9% in 2005. The aggregate bank profits, during the period 2002-07, rose 3.5 times from US $ 222.8 bn in 2002 to US $ 786 bn in 2007. Concerns of slowing down of profits, which grew at 18.6% in 2006, were overcome with the world?s top banks showing a profit growth of 21.7% in 2007. Tier I Capital of the global banks reached US $ 3.3 trillion, a growth of 18.3% and assets rose a

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robust 16.3% to reach US $ 74 trillion in 2007. There was a marked increase in the growth of capital and assets in 2007 survey as compared to the previous year. The United States holds a major share in global banking. In the 2007 survey, United States accounted for 19.1% of the aggregate capital of the world?s top 1000 banks, 13.2% of the aggregate assets and 23.6% of the profits and posted an average return on capital of 28.9%, much higher than the world average of 23.4%. Japan accounted for 10% each of the aggregate Tier I capital and total assets respectively and 7% of overall profits with a return on capital of 16.2%. The European Union accounted for 42% of the capital, 52.5% of the assets and 40.7% of aggregated profits, making it the largest group in the global banking community with a return on capital that rose from 20.9% in 2006 to 22.7% in 2007. Emerging economies, which have been showing rapid growth in the global financial markets, made a mark in banking also. Two Chinese banks namely, ICBC and Bank of China find themselves in the top 10 banks in the world on the basis of Tier I Capital. These two banks together hold US $ 111 bn of capital. On the basis of the market capitalisation, these two banks are among the top seven positions. Asia (ex-Japan) showed 26.8% in capital and 20.2% growth in profits, accounting for 14.5% of the capital and 12.2% of the overall profits. Banking industry in Asia notably that in China, India, and South Korea witnessed rapid growth in business. Also, their aggregate assets went up by 16.2%. Latin American banks, on the other hand reported a muted growth in profits of 4.9%, even though their assets grew by as much as 26.2%. Middle East banks? profits grew by 30 % and they earned a 13% return on capital, accounting for 3.4% of the capital, 1.7% of assets and 3.3% of aggregate profits of the world?s top 1,000 banks. The top 25 banks in Asia region (ex-Japan) are represented by seven banks from South Korea, six from China, four from Australia, three each from Singapore and Taiwan and two from India. State Bank of India and ICICI Bank feature in the top 25 banks in the world in respect of Tier I Capital. India has 27 banks that figure in the Top 1000 World Banks. Increasing competition has forced banks to search for more income at the expense of more risk. Banks that lent heavily to Asia in search of better returns than

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those available in Western markets are now being blamed for bad credit decisions. The Asian crisis has renewed interest on credit risk management casting doubts on the effectiveness of current credit regulations. Technological changes have also heightened competition by making it easier to imitate bank services. The traditional advantage of physical proximity to clients given by extended networks of branches has vanished. Banks have to compete with money market mutual funds for deposit business, commercial papers, and medium-term notes for Bank loans As margins are squeezed, commercial banks in the United States and Europe have been forced to cut costs and branches while diversifying into pensions, insurance, asset management, and investment banking. In the United States, many banks call themselves financial service companies even in their reported financial statements. Diversification, however, has not always proved to be an effective strategy, and many banks have had to revert to a concentrated business. These examples illustrate how commercial banks are reinventing themselves, not just once but many times Global shifts in banking While the growing power of emerging markets is a long-term structural phenomenon, it has accelerated in the banking industry thanks as much to the relative decline of the west as to expansion in the east. There has been a pronounced shift from west to east – and, to some extent, from north to south – in the wake of the crisis. Banks on both sides of the Atlantic are expected to have written down more than $2.1trn of assets by the end of 2010, according to the International Monetary Fund. The equivalent figure for Asian banks is just $115bn. Banks in emerging markets are now well capitalised and well funded and big enough to be able to compete directly against their western counterparts in the global marketplace. The two largest banks by market capitalisation are both Chinese – ICBC and China Construction Bank. Although third place is taken by a British bank, HSBC, it is largely an Asian operation. A league table, compiled by Bloomberg in April, shows that Citi, once the world?s largest bank, comes in at fifth, while banks from Brazil,

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Russia and India – the other members of the BRIC grouping alongside China – are all in the top 25. Stephen Green, Group Chairman of HSBC, referred to this trend just a month after the collapse of Lehman, when he said there was a long-term shift towards Asia and the Middle East. „It is this shift that will affect financial markets most profoundly,? he told a global financial summit in Dubai. „The rapid growth of emerging markets does not signal an absolute decline in the economies of mature nations. The pie will grow. But it does entail a loss of share – the developed world will decline in the economies of mature nations have a smaller share of a larger pie.? The rise of China is the most obvious feature of this shift. China?s banking market is dominated by the „big four? state owned commercial banks, of which three are listed on the Shanghai stock market. As well as ICBC, the world?s largest bank, there is Bank of China, the country?s foreign exchange and trade finance bank and China Construction Bank, which specialises in infrastructure projects. The last one and the only one still in full state control is the Agricultural Bank of China, which is gearing up for a flotation in 2010. The key role of the state in investment banking is also evident in India, where three quarters of the banking sector is in government hands. The State Bank of India alone controls about one quarter of the market. The country?s largest private sector bank and second biggest lender is ICICI Bank, which is 23rd in the global table. HDFC Bank is another significant private bank. But this is not just an Asian story. Brazil has three out of the top 25 global banks: Itaú Unibanco is the pre-eminent private bank and seventh in the global league table, just ahead of rival Bradesco, while state owned Banco do Brasil is 15th. Russia, the industry is dominated by Sberbank, a state controlled institution that holds a third of the country?s deposits, In and by VTB Bank, which is also in government ownership. Singapore, Turkey and South Korea also have banks with market values above $20bn, the cut-off point for the top 25. South Africa – often known as the S in the BRICS – is now a global player thanks to Standard Bank, in which ICBC holds a 20% stake.

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At the beginning of the 21st century, the biggest banks in the industrial world have become complex financial organizations that offer a wide variety of services to international markets and control billions of dollars in cash and assets. Supported by the latest technology, banks are working to identify new business niches, to develop customized services, to implement innovative strategies and to capture new market opportunities. With further globalization, consolidation, deregulation and

diversification of the financial industry, the banking sector will become even more complex. Although, the banking industry does not operate in the same manner all over the world, most bankers think about corporate clients in terms of the following:
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Commercial banking - banking that covers services such as cash management (money transfers, payroll services, bank reconcilement), credit services (asset-based financing, lines of credits, commercial loans or commercial real estate loans), deposit services (checking or savings account services) and foreign exchange;

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Investment banking - banking that covers an array of services from asset securitization, coverage of mergers, acquisitions and corporate restructuring to securities underwriting, equity private placements and placements of debt securities with institutional investors. Over the past decade there has been an increasing convergence between the

activities of investment and commercial banks, because of the deregulation of the financial sector. Today, some investment and commercial banking institutions compete directly in money market operations, private placements, project finance, bonds underwriting and financial advisory work. Furthermore, the modern banking industry has brought greater business diversification. Some banks in the industrialized world are entering into investments, underwriting of securities, portfolio management and the insurance businesses. Taken together, these changes have made banks an even more important entity in the global business community.

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The top 10 banks have about $24.7 trillion in combined assets. Two of the Top 5 largest banks are Japanese institutions. Deutsche Bank is currently the largest bank in the world in terms of total assets. The Bank employs over 100,000 people and serves over 20 million customers through a network of about 3,100 branches worldwide. With a market share of 21%, Deutsche Bank is the largest foreign exchange dealer in the world. Mitsubishi UFJ Financial Group (MUFG) is the second largest bank in the world by assets. The company's main subsidiaries include: Bank of Tokyo-Mitsubishi UFJ, Mitsubishi UFJ Trust and Banking, Mitsubishi UFJ Securities and UnionBanCal Corporation. Opportunities for the future But not all western banks have been left weaker. Spain?s Santander was a regional bank a decade ago but is now the third largest developed country bank. It bought several injured UK banks to add to the Latin American portfolio it has built up. According to Keating, the world is becoming „multipolar? in terms of both economics and politics. „This is likely to be clearly reflected in many aspects of the financial system,? he says. „The dominant role of the dollar and of the US banks is set to give way to a world in which the US is still important, but in which other countries, their currencies, their capital markets and their banks, all play a greatly enhanced role. As with all great changes, this structural shift will offer both threats and opportunities for investors?. As western banks go through painful restructuring, tackle the problems with toxic assets and – in the case of nationalised banks – get ready for re-entry into the private sector, emerging market banks are likely to look to each other for Keating?s new opportunities. ICBC?s $5.5bn acquisition of a 20% stake in Standard Bank of South Africa is probably the pre-eminent example. Russia?s Sberbank has a branch in India and Brazil?s Itaú has established a presence in Dubai and Shanghai. In South Africa, FirstRand has entered into a „strategic cooperation? with China Construction Bank focused on growth opportunities in the African continent. And HSBC is looking to acquire a majority stake in Nedbank, South Africa?s fourth largest banking group.

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Indian Banking Industry The Indian Banking industry, which is governed by the Banking Regulation Act of India, 1949 can be broadly classified into two major categories, nonscheduled banks and scheduled banks. Scheduled banks comprise commercial banks and the co-operative banks. In terms of ownership, commercial banks can be further grouped into nationalized banks, the State Bank of India and its group banks, regional rural banks and private sector banks (the old/ new domestic and foreign). These banks have over 67,000 branches spread across the country. The Reserve Bank of India (RBI), as the central bank of the country, closely monitors developments in the whole financial sector. The banking sector is dominated by Scheduled Commercial Banks (SBCs). As at end March 2008, there were 296 Commercial banks operating in India. This included 27 Public Sector Banks (PSBs), 31 Private, 42 Foreign and 196 Regional Rural Banks. Also, there were 67 scheduled co-operative banks consisting of 51 scheduled urban cooperative banks and 16 scheduled state co-operative banks. Scheduled commercial banks touched, on the deposit front, a growth of 14% as against 18% registered in the previous year. And on advances, the growth was 14.5% against 17.3% of the earlier year. State Bank of India is still the largest bank in India with the market share of 20% ICICI and its two subsidiaries merged with ICICI Bank, leading creating the second largest bank in India with a balance sheet size of Rs. 1040bn Higher provisioning norms, tighter asset classification norms, dispensing with the concept of „past due? for recognition of NPAs, lowering of ceiling on exposure to a single borrower and group exposure etc., are among the measures in order to improve the banking sector. A minimum stipulated Capital Adequacy Ratio (CAR) was introduced to strengthen the ability of banks to absorb losses and the ratio has subsequently been raised from 8% to 9%. Retail Banking is the new mantra in the banking sector. The home Loans alone account for nearly two-third of the total retail portfolio of the bank. According to one estimate, the retail segment is expected to grow at 30-40% in the coming years. Net banking, phone banking, mobile banking, ATMs and bill payments are the
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new buzz words that banks are using to lure customers. With a view to provide an institutional mechanism for sharing of information on borrowers / potential borrowers by banks and Financial Institutions, the Credit Information Bureau (India) Ltd. (CIBIL) was set up in August 2000. The Bureau provides a framework for collecting, processing and sharing credit information on borrowers of credit institutions. SBI and HDFC are the promoters of the CIBIL. The Government has sought to lower its holding in PSBs to a minimum of 33% of total capital by allowing them to raise capital from the market. Banks are free to acquire shares, convertible debentures of corporate and units of equity oriented mutual funds, subject to a ceiling of 5% of the total outstanding advances (including commercial paper) as on March 31 of the previous year. The finance ministry spelt out structure of the government-sponsored ARC called the Asset Reconstruction Company (India) Limited (ARCIL), this pilot project of the ministry would pave way for smoother functioning of the credit market in the country. The government will hold 49% stake and private players will hold the rest 51%- the majority being held by ICICI Bank (24.5%). The first phase of financial reforms resulted in the nationalization of 14 major banks in 1969 and resulted in a shift from Class banking to Mass banking. This in turn resulted in a significant growth in the geographical coverage of banks. Every bank had to earmark a minimum percentage of their loan portfolio to sectors identified as “priority sectors”. The manufacturing sector also grew during the 1970s in protected environs and the banking sector was a critical source. The next wave of reforms saw the nationalization of 6 more commercial banks in 1980. Since then the number of scheduled commercial banks increased four-fold and the number of bank branches increased eight-fold After the second phase of financial sector reforms and liberalization of the sector in the early nineties, the Public Sector Banks (PSB) s found it extremely difficult to compete with the new private sector banks and the foreign banks. The new private sector banks first made their appearance after the guidelines permitting them were issued in January 1993. Eight new private sector banks are presently in

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operation. These banks due to their late start have access to state-of-the-art technology, which in turn helps them to save on manpower costs and provide better services. Classification of Banks The Indian banking industry, which is governed by the Banking Regulation Act of India1949 can be broadly classified into two major categories, nonscheduled banks and scheduled banks. Scheduled banks comprise commercial banks and the co-operative banks. In Terms of ownership, commercial banks can be further grouped into nationalized banks, the State Bank of India and its group banks, regional rural banks and private sector banks (the old / new domestic and foreign). These banks have over 67,000 branches spread across the country. The Indian banking industry is a mix of the public sector, private sector and foreign banks. The private sector banks are again spilt into old banks and new banks. The banking system in India is significantly different from that of other Asian nations because of the country?s unique geographic, social, and economic characteristics. India has a large population and land size, a diverse culture, and extreme disparities in income, which are marked among its regions. There are high levels of illiteracy among a large percentage of its population but, at the same time, the country has a large reservoir of managerial and technologically advanced talents. Between about 30 and 35 percent of the population resides in metro and urban cities and the rest is spread in several semi-urban and rural centres The country?s economic policy framework combines socialistic and capitalistic features with a heavy bias towards public sector investment. India has followed the path of growth-led exports rather than the “exported growth” of other Asian economies, with emphasis on selfreliance through import substitution. These features are reflected in the structure, size, and diversity of the country?s banking and financial sector. The banking system has had to serve the goals of economic policies enunciated in successive five-year development plans, particularly concerning equitable income distribution, balanced regional economic growth, and the reduction and elimination of private sector monopolies in trade and industry. In order for the banking industry to serve as an

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instrument of state policy, it was subjected to various nationalization schemes in different phases (1955, 1969, and 1980). As a result, banking remained internationally isolated (few Indian banks had presence abroad in international financial centers) because of preoccupations with domestic priorities, especially massive branch expansion and attracting more people to the system. These features have left the Indian banking sector with weaknesses and strengths. A big challenge facing Indian banks is how, under the current ownership structure, to attain operational efficiency suitable for modern financial

intermediation. On the other hand, it has been relatively easy for the public sector banks to recapitalize, given the increase in nonperforming assets (NPAs), as their Government dominated ownership structure has reduced the conflicts of interest that private banks would face.

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Current Scenario
The industry is currently in a transition phase. On the one hand, the PSBs, which are the mainstay of the Indian Banking system, are in the process of shedding their flab in terms of excessive manpower, excessive non Performing Assets (Npas) and excessive governmental equity, while on the other hand the private sector banks are consolidating themselves through M&A.

PSBs, which currently account for more than 78 percent of total banking industry assets are saddled with NPAs (a mind-boggling Rs 830 billion in 2000), falling revenues from traditional sources, lack of modern technology and a massive workforce while the new private sector banks are forging ahead and rewriting the traditional banking business model by way of their sheer innovation and service. The PSBs are of course currently working out challenging strategies even as 20 percent of their massive employee strength has dwindled in the wake of the successful VRS The private players however cannot match the PSB?s great reach, great size and access to low cost deposits. Therefore one of the means for them to combat the PSBs has been through the merger and acquisition (M& A) route. Over the last two years, the industry has witnessed several such instances. For instance, Hdfc Bank?s merger with Times Bank Icici Bank?s acquisition of ITC Classic, Anagram Finance and Bank of Madura. Centurion Bank, Indusind Bank, Bank of Punjab, Vysya Bank are said to be on the lookout. The UTI bank- Global Trust Bank merger however opened a pandora?s box and brought about the realization that all was not well in the functioning of many of the private sector banks. Private sector Banks have pioneered internet banking, phone banking, anywhere banking, mobile banking, debit cards, Automatic Teller Machines (ATMs) and combined various other services and integrated them into the mainstream banking arena, while the PSBs are still grappling with disgruntled employees in the aftermath of successful VRS schemes. Also, following India?s commitment to the W To agreement in respect of the services sector, foreign banks, including both new and the existing ones, have been permitted to open up to 12 branches a year with effect from 1998-99 as against the earlier stipulation of 8 branches.

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Talks of government diluting their equity from 51 percent to 33 percent in November 2000 have also opened up a new opportunity for the takeover of even the PSBs. The FDI rules being more rationalized in Q1FY02 may also pave the way for foreign banks taking the M&A route to acquire willing Indian partners.

Meanwhile the economic and corporate sector slowdown has led to an increasing number of banks focusing on the retail segment. Many of them are also entering the new vistas of Insurance. Banks with their phenomenal reach and a regular interface with the retail investor are the best placed to enter into the insurance sector. Banks in India have been allowed to provide fee-based insurance services without risk participation invest in an insurance company for providing infrastructure and services support and set up of a separate joint-venture insurance company with risk participation. General Banking Scenario The predicament of the banks in the developed countries owing to excessive leverage and lax regulatory system has time and again been compared with somewhat unscathed Indian Banking Sector. An attempt has been made to understand the general sentiment with regards to the performance, the challenges and the opportunities ahead for the Indian Banking Sector. A majority of the respondents, almost 69% of them, felt that the Indian banking Industry was in a very good to excellent shape, with a further 25% feeling it was in good shape and only 6% of the respondents feeling that the performance of the industry was just average. In fact, an overwhelming majority (93.33%) of the respondents felt that the banking industry compared with the best of the sectors of the economy, including pharmaceuticals, infrastructure, etc. Most of the respondents were positive with regard to the growth rate attainable by the Indian banking industry for the year 2009-10 and 2014-15, with 53.33% of the view that growth would be between 15-20% for the year 2009-10 and greater than 20% for 2014-15. On being asked what is the major strength of the Indian banking industry, which makes it resilient in the current economic climate; 93.75% respondents feel the regulatory system to be the major strength, 75%

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economic growth, 68.75% relative insulation from external market, 56.25% credit quality, 25% technological advancement and 43.75% our risk assessment systems India?s GDP has been growing at a rapid clip over the past decade and is set to grow at even a faster pace in the coming decade. Financial services penetration of the Indian economy is quite low compared to even other developing economies. With majority of the Indian population mired in poverty, access to banks and financial companies is quite hard as people lack knowledge and education. India?s banks have grown at a rapid pace over the past 2 decades after the financial liberalization. However this growth has still lacked in meeting the massive demand in the need of financial intermediation. This has led to the growth on non-banking financing companies (NBFCs) and microfinance companies. With the opening of the insurance sector, financial companies in India are set to enter a new growth phase. Major Banks in India is either state owned or previous government owned institutions which have been fully privatized like ICICI and HDFC Bank. Both the state owned banks and the private banks have managed to grow without throwing the whole system in a crisis like what has happened in the recent past in Europe and USA and in China in the 1990s.Here is a list of the 10 Major Banks in India 1) State Bank of India (SBI) - SBI is India?s Largest Bank which is majority owned by the Government. The Company has a number of Subsidiaries and has been a market outperformer in recent times with Revenue of $22 Billion. The SBI has 7 subsidiaries of which 2 have been merged and 5 are remaining.
? ? ? ? ?

State Bank Bikaner Jaipur State Bank of Hyderabad State Bank of Mysore State Bank of Patiala State Bank of Travancore

2) ICICI Bank – This is the largest Indian Private Bank with operations in all Financial Services Sectors. The Company has faced a bad time during the Lehman
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downturn but has recovered well. ICICI Bank is also strong in almost all sectors of the financial industry and has one of the strongest management teams in the country. Like HDFC Bank majority of the shareholding is held by foreign investors. The company which overextended itself in the 2007-2008 boom has now reduced the size of its risky segments and is again back on the growth trajectory. 3) HDFC Bank – HDFC Bank like Axis Bank has shown remarkable growth in the last few years. The Bank which was founded by India?s largest housing finance company HDFC has assets of around $22 billion. It is the one of the best rated banks in terms of service quality and growth. 4) Punjab National Bank – Punjab National Bank (PNB , is the second largest PSU bank with about 5000 branches across 764 cities. The Bank like BOB and SBI has shown good growth while at the same time managed to control bad debt. 5) Axis Bank - Axis Bank has been the best performing private bank along with HDFC Bank showing excellent growth in top line and bottom line. The Bank has been expanding into insurance and investment banking (acquired Enam).Axis Bank was formerly UTI Bank that begun operations in 1994.The Bank was promoted jointly by UTI,LIC and other state owned general insurers. One of the best Indian bank stock picks. 6) Bank of Baroda – Bank of Baroda (BoB) is the third largest bank in India and is government owned like SBI and PNB. BOB as it is popularly known has shown excellent growth over the last few years and has managed to control its NonPerforming Asset (NPA).The Bank has good management and manages to earn nice interest spreads. 7) Bank of India -Bank of India (BoI)is India?s 4th largest bank, with 3374 branches, including 27 branches outside India. It was the first bank in India promoted by Indian interests to serve all the communities of India. The stock of the company has not performed as well as it peers post the Lehman crisis. It has seen its market cap decrease relative to its larger PSU Bank peers

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8) IDBI Bank - Industrial Development Bank of India Limited (IDBI) is a leading public sector banks. RBI categorised IDBI as an “other public sector bank”. The commercial banking arm, IDBI BANK, was merged into IDBI. This PSU Bank has supposed have great potential and could be the next ICICI in the making. 9) Kotak Mahindra Bank - This is the first NBFC to convert into a bank. The bank has its origins as an investment bank and is still very strong in the capital markets. The Bank and its sister concerns are present in most of the financial segments of the market like Private Equity, Wealth Management, Broking, Investment Banking etc. 10) Yes Bank – Yes Bank was founded by Ashok Kapur and Rana Kapoor. This bank though still small compared to its larger peers, has come into the top 10 due to its path breaking performance over the last few years in terms of growth. It has managed to set new standards and has broken out from the league of smaller private banks.

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Kerala Banking Industry The most essential element in the process of development and growth of the country is finance. The economy of a country becomes crippled without the flow of finance and the economic growth is stunted. Monitory resources can be channelized only with the help of a proper financial infrastructure. An effective financial system in the form of banks and financial institutions offer economical lending and borrowing. Kerala boasts of a well-developed banking infrastructure. With progressing time Kerala banking system has attained a high benchmark. Commercial, Nationalized a large number of Grameen banks have sprung up within the state. In fact there was a surge of Banks in the state following the nationalisation of the banks in1969. The State Bank of India (S.B.I.), Canara Bank and Syndicate Bank are the principal nationalized banks. The State Bank of India offers around 228 branches and the Syndicate Bank has 115 branches in the fourteen districts of Kerala. Apart from these commercial banks like Vijaya Bank, Dhanlakshmi Bank and the Federal Bank also offer commendable finance and banking facilities. Dhanalakshmi Bank offers 112 branches in the state. The Grameen Banks like SMGB and NMGB provide loans at low interest rates, special, subsidized lands and relief facilities to the local farmers and plays a great role in enhancing the agrarian productivity of the state.

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2.2 COMPANY PROFILE
Established in 1985, the Kotak Mahindra group has been one of India's most reputed financial conglomerates. In February 2003, Kotak Mahindra Finance Ltd, the group's flagship company was given the license to carry on banking business by the Reserve Bank of India (RBI). This approval created banking history since Kotak Mahindra Finance Ltd. is the first non-banking finance company in India to convert itself in to a bank as Kotak Mahindra Bank Ltd. Today, we are one of the fastest growing bank and among the most admired financial institutions in India Kotak Mahindra Bank has over 335 branches and 803 ATMs, which are spread all over India, not just in the metros but in Tier II cities and rural India as well, we are redefining the reach and power of banking. Kotak Mahindra Bank Limited (the Bank) is a commercial bank. The Bank operates in nine business segments: Treasury, Investments and Balance Sheet Management Unit includes dealing in debt, forex market, investments and primary dealership of government securities; Retail Banking includes lending, personal loans and agriculture finance, branch banking, which includes retail borrowings covering savings and branch banking network/services, including distribution of financial products, and credit cards, which includes receivables relating to credit card business; Corporate Banking includes wholesale borrowings and lendings; Vehicle Financing include retail vehicle and wholesale trade finance; Other lending activities include financing against securities and other loans; broking include brokerage income; advisory and transactional services provides financial advisory and transactional services; Asset Management include management of investments, and Insurance, which include life insurance.

Our Story
Milestones that have shaped the Kotak Mahindra Group, since 1986 Since the inception of the erstwhile Kotak Mahindra Finance Limited in 1985, it has been a steady and confident journey leading to growth and success. The milestones of the group growth story are listed below year wise

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2010

o

Ahmedabad Derivatives and Commodities Exchange, a Kotak anchored enterprise, became operational as a national commodity exchange.

2009

o

Kotak Mahindra Bank Ltd. opened a representative office in Dubai

o

Entered Ahmedabad Commodity Exchange as anchor investor.

2008

o

Launched a Pension Fund under the New Pension System.

2006

o

Bought the 25% stake held by Goldman Sachs in Kotak Mahindra Capital Company and Kotak Securities.

2005 o Kotak Group realigned joint venture in Ford Credit; their stake in Kotak Mahindra Prime was bought out (formerly known as Kotak Mahindra Primus Ltd) and Kotak group?s stake in Ford credit Kotak Mahindra was sold. o Launched a real estate fund

2004

o

Launched India Growth Fund, a private equity fund.

2003

o

Kotak Mahindra Finance Ltd. converted into a commercial bank - the first Indian company to do so.

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2001

o o o

Matrix sold to Friday Corporation. Launched Insurance Services. Kotak Securities Ltd. was incorporated

2000

o

Kotak Mahindra tied up with Old Mutual plc. for the Life Insurance business.

o o

Kotak Securities launched its on-line broking site. Commencement of private equity activity through setting up of Kotak Mahindra Venture Capital Fund

1998

o

Entered the mutual fund market with the launch of Kotak Mahindra Asset Management Company.

1996

o

The Auto Finance Business is hived off into a separate company - Kotak Mahindra Prime Limited (formerly known as Kotak Mahindra Primus Limited). Kotak Mahindra takes a significant stake in Ford Credit Kotak

o

Mahindra Limited, for financing Ford vehicles. The launch of Matrix Information Services Limited marks the Group's entry into information distribution.

1995

o

Brokerage and Distribution businesses incorporated into a separate company - Securities. Investment banking division incorporated into a separate company - Kotak Mahindra Capital

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Company

1992

o Entered the Funds Syndication sector

1991

o

The Investment Banking Division was started. Took over FICOM, one of India's largest financial retail marketing networks

1990

o The Auto Finance division was started

1987

o

Kotak Mahindra Finance Ltd entered the Lease and Hire Purchase market

1986

o

Kotak Mahindra Finance Ltd started the activity of Bill Discounting

Kotak Mahindra Bank Ltd is a one stop shop for all banking needs. The bank offers personal finance solutions of every kind from savings accounts to credit cards, distribution of mutual funds to life insurance products. Kotak Mahindra Bank offers transaction banking, operates lending verticals, manages IPOs and provides working capital loans. Kotak has one of the largest and most respected Wealth Management teams in India, providing the widest range of solutions to high net worth individuals, entrepreneurs, business families and employed professionals

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Senior Management
Core Kotak Mahindra Group team Mr. Uday S. Kotak Executive Vice Chairman and Managing Director Mr. Uday Kotak, is the Executive Vice-Chairman and Managing Director of the Bank, and its principal founder and promoter. Mr. Kotak is an alumnus of Jamnalal Bajaj Institute of Management Studies. In 1985, when he was still in his early twenties, Mr Kotak thought of setting up a bank when private Indian banks were not even seen in the game. First Kotak Capital Management Finance Ltd (which later became Kotak Mahindra Finance Ltd), and then with Kotak Mahindra Finance Ltd, Kotak became the first non-banking finance company in India's corporate history to be converted into a bank. Over the years, Kotak Mahindra Group grew into several areas like stock broking and investment banking to car finance, life insurance and mutual funds. Among the many awards to Mr Kotak's credit are the CNBC TV18 Innovator of the Year Award in 2006 and the Ernst & Young Entrepreneur of the Year Award in 2003. He was featured as one of the Global Leaders for Tomorrow at the World Economic Forum's annual meet at Davos in 1996. He was also featured among the Top Financial Leaders for the 21st Century by Euromoney magazine. He was named as CNBC TV18 India Business Leader of the Year 2008 and as the most valued CEO by businessworld in 2010. Mr. C Jayaram Joint Managing Director Mr. C. Jayaram, is a Joint Managing Director of the Bank and is currently in charge of the Wealth Management Business of the Kotak Group. An alumnus of IIM Kolkata, he has been with the Kotak Group since 1990 and member of the Kotak
26

board in October 1999. He also oversees the international subsidiaries and the alternate asset management business of the group. He is the Director of the Financial Planning Standards Board, India. He has varied experience of over 25 years in many areas of finance and business, has built numerous businesses for the Group and was CEO of Kotak Securities Ltd. An avid player and follower of tennis, he also has a keen interest in psychology Mr. Dipak Gupta Joint Managing Director An electronics engineer and an alumnus of IIM Ahmedabad, Mr. Gupta has been with the Kotak Group since 1992 and joined the board in October 1999. He heads commercial banking, retail asset businesses and looks after group HR function. Early on, he headed the finance function and was instrumental in the joint venture between Kotak Mahindra and Ford Credit International. He was the first CEO of the resulting entity, Kotak Mahindra Primus Ltd. Kotak Mahindra Bank has reported its results for the quarter ended Dec '11. Interest earned for the quarter was Rs 1,640.98 crore and net profit was Rs 276.08 crore. For the quarter ended Dec 2010 the interest earned was Rs 1135.40 crore and net profit was Rs 187.87 crore

Products and Services
?

The bank offers complete financial solutions for infinite needs of all individual and non-individual customers depending on the customer's need delivered through a state of the art technology platform. Investment products like Mutual Funds, Life Insurance, retailing of gold coins and bars etc are also offered. The bank follows a mix of both open and closed architecture for distribution of the investment products. All this is backed by strong, in-house research on Mutual Funds.

?

The bank?s savings account goes beyond the traditional role of savings, and allows us to put aside a lot more than just money. The worry-free feature of
27

Savings Account provides a range of services from funds transfer, bill payments, 2-way sweep through our Active Money feature and much more. We can place standing instructions for investment options that can be booked through Internet or through Phone banking services. The Savings Account thus provides for attractive returns earned through a comprehensive suite products and services that offer investment options, all delivered seamlessly to the customer by well integrated technology platforms.
?

Apart from Phone banking and Internet banking, the Bank offers convenient banking facility through Mobile banking, SMS services, Netc@rd, Home banking and Bill Pay facility among others.

?

The Depository services offered by the Bank allows the customers to hold equity shares, government securities, bonds and other securities in electronic or Demat forms.

?

The Salary 2 Wealth offering provides comprehensive administrative solutions for Corporates with features such as easy and automated web based salary upload process thereby eliminating the paper work involved in the process, a dedicated relationship manager to service the corporate account, customized promotions and tie - ups and many such unique features. The whole gamut of investment products and investment advisory services is available to the salary account holders as well.

?

For the business community, the bank offer comprehensive business solutions that include the Current Account, Trade Services, Cash Management Service and Credit Facilities. The bank?s wholesale banking products offer business banking solutions for long-term investments and working capital needs, advice on mergers and acquisitions and equipment financing. To meet special needs of the rural market, the bank has dedicated business offerings for agricultural financing and infrastructure. Its Agriculture Finance division delivers customised products for capital financing and equipment financing needs of our rural customers.

28

?

For financial liquidity the bank offers loans that meet personal requirements with quick approval and flexible payment options. To complete the personal financial offerings space, the bank now offers Kotak Credit Card which is a hassle-free, transparent product that also happens to be the first vertical credit card in the industry.

?

Kotak Mahindra Bank addresses the entire spectrum of financial needs of Non-Resident Indians. The bank has tie-up with the Overseas Indian Facilitation Centre (OIFC) as a strategic partner, which gives them a platform to share their comprehensive range of banking and investment products and services for Non Resident Indians (NRIs) and Persons of Indian Origin (PIOs). Their Online Account Opening facility and Live Chat service helps to get in touch at the comfort of homes and at the convenience. These offerings are specifically designed to suit the overseas Indian's personal financial needs and give the global Indians a near to home feel.

29

Products

Business loans

Term loans

Facility on Credit Card Receivables (FCCR)

Normal SENP& SEP

Net Margin

PSL / Non PSL

PL PTR

3 to 9

TERM LOAN
1. Normal SENP& SEP 2. Net Margin 3. 3 to 9 4. PSL / Non PSL

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5. PL PTR

1. NORMAL SENP
Terms & Condition ? ? ? ? ? ? ? ? ? Max 5 inward cheque return allowed ( 6 month bank statement) DSCR Debt service coverage ratio- minimum 1 Business continuity 5 year Minimum loan amount 3 lakh maximum 1 crore Tenor minimum 12 month maximum 36 month SEP maximum 60 month Maximum age limit 60 years Case update 1 month from the last approval After 1 month update docs & CIBIL

2. NET MARGIN Business
Petrol Pump Gas agency Pharma FMCG& Mbl Restaurant Caters Printers Medical store / General store Department store

Net margin
1% 2% 4% 1% 10% 10% 4% 10% 10%

Turnover
5 cr 2 cr 1 cr 1cr 30 cr 40 cr 1 cr 60 cr 50 cr

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? ? ? ? ? ?

Maximum Loan amount 10 lacs Last 11 month 12 to 17 month Above 17 month 1 bounce 2 bounce 3 bounce

Maximum age limit-65 years Maximum 6 inward cheque return allowed ( Last 6 month bank statement)

3. 3 TO 9 Conditions
1. Minimum Business income 1.5 Lacs 2. Minimum turnover – manufacture 50 Lacs Other business normal turnover 3. Business continuity Manufactures 4 year, other 5 year 4. Past track record EMI 5000 Last 6 month closed track accepted Within 12 month 13 to 23 month Above 24 months 1 bounce 2 bounce 3 bounce 12 month existing track minimum

Last 6 month not any bounce allowed 5 PL allowed 3 PL allowed

5. Any loan last 6 month 1 loan last 6 month

32

6. statement bounce last 6 month - 6 bounce 7. 8. Not more than 2 PL enquiry in last one month within 6 month closed track is not obligation

4. PL PTR Scheme
? ? ? ? ? ? ? ? Age Norms – Min 25 Max 65 Only SENP Cases Own Property compulsory Minimum 3yrs BCP 6 non EMI cheque bounce is allowed in the Bank Statement. CIBIL score should be >= 725 Max PL customer can have is 4 Approved Financiers 1. ICICI 2. HDFC 3. Citi Bank (not citi finance) 4. ABN 5. SCB 6. Reliance 7. HSBC 8. Barclays

33

9. Religare 10. Bajaj ? 1 fresh loan in last 6mts is allowed and customer shouldn?t have taken any PL in last 3mts. ? ? Minimum Original loan amount should be 5L Minimum seasoning is 18mts and also loans matured in 3mts can be considered. ? If the loan is topped up and combined seasoning is considered, then the lower EMI to be considered for eligibility. ? Minimum loan amount is Rs 2.50 Lac/24M and Max is Rs 12.50 Lac/36M. The loan amount cannot exceed the original loan amount based on which the eligibility being calculated. ? Maximum tenor should not exceed tenor of loan considered for eligibility

Facility against Credit Card Receivables
Avail upto Rs. 3 crores as a Business Loan Kotak Mahindra Bank introduces a unique new product, Facility against Credit Card Receivables where under you can avail upto Rs. 3 crores as a Business Loan or have the flexibility to have some portion of the facility as an Overdraft. It is a finance option for merchant establishments that use credit card Point of Sales (POS) machines for their daily business transactions. With this product, a merchant with a POS machine can avail of either a Business Loan or an Overdraft Facility on the basis of the yearly sales that takes place on his credit card POS machine. 1. 12 month audited credit-card sales statement 2. Basic financial documentation
34

Key Features
? ? ? ? ? ?

Higher eligibility for Self Employed Loan amounts up to Rs. 3 crores Flexibility of combining Loan and Overdraft Lower Processing Fees Easy repayment option Collateral free

Features & Benefits
? ? ? ? ?

Loan amounts up to Rs. 3 crores Flexibility of combining Loan and Overdraft Easy repayment option Competitive interest rates Quick disbursement

35

CHAPTER – 3 REVIEW OF LITERATURE

36

3.1 Review of Literature
Allen and Gayle (2003) describe the most recent BIS proposals for the credit risk measurement of retail credits in capital regulations1. We also describe the recent trend away from relationship lending toward transactional lending in the small business loan arena. These trends create the opportunity to adopt more analytical, data-based approaches to credit risk measurement. We survey proprietary credit scoring models (such as Fair Isaac), as well as options-theoretic structural models (such as KMV and Moody’s Risk Calc), and reduced-form models (such as Credit Risk Plus). These models allow lenders and regulators to develop techniques that rely on portfolio aggregation to measure retail credit risk exposure. David Blanch flow (1993) et.al investigated data from the 1993 National Survey of Small Business Finances to determine the extent to which minority-owned small businesses face constraints in the credit market beyond those faced by whiteowned small businesses2. First, we present qualitative evidence indicating that blackand white-owned firms report similar concerns about the factors that may affect their businesses except that blacks are far more likely to report problems with credit availability. Second, we conduct an econometric analysis of loan denial probabilities by race and find that black-owned small businesses are almost three times more likely to have a loan application denied. Even after controlling for the differences in credit-worthiness and other factors that exist between black- and white-owned firms, blacks are still about twice as likely to be denied credit. A series of specification checks indicates that this gap is unlikely to be largely attributed to omit variable bias. Third, we conduct a similar analysis regarding interest rates charged to approved loans and find black-owned firms pay higher interest rates as well. Finally, even these results are likely to understate differences in credit access because many potential black-owned firms are not in operation due to the lack of credit and those in business may be too afraid to apply. These results indicate that the racial disparity in credit availability is likely caused by discrimination.

Marc (2010) et.al explains a unique dataset comprised of small firms facing a very real, and binding, credit constraint, to question whether a corrective scheme

37

such as the SFLGS has, in practice, alleviated such constraints by promoting access to debt finance for small credit constrained firms3. The results broadly support the view that the SFLGS has fulfilled its primary objective. It is a widely held perception, although empirically contentious, that credit rationing is an important phenomenon in the UK small business Jimén & Sau(2004) analyses the determinants of the probability of default (PD) of bank loans4. We focus the discussion on the role of a limited set of variables (collateral, type of lender and bank–borrower relationship) while controlling for the other explanatory variables. The study uses information on the more than three million loans entered into by Spanish credit institutions over a

complete business cycle (1988–2000) collected by the Bank of Spain's Credit Register (Central de Información de Riesgos). We find that collateralised loans have a higher PD, loans granted by savings banks are riskier and, finally, that a close bank–borrower relationship increases the willingness to take more risk. Scott & Aruna (2001) examines the effect of credit scoring on small-business lending for a sample of large U.S. banking organizations5. We find that credit scoring is associated with an 8.4 percent increase in the portfolio share of small-business loans, or $4 billion per institution. However, we fail to uncover any specific attributes of bank small-business credit-scoring programs that lead to this increased lending. Overall, we conclude that credit scoring lowers information costs between borrowers and lenders, thereby reducing the value of traditional, local bank lending relationships. John and Jonathan (1989) examine the first rigorous statistical test of the transaction cost models of secured debt6. Data from two samples of over 1,000 small business loans generally support the common set of predictions of these theories. The incidence of secured debt is positively related to probability of default, loan size, loan maturity, and marketability of assets. Changes in the legal and economic environment also alter firms' decisions regarding the pledging of collateral. Critics claim that theories of secured debt fail to explain the widespread use of collateral because they incorrectly predict when a loan will be secured

38

Jonathan (1986) investigate The Bankruptcy Reform Act of 1978 contains several provisions that can affect the cost of producing loans for financial intermediaries7. In a competitive lending market the additional monitoring and expected foreclosure costs imposed by the change in the bankruptcy law should be passed on to the borrower. Using survey data from a sample of small business loans from commercial banks, evidence is presented that the enactment of the new law resulted in higher contract rates of interest. Jeremy Berk (2004) et.al investigates how personal bankruptcy law affects small firms' access to credit8. When a firm is unincorporated, its debts are personal liabilities of the firm's owner, so that lending to the firm is legally equivalent to lending to its owner. If the firm fails, the owner has an incentive to file for personal bankruptcy, since the firm's debts will be discharged and the owner is only obliged to use assets above an exemption level to repay creditors. The higher the exemption level, the greater is the incentive to file for bankruptcy. We show that supply of credit falls and demand for credit rises when non-corporate firms are located in states with higher bankruptcy exemptions. We test the model and find that, if small firms are located in states with unlimited rather than low homestead exemptions, they are more likely to be denied credit, they receive smaller loans and interest rates are higher. Results for non-corporate versus corporate firms suggest that lenders often disregard small firms' organizational status in making loan decisions. William and Nelson (1998) find that the use of risk rating systems is quite widespread, but that smaller banks generally have less detailed systems than do larger banks9. In addition, the new survey data allow us to assess the relationships between loan risk ratings and loan terms. Not surprisingly, riskier loans generally carry higher interest rates, even after taking account of other loan terms. There are more complex relationships between loan risk and other loan terms. Regression results indicate that banks of all sizes price for risk. We do not find a relationship between reported loan risk and delinquency and charge-off rates. However, this may reflect how recently the risk rating data have become available. In recent years many banks have attempted to improve the measurement and management of credit risk by assigning risk ratings to business loans. Virtually all large banks now assign such
39

ratings. However, until recently there has been little information on the use of risk ratings by smaller banks. Recent revisions to the Federal Reserve's Survey of Terms of Business Lending and telephone consultations with more than 100 banks on the survey panel provide data on the prevalence and precision of risk rating systems at banks of all sizes. Frame (2004) et.al estimates that credit scoring is associated with about a $3,900 increase in small business lending per sample banking organization, per lowand moderate-income (LMI) area served, and this effect is roughly equivalent to that estimated for higher-income areas10. For our sample, this corresponds to a $536 million increase in small business credit in LMI areas in 1997 than otherwise would have been the case. This effect appears to be driven by increased out-of-market lending by banking organizations, as in-market lending generally declines. Overall, it does not appear that credit scoring has a disparate impact on LMI areas. Shelagh (2006) points out an econometric model to examine the pricing behaviour of British financial institutions with respect to key bank products/services offered to small and medium sized enterprises (SMEs) including current accounts, investment accounts, business loans, and mortgages11. A mean group approach is used on a panel of monthly data to gauge individual banks’ reactions to identify factors influencing the setting of deposit and loan rates, and to assess the competitive structure that best describes the UKs SME banking market. Though the results should be interpreted with caution, the empirical evidence is suggestive of a complex oligopoly. Policies directed at improving information and making it easier for small businesses to change banks/accounts would reduce inertia and improve competition among financial institutions. Jalal (2001) et.al investigates a significant contribution to the financial innovation literature by examining the diffusion of a recent important innovation of the 1990s: banks' use of credit scoring for small business lending12. We examine the responses of 95 large banking organizations to a survey that asked whether they had adopted credit scoring for small business lending as of June 1997 (56 had done so) and, if they had adopted it, when they had done so. We estimate hazard and tobit

40

models to explain the diffusion pattern of small business credit scoring models. Explanatory variables include several market, firm, and managerial factors of the banking organizations' under study. The hazard model indicates that larger banking organizations innovated earlier, asdid those located in the New York Federal Reserve district; both results are consistent with our expectations. The tobit model confirms these results and also finds that organizations with fewer separately chartered banks but more branches innovated earlier, which is consistent with theories stressing the importance of bank organizational form on lending style. Though the managerial variables' signs are consistent with our expectations, none yields significant results. Frame (2001) et.al empirically examines the effect of the use of credit scoring by large banking organizations on small business lending in low- and moderateincome (LMI) areas13. Using census tract level data for the south-eastern United States, the authors estimate that credit scoring increases small business lending by $16.4 million per LMI area served. Furthermore, this effect is almost 2.5 times larger than that estimated for higher income census tracts ($6.8 million). The authors also find that credit scoring increases the probability that a large banking organization will make small business loans in a given census tract. The change in this probability is 3.8 percent for LMI areas and 1.7 percent for higher income areas. These findings suggest that credit scoring reduces asymmetric information problems for borrowers and lenders and that this is particularly important for LMI areas, which lenders may have historically bypassed because of their questionable economic health. Gregory (1990) describes that most commercial loans are made on a secured basis, yet little is known about the relationship between collateral and credit risk14. Several theoretical studies find that when borrowers have private information about risk, the lowest-risk borrowers tend to pledge collateral. In contrast, conventional wisdom holds that when risk is observable, the highest-risk borrowers tend to pledge collateral. An additional issue is whether secured loans (as opposed to secured borrowers) tend to be safer or riskier than unsecured loans. Empirical evidence presented here strongly suggests that collateral is most often associated with riskier borrowers, riskier loans and riskier banks.

41

Forrest (1996) et.al explore this issue by examining how in the years before 1914 these banks treated loan applications from industrialists, specifically analysing the extent of refusals and the reasons given for refusals15. The results confirm that the banks operated their lending business within general constraints imposed by the principles of prudent banking. However, it is also clear that the banks gave very careful consideration to all applicants, applied a set of reasonable criteria, and approved the great bulk of all applications for industrial lending. English commercial banks have suffered severe criticism for their alleged failure to support industrial activity, to provide „industrial finance?. They are said to compare unfavourably with their European counterparts. Jay?s et.al describes that the unsecured enterprise loans can be procured quickly with speedy help16. So, funding company no more stays a problem. Also, you do not have to go by means of the unpleasant &amp time sucking process of finding to banking institutions, heading by way of endless identity or safety verifications. If your goal is company growth, renovation or up gradation then, you know you might be secure and well furnished for, with the alternative of unsecured business loans. The most fascinating bit is that you don?t have to complacent financially to procure these loans. Andrew Baker explains about Businesspersons, who have undergone bad credit history, also make use of this category of loans17. Such businesspersons and enterprises are known as problem cases. Failure to pay certain debts in the past leads to county court judgements, and bankruptcy, which in turn leads to bad credit history. Such businesspersons are disadvantaged in secured loan deals. Unsecured business loans however, present immense financial opportunities before borrowers; particularly where the loan amount desired is small. The amount received through unsecured business loans will be used for business commencement or expansion purposes, assets and equipment purchase and refinance, and to restructure finances. Some businesses use the loan proceeds as a working capital. Still others would use the unsecured business loan to finance a particular consignment. The repayment of this type of loan will be due immediately after the entrepreneur gets payment from the consignee, or any date decided.
42

Todd Kalb describes about small businesses and entrepreneurs facing a perpetual lack of funds for taking their business to the next level, small business unsecured loans are the solution18. With the easy availability of unsecured loans most small businesses prefer going in for small business unsecured loans. Sometimes business owners are put off by what they perceive as slightly higher rates of interest for small business unsecured loans. Since the loan is unsecured it is natural to think that lenders use the higher rates to offset the risk involved. However in reality, these types of unsecured business loans may have lower interest rates than other types of collateralized loans, such as factoring. To put it all together you get capital without any stakes and a lot of ease. Also, you can use it in any way that you want. Now suppose you took the loan to buy some office equipment, but decided to go in for that sales program instead. The small business unsecured loan lender couldn't care less. You can spend it in any way that you want. Small business unsecured loans are similar to other loans in most other aspects, with unsecured loans not requiring collateral and with good credit you can apply now with no documented income. The loan application process is initiated by the borrower filling in the unsecured loan application, which can be done online via desktop conferencing technology. Once the application is received the lender starts to work to find more about the borrower in regards to his credit history and their financial details also decides on what they can offer to the borrower. If the borrower's requirements and the lenders offerings are inline with each other, the deal works out and even if they are not, oftentimes the lender may make a counter offer to the borrower until they do come to equilibrium and they fall into line with each other and the loan gets approved and funded. Generally for small business, unsecured loans are approved faster compared to secured loans and this is one of the key factors that a borrower would consider when having multiple lenders offering them various types of loans. Borrowers like to have their unsecured loans available promptly. Unsecured small business loans are now in the mainstream and are considered as a regular source of acquiring finance. Unsecured loans are offered with absolutely no strings attached and the borrower is free to spend it any way they find suitable. This makes it a more lucrative proposition for the borrowers and they are increasingly using unsecured small business loans for

43

business start up, debt settlement, purchase of assets, business expansion and even working capital. Venditto (2007) et.al discusses the Official Committee of Unsecured Creditors in the U.S19. The committee is aimed at representation and protection of the interests of unsecured creditors during the reorganization proceedings. The committee has several responsibilities including consulting with the debtor in possession about the administration of the case and investigating the debtor?s business finances and the desirability of continued operation. Many people prefer to apply for unsecured loans or loans without collateral, thinking that it involves much less risk and responsibility20. While it is true that unsecured loans do not require the submission of collateral or the borrower?s home property, a borrower must still take his/her repayment obligations seriously. Today, let?s discuss some of the basic things about unsecured loans along with some tips on how you can a better loan deal. Compared to secured loans, loans without collateral are expected to have higher interest rates. It is very important to make sure that the rate of your unsecured loan is based on a fixed-rate system, not a variable one. A fixed-rate loan will ensure that your monthly interest will never change until your loan has been completely paid off. Lenders who extend unsecured loans offer limited loan amounts or loan value to ensure that the borrower will be capable of repayment. It is still worth the try to request your lending company for a lower interest rate especially if your credit history does show that you are credit worthy. Even if your lending company may refuse to lower your rate, you will never know until you try to negotiate. Again, make sure that the interest rate will be fixed and that there will be no hidden charges or extra fees that are not in your contract. You?ll want to inquire about the different payment methods that the lender offers so you can submit your payments at your convenience. Also, a shorter repayment period may come with a slightly higher rate but in the end, your total costs will be much lower than a loan with a longer repayment period. Last but not least, see to it that you have a realistic plan in paying off your unsecured loan to avoid expensive late charges or an increased rate of interest. Borrow only the amount of money you need so that repayment will not be such a burden later on.
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3.2 Theoretical Review
3.2 (A) Factor Analysis Factor analysis is a statistical method used to describe variability among observed, correlated variables in terms of a potentially lower number of unobserved, uncorrelated variables called factors. In other words, it is possible, for example, that variations in three or four observed variables mainly reflect the variations in fewer such unobserved variables. Factor analysis searches for such joint variations in response to unobserved latent variables. The observed variables are modeled as linear combinations of the potential factors, plus "error" terms. The information gained about the interdependencies between observed variables can be used later to reduce the set of variables in a dataset. Computationally this technique is equivalent to low rank approximation of the matrix of observed variables. Factor analysis originated in psychometrics, and is used in behavioral sciences, social sciences, marketing, product management, operations research, and other applied sciences that deal with large quantities of [data.] Factor analysis is related to principal component analysis (PCA), but the two are not identical. Latent variable models, including factor analysis, use regression modelling techniques to test hypotheses producing error terms, while PCA is a descriptive statistical technique21. 3.2 (B) Type of factor analysis Exploratory factor analysis (EFA) is used to uncover the underlying structure of a relatively large set of variables. The researcher's a priori assumption is that any indicator may be associated with any factor. This is the most common form of factor analysis. There is no prior theory and one uses factor loadings to intuit the factor structure of the data. Confirmatory factor analysis (CFA) seeks to determine if the number of factors and the loadings of measured (indicator) variables on them conform to what is expected on the basis of pre-established theory. Indicator variables are selected on the basis of prior theory and factor analysis is used to see if they load as predicted on the
45

expected number of factors. The researcher's a priori assumption is that each factor (the number and labels of which may be specified a priori) is associated with a specified subset of indicator variables. A minimum requirement of confirmatory factor analysis is that one hypothesizes beforehand the number of factors in the model, but usually also the researcher will posit expectations about which variables will load on which factors. The researcher seeks to determine, for instance, if measures created to represent a latent variable really belong together. 3.2 (C) Types of factoring ? Principal component analysis (PCA)

The most common form of factor analysis, PCA seeks a linear combination of variables such that the maximum variance is extracted from the variables. It then removes this variance and seeks a second linear combination which explains the maximum proportion of the remaining variance, and so on. This is called the principal axis method and results inorthogonal (uncorrelated) factors. ? Canonical factor analysis

It is called Rao's canonical factoring, is a different method of computing the same model as PCA, which uses the principal axis method. Canonical factor analysis seeks factors which have the highest canonical correlation with the observed variables. Canonical factor analysis is unaffected by arbitrary rescaling of the data. ? Common factor analysis It also called principal factor analysis (PFA) or principal axis factoring (PAF), seeks the least number of factors which can account for the common variance (correlation) of a set of variables. ? Image factoring Based on the correlation matrix of predicted variables rather than actual variables, where each variable is predicted from the others using multiple regressions.

46

?

Alpha factoring Based on maximizing the reliability of factors, assuming variables are

randomly sampled from a universe of variables. All other methods assume cases to be sampled and variables fixed. ? Factor regression model This is a combinatorial model of factor model and regression model; or alternatively, it can be viewed as the hybrid factor model, whose factors are partially known22. 3.2 (D) Terminology a) Factor loadings The factor loadings, also called component loadings in PCA, are the correlation coefficients between the variables (rows) and factors (columns). Analogous to Pearson's r, the squared factor loading is the percent of variance in that indicator variable explained by the factor. To get the percent of variance in all the variables accounted for by each factor, add the sum of the squared factor loadings for that factor (column) and divide by the number of variables. (Note the number of variables equals the sum of their variances as the variance of a standardized variable is 1.) This is the same as dividing the factor's eigenvalue by the number of variables. b) Interpreting factor loadings By one rule of thumb in confirmatory factor analysis, loadings should be .7 or higher to confirm that independent variables identified a priori are represented by a particular factor, on the rationale that the .7 level corresponds to about half of the variance in the indicator being explained by the factor. However, the .7 standard is a high one and real-life data may well not meet this criterion, which is why some researchers, particularly for exploratory purposes, will use a lower level such as .4 for the central factor and .25 for other factors call loadings above .6 "high" and those below .4 "low". In any event, factor loadings must be interpreted in the light of theory, not by arbitrary cutoff levels.

47

In oblique rotation, one gets both a pattern matrix and a structure matrix. The structure matrix is simply the factor loading matrix as in orthogonal rotation, representing the variance in a measured variable explained by a factor on both a unique and common contributions basis. The pattern matrix, in contrast, contains coefficients which just represent unique contributions. The more factors, the lower the pattern coefficients as a rule since there will be more common contributions to variance explained. For oblique rotation, the researcher looks at both the structure and pattern coefficients when attributing a label to a factor. c) Communality The sum of the squared factor loadings for all factors for a given variable (row) is the variance in that variable accounted for by all the factors, and this is called the communality. The communality measures the percent of variance in a given variable explained by all the factors jointly and may be interpreted as the reliability of the indicator. d) Spurious solutions If the communality exceeds 1.0, there is a spurious solution, which may reflect too small a sample or the researcher has too many or too few factors. e) Uniqueness of a variable That is, uniqueness is the variability of a variable minus its communality. f) Eigenvalues:/Characteristic roots The eigenvalue for a given factor measures the variance in all the variables which is accounted for by that factor. The ratio of eigenvalues is the ratio of explanatory importance of the factors with respect to the variables. If a factor has a low eigenvalue, then it is contributing little to the explanation of variances in the variables and may be ignored as redundant with more important factors. Eigenvalues measure the amount of variation in the total sample accounted for by each factor. g) Extraction sums of squared loadings Initial eigenvalues and eigenvalues after extraction (listed by SPSS as "Extraction Sums of Squared Loadings") are the same for PCA extraction, but for
48

other extraction methods, eigenvalues after extraction will be lower than their initial counterparts. SPSS also prints "Rotation Sums of Squared Loadings" and even for PCA, these eigenvalues will differ from initial and extraction eigenvalues, though their total will be the same. h) Factor scores It also called component scores in PCA. These are the scores of each case (row) on each factor (column). To compute the factor score for a given case for a given factor, one takes the case's standardized score on each variable, multiplies by the corresponding factor loading of the variable for the given factor, and sums these products. Computing factor scores allows one to look for factor outliers. Also, factor scores may be used as variables in subsequent modelling. 3.2 (E) Criteria for determining the number of factors Using one or more of the methods below, the researcher determines an appropriate range of solutions to investigate. Methods may not agree. For instance, the Kaiser criterion may suggest five factors and the scree test may suggest two, so the researcher may request 3-, 4-, and 5-factor solutions discuss each in terms of their relation to external data and theory. i. Comprehensibility

A purely subjective criterion would be to retain those factors whose meaning is comprehensible to the researcher. This is not recommended. ii. Kaiser criterion

The Kaiser rule is to drop all components with eigenvalues under 1.0 – this being the eigenvalue equal to the information accounted for by an average single item. The Kaiser criterion is the default in SPSS and most statistical software but is not recommended when used as the sole cut-off criterion for estimating the number of factors as it tends to overextract factors23.

49

iii.

Variance explained criteria Some researchers simply use the rule of keeping enough factors to account

for 90% (sometimes 80%) of the variation. Where the researcher's goal emphasizes parsimony (explaining variance with as few factors as possible), the criterion could be as low as 50% iv. Scree plot

The Cattell scree test plots the components as the X axis and the corresponding eigenvalues as the Y-axis. As one moves to the right, toward later components, the eigenvalues drop. When the drop ceases and the curve makes an elbow toward less steep decline, Cattell's scree test says to drop all further components after the one starting the elbow. This rule is sometimes criticised for being amenable to researcher-controlled "fudging". That is, as picking the "elbow" can be subjective because the curve has multiple elbows or is a smooth curve, the researcher may be tempted to set the cut-off at the number of factors desired by his or her research agenda. 3.2 (F) Horn's Parallel Analysis (PA): A Monte-Carlo based simulation method that compares the observed eigenvalues with those obtained from uncorrelated normal variables. A factor or component is retained if the associated eigenvalue is bigger than the 95th of the distribution of eigenvalues derived from the random data. PA is one of the most recommendable rules for determining the number of components to retain, but only few programs include this option24. Before dropping a factor below one's cut-off, however, the researcher should check its correlation with the dependent variable. A very small factor can have a large correlation with the dependent variable, in which case it should not be dropped. 3.2 (G) Rotation methods The unrotated output maximises the variance accounted for by the first and subsequent factors, and forcing the factors to be orthogonal. This data-compression

50

comes at the cost of having most items load on the early factors, and usually, of having many items load substantially on more than one factor. Rotation serves to make the output more understandable, by seeking so-called "Simple Structure": A pattern of loadings where items load most strongly on one factor, and much more weakly on the other factors. Rotations can be orthogonal or oblique (allowing the factors to correlate). i. Varimax rotation

It is an orthogonal rotation of the factor axes to maximize the variance of the squared loadings of a factor (column) on all the variables (rows) in a factor matrix, which has the effect of differentiating the original variables by extracted factor. Each factor will tend to have either large or small loadings of any particular variable. A varimax solution yields results which make it as easy as possible to identify each variable with a single factor. This is the most common rotation option. ii. Quartimax rotation

It is an orthogonal alternative which minimizes the number of factors needed to explain each variable. This type of rotation often generates a general factor on which most variables are loaded to a high or medium degree. Such a factor structure is usually not helpful to the research purpose. iii. Equimax rotation

It is a compromise between Varimax and Quartimax criteria. iv. Direct oblimin rotation

It is the standard method when one wishes a non-orthogonal (oblique) solution – that is, one in which the factors are allowed to be correlated. This will result in higher eigenvalues but diminished interpretability of the factors.

51

v.

Promax rotation

It is an alternative non-orthogonal (oblique) rotation method which is computationally faster than the direct oblimin method and therefore is sometimes used for very large datasets

REFERENCE
1. Linda Allen and Gayle DeLong, Issues in the credit risk modeling of retail markets, Zicklin School of Business, Baruch College, One Bernard Baruch Way, Box B 10-225, New York, NY 10010, USA, Available online 27 November 2003 2. David G. Blanchflower & Phillip B. Levine & David J. Zimmerman, 2003. "Discrimination in the Small-Business Credit Market," The Review of Economics and Statistics, MIT Press, vol. 85(4), pages 930-943, 09. 3. Marc Cowling, The role of loan guarantee schemes in alleviating credit rationing in the UK, Financial Stability, Volume 6, Issue 1, April 2010, Pages 36-44 4. Gabriel Jiménez, Jesús Saurina, Collateral, type of lender and relationship banking as determinants of credit risk, Journal of Banking & Finance, Volume 28, Issue 9, September 2004, Pages 2191-2212 5. W. Scott Frame, Aruna Srinivasan and Lynn Woosley, Journal of Money, Credit and Banking, Vol. 33, No. 3 (Aug., 2001), pp. 813-825 6. John D. Leeth and Jonathan A. Scott, The Incidence of Secured Debt: Evidence from the Small Business Community, Journal of Financial and Quantitative Analysis (1989), 24 : pp 379-394 7. Jonathan A. Scott, The effect of the Bankruptcy Reform Act of 1978 on small business loan pricing, Journal of Financial Economics, Volume 16, Issue 1, May 1986, Pages 119–140

52

8.

Berkowitz, Jeremy and Michelle J. White. "Bankruptcy and Small Firms' Access to Credit." RAND Journal of Economics 35, 1 (Spring 2004): 69-84

9. William B. and Nelson, William R., Bank Risk Rating of Business Loan (December 7, 1998). Board of Governors of the Federal Reserve System FEDS Paper No. 98-51. 10. W. Scott Frame & Lynn Woosley, Credit Scoring and the Availability of Small Business Credit in Low- and Moderate-Income Areas, Financial Review Volume 39, Issue 1, pages 35–54, February 2004 11. Shelagh Heffernan, UK bank services for small business, Finance, Volume 30, Issue 11, November 2006, Pages 3087-3110 12. Akhavein, Jalal D., Frame, W. Scott and White, Lawrence J., The Diffusion of Financial Innovations: An Examination of the Adoption of

Small Business Credit Scoring by Large Banking Organizations (March 2001) 13. Frame, W. Scott, Padhi, Michael and Woosley, Lynn W., The Effect of Credit Scoring on Small Business Lending in Low- and Moderate-Income Areas (April 2001). FRB Atlanta Working Paper No. 2001-6. 14. Gregory F. Udell, Collateral, loan quality and bank risk, Journal of Monetary Economics Volume 25, Issue 1, January 1990, Pages 21–42 15. Forrest Capiea & Michael Collins, Industrial Lending by English Commercial Banks, 1860s–1914: Why Did Banks Refuse Loans?, Business History, Volume 38, Issue 1, 1996 16. Jay,s, Unsecured business loans – Effortless finance for tiny enterprise operations, Finance For A Small Business category 17. Andrew Baker, Benefits of Unsecured Business Loans, EzineArticles.com Expert Author 18. Todd Kalb, Small Business Unsecured Loans, Articlesnatch.com
53

19. Venditto, Michael, Business Credit; May2007, Vol. 109 Issue 5, p6-8, 3p 20. Getting to Know Unsecured Type Loans, All Topics -Personal FinanceFinancial Planning 21. Bartholomew, D. J., Steele, F., Galbraith, J., & Moustaki, I. (2008). Analysis of Multivariate Social Science Data (2 ed.). New York: Chapman & Hall/Crc. 22. Meng, J. (2011). "Uncover cooperative gene regulations by microRNAs and transcription factors in glioblastoma using a nonnegative hybrid factor model". International Conference on Acoustics, Speech and Signal Processing. 23. Bandalos, D.L. & in Boehm-Kaufman, exploratory factor M.R. (2009). In Four common and

misconceptions

analysis

Statistical

methodological myths and urban legends: Doctrine, verity and fable in the organizational and social sciences. Lance, Charles E. (Ed.); Vandenberg, Robert J. (Ed.). New York: Routledge. pp. 61–87. 24. Ledesma, R.D. and Valero-Mora, P. (2007). "Determining the Number of Factors to Retain in EFA: An easy-to-use computer program for carrying out Parallel Analysis". Practical Assessment Research & Evaluation, 12(2), 1-11

54

CHAPTER – 4 RESEARCH METHODOLOGY

55

Descriptive research design was used for carrying out this study. This study is focused to analyse Unsecured Business Loans requirements. 4.1 Data Source Primary and secondary data was explored for the requirements of the study. The preliminary study and extensive literature review was carried out. The primary data is directly collected from the respondents using a questionnaire. The scope of Internet for collecting secondary data was also exploited. 4.2 Research Approach Survey using a questionnaire was adopted in this study. Personal interactive method was followed with respondent?s to find out their requirements. The questionnaire shall be circulated to the respondents as per the research design 4.3 Research Instrument Questionnaire was prepared with the objective of collecting all relevant information required for achieving the research objectives. Wide discussions with experts in the field of Business loans were conducted before selecting the questions and included it in the questionnaire. The prepared questionnaire was pre-tested before using the study. 4.4 The Population The population was defined as all registered SME in Ernakulum District. 4.5 Sample Size Sample size was estimated from the list of registered SME in The Confederation of Indian Industry at Ernakulum District. 4.6 Sampling Procedure The sample size was selected by using simple random lottery method, from the list of SME registered in The Confederation of Indian Industry at Ernakulum District. 4.7 Scope This study can be very useful for the Banks to understand how a SME?s responds for an Unsecured Business Loans and also to find out the respondents requirements while preferring an Unsecured Business Loans. 4.8 Limitations All respondents may not be willing to answer and also difficulty in contacting respondents
56

CHAPTER-5 DATA ANALYSIS

57

This study was executed in all registered SME in Ernakulum District. Sample size was estimated from the list of registered SME in The Confederation of Indian Industry at Ernakulum District. Finally the sampling procedure was selected by using simple random lottery method, from the list of SME registered in The Confederation of Indian Industry at Ernakulum District.

Availed Loans for Business Purpose
Table-5.1 Availed loans for Business Purpose Frequency Yes No Total 68 32 100 Percent 68.0 32.0 100.0 Valid Percent 68.0 32.0 100.0 Cumulative Percent 68.0 100.0

Source: Survey Data

From the table it can be concluded that, 68% of the people who are doing Business in SME opted for Business loans and 32% of the people did not opt for Business loans.

Figure 5.1

58

First Preference for Business Loan

Table-5.2 First Preference for Business Loan Frequency Secured Unsecured Total
Source: Survey Data

Percent 80.0 20.0 100.0

Valid Percent 80.0 20.0 100.0

Cumulative Percent 80.0 100.0

80 20 100

From the table it can be seen that, 80% of the people preferred Secured loans over unsecured loans. This can be because the term for secured loan is longer than that of unsecured loan and the interest rate is lower for secured loan.

Figure -5.2

59

Cross Tabulation for Availed loans for Business Purpose and first Preference for Business Loans
5.2.1 Availed loans for Business Purpose * First Preference for Business Loans Cross tabulation First Preference for Business Loans Secured Unsecured Total Availed loans for Yes Count 50 18 68 Business Purpose Expected Count 54.4 13.6 68.0 % within Availed 73.5% 26.5% 100.0% loans for Business Purpose % within First 62.5% 90.0% 68.0% Preference for Business Loans No Count 30 2 32 Expected Count 25.6 6.4 32.0 % within Availed 93.8% 6.3% 100.0% loans for Business Purpose % within First 37.5% 10.0% 32.0% Preference for Business Loans Total Count 80 20 100 Expected Count 80.0 20.0 100.0 % within Availed 80.0% 20.0% 100.0% loans for Business Purpose % within First 100.0% 100.0% 100.0% Preference for Business Loans
Source: Survey Data

It was observe that out of 68 who took business loan, 73.5% took secured loan and 26.5% took unsecured loans and out of 32 people, who took loan for other than business purpose, 93.7% took secured loans and only 6.3% took unsecured loan

60

Hypothesis H0: There is no relationship between availed business loan and type of loan taken H1: There is relationship between availed business loans and type of loan taken

Table 5.2.2 Chi-Square Test Asymp. Sig. (2-sided) .018 .037 .011 .018 5.505 1 .019 .014 Exact Sig. (2-sided) Exact Sig. (1-sided)

Value Pearson Chi-Square Continuity Correction Likelihood Ratio Fisher's Exact Test Linear-by-Linear Association N of Valid Cases
Source: Survey Data

df 1 1 1

5.561a 4.369 6.520

100

From table 5.2.2 we can interpret that Chi-square test was found to be significant with ? is 5.561, df=1, P<0.05. Hence we reject the Hypothesis and can conclude that there is relation between the availed business loans and type of business loan taken Hence we conclude that the people who have taken business loan prefer to take secured loan.

61

Three main factors influenced in selecting Unsecured Business Loans

Table-5.3 Factors influenced in Selecting Unsecured Business Loans Factors Interest Rate Loan Ceiling Loan Tenure Time Duration for Loan Processing Processing and Documentation Charges Tax Benefits Liberal Loan amount sanctioning Process
Source: Survey Data

Frequency 89 26 42 85 21 4 33

From the table we can observe that the three main factors influencing in the selection of Unsecured Business Loans are interest rate, time duration for loan processing and loan tenure.

Frequency
4 21 33 89 Interest Rate Loan Ceiling Loan Tenure Time Duration for Loan Processing Processing and Documentation Charges

85 42

26

Figure – 5.3
62

Identify those institutions which provide maximum amount of Unsecured Loans
Table-5.4 Institutions provide maximum amount of Unsecured Business Loans Frequency HDFC Bank Kotak Mahindra Bank Dhanalakshmi Bank Tata Finance Bajaj Finance Others Total
Source: Survey Data

Percent 28.0 17.0 5.0 1.0 3.0 46.0 100.0

Valid Percent 28.0 17.0 5.0 1.0 3.0 46.0 100.0

Cumulative Percent 28.0 45.0 50.0 51.0 54.0 100.0

28 17 5 1 3 46 100

From the table we can observe that 46% of the respondents chose other institutions like SBI, ICICI, Canara Bank etc whereas 28% of the respondents chose HDFC Bank and 17% of the respondents chose Kotak Mahindra Bank Ltd.

Figure – 5.4

63

The Preference of kind of Loan availed for Business
Table-5.5 Preference of Kind of Loan availed for Business Preference Overdraft Unsecured Term Loans Secured Term Loans Gold Loans Agri Loans Asset Finance Friends and Family
Source: Survey Data

Score 28 6 22 21 7.4 0.6 15

From the table we can observe that respondents prefer Overdraft as a business loan. This may be due to easy and quick disbursement of loan amount and also the customer has to pay interest only on the amount overdrawn. As a second option respondents prefer secured term loans. This may be due to long tenure and low rate of interest. As a third preference respondents would rather go for Gold loan, as even if they have a bad credit history and low income level they can avail it.

Overdraft 0.6 7.4 15 28 Unsecured Term Loan Secured Term Loan 21 22 6 Gold Loan Agri Loan

Figure– 5.5

64

Looking for Unsecured Business Loan

Table-5.6 Looking for Unsecured Business Loans Cumulative Frequency Percent Valid Percent Percent Yes No May be after 3 months Total
Source: Survey Data

3 88 9

3.0 88.0 9.0

3.0 88.0 9.0

3.0 91.0 100.0

100

100.0

100.0

From the table it can be observed that, 88% of respondents are not interested in taking Unsecured Business Loans. This may be due to higher interest rate and long tenure

Figure – 5.6
65

Perception of Unsecured Business Loans among Small Medium Enterprises – A Factor Analysis
Factor analysis attempts to identify underlying variables, or factors, that explain the pattern of correlations within a set of observed variables. Factor analysis is often used in data reduction to identify a small number of factors that explain most of the variance that is observed in a much larger number of manifest variables. Factor analysis is primarily used for data reduction or structure detection. The purpose of data reduction is to remove redundant (highly correlated) variables from the data file, perhaps replacing the entire data file with a smaller number of uncorrelated variables. Therefore we are able to identify the perception of unsecured business loans among Small Medium Enterprise so as to group them into specific segment to enable the designing of the appropriate marketing strategy; Factor Analysis was done using Principal Component Analysis

Table-5.7 Communalities Unsecured Business Loans do not require collateral to assure the Business Credit Loan Good credit rating is needed on the part of Borrower while preferring Unsecured Business Loans Unsecured Business Loans maintains easy and rapid way to get cash for your business needs Unsecured Business Loans are turning out to be a key viable alternative for small business Unsecured Business Loans can be acquirable within 10 days Unsecured Business Loans provides flexibility to borrowers Interest Rate for Unsecured loans is high Risk involved on part of borrower is very high The paper work involved during the processing of Unsecured business loans is less Many lenders will approve or deny Unsecured Loans in a matter of a week or less Unsecured Business Loans are taken for comparatively smaller Period Initial 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.000 Extraction .496 .609 .654 .695 .712 .459 .501 .711 .645 .763 .668

66

Unsecured Business loans are best suited for companies that have been operational for long period of time and have built good reputation for themselves The Maximum amount of loan that can be borrowed depends on the credit score of the applicant The more you owe on the Unsecured Business Loan(including interest)the more will be the money which you have to repay If there is delay in repayment, late fee is charged
Extraction Method: Principal Component Analysis.

1.000

.633

1.000 1.000

.646 .564

1.000

.673

15 Likert scales statements were considered for executing the Factor analysis. The extraction method used was Principle Component Analysis. From table 5.7 it was found that the extraction values for all the Likert statements were having adequate loadings. It is observed that the communalities show sufficiently large values suggesting that the statements are equally important for the contemplated problem. The factors extracted and the related results are given below

Table 5.8 Total Variance Explained Extraction Sums of Rotation Sums of Initial Eigenvalues Squared Loadings Squared Loadings Comp % of % of % of onent Cumulat Cumulat Cumulati Total Varianc Total Varianc Total Varianc ive % ive % ve % e e e 1 4.216 28.108 28.108 4.216 28.108 28.108 2.447 16.313 16.313 2 1.661 11.075 39.183 1.661 11.075 39.183 1.999 13.324 29.637 3 1.487 9.914 49.097 1.487 9.914 49.097 1.711 11.410 41.047 4 1.051 7.006 56.103 1.051 7.006 56.103 1.676 11.172 52.218 5 1.013 6.751 62.854 1.013 6.751 62.854 1.595 10.635 62.854 6 .924 6.157 69.011 7 .827 5.514 74.525 8 .675 4.498 79.022 9 .637 4.247 83.270 10 .585 3.902 87.172 11 .494 3.291 90.463 12 .443 2.954 93.417

67

13 14 15

.381 .332 .275

2.537 95.954 2.211 98.165 1.835 100.000
Extraction Method: Principal Component Analysis.

Table 5.8 explains about the total variance reported. It can be found out that the five components extracted from principle component analysis is capable of explaining 62.8% of the variations and the first component alone could explain about 16.3% of the variations. The variations explained by the five variations are quite large.

Table-5.9 Rotated Component Matrix 1 .177 Component 2 3 4 .277 .012 .119 5 .611

Unsecured Business Loans do not require collateral to assure the Business Credit Loan Good credit rating is needed on the part of Borrower while preferring Unsecured Business Loans Unsecured Business Loans maintains easy and rapid way to get cash for your business needs Unsecured Business Loans are turning out to be a key viable alternative for small business Unsecured Business Loans can be acquirable within 10 days Unsecured Business Loans provides flexibility to borrowers Interest Rate for Unsecured loans is high Risk involved on part of borrower is very high The paper work involved during the processing of Unsecured business loans is less

.684

.106

.035

.332

.137

.042

.210

.091

.593

.498

.231

.082

-.023

.780

-.160

.093 .031 .548 .395 .444

.800 .103 .042 -.252 .587

-.018 .132 -.135 .571 -.037

-.089 -.165 -.079 -.363 .267

.235 .634 .417 .183 .175

68

Many lenders will approve or deny Unsecured Loans in a matter of a week or less Unsecured Business Loans are taken for comparatively smaller Period Unsecured Business loans are best suited for companies that have been operational for long period of time and have built good reputation for themselves The Maxium amount of loan that can be borrowed depends on the credit score of the applicant The more you owe on the Unsecured Business Loan(including interest)the more will be the money which you have to repay If there is delay in repayment, late fee is charged
Extraction Method: Principal Component Analysis. Rotation Method: Varimax with Kaiser Normalization. a. Rotation converged in 9 iterations.

.095

.800

.256

.203

.086

.055 .563

-.076 -.056

.613 .288

.241 .480

.475 .014

.756

.194

.153

.110

.019

.569

.220

.436

-.042

-.003

.065

.255

.775

.054

-.022

The researcher attempted identifying those variables by using a Rotated Component Matrix. The rotation method used was Varimax method with Kaiser Normalization. In the above Table 5.9 the variables having high loadings are indicated. These variables are collected and organized based on their loadings. In this, components are identified based on the statements which are having high loadings. The researcher has named each and every component factor with a suitable name identified from the common behaviour shown by the statements. Sl. No 1 2 Factor One – Eligibility - Supporting factors The Maximum amount of loan that can be borrowed depends on the credit score of the applicant Good credit rating is needed on the part of Borrower while preferring Unsecured Business Loans

The first factor was identified and named to be Eligibility because the extracted statements says about credit score and credit rating of the Borrower

69

Sl. No 1 2

Factor Two – Time Duration - Supporting factors Unsecured Business Loans can be acquirable within 10 days Many lenders will approve or deny Unsecured Loans in a matter of a week or less

The second factor was identified and named to be Time Duration because the extracted statements says about time duration for processing of Unsecured Business Loans Sl. No 1 2 Factor Three – Risk - Supporting factors If there is delay in repayment, late fee is charged Unsecured Business Loans are taken for comparatively smaller Period

The third factor was identified and named to be Risk because the extracted statements says about risk for repaying the Loan Sl. No 1 2 Factor Four –Need - Supporting factors Unsecured Business Loans are turning out to be a key viable alternative for small business Unsecured Business Loans maintains easy and rapid way to get cash for your business needs

The fourth factor was identified and named to be Need because the extracted statements says about Key viable alternative and rapid way to get cash for business Needs. Sl. No 1 2 Factor Five –Flexibility to borrowers- Supporting factors Unsecured Business Loans provides flexibility to borrowers Unsecured Business Loans do not require collateral to assure the Business Credit Loan

The fifth factor was identified and named to be Flexibility because the extracted statement says about Flexibility to Borrowers.

70

Table 5.10 Correlations Time Eligibility Duration Risk 1 .300** .269** Flexibility to Borrowers .260** .009 100 .314** .001 100 .275** .006 100 .226* .024 100 1

Pearson Correlation Sig. (2-tailed) .002 .007 .000 N 100 100 100 100 ** ** Time Duration Pearson .300 1 .288 .316** Correlation Sig. (2-tailed) .002 .004 .001 N 100 100 100 100 ** ** Risk Pearson .269 .288 1 .264** Correlation Sig. (2-tailed) .007 .004 .008 N 100 100 100 100 ** ** ** Need Pearson .371 .316 .264 1 Correlation Sig. (2-tailed) .000 .001 .008 N 100 100 100 100 ** ** ** Flexibility to Pearson .260 .314 .275 .226* Borrowers Correlation Sig. (2-tailed) .009 .001 .006 .024 N 100 100 100 100 **. Correlation is significant at the 0.01 level (2-tailed). *. Correlation is significant at the 0.05 level (2-tailed).

Eligibility

Need .371**

100

From the table 5.10 it can be observed that, all the extracted components are positively correlated.

71

CHAPTER- 6 SUMMARY & CONCLUSIONS

72

6.1 FINDINGS
6.1.1 Introduction This study was executed in all registered SMEs in Ernakulum District. The objective of the study was to have a basic understanding about Unsecured Business loan requirements. An attempt was made by the researcher to find out the preference level of respondents in going for Unsecured Business Loans and to study about the factors influencing respondents while choosing Unsecured Business Loans. Sample size was estimated from the list of registered SME in The Confederation of Indian Industry at Ernakulum District. Questionnaires were circulated and data was collected and analysed by using by appropriate statistical tools and the findings are furnished under. 6.1.2 Availed Loans for Business Purpose It was found out that, 68% of the people who are doing Business in SME opted for Business loans and 32% of the people did not opt for Business loans. 6.1.3 First Preference for Business Loan It was found that 80% of the people preferred Secured loans over unsecured loans. This could be because the term for secured loan is longer than that of unsecured loan and the interest rate is lower for secured loan. 6.1.4 Main factors influenced in selecting Unsecured Business Loans It was found that the three main factors influencing in the selection of Unsecured Business Loans are interest rate, time duration for loan processing and loan tenure. 6.1.5 Institutions which provide maximum amount of Unsecured Loans It was found that 46% of the respondents chose other institutions like SBI, ICICI, Canara Bank etc whereas 28% of the respondents chose HDFC Bank and 17% of the respondents chose Kotak Mahindra Bank.

73

6.1.6 The Preference of kind of Loan availed for Business It was found that respondents mostly prefer the business loan in the form of Overdraft. This may be due to easy and quick disbursement of loan amount and also the customer has to pay interest only on the amount overdrawn. As a second option, respondents prefer secured term loans. This may be due to long tenure and low rate of interest. As a third preference, respondents would rather go for Gold loan, as even if they have a bad credit history and low income level they can avail it. 6.1.7 Looking for Unsecured Business Loan It was found that 88% of respondents are not interested in taking Unsecured Business Loans. This may be due to higher interest rate and long tenure. 6.1.8 Factor Analysis: Perception of Unsecured Business Loans among Small Medium Enterprises 15 Likert scale statements were considered for executing the factor analysis. The extraction method was used and it was found that the extraction values for all the Likert statements were having adequate loadings (above.5). Thus it was found that that the five components extracted from principle component analysis is capable of explaining 62.8% of the variations and the first component alone could explain about 16.3% of the variations. The variations explained by the five variations are quite large. Statements are identified based on the statements which are having high loadings. Thus the findings are; ? The Maximum amount of loan that can be borrowed depends on the credit score of the applicant ? Unsecured Business Loans can be acquired within 10 days ? If there is delay in repayment, late fee is charged ? Unsecured Business Loans are turning out to be a key viable alternative for small business ? Unsecured Business Loans provides flexibility to borrowers

74

Thus the new identified factors are named as Eligibility, Time Duration, Risk, Need and Flexibility to Borrowers. In order to find out the interrelationship between satisfaction score and other variables, a correlation analysis was attempted. It was found that all the extracted components are positively correlated.

6.2 SUGGESTION
The respondents are not aware about those institutions which provides maximum amount of Unsecured Business Loans. For this purpose, banks have to increase the awareness level among SMEs about the different scheme offered to them.

75

6.3 CONCLUSION
We can conclude by saying that generally people prefer to take secured loans compared to unsecured loans, due to difference in interest rate and tenure of the loan Some of the limitations of the study which could be the subject of the further research include: a. The sample includes 100 SMEs of Ernakulum District only b. Only the broad classification of Secured and Unsecured loans have been studied and c. Only loan taken for business purpose have been studied. This study will be very useful for the Banks to find out the respondents requirements while taking a Business Loan.

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BIBLIOGRAPHY ? Books
1. Kothari, C.R.,2004, Research Methodology- Methods and Techniques,(Second Revised Edition) New Age International Publisher, New Delhi. 2. James C. Vanhorne, 2007, Financial Management Policy (12thEdition) Hall of India Private Limited, New Delhi

? Journals
1. Gabriel Jiménez, Jesús Saurina, Collateral, type of lender and relationship banking as determinants of credit risk, Journal of Banking & Finance, Volume 28, Issue 9, September 2004, Pages 2191-2212 2. John D. Leeth and Jonathan A. Scott, The Incidence of Secured Debt: Evidence from the Small Business Community, Journal of Financial and Quantitative Analysis (1989), 24 : pp 379-394 3. Gregory F. Udell, Collateral, loan quality and bank risk, Journal of Monetary Economics Volume 25, Issue 1, January 1990, Pages 21–42

? Articles from newspapers
1. Somasroy Chakraborty, „ Foreign banks shift focus to unsecured loans? , Mumbai Mar 09, 2011, Business Standard, Friday, May 18, 2012 http://www.business-standard.com/india/news/foreign-banks-shift-focusto-unsecured-loans/427793/

? Websites
1. www.kotak.com 2. www.prlog.org 3. www.zimbio.com 4. www.kazor.com

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APPENDIX
This questionnaire is intended to find out the preference level of respondents in going for Unsecured Business Loans and to study about respondents Perceptions and variations while choosing Unsecured Business Loans. Kindly cooperate by filling this questionnaire and your responses will be used only for academic purposes. Name & Address of the Respondents Nature of Business No of years in the Business Turnover of your Company 1. Have you availed loans for Business Purpose Yes 2. No : : : :

What will be your first preference, when you think of Business Loan? Secured Unsecured

3. Mark any 3 factors influenced you in selecting Unsecured Business Loans Factors Interest Rate Loan Ceiling Loan Tenure Time duration for loan Processing Processing and Documentation charges Tax Benefits Liberal Loan amount Sanctioning Process Rank

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4. Identify any of those institutions which provides maximum amount of Unsecured Loans

Institutions HDFC Bank Kotak Mahindra Bank Dhanalakshmi Bank Tata Finance Bajaj Finance Others

5. Mark the Preference of kind of loan availed for Business (Please rate 1 to 5 where 1 is significant increase and 5 is significant decrease.) Preferences Overdrafts Unsecured Bank Loans Secured Bank Loans Gold Loans Agri Loans Asset Finance(Leasing and Hire Purchase) Friends and Family Ranks

6. Are you looking for a Unsecured Business Loan for next 3 months Yes No May be after 3 months

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7. Please select your degree of agreement with the following statements. SA stands for strongly agree, A for agree, NA/ND – neither agree nor disagree, DA – Disagree and SDA strongly disagree

NA/ STATEMENT 1. Unsecured business loans do not require collateral to assure the business credit loan. SA A ND DA SDA

2. Unsecured Business Loans prefer to take a high-scoring, business credit report to ensure that you can pay off the credit loan in due course.(Good Credit Rating is needed) 3. Unsecured business loans maintain an easy and rapid way to get cash for your business needs.

4. For small businesses and the business services industry, unsecured business loans are turning out to be a key viable alternative 5. Unsecured business loans can be acquirable within 10 days 6. One can use the fund availed from Unsecured Business Loans for any business reason to grow your business.(Flexibility to Borrowers) 7. Interest Rate for Unsecured loans is high 8. The Risk involved on the part of borrower while selecting unsecured Loans is very high

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9. The paper work which is involved during the processing of an unsecured loan is less 10. Many lenders will approve or deny Unsecured Loans in a matter of a week or less 11. Unsecured Business Loans are taken for a comparatively smaller period. 12. Unsecured Business loans are best suited for companies that have been operational for a long period of time and have built-up quite a reputation for themselves. 13. The maximum amount of loan that can be borrowed depends on the credit score of the applicant 14. The more you owe on the Unsecured Business loan (including interest), the more will be the money which you have to repay. 15. If there is a delay in repayment, late fee is charged

THANK YOU

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