Credit Appraisal & Risk Management
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project on credit appraisal and risk management for punjab national bank ranchi.Punjab National Bank (PNB) was establish...
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A PROJECT REPORT ON CREDIT APPRAISAL AND CREDIT RISK MANAGEMENT
At Punjab National Bank Circle Office, Ranchi Submitted To Rashtrasant Tukdoji Maharaj, Nagpur University in partial Fulfilment of Degree of Master of Business Administration For the Academic Year 2007-2009 Submitted By Manoj Kumar Rao Researcher B.Com (Enrolment No – NU/A8/37904) PROJECT GUIDE
PROJECT GUIDE
Ms. Jyoti Mahajan
Mr.Sanjay Prasad
Faculty MBA Dept.
Senior Manager Credit PNB
Circle Office, Ranchi
============================2007-2009================================ G.H.RAISONI COLLEGE OF ENGINEERING DEPARTMENT OF MANAGEMENT STUDIES, HINGNA , NAGPUR
A PROJECT REPORT ON CREDIT APPRAISAL AND CREDIT RISK MANAGEMENT
At Punjab National Bank Circle Office, Ranchi Submitted To Rashtrasant Tukdoji Maharaj, Nagpur University in partial Fulfilment of Degree of Master of Business Administration For the Academic Year 2007-2009 Time Period: 08-06-2008 to 08-08-2008 Geographical Area: Jharkhand Submitted By Manoj Kumar Rao Researcher B.Com (Enrolment No – NU/A8/37904) PROJECT GUIDE
PROJECT GUIDE
Ms. Jyoti Mahajan
Mr.Sanjay Prasad
Faculty MBA Dept.
Senior Manager Credit PNB Circle
Office, Ranchi
============================2007-2009================================ G.H.RAISONI COLLEGE OF ENGINEERING DEPARTMENT OF MANAGEMENT STUDIES, HINGNA , NAGPUR
DECLARATION
I Manoj Kumar Rao here by declares that the project report entitle “CREDIT APPRAISAL AND CREDIT RISK MANAGEMENT” has been submitted by me in partial fulfilment of the requirement for awarding degree in Master of Business Administration from Nagpur University
I solemnly declare that this report is a result of research work undertaken by me. It is my original work and has not been published anywhere nor has been submitted to any university/institute for the award of any degree before this.
Place: Nagpur Date:
(Manoj Kumar Rao)
ACKNOWLEDGEMENT
First and foremost, I would like to express my deep sense of gratitude to my Project Guide, Ms. Jyoti Mahajan (Faculty, GHRCE) & Mr.Sanjay Prasad (Punjab National Bank, Circle Office Ranchi) for their valuable guidance and supervision throughout the project work. I am grateful to Mr.Kamal Prasad(Circle Head) for permitting me to pursue my summer internship project in his Circle Office. I am also grateful to Mr.Amitabh Moitro, the new Circle Head, PNB Ranchi Circle for his guidance and support. I take this opportunity to thank my parents and my family members who have always been a motivating spirit behind my work and have supported me all throughout. I owe my highest acknowledgement to them without whose support I wouldn’t have been where I am today. I would also like to thank all my friends and my seniors for their priceless contribution and kind help without which I couldn’t have completed my project work. I record my sincere gratitude to Mr. Narayan Biruli, Senior Manager HRD and Mr.Manish Kumar of Credit department, Circle office, PNB Ranchi for their encouragement and support.
Place: Nagpur Date:
(Manoj Kumar Rao)
INDEX Contents 1. Bank Profile
Page no. …………………………
1
2. Brief history of PNB
………………………..
2
3. Credit appraisal (An overview)
……………………….
4
−
Pre sanction appraisal
………………………..
6
−
Sanctioning of loan
………………………..
17
−
Post sanction follow up
………………………..
18
4. Credit Appraisal- A case study
………………………...
20
5. Credit risk management
…………………………
65
6. Research Methodology
…………………………
83
7. Hypothesis
………………………….
85
8. Suggestions
………………………….
86
Bank Profile
Punjab National Bank (PNB) was established in 1895 at Lahore. PNB has the distinction of being the first Indian bank to have been started solely with Indian capital. In 1969, Punjab National Bank was nationalized along with 13 other banks. Punjab National Bank serves over 3.5 crore customers and has the largest branch network in India - 4540 branches and 421 extension counters spread all over the country. Again considering the importance of small scale industries bank has established 31 specialized branches to finance exclusively such industries. Its Debit card cum ATM card can be used to buy goods and services at over 99270 merchant establishments across the country, to withdraw cash at more than 25000 ATMs, where the 'Maestro' logo is displayed, apart from the PNB's over 1094 ATMs and tie up arrangements with other Banks. Punjab National Bank has achieved many awards and distinctions. Major among them are:
* *
Ranked 38th amongst top 500 companies by the leading financial daily, Economic Times.
*
Earned 9th place among India's Most Trusted top 50 service brands in Economic Times- A.C Nielson Survey.
*
Ranked 248 amongst the top 1000 banks in the world according to "The Banker" London.
*
Golden Peacock Award for Excellence in Corporate Governance - 2005 by Institute of Directors.
*
FICCI's Rural Development Award for Excellence in Rural Development - 2005.
*
Punjab National Bank was ranked at 1243 in the Forbes Global 2000 list of global giants and fast growing companies.
*
one among 300 global companies and seven Indian companies which are expected to emerge as challengers to World’s leading blue chip companies
Ranked as 323rd biggest bank in the world by Bankers Almanac (January 2006), London.
Brief History of PNB 1895: PNB established in Lahore. 1904: PNB established branches in Karachi and Peshawar. 1939: PNB acquired Bhagwandas Bank. 1947: Partition of India and Pakistan at Independence. PNB lost its premises in Lahore, but continued to operate in Pakistan. 1961: PNB acquired Universal Bank of India. 1963: The Government of Burma nationalized PNB's branch in Rangoon (Yangon). September 1965: After the Indo-Pak war the government of Pakistan seized all the offices in Pakistan of Indian banks, including PNB's head office, which has moved to Karachi. PNB also had one or more branches in East Pakistan (Bangladesh). 1960s: PNB amalgamated Indo Commercial Bank (est. 1933) in a rescue. 1969: The Government of India (GOI) nationalized PNB and 13 other top banks. 1978: PNB opened a branch in London. 1986 The Reserve Bank of India required PNB to transfer its London branch to State Bank of India after the branch was involved in a fraud scandal. 1988: PNB acquired Hindustan Commercial Bank in a rescue. 1993: PNB acquired New Bank of India, which the GOI had nationalized in 1980. 1998: PNB set up a representative office in Almaty, Kazakhstan. 2003: PNB took over Nedungadi Bank, the oldest private sector bank in Kerala.
HEAD OFFICE PUNJAB NATIONAL BANK 7, Bhikaiji Cama Place New Delhi – 110 066
Chairman and Managing Director
Sr. No.
Directors name
Designation
1
K C Chakrabarty
Chairman and Managing Director
2
K Raghuraman
Executive Director
3
Jag Mohan Garg
Executive Director
4
L M Fonseca
Director
5
S R Khurana
Director
6
P K Nayar
Director
7
Mohan Lal Bagga
Director
8
Harsh Mahajan
Director
9
Mohanjit Singh
Director
10
Prakash Agarwal
Director
11
Rakesh Singh
Director
12
Ramesh Kumar Kochar
Company Secretary
Local Administrative Office Punjab National Bank CIRCLE Office
Ranchi-834001
Credit Appraisal (An Overview)
CREDIT APPRAISAL:-
The core area of activity of a commercial bank is accepting deposit from public and Lending to Public and making investments. In addition to that other tertiary services are there as defined in Banking Regulation Act. Lending or Credit delivery has various dynamics which can be divided into two major parts viz. Asset Acquisition and Asset Maintenance. Credit portfolio is an asset for any bank, and its’ acquisition requires due diligence and a proper appraisal. Bank is utilizing the public deposit toward lending to public or making investments and it is the paramount duty of the Banks to thoroughly appraise the credit proposal and then take a decision so that the risk is minimized and quality credit portfolio grows. As per the present norms any loan where the overdue is more than 90 days old will be treated as Non Performing Assets and the bank will not recognize the interest charged in the said NPA account unless actually recovered and they have to make provisions against the NPAs. These two things affect the profitability of the banks directly. Therefore a sound Credit Appraisal and Post sanction follow up along with Risk Management Approach is necessary for a healthy credit portfolio of any bank. Punjab National Bank has developed a very sound system of credit appraisal and risk management. There is a detailed guideline for post sanction follow up (asset maintenance) also. I had made a study of the credit appraisal techniques adopted by PNB and the post sanctions follow up guidelines of the bank. The risk management policy is also covered in my study. Apart from the theoretical aspects one case study has also been included.
PRE SANCTION APPRAISAL
Whenever a proposal is received by the bank, the Key areas that are assessed by the bank for granting loan are as under:-
PROMOTERS: - The Entrepreneurs who form the company are known as Promoters .It is they who conceive the idea of forming the company or the business concern .The bank takes this factor of promoters as one of the most important one because it is the promoters who lay the foundation of the business of the company. Bank also takes into consideration their experience, whether they have been engaged in such type of industry or not. Promoters with high experience are better because they know the working mechanism of the industry and can successfully manage their company. The man behind the show is very important as there are many success stories which prove that even in adverse circumstances by sheer labour, perception and commitment of the promoters the company survives. The bank also studies the qualification of the promoters to ascertain whether the company is self sufficient or it has to hire the professional from outside for e.g.-: a doctor is not enough qualified and capable to run an iron and steel factory. On the other side he can successfully handle a hospital business. Also the experience is considered while taking a decision on sanction loan amount and margins. The bank investigates the past record of the promoters to confirm that there has been nothing is adverse against the promoters and the promoters have not indulged in any unlawful activity or they are not defaulters to any bank in earlier loans. PROMOTERS FINANCIAL STRENGTH:-The bank also assesses the financial strength of the promoters, what are their immovable property, what are their net worth and how far they are financially sound .The bank also prepares the confidential report of each promoters for assessing their personal worth and their market reputation .If the bank is satisfied with the promoters the further processing takes place. However all the parameters discussed here is concurrent in nature and the assessments on all issues are done on a parallel basis.
COMPANY’S FINANCIAL POSITION: - The bank analyses the financial position of the company as a whole. The Balance sheets, P/L A/c, Cash Flow and Fund Flow statement are required for assessing the financial strength of the company. They calculate the various ratios to see the trend of the company’s growth .They critically assess the balance sheet for determining the true financial position. They calculate Cash Flow and Fund Flow for ascertaining the availability of cash/fund for short and long term requirement. The Fund Flow statement also indicates the movement of funds from long term to short term and from short term to long term. To assess the company‘s financial position, the bank sees the following points: (a)SALES: - It’s the most important indicator of financial position of the company. The bank analyses the sales of past 3- 5 years and studies the trend .If the sales are increasing then what are the rate of growth of sales. If it is increasing at decreasing rate then what are the reasons for deviations. The future sales are analysed keeping in view the capacity utilisation and probable demand of that product. Sales are an important indicator of the company‘s financial position because ultimately this will decide the profitability also. (b)NET WORTH - Besides seeing the promoter’s net worth the bank also sees the company’s net worth to determine their loan amount. The company’s net worth is the Capital and Reserve & Surplus less Intangible Assets. The purpose of assessing the net worth is to determine the promoter’s contribution in the project. (c)LIQUIDITY:-By liquidity, we mean the organisational ability to meet liabilities in short term. The bank measure the liquidity ratios to measures the firm’s ability to meet short term current obligation. It is very important that a firm should maintain its liquidity because the short term success is a prerequisite for long term survival. The company should maintain a proper liquidity so that the company manages the working capital easily which is necessary for running the business. Under liquidity ratios the bank calculates the following ratios: (i) CURRENT RATIO (CA/CL):-The current ratio of a firm measures its liquidity that is its ability to meet short term obligations. The benchmark current ratio is 1.33:1, because the promoter’s contribution towards current assets is 25%. (ii)ACID-TEST/QUICK RATIO (CA-INVENTORIES/CL-BANK O/D):-The acid-test ratio is the ratio between quick current assets and current liabilities and is calculated by dividing the quick assets by the current liabilities. The benchmark acid – test ratio is 1:1. This ratio indicates that even when there is large stock holding and sales are not taking place what is the position of the company liquidity. (d)SOLVENCY: - It shows firm’s ability to pay its long term debts in time .It shows the proportion of debt and equity in financing the firm assets. The bank is highly interested in solvency of the firm .The bank judge the soundness of the firm on the basis of long term financial strength measured in terms of its ability to pay the interest regularly as well as repay the instalment of the principal on due dates. Under leverage ratios the bank calculates the following ratios:(i)Debt Equity ratio (Long term debts/shareholders fund):-It measures the ratio of long term or total debt to shareholders equity. This ratio shows the percentage of owner’s equity to long term outsider’s liability. From the firms point of view higher debt equity ratio is better but for outsiders like bank lower ratio is considerable. (ii)Interest coverage ratio:-It measures the firm’s ability to make contractual interest payments.
(iii)Debt service coverage ratio:-DSCR is the ability of a firm to make the contractual payments required on a basis over the life of the debt. This ratio is used in case of term loan. (iv)Proprietary ratio:-It indicates the extent to which assets are financed by owner’s funds. (v)Dividend coverage ratio:-It measures the ability of a firm to pay dividend on preference shares which carry a stated rate of return. (vi)Capital gearing ratio:-It shows the relationship income bearing funds.
between equity funds and fixed
(e)Profitability :-It shows the earning capacity of the organisation .The operating efficiency of a firm and its ability to ensure adequate returns to its shareholders depends ultimately on the profit earned by it .The profitability ratios are calculated to provide assures to questions such as: (i)Is the profit earned by the firm adequate? (ii)What rate of return does it represent? (iii)What is the rate of profit for various division and segments of the firm? (iv)What is the earning per share? (v)What was the amount paid in dividend? The bank measures profitability ratios in order to ensure that company is gaining sufficient profit and able to pay its dividend and debt in the right time. Various ratios under profitability are as follows:(i)Gross profit margin (Gross profit/sales):-It measures the percentage of each sales rupee remaining after the firm has paid for its goods. (ii)Net profit margin (Net profit/sales):-It measures the percentage of each sales rupee remaining after all costs and expenses including interest and taxes have been deducted. (iii)Return on total assets:-It is the net earnings available to owners and interest to lenders as assets are financed by owners as well as creditors. It is used for both term loan and working capital requirements. (iv)Return on investments:-It measures the overall effectiveness of management in generating profit with its available assets. (v)Return on equity: - It measures the return on the owner’s investment in the firm. All the above ratios are calculated in terms of historical data and the projections. The banks calculate these ratios in order to ascertain their ability to meet their short and long term obligation and also ascertain their profit margin in order to see whether sufficient margin is earned by the company or not. The above aspects are of core importance for any Project Appraisal. However the financial analysis and promoter’s background or their capacity to consume credit is not the only aspect which covers the complete project appraisal. We now discuss the various issues which form part of a comprehensive credit
appraisal at the pre sanction stage and only after they satisfy the bank’s guidelines the final decision for sanction of loan is taken. (a)Technical appraisal (b)Commercial appraisal (c)Economic appraisal (d)Managerial appraisal (e)Financial appraisal
Technical appraisal:The technical appraisal on the following aspects is done by the Dy. Manager/Manager/Senior Manager, Industry, posted in the bank based on the data submitted by the company:
Manufacturing process/Technology Technical Arrangements Size of the plant Product Mix Selection of plant and machinery Plant layout Location of the project Density of industry Innovations and technology Technical diversification Feasibility of the product
If the proposal is found to be technically feasible then only bank takes it up for further study.
Commercial Appraisal: Sales
Demand forecasting -Import substitution -Past & future trends -End- use -Export market -Correlation and regression
Global and future prospects of the business
Supply competition Pricing policy
Current market position Life cycle of the product Brand name of the product Packing and transportation Distribution channel Sales promotion Sources of market information/publication
ECONOMIC APPRAISAL:
Competitive or monopoly product/market
Efficient and economical production
Large scale production
Availability of manpower, raw material and other factors of production
MANAGEMENT APPRAISAL:
Form of organisation -Proprietorship -Partnership -Private/public limited company -Trust/society etc.
Organizational set up: The companies in SME sector are mostly family run business enterprises. In large corporate sector the organisational set up is well defined. The bank assesses the ability of the managing promoters to run the organisation and also discusses the level of involvement of professionals. Management problems: In most of the cases of SME sector the promoters are the main resource in all the activities. Bank mostly faces the problems of management of the organisation in this sector. In large corporate sector the problems are all the same as seen at the industry level. Quality of entrepreneurs -Integrity -Involvement in the project -Financial resources -Compliance -Risk taking ability -Initiative
-Intelligence -Drive and energy -Self confidence -Past track records FINANCIAL APPRAISAL Term Loan
Capital cost of -Land and site development -Building -Plant and machinery -Engineering and consultation fees -Margin for working capital
Means of financing -List of sources:-Promoters contribution, other debts & loan from bank
-Details of each sources of finance-: Promoters contribution: - It includes owners capital, reserves, retained earnings, surplus etc. It is the major source of finance for a business. It is of utmost concern to the outside parties especially for bank because it decides the owner’s contribution in the project. Unsecured loans: - A firm acquires both secured and unsecured loans from outside. Secured loan is provided by banks and other financial institutions and they are secured by assets or immovable property. The rate of unsecured loan is higher than that of secured loans. Share application money: - It is the part of current liabilities. It is the amount of money paid by the person to become a shareholder of the company. Debenture: - It is a kind of long term debt. The company issues debentures for raising the funds. After a fixed period of time company redeems these debentures. Loan from bank: - It is also the source of finance for the business. Bank provides the loan at a reasonable rate and also helps in taking correct financial decision .This may be short term or long term loan.
Financial projections
- Balance sheet and Profit and Loss analysis. Operating Statement
Basis of sales assessment. Cost of sales/ Gross profit ratio. PBDIT/ Sales PBT/PAT (absolute) Cash accruals/ sales Retained cash earnings
-Cash flow estimates -Break-even point:-
A very important tool to determine resilience Fixed costs x Sales/ (Sales – Variable costs) Sensitivity to BEP Sensitivity to DSCR
-Ratio analysis: As discussed at the beginning. -Sensitivity analysis:- The bank makes +/- study of major factors of production to understand its sensitivity towards sales,profits,DSCR etc. The bank studies the sensitivity analysis by increasing raw-material price by 5% and reducing sales price by5%. On the aforesaid situation, DSCR is checked. If it indicates that the unit shall be able to withstand adverse price situation then it is considered good.
RISK MANAGEMENT: After the implementation of Basel I and II every assets has a risk weightage. To assess and mitigate risks the bank has developed it’s model and it has a risk management policy. Every account undergoes an online risk rating. RISK RATING:-The bank adopts its own criteria for giving the risk rating. The bank has developed its own software which assesses credit risk parameter. It has 6 category under which various parameters are given. They are basically:(i)
Future risk
(ii)
Subjective Assessment of financial
(iii)
Adjustment for financial trend
(iv)
Business and industry evaluation
(v)
Management evaluation
(vi)
Account evaluation
Each sub category under category has standard weights. The bank measures the weight of the organization as a whole and compare it with standard and finds the deviation if any. Then reasons
are searched for the deviations and their explanations are mentioned. The bank then provides the weighted average risk and then decides whether to accept the proposal or not. RISK PRICING:-Interest rates are based upon the risk weight age of the company as per risk management policy. There are 8 categories of risk weight.ie: AAA, AA, A, BBB, BB, B, C&D. Based on the risk rating of the company, Interest rates are determined. This is known as risk pricing .e.g.:- If the co. Is having AAA then interest rates will be low and the company is having excellent market credit, superior assets, excellent debt capacity and coverage.
Risk Mitigation: Banks opt for collateral securities to cover the loan amount which in turn mitigates the risk. Focus on:
IRR/NPV Schedule of implementation Gearing/ Liquidity. Moratorium/ Repayment
Working Capital Focus on
Volumes/ Sales growth Operating efficiency Liquidity Gearing Quality of current assets. Efficiency in asset turnover.
Methods of WC Assessment
NAYAK COMMITTEE - : Working capital:-According to Nayak committee/simplified method: - Under SSI up to 5 crores. - Other up to 2 crores. Calculation under NAYAK COMMITTEE:(1)Working capital requirement is 25% of sales. (2)Minimum promoter’s margin is 20% of WCR i.e. 5% of sales. (3)Permissible bank finance: 1-2 Ex: -
Sales WCR
100 25 (25% of sale)
Margin
05 (20% of WCR)
PBF
20(Permissible Bank finance)
OPERATING CYCLE METHOD & WORKING CAPITAL GAP METHOD (based on TANDON committee model): -Holding of raw-materials, finished goods and semi industrial products.
PBF calculation under this method: 1. Total Current Asset 2. Less Other current liability (Excluding Bank finance) 3. Working Capital requirement (1-2) 4. Minimum margin: 25% of TCA 5. PBF : 3-4 The total current assets are based on the holding period required for the company and the operating cycle. Ex:1. Total Current Asset 2. Less Other current liability
100 60
3. Working Capital requirement
40
4. Minimum margin
25(25% of TCA)
5. PBF
15
Operating Cycle
CASH FLOW METHOD: - For special types of business requirement which is based on the future cash flow only, like future lease financing. We again wish to mention here that ratio analysis is an integral part of working capital finance also.
Financial Analysis What are we looking at?
Manufacturing efficiency Operating efficiency Is it turning over the assets efficiently Yield pattern Appropriation of yield Liquidity to meet day to day operations
What is the quality of current assets Can the unit sustain in difficult times Can it service our interest and repayments
Effective appraisal: An effective appraisal includes all the above points which are either a part of Techno Economic Viability or the Management aspect. Any appraisal to be called as effective need to be:
Authentic Brief Analysis-correctly interpreted Exceptions only SWOT analysis :- To assess the overall position of the project and the promoters the bank is required to make the swot analysis and submit its report which includes:-
STRENGTHS:-The strong points in favour of the organisation and the project are mentioned in order to show that organization has a good reputation and it can repay the loan amount in right time. The strong points of the organization shows excellent business credit, superior assets quality, liquidity, excellent debt capacity and coverage.
WEAKNESS:-Perceived weakness is mentioned and the real solution to the problem is also mentioned.
OPPORTUNITIES:-The prospects of the organisation are mentioned. The prospect of the development of the product or the organisation in the economy is assessed and the opportunities are mentioned for the firm. It also shows the efficiency of organisation to capitalise opportunities. It also gives an idea of global and future aspect of the organisation.
THREAT:-Potential threats against the organisation are identified and their possible solutions are also sought for the better of the organisation. Some of the threats are:-cut throat competition, escalating prices, scarcity of factors of production, incapable management etc.
Sanctioning of Loan
In PNB the sanctioning of loan is at various stages. Powers are delegated in a very structured manner which is decentralised and keeping in view the business requirement and the level of Managers working in different scales.
Our study pertains to the loans under the powers of Circle Head and above. At this stage the proposal is received from the branches and after the pre sanction appraisal is done at Circle office on the above mentioned points the Credit Departments places the proposal with their recommendation before the credit committee which comprises of different functional heads and the Chief Managers in form of a standard credit appraisal format popularly known as Board Note.
RECOMMENDATIONS & SANCTION:- The credit committee goes through the proposal in detail and thereafter recommends the same for final sanction before the sanctioning authority as per terms and conditions of the bank.
POST-SANCTION FOLLOW UP As discussed earlier Asset Management is of Prime Importance in any business activities. In banking sector it has gained too much importance after the implementation of Prudential norms since 1991. PNB is having a sound policy for this purpose which we discuss hereunder.
a) Documentation– Vetting of Loan Documents Bank has in place a system of Vetting of Loan Documents from the approved advocate in case of borrowal accounts, with sanctioned limits of Rs. 5 crore & above (both fund based and non-fund based). The system is followed meticulously.
b) Legal Compliance Certificate Under this system, for all credit limits of Rs.10 lakh & above, branches submit legal compliance certificate, certifying the compliance of all the formalities contained therein. Pending formalities, if any, are reported in terms of extant guidelines and are submitted in respect of all fresh sanctions/ enhancement/renewal, to the respective controlling office, within the stipulated time.
c) Ensuring end-use of funds In order to ensure end-use of funds it has lent. The Bank does not depend entirely on the end-use certificates issued by the Chartered Accountants but on its internal controls and the Credit Risk Management System which enhance the quality of the loan portfolio. Some of the illustrative measures that are taken by the branches to ensure end-use of funds are: I. II.
Meaningful scrutiny of quarterly progress reports/operating statements, balance sheets of the borrowers; Regular inspection of borrowers’ assets charged to the Bank as security;
III.
Periodical scrutiny of borrowers’ books of accounts:;
IV.
Periodical visits to the assisted units;
V.
System of periodical stock audit, in case of working capital finance;
d) Loan Review Mechanism It is an effective tool for constantly evaluating the quality and risk of loan book of the bank and to bring about qualitative improvements in credit administration. The Credit Audit and Review system covers all borrowal accounts beyond a threshold limits and identifies weak accounts. Under the system independent team of Credit Auditors examines the credit process. Credit audit facilitates focusing the attention about overall assessment of the borrowal entity. Loan Review Mechanism has been made applicable to all loan accounts in standard category having total exposure of Rs. 5.00 crore & above and identified High Risk accounts having total exposure of Rs. 1 crore & above. In case of higher value accounts with total exposure of Rs. 50 crore & above and having risk rating of (PNB-BB) or below, Follow Up Credit Audit is done after 6 months is being done.
e) Preventive Monitoring System (PMS) Bank has introduced Preventive monitoring system for large borrowal accounts. The system is applicable to all borrowal accounts having sanctioned limits (FB plus NFB) above Rs. 1 crore in CBS branches and above Rs. 12 crore in other branches. The model for PMS has also been placed in central
server environment. This system is a dynamic system for tracking the health and conduct of borrowal accounts to capture the signals of early warning. Timely decision should be taken on the future course of action in the borrowal accounts depending upon PMS rank.
f) Stock Audit Bank has a policy to conduct annual stock audit (including book debts) for all accounts with fund based working capital limits of Rs.5 crore and above whether standard or NPAs, which is followed by the branches. Further, in respect of borrowers enjoying fund based limits of less than Rs. 5 crore, the extant guidelines for getting the stock audit done in emergent cases and/or, wherever bank’s interest demands, with prior concurrence of ZM is done. Annual Stock Audit should is compulsorily conducted in all accounts with risk rating ‘B’ & below and enjoying fund based working capital limits of Rs. 1 crore and above. In cases of Consortium/Multiple Financing where the borrower is enjoying working capital limits (fund based) of less than Rs. 5 crore from the Bank and Rs. 20 crore and above in aggregate from the banking system, branches take up with lead bank/major share-holder banks in multiple banking arrangement for getting the stock audit conducted. The final decision regarding stock audit in the account, however, is based on the consensus amongst the member banks. Further, in ‘BB’ to ‘AAA’* risk rated accounts, which signify ‘lower risk’, GM-Credit, Head Office may permit exemption for conducting of Stock Audit.
g) Recovery in Loans After the introduction of NPA norms and capital adequacy requirements, Recovery has assumed greater importance. Hence at all levels, meticulous follow up continued to ensure that the recovery is made in terms of sanction and the targets fixed for recovery are achieved.
Case Studies: 1. M/s ABC Co.(P) Ltd (Fund Based Limit)
Enhancement in term loan and additional facilities in existing loan account.
Whether fresh/renewal/ enhancement Asset Classification as on 14.12.2007 Credit Risk Rating by Bank
Standard Rating Score ABS Present
BB
52.15
31.03.07
Previous
BB
58.65
31.03.06
a)Whether sensitive Sector Real Estate/Capital Market b) Applicable weight
Risk NO
Consortium/Multiple Banking
Multiple Banking
Lead Bank
NA
PNB’s Share %
NA
Date of Receipt of Proposal at BO
10.11.2007
Date of last sanction 10.05.2007, Zonal Manager (TL2) & authority/NBG Clearance
PUNJAB NATIONAL BANK ADITYAPUR, JAMSHEDPUR
The Zonal Manager Zonal office, Ranchi
Gist of proposal ( For Tube unit) Term Loan
–
Rs. 197.00 lac
Cash Credit (BD) - Rs. 60.00 lac Bank Guarantee - Rs. 140.00 lac
TOTAL
-
Rs. 397.00 lac
1.
Name of the Borrower
: M/S BINA METAL WAY PVT LTD.
Address of Regd. Office
: 9C, 9 th Floor, Crescent Tower, 229, A.J.C.Bose Road, Kolkata- 700020
b.
Works/Factory
: B-4,Phase-II,Industrial Jamshedpur 8310013
c.
Constitution
d.
Date of incorporation/
a.
Area,Adityapur,
Private Limited : 20.12.1986
Establishment e.
Dealing with PNB since
f.
Industry/Sector
Manufacturing Industry
g.
Business Activity (Product)/
Existing
Installed Capacity.
: 27.02.2006
2.
Branch Office/Zone
Manufacturing different types of switches and crossings for railways track material and auto components for M/s. Tata Motors, Jamshedpur. Steel Tubes for TATA Steel
: Adityapur, Jamshedpur/Jharkhand
3. A) Directors (S/Shri) 1. Mr. Probal Mukherjee 2. Mr. Pradip Mukherjee 3. Mr. Pronab Mukherjee B (i) If any of them, in RBI's / Wilful defaulters' list/caution list of ECGC / CIBIL database No none of the promoters are in any defaulter list.
(ii) If any one of them connected in the past with any NPA/OTS / Compromise/ unscrupulous defaulters- None of the director is connected in the past with any NPA/OTS / Compromise/ unscrupulous defaulters.
(iii) If any of them, related to Directors/Senior Officers of PNB
None of them are relatives of directors /senior officers of PNB.
c) Management Change since last sanction, if any: None . d) Shareholding Pattern- As on 28.09.2007 Particulars No. of Shares
@
Amount
Mr. Pronab Mukherjee
357624
10
3576240.00
Mr. Pradip Mukherjee
349283
10
3492830.00
Mr. Probal Mukherjee
347523
10
3475230.00
Mr. Bina Mukherjee
30
10
300.00
Mrs. Samprity Mukherjee
18300
10
183000.00
Mrs. Surita Mukherjee
115500
10
1155000.00
Mrs Nandini Mukherjee
10000
10
100000.00
Mrs. Rohini Mukherjee
101600
10
1016000.00
Thermatix Developers p ltd.
11500
10
115000.00
Mr. Santanu Ganguly
2000
10
20000.00
Mrs. Sheela Ganguly
100
10
1000.00
TOTAL
1313460
13,134,600
4.A Facilities Recommended: (Rs in lacs)
Nature
Existing
Proposed
Secured/Unsecured alongwith the basis thereof
Fund Based
(As per RBI’s guidelines)* CC(H)
0.00
60.00
WCDL
0.00
0.00
FOBP/FOUBP/FABC
0.00
0.00
Others
0.00
0.00
Fund Based Ceiling
0.00
60.00
Secured
Secured
Non Fund Based ILC/FLC ILG
300.00
440.00
Secured
Term Loan
1226.00
1423.00
Secured
TOTAL COMMITMENT
1526.00
1923.00
Secured
FLG Non Fund Based Ceiling
Present proposal Term Loan
–
Rs. 197.00 lac
Cash Credit (BD) - Rs. 60.00 lac Bank Guarantee - Rs. 140.00 lac
4.B Our Commitment and Maximum Permissible Exposure Norms (Rs in lac)
a)
Fund Based Working Capital limits
Unit I
Tube Div.
Total
Nil
60.00(BD)
60.00
b) Non Fund Based
440.00 440
c)
Term Loan
226.00
1197
1423
d) Investments in shares, debentures etc.
Nil
Nil
Nil
e)
Total of (a), (b), (c) & (d)
226.00
1697
1923
f)
Total exposure as %age of Bank’s capital funds
g) Bank’s permissible exposure level in terms of our latest audited Balance Sheet
5. A
Facilities from PNB Subsidiaries/Exposure by way Equity/Debentures/Derivatives/Foreign Exchange etc. : NIL
of
investment
in
(Rs. in lac) Name of the Nature of Security Institution facility
O/s
Purpose
as on
Overdue, if any
a) b)
5.B Term Loans from other Banks/Financial Institutions/Other Institutions - (including Lease, ICDs, Corporate Loans, Debentures etc.) (Rs. in lac) Name of the Bank/FI
Facility Sanctioned
Balance O/s
Overdue, if any
Car Loan
1.11
Nil
7.5%
Mortgaged Loan
29.32
Nil
11.25%
As on 31.12.2007
Rate of Interest
HDFC
ICICI
5.C Credit Rating by agencies {CRISIL/ICRA/CARE etc.} with purpose of such rating. rating has been done by rating agencies.
No credit
5D. Details of Working Capital Limits from the Consortium/Multiple Banking:
Name of the Bank
Existing
Canara Bank
FB 600
NFB
Share % FB NFB
Proposed FB NFB
Share % ROI FB NFB
1000
100%
NA
NA
100%
Confidential report from Canara Bank is obtained & enclosed
NA
NA
6.A Details of Group /Allied/Associate firms and the facilities sanctioned to them (Rs in lac) Name of the Activity Company
M/s Thermatix Developers Pvt. Ltd.
Development and promotion of Real estate
Financials
Period
31.03.07 31.03.06
Share Capital
3.05
3.05
Add Reserves & Surplus
57.38
47.40
Nil
Nil
60.43
50.45
Sales
61.36
47.95
Period
31.03.07 31.03.06
Share Capital
6.63
7.23
Add Reserves & Surplus
Nil
Nil
Less Acc. Losses & Intangible Assets
Nil
Nil
TNW
6.63
7.23
PBT
-
-
Sales
1.12
3.19
Less Acc. Losses & Intangible Assets TNW
Dealing Bank
Facilities
Canara Bank
Current Account
Canara Bank
Current Account
Nature & Amount
PBT
M/s Bina Agriculture Krishi Udyog
6.B Comments on conduct of these accounts with our bank/other banks Conduct of account with Canara Bank is satisfactory. There is no loan in the above firms. The activities are also very minimal without having much impact on the overall functioning of the group.
6.C Comments on adverse Financial Indicators, if any
Nil
7.A(i) Financial Position of the Company
(Rs. in Crore) 31.3.05
31.3.06
31.3.07
Audited
Audited
Audited
Gross Sales
11.32
14.18
15.09
9.04
-Domestic
11.28
14.18
15.09
9.04
-Export
0.04
-
-
% growth
-39.9%
25.26%
6.42%
Other Income
0.73
0.23
0.92
0.10
PBIDT
0.06
1.82
1.23
1.40
Operating Profit/Loss
0.14
0.53
0.08
0.32
Profit before tax
0.06
0.60
0.05
0.08
Profit after tax
-0.05
0.40
-0.02
0.08
Cash profit/ (Loss)
0.31
0.81
0.36
0.32
Paid up capital
0.16
0.16
1.31
1.31
Surplus 5.06 revaluation
5.46
6.84
6.92
Reserves excluding reserves
and
30.09.2007
Misc. expenditure not written off
0.15
0.08
0.02
0.02
Accumulated losses
0.00
0.00
0.00
0.00
Deferred Tax Liability/Asset
-0.38
-0.25
-0.20
-0.20
a)Tangible Net Worth
4.69
5.29
7.93
8.01
b)Investment in allied concerns and amount of cross holdings
0.0
0.0
0.0
0.00
c) Net owned funds (a –b)
4.69
5.29
7.93
8.01
Investments
0.02
0.02
0.02
0.02
Unsecured Loans
1.60
3.84
1.88
3.46
Net Working Capital
2.67
5.42
4.06
5.99
Current Ratio
1.30
1.57
1.32
1.53
Debt Equity Ratio
0.27
0.86
1.44
2.73
Operating Profit/Sales
-6%
2.6%
31.3.05
31.3.06
31.3.07
Audited
Audited
Audited
TOL/TNW
2.03
2.57
2.98
Fund flow Long Term Sources
6.65
10.45
19.90
Long Term Uses
3.98
5.03
15.84
Short Term Sources
8.88
9.39
12.51
Short Term Uses
11.55
14.81
16.57
7A (ii) Key Financials up to last quarter (as per published Unaudited Results in case of listed companies) : NA . Company is not listed. (Rs. Crore) Period ended Sales Other Income PBT PAT
Latest quarter ended
Corresponding % Cumulative upto Cumulative upto % quarter of last year Change this quarter of this quarter of Change current year previous year
7A (iii) Capital Market Perception Stock is not traded in any stock exchange
Listing
BSE/NSE
Face Value Current Share Price as on 52 weeks High / Low
7.A (iv) Comments on Financial Indicators (growth, achievement vis-à-vis estimate)
Comments on financials
Growth: Growth of the firm is increasing gradually. In the FY 2004-05, there is negative growth of 39.9% over the previous FY due to irregularity in export orders from countries like Malaysia, Thailand, and Bangladesh Railways. The domestic sales have been more of less stable in all the years. There is positive growth of 26% in FY 2005-06 & 6.42% in FY 2006-07 over their previous years.
Profitability: Profit after tax in FY 2006-07 is negative by amount of Rs. Two & half lac, although there were no cash losses and the PBT is positive. During the FY 2006-07, Company has executed certain jobs other than Railway, which involved procurement of entire material from Company’s own fund, which resulted increase in the cost of purchase of raw material and consumption, where as during the year 2005-06, total sale was out of rail supplied by Indian Railway. Over and above, escalation clause allowed in purchase order was supposed to be raised during the year but due to non-availability of price index from the Railway, Company could not raise escalation bill amounting to Rs. 68 Lacs. The same has been raised during the current financial year, resulted decrease in profitability in comparison to earlier year. During the current financial year Company received contract from private parties amounting to Rs. 400 Lacs having substantial margin over and above order received from Railway. This order will have to be executed by March 2008.This will ensure increase in profitability of current financial year.
Liquidity: The Company is in comfortable position to meet their current liabilities. Since company was under construction, hence investment in fixed assets led to the decreasing the value of current assets, resulting reduction in NWC compared to previous year. Although it is at present
1.32 as on 31.03.2007, which has further improved on 30.09.2007. In the coming year it is in comfortable position.
Solvency: The long-term solvency of the company is very comfortable at present, which is evident from low debt equity ratio. The TOL/TNW ratio is also low, suggesting better overall solvency position of the company. The amount of unsecured loan was converted in to share capital. Hence amount of unsecured loan decreased.
BM has further informed that as on 31.12.2007, share capital of the company is Rs.131.3 Lacs and including the share premium accounts the amount as on 31.12.2007 is Rs.271.88 lacs. There will be subsequent infusion of capital and unsecured loan till 31.03.2008. Position of actual share capital and unsecured loan and R&S vis-à-vis projections are as under:Rs.in lacs Means
Before Tube Envisaged Mill Project Tube Mill
for Actual as on Actual as 31.03.2007 31.12.2007
Share Capital 16.00 and Premium
390.00
271.88
271.88
Unsecured Loan
187.29
188.11
394.83
0.00
543.38
543.38
577.29
1003.37
1210.09
Reserve Surplus Total
160.20 & 506.04 682.24
on
From the above table, it can be observed that the present net owned fund of Rs. 1210 Lacs, which is 49.44 Lacs short from the projected level ( i.e. Rs.682.24 lacs+Rs.577.29 lacs= 1259.53 lacs). The promoters of the company are arranging further fund to meet this shortfall and will complete the project by the end of the current financial year.
Debt Service: The present track record of the firm is good. The average DSCR is coming at 1.66 ( excluding the DSCR for the last year of repayment which is quite high).
Target vis a vis Achievement : Particulars Accepted during last assessment 2006-07
Actual for
Variance
Net Sales
22.55
15.09
7.46
PBT
0.76
0.05
0.71
PAT
0.69
-0.02
0.71
2.77
1.12
Net Capital
Working 1.65
Note- Tube Div. Came in production in May 2007,so there is variance between accepted and actual parameters. In view of the above, the financial position of the company may be termed as satisfactory.
7.B
7.C
Details of investment in Shares, Debentures, Units or diversion of funds outside the business etc. Nil
Details of Liabilities not accounted for/Contingent liabilitiesa) Claims against the Company not acknowledged as debt Rs.1721 thousand. b) Outstanding Bank Guarantees Rs. 68674 thousand. As far as contingent liability other than BGs of the Company is concerned, it is AMG bill of JSEB (for unit I). Till date decision of the Board is pending, in case if it is payable the same will be paid by the party’s own generation (Party has submitted undertaking on this subject).
7.D 7.E
Status/details of adverse comments by Auditors of the borrowing unit- No adverse comment has been given by auditors. Position of assessment of income tax/sales tax/wealth tax of the partners/proprietor IT returns are being filed regularly
borrowing concern/
7F. Information on litigation initiated by other banks/FIs against the borrower as per latest Audited Balance Sheet, if NIL
7.G Overall likely impact of ( 7.B to 7.F) on the financial position of the borrowing unit NIL 8. A.
SECURITY Primary :
For working capital limits
Hypothecation of raw material, stock in process, finished goods, bill receivable arising out of genuine business and any other current asset acceptable to the Bank. For Term Loan Continuation of EM of existing block assets comprising factory land & building and hypothecation of plant and machineries and other moveable asset not embedded to ground. Lease hold land at plot no. A36(P), A37(F) to A43(F) & A44(P) situated at Adityapur, Area 8.60 acre Collateral Securities i) Hypothecation/ Mortgage of Block Assets Immovable Properties (Rs in lac) roperty Details
Owned by
Value as Present Realis per Last able Value as sanction value per valuer
Basis for valuati on
Date
Whether existing/ fresh
Valuer report
15.02.2 Existing 006 To be extende d
report 1. EM of land at mauza Kandedbera, Chandil,Serai kelakharsawan,th ana no. 327,Area 9.92 acre,khata no. 10, plot no.539,540,5 41,542,543,5 51 2..EM of factory shed, building & land of area 2.078 Acre situated at Phase III, plot no.B/23,B/24 & B/25,
M/s Bina 250 Krishi Udyog, Mr. Pranab Mukherjee & others
NA
250
250
96.57
96.57
Valuer report
M/s Bina Metal way pvt. Ltd.
250
250
250
Valuer
14.11.2 007
Fresh
Industrial area, Adityapur.
report 15.02.2 006
Mr. Pranab Mukherjee 3. EM of IP & others. situated at 70,Rajendra Nagar, Sakchi, Jamshedpur.
ii)
Second charge
Existing
: none (Rs. in lac)
Nature of Security limits
Value of block assets as on: (as per B/Sheet as on 31.03.2007)
Value of block assets excluding specific charge if any
Extent of Balance / first / residual value second of charge charge available to holders bank/consorti um NA
iii) Personal /Corporate Guarantee
(Rs in lac)
NA
To be extende d
Name of Guarantor
Net Worth
Prev.
Present
Immovable property
Date of report
Prev. As at
Prev.
Present
As at As at 31.03.06 31.03.07 31.03.06
Present
confidential
As at 31.03.07
Mr. Pronab Mukherje
205
300
64
-
19.01.07
14.12.07
Mr.Probal Mukherjee
186
224
61
-
19.01.07
14.12.07
Mr.Pradip Mukherjee
111
147
60
-
19.01.07
14.12.07
Smt. Nandini Mukherje
22
22
01
01
19.01.07
14.12.07
Smt. Sampritee Mukherjee
73
77
10
10
19.01.07
14.12.07
Smt. Surita Mukherjee
72
83
13
13
19.01.07
14.12.07
Mr. Barun Mukherjee
-
73
-
-
-
12.01.08
Smt. Raka Mukherjee
-
20
-
-
-
12.01.08
M/s Bina Krishi Udyog
07
Comments on changes, if any
.
02
No change
Status of creation of charge: As per previous sanction charge has been modified with Registrar of Companies on 13.07.2007. 8. C
Security Margin ( Fixed Asset Coverage Ratio – for term loans) Existing Nature
Book value
Proposed FACR
Book Value
FACR on project completion
(Rs in lac) Primary
1532
1.25
1811
1.27
Collateral
500
0.41
597
0.42
Total
2032
1.66
2408
1.69
9. Position of Account as on 30.12.2007
(Rs. in lac)
Nature
Limit
VS
1000
1481
950
950
0.00
226
300
215
226
11.30*
B/G
300
-
-
226.39
C/C(BD)
0.00
0.00
T/L I plant
(IC 18)Tube mill
T/L II (IC machine
72)
CNC
DP
Balance
Irregularity
Nil
0. 00
* The installment due in December quarter for Rs.11.30 lacs is due and party will be depositing the same within 15 days. The interest is paid up to date.
10.A
Conduct of the Account including details of terms & conditions not complied with Conduct of the account is satisfactory & all terms and conditions of the sanction have been complied with.
10 B
Review of the Account (as per General Instructions) - NA
10. C i)
Value of the Account (Rs. in Lac)
Period 8 month
Nature of Limit Limit Term loan 1000
7 month
BG
300
Interest/Commission Earned
Yield (%)
41
4.1%
15.86
5.28%
The Yield on TL is low because the disbursement was gradual during the year. ii)
10.D
Concessions allowed, if any
: 1.50% in ROI.
Summary of serious irregularities pointed out by Bank’s Inspectors, Concurrent Auditors, Credit Audit & Review Division (CA&RD), RBI Inspectors, Statutory Auditors, observations of Stock Audit Report, Comment on Preventive Monitoring Score Trends, (and status of rectification of these irregularities)
NO SERIOUS IRREGULARITY POINTED OUT BY AUDITORS
11.
Brief History
11.A General : M/s. Bina Metal Way (P) Ltd has set up tube mill at Gamharia, Dist. Seraikela Kharswan, which manufactures tubes of different sizes and specification for M/s. Tata Steel. The company has entered into an agreement with M/s. Tata Steel for the said conversion job. BMW is engaged in manufacture and supply of Railway Turnouts for the last few decades. Recently Indian Railway has decided to upgrade /modernize its existing Turnout system with improved Thick Web Switches instead of conventional one. To become a part and parcel of this programme of modernization of Thick Web Switches, BMW has already entered in to a technical collaboration agreement with M/s Balfour Beatty Rail Track System Ltd. This Company has offered to manufacture the Thick Web Switches with the help of latest international technology.
11.B
Comments on Industry Scenario and industry outlook with particular
Activities of the company fall under light engineering industry, for which neither RMD nor ICRA has given any specific industry rating in the year 2007, As such we have assumed neutral status of the industry.The firm is not having many competitors in this area. Moreover the company is having agreement for supply with Tata Steel.
11.C Comments on management , production and marketing The Directors of the Company are as under1. Mr. Probal Mukherjee 2. Mr. Pradip Mukherjee 3. Mr. Pronab Mukherjee
Mr. Probal mukherjee has got Diploma in Hotel management, but he has been associated with this firm since long. He has more than 20 years working experience in the field of manufacture of Permanent way items. He is the Director Commercial of BMW and looking after entire finance and HRD activities of the Company. He is also Director of M/s Thermatix Developers Pvt. Ltd. engaged in the field of real estate.
Mr. Pronab Mukherjee is Diploma holder in Civil Engineering. He has about 30 years working experience in the field of manufacture of Permanent way items. Presently he is holding the position of Managing Director of BMW & he is also Director of M/s Thermatix Developers Pvt. Ltd.
Its tube division is presently engaged in tube manufacturing, with a capacity to manufacture more than 50000 MT per annum. The tube mill is engaged in manufacturing circular pipes of sizes varying from 4” NB to 14” NB and corresponding sizes of square/ rectangular cross sectional structural as per ISI and API standards. The firm has entered into an agreement with M/s. Tata Steel for processing of slitting HR coils to required diameters as per technical specifications initially for 36 months with further renewable up to 24 months. M/s. Tata Steel shall be requiring around 3500 to 5000MT of piping materials per month from the firm. The non circular pipes of different sections are basically meant for construction purpose, now a days required for modern construction activities especially in modern airports and some new high profile construction.
11.D. Borrowers' diversification, expansion, modernization programme, if any-The present proposal is for additional term loan of Rs. 197.00 lacs to meet the above requirement and new credit facilities of CC(BD) Rs. 60.00 lacs & BG limit of Rs. 140.00 lacs over and above the existing term loan limit of Rs. 1000.00 lacs for its tube division. Although there is no diversification or moderninsation program but to complete the project as per the requirement of full capacity utilization and supply as per the contract the party requires the present fund.
Present Proposal a) Brief of the proposal 12.
Term Loan
–
Rs. 197.00 lac
Cash Credit (BD) - Rs. 60.00 lac Bank Guarantee - Rs. 140.00 lac TOTAL
-
Rs. 397.00 lac
This proposal is for following credit facilities:-Justification for working capital sanction(For unit II) Comments on Sales estimation /projections and Justification for acceptance Working Capital Requirement: (CC(BD): b)
The company has requested for working capital limit of Rs. 60.00 lacs for its tube division unit. The assumptions for financial figures are as under:
The production capacity of the tube 74400 MT per annum, based on 20 MT per hr, 12 working hour per day and 310 working days per year. The capacity utilization for the mill has been taken 60%, 75%, 80% for 1st,2nd, 3rd year respectively. For rest of the years, production capacity has been taken 85%. It is acceptable.
The conversion charges of Rs. 1630/- per MT has been taken. PBF CALCULATION
II method of lending
2007-08
Chargeable Current asset
90.95
Other current asset
102.73
Total current asset
193.68
Other current liab.
15.60
Work cap gap
178.08
Min stip.margin
48.42
Available margin
118.08
MPBF
129.66
MPBF
60.00
As per II method of lending, pbf works out to Rs. 60.00 lacs. The party has requested for CC(BD) limit of Rs. 60.00 lacs, which is acceptable. (The NWC taken for calculation here in above is only for unit II whereas the NWC given at para 7 A is for the whole company). Holding period for current assets:
Sr
1
Particular
Receivables
Holding period (in months) 1st year
2nd year
3rd year
1.50
1.50
1.50
Since the company is dealing only with TISCO, the bills realization normally takes approx 40-45 days. The holding period as mentioned above is reasonable. Assessment of non-fund based facilities
LETTER OF CREDIT: NA (Rs in lac) Letter of Guarantee Nature & amount of limit sanctioned
440.00 236.15
Outstanding as on 31.12.2007 Name of the beneficiary / ies in whose favour guarantees to be issued
Railways, Tatas
Nature of the guarantee limit required i.e. performance/ financial/ Bid Bond etc.
Performance
Margin proposed
10%
Security
Counter Indemnity of borrower
Justification for the proposed limit
The company does conversion job for Indian Railways and Tata Steel and Tata Tube. For getting the Raw material they need to submit the BG.
BANK GUARANTEE: Party has requested us for further Bank Guarantee limit of Rs. 140 lacs for Tube Mill unit. This amount is required for furnishing Bank Guarantee to Tata Steel for getting H.R. Coil for the purpose of converting Tubes. d) Justification for term loan/DPG (i) Purpose As per revised cost of project submitted by the party, the cost of project works out to Rs. 1857.38 lacs. The actual cost incurred in the project so far is Rs.1456.86 lacs as declared by the party. Certification from chartered accountant has been obtained regarding the matter which is dated 09.01.2008. It may be noted that there has been significant increase in the cost of factory shed and plant & machineries in revised cost of project. The additional expenses to be incurred in the project mainly comprises of additional cost of Rs. 281.60 lacs for plant machineries and Rs. 90.69 lacs for civil construction. The quotations for plant and machineries & estimation for proposed civil construction have been submitted. Considering 30% margin on the proposed additional investment only under plant & machineries, the term loan component works out to Rs. 197.00 lacs and is acceptable.
For tube division: Break even, capacity utilization and break even sales works out to be 48.01% 38.41% and Rs. 465.79 lacs respectively during the year 2009-10.
(ii) Appraising agency : The project was got studied by our Industry officer .As per his report the project is technically feasible and economically viable. The report is enclosed herewith.
(iii) Summary of cost of project and means of finance :
DETAILS OF ORIGINAL AND REVISED COST OF PROJECT:
Sr
Particular
Original cost
Revised Cost
Cost incurre d
To be incurre d
1
Land & Land Development
84.10
99.06
94.06
5.00
2
Shed & Building
260.00
461.72
371.03
90.69
3
Plant & Machinery
849.73
885.62
604.02
281.60
4
Testing & material handling
65.00
27.82
26.02
1.80
5
Electrical installation
165.00
117.88
116.38
1.50
6
Furniture
5.00
5.33
2.76
2.57
7
Security deposit
30.00
11.26
11.26
0.00
8
Preop expn
63.46
231.33
231.33
0.00
9
Contingency
37.31
0.00
0.00
0.00
10
Margin money for WC
17.36
17.36
0.00
17.36
1576.96
1857.38
1456.86
400.52
Total MEANS OF FINANCE 1
Share capital
390.00
390.00
2
Unsecured loan
186.96
270.38
3
Term loan
1000.00
1197.00
Total
1576.96
1857.38
At the time of submitting original proposal, cost of construction was considered @ 300/- per sq.ft., which was prevailed during that time. Due to various reasons beyond the control and prolong rain delayed the project by more than 3 months. Due to delayed in construction work, material as well as labour charges increased heavily. Therefore cost of project increased. Original cost of the project
1576.96/- Lac
Revised cost of the project
1857.38/- Lac
Difference
280.42/- Lac
As per the above chart the total investment in the project has been Rs.1456.86 lacs. As against the balance of Rs.400.52 lacs the promoters will bring in Rs.203.52 lacs.
(iv) Brief explanation for each major individual item of cost of Project with present status along with comments on the reasonableness/competitiveness
The firm has requested for term loan of Rs. 197.00 lacs in addition of existing limit of Rs. 1000 lac against investment in fixed asset of Rs. 1597.43 lacs, which yields 75%. As we have discussed earlier party is seeking additional facilities due to excessive hike in the cost of building materials. The proposed term loan will be utilized for both, P & M and shed & building. Quotation regarding machinery has obtained and kept in record at the branch.
v) Sources of Promoters’ Contribution : By increasing share capital to lac and raise unsecured loan to the tune of Rs. 267.38 lac till March 2008.
vi) Status of tie-up of loans
the tune of Rs.390.00
: NA
vii Comments on all major technical aspects like location advantage, Technology/ manufacturing process, power, man power, utilities, transportation, etc.
The company is situated at the Adityapur Industrial Area, which is the industrial hub of the state. They have advantage in having backward forward linkage and technical support as Jamshedpur is a fully industrial township.
Process:
The raw material for pipe manufacturing process is slitted HR coils of suitable sizes, which is supplied by M/s. Tata Steel, Jamshedpur. The coils are fed to the decoiler unit. The coils pass through forming section, cluster section, fin section, seam guide section, welding section, ironing section, sliding section, sizing stand and finally turk head stand.
Initially the coils pass through end shear, butt welding set where next coil is butt welded as per requirement of length of finished pipes. After getting welded, the coils are passed through leveling and pinch rolls. The coils are then allowed to pass through vertical cage where the coils are getting accumulated and from here the coils are fed to stands. The coils are passed through forming, cluster section. fin stand and seam guide, where the rollers of different sizes, profiles and inclination are installed as per the specification of end product. The coils get the shape of tube with open slit at the top. Then the welding unit comes into play and open seam is heated by HP induction generator. Immediately after heating, the edges of the pipes are forged or fused in the squeezing unit and it takes the shape of complete pipe. The pipe is then passed through cooling unit, where the weld formed pipe is cooled to ambient temperature. The welded pipe thus prepared is slightly of oversize. To get rid of this problem, the welded pipe is then passed through sizing unit, where with the help of rolls and dies the pipe is made to the exact size as per the requirement. After this the pipe is allowed to pass through turks heads, where the pipe get straightened. The pipes are passed through Non Destructive Testing unit, where with the help of eddy currents the defects are marked and the required length of pipe is cut and rejected to separate pockets.
The pipes are then cut into required sizes and collected in pockets. Thereafter the pipes are sent to end facing and beveling machine. After beveling, the pipes are ready for dispatch.
Water availability: Presently the firm is having one deep boring, which is quite sufficient to meet the requirement of plant and for drinking & sanitation purpose. The manufacturing process does not require significant quantity of water.
Raw Material: The raw material for the process of tube manufacturing is slit HR coils, which is supplied by M/s. Tata Steel, Jamshedpur. The proximity of raw material is very easy as supplier and recipient are in same city. The firm has entered into an agreement with M/s. Tata Steel for supply of raw material and then finished goods shall be supplied the them.
Land & Building: Adityapur Industrial Development Authority at Industrial Area Adityapur has allotted the firm the land measuring approx 8.60 acres.
viii) Comments on product marketing with particular reference to industry position Product & Market:
Its tube division is presently engaged in tube manufacturing, with a capacity to manufacture more than 50000 MT per annum. The proposed tube mill is engaged in manufacturing circular pipes of sizes varying from 4” NB to 14” NB and corresponding sizes of square/ rectangular cross sectional structural as per ISI and API standards. The firm has entered into an agreement with M/s. Tata Steel for processing of slitting HR coils to required diameters as per technical specifications initially for 36 months with further renewable up to 24 months. M/s. Tata Steel shall be requiring around 3500 to 5000MT of piping materials per month from the firm. The non circular pipes of different sections are basically meant for construction purpose, now a days required for modern construction activities especially in modern airports and some new high profile construction.
IX) Summary of profitability, Break-Even, DSCR and IRR with including Assumptions underlying profitability projections:
comments thereon
For tube division: Break even, capacity utilization and break even sales works out to be 48.01% 38.41% and Rs. 465.79 lacs respectively during the year 2009-10.
Debt equity ratio works out to be 2.60 for the year 2007-08, which reduces further, in subsequent years.
For company as a whole: The company has achieved gross sales of RS.1518.65 lacs for the year 2006-07. It has achieved sales of Rs. 785.43 lacs during the period ended August 2007 i.e. for a period of 5 months. The company has given sale projection of Rs. 2513.71 lacs for the year 2007-08. Recently te company has procured one CNC plano milling machine, which shall exclusively be used for complex and accurate milling jobs. Presently the company has orders worth more than Rs. 800.00 lacs from railways, besides this, it is also taking initiation for additional work orders. It is also expecting a work order from TGS ( Tata Growth Shop) of sizable amount in a month or so. It is envisaged that the company may achieve the projected sales for the year 2007-08 provided it gets orders in time. Considering company as a whole, DSCR and other financial calculation are as under:
Break even and break even sales works out to be 51.41% and Rs. 1634.42 lacs respectively during the year 2009-10, which sounds comfortable. Debt equity ratio works out to be 1.37 for the year 2007-08, which reduces further, in subsequent years.
A. Project on stand alone basis Particulars Projections Year 1
Year 2
Year 3
Year 4
Year 5
Installed Capacity(MT)
74400 74400
74400
74400
74400
Capacity Utilisation
60%
80%
85%
85%
Net sales
363.82 909.54 970.18 1133.89 1133.89
Profit after Tax
15.13
188.80 253.98 380.99
422.44
Cash Profit
120.86 386.45 425.85 530.49
552.54
75%
DSCR 2007-08 2008-09 2009-10 2010-11 Profit after tax Add depreciation Add intt on term loan
2011-12
2012-13
15.13
188.80 253.98
380.99
422.44 515.01
105.73
197.65 171.87
149.50
130.10
113.25
69.71
26.33
3.2 5
0.50
0.50
0.50
-
100.21
133.74 103.35
Prel exp
0.50
Total (A)
221.57
520.69 529.70
600.71
579.36 631.51
50.00
205.73 230.73
305.73
280.73
30.73
Term loan repayment
0.50
Intt on term loan
100.21
133.74 103.35
69.71
26.33
3.2 5
Total (B)
150.21
339.47 334.08
375.44
307.05
33.98
1.60
1.89
18.59
DSCR= A/B Avg. DSCR
1.47
1.53
.59
1.66(excl.2012-13)
Average DSCR works out to be 1.62 as per above, which is satisfactory.
B.
Company as a whole Particulars
(Rs in lac) Projections Year 1
Year 2 Year 3
Year 4 Year 5
Installed Capacity(MT) Capacity Utilisation Net sales Profit after Tax Cash Profit
Note- Since Company is having no. of products, so it is difficult to calculate capacity utilization as a whole.
DSCR (Combined) 2007-08 2008-09 Profit after tax Add depriciation Add intt on term loan
2009-10 2010-11
2011-12
2012-13
21.36
216.06
307.50
438.90
498.99
594.66
182.16
263.31
228.43
198.35
172.37
149.92
123.09
158.64
120.81
82.04
Deffered tax
0.60
2.34
1.34
0.56
Total (A)
327.22
640.35
658.08
719.86
704.81
749.60
72.60
262.80
288.05
363.33
338.63
66.36
Term loan repayment Intt on term loan Total (B) DSCR= A/B
123.09
158.64
120.81
82.04
33.49
5.53
(0.04)
(0.50)
33.49
5.53
195.69
421.44
408.86
445.37
372.12
71.89
1.67
1.52
1.61
1.62
1.89
10.43
Avg DSCR
1.66(excl.2012-13)
Average DSCR works out to be 1.66 without taking into account 2012-13 , which is quite satisfactory. (As per the report of the Dy. Mgr. Industries the TL installment was taken as Rs.122.60 lacs but since the installment for December 2007 and March 2008 quarter has been rescheduled from June 08, the same has been taken for the calculation herein above).
x)
Detailed Sensitivity Analysis:
The sensitivity analysis carried out considering 5% decrease in selling price and other increase in different head of cost of production taking other factors as unchanged. It is found that net profit and cash accruals are quite satisfactory in each case. Tube Division Capacity
Sales
Raw Materials
Utilisation
Price
Price
Price
Rate
cost
80%
Decrease
Increase
Increase
Increase
Increase
Increase
-5%
5%
5%
5%
5%
10%
2009-10
Sales (Net)
970.18
consumabl Power & e Fuel
Fixed & semi-
Other var.
variable exp.
921.67
Raw Materials
-
Consumables
-
Power & Fuel
166.01
Other Variable Cost
104.64
Fixed & semi-Var. Cost
210.92
174.31
109.87
232.01
Net Profit (After tax & Dividend)
253.98
205.47
253.98
253.98
245.68
248.75
232.89
Cash Accrual
425.85
377.34
425.85
425.85
417.55
420.61
404.75
Combined Unit Capacity
Sales
Raw Materials
consumable
Utilisation
Price
Price
Price
Rate
variable exp.
0%
Decrease
Increase
Increase
Increase
Increase
-5%
5%
5%
5%
10%
2009-10
Sales (Net)
3179.18
Raw Materials
1443.20
Consumables
66.00
Power & Fuel
Power & Fuel
3,020.22
1,515.36
69.30
248.51
Other Variable Cost
525.17
Fixed & semi-Var. Cost
505.71
Fixed & semi-
260.94
556.28
Net Profit (After tax & Dividend)
Cash Accrual
307.50
535.93
148.54
235.34
304.20
295.07
256.93
376.97
463.77
532.63
523.51
485.36
Status of various statutory approvals and clearances The necessary statutory approvals and clearance are available.
Power connection: The firm requires power load of approximately 1500 KVA. The firm has got sanction letter from state electricity board for the requisite power load of 1500 KVA from 33 KV line of JSEB vide their letter no 3159 dtd. 14/11/2006. The firm is having 1 D.G. set of 62.5 KVA for its requirement of auxiliary power in case of power failure. The operation of the unit is totally dependent upon the power supply from JSEB because such a huge load cannot be met through D.G. set of such high rating.
Pollution Control: The process of manufacturing tubes involves neither any smoke generation nor usage of chemicals. But even then the firm has applied for pollution clearance. PCB has communicated vide their letter no. 2833 dtd. 03/09/07 for compliance of certain terms and conditions like providing details of production process/ details of pollution control measures etc. The company has replied to pollution control board vide their letter no. nil dtd. 11/09/2007 and provided the required information. Now the company is awaiting for the NOC, which shall be issued from the board.
Factory license: Consequent upon its application for factory license, the chief factory inspector has instructed to factory inspector to issue the factory license vide his letter no 185 dtd. 10/07/2006. As of now the company has yet to get factory license.
(XI)
Present physical & financial status of project, if any
Factory shed II, which is an extension of existing shed I. The remaining construction of 11090 sq ft to be taken place. The estimated expenditure to be incurred in the extension of shed is Rs. 75.97 lacs. The other constructions to be taken place are underground tank, internal concrete road and security room with estimated value of Rs.14.72 lacs. The total estimated expenditure for shed and building works out to Rs. 90.69 lacs, which is yet to be incurred.
xiii)
Implementation schedule
The main shed of the factory is already constructed and extension of the shed on the eastern portion of the existing one is under construction with plinth area of approx 1008 sq mtr. 06 nos of structural columns on each side of the stretch have been erected on concrete foundation. The required truss has been also erected over the columns and sheeting works are to be done over the structural truss. Flooring works on the extension are yet to be taken up. The other civil constructions to be taken place are internal concrete road, underground water reservoir and ramp or approach to the weighbridge. Completion of the said civil works and installation of EOT shall be completed by the end of December 2007.
xiv)
Proposed repayment schedule
Term loan –II (Rs. 197.00 lac) : Entire loan to be repaid in 20 quarterly installment of Rs 10.00 lac + interest starting from June 2008. 13.
A.
Pricing Facility Existing
Proposed
Applicable rate
Justification for concessions, if any
CC-BD NA
13.5%
BPLR+2% i.e15.0%
Applicable rate-1.5%
TL
14.00%
BPLR+2%+Term premia 0.5% i.e
Applicable rate-1.5%
Rate of interest 12.25%, 14.00 %
15.5% Processing Fee
WC
As per Rs 250/= per lac Bank schedule
Upfront Fee
1.25 % of the loan amount
Lead Bank Fee
NA
NA
NA
NA
Commission on NFB
NA
NA
NA
NA
As per Bank schedule
Rs. 220/ per lac.
Other charges, if any
Documentation charges
Cost Benefit Analysis:
Earning at applicable rate: TL: Rs.31.00 lacs approx pa CC: Rs. 09.00 lacs aprox pa Total
Rs.40.00 lacs pa
Earning at proposed rate: TL: 28.00 lacs aprox pa CC: 08.50 lacs aprox pa
Total
Rs.36.50 lacs pa
Concession: Rs.3.50 lacs pa
HO interest on FD kept against BG : Rs.3.74 lacs pa
Keeping in view the high value client and earnings in various loan facilities and the above calculations we propose for the concession in interest rates as above.
B.
ROI/other charges stipulated by other participating banks, if applicable Not applicable
14.
Other Issues Nil
15. a) Credit Risk Rating including Risk Factors & mitigation The account has been rated under BB category indicating Average risk in Bank exposure. Loan Policy The company is categorized under large scale industry and light engineering sector. c) Industry Exposure as on b)
Industry Outstanding ( Rs. in crore) % of Gross Credit in the Industry Ceiling in terms of outstanding as per current loan policy Amount of NPA in industry % to total advances in --------industry
16. SWOT Analysis: Strength:
The company has successfully installed its machineries and it has started its commercial production.
The job activity is basically conversion activity for M/s. Tata Steel. Hence the company’s customer base is already established. It does not have to go for another customers for its products. They have an agreement for sale and conversion with Tata Steel. The company is having very well technically qualified workforce in its operation and maintenance team. The additional CNC plano milling machine shall add value to its products in quality and quantity as well in Unit I. The promoters are very resourceful and experienced in this field.
Weakness: There is no provision for alternate power. The firm shall be totally dependent on power supply of 33 KV from JSEB. Mitigation: Jusco is coming with power in Adityapur. Opportunities:
Government is trying to boost up industrial sector by providing road and basic infrastructure.
Threat:
As far as tube division is concerned, the business of the company is totally dependent on the work orders from M/s. Tata Steel. Mitigation: The company has got the 36 months of agreement for supply to Tata Steel
17
Recommendations:
In view of the foregoing, we recommend for sanction of following credit facilities in favour of the company for tube unit on the terms and conditions annexed Term Loan
–
Rs. 197.00 lac
Cash Credit (BD) - Rs. 60.00 lac Bank Guarantee - Rs. 140.00 lac
TOTAL
-
Rs. 397.00 lac
Sr. Manager
Sr Manager(Credit)
Annexure to Board Note: M/s Bina Metal Way Pvt. Ltd.
Facility No. 1
Nature :CC (BD)
Limit
:Rs. 60.00 lac
Margin
:30%
Interest
: BPLR+0.5% i.e presently 13.5%
Period
: One year subject to renewal on merit basis.
Security
: Hypothecation of entire book debts, present and future arising out of genuine credit sale transactions.
1) Stock Statements: The borrower has to submit statement of receivables on the Performa prescribed by the bank as on the last day of each month within 10 days of the following month. Statement should contain all the required information such as realization of book debts during the period and their deposit with the bank, age of book debts and debts outstanding for “0-90” days, “91-180” days etc. DP shall however be allowed against book debts of the age up to 90 days. Branch tol obtain statement of Book Debts duly certified by CA in each quarter. 2) Verification: bank officials will verify the statement from the books of the party at least once in a month at irregular intervals and satisfy that: a)
The statement is in agreement with the books of the accounts maintained by the party.
b)
Ages-wise classifications of debts are correctly done.
c)
The realization of book debts are routed through our bank.
d) Book debts are out of genuine trade transaction and for the activities for which the limit has been sanctioned. 3) Drawing Power. No DP shall be allowed against: a)
Book debts outstanding more than 90 days.
b)
Book debts relating to allied/associate/group concerns.
Facility – 2 Nature:
Term Loan(Enhancement)
Amount
:
Rs. 197.00 lac
Margin
:
25%
Interest
:
BPLR+0.50% +0.50% (term premia) i.e @14.00% p.a on monthly rest subject to change from time to time as per HO guidelines.
Repayment
:
: Entire loan to be repaid in 20 quarterly installment of Rs 1000000 w.e f June 08.Interest to be paid as and when levied.
Security
:Loan to be secured by EM of block assets comprising factory land & building and hypothecation of plant and machineries and other moveable asset not embedded to ground .
Insurance :
:
The factory building, plant and machineries and other equipments to be insured comprehensively against all risk at party’s cost with usual bank clause. A copy of Insurance policy to be kept on Bank’s record also.
Repayment default : Penal intt @ 2% p.a. above the normal rate to be recovered for the amount/period of default.
Name Plate: Bank’s name plate to be prominently displayed where the securities charged to the bank are kept. Pre payment penalty @2% will be charged by the bank, on the sanctioned limit, if the loan account is transferred to any other Bank/FI through take over of account during the currency of the loan
Facility No. 3 Nature:
Bank guarantee (Inland ) (Fresh)
Limit
:
Margin Purpose Period
Rs.140.00 lac :
:
For getting H.R.Coil for the purpose of converting tubes from Tata Steel. :
Commission: Security
10% by way of FDRs
For one years. As per bank’s instructions issued from time to time.
: Counter guarantee from the company.
Collateral Securities
i) Hypothecation/ Mortgage of Block Assets Immovable Properties (Rs in lac) i) Property Details
Owned by
Value as Present Realis per Last able Value as sanction value per valuer
Basis for valuati on
Date
Whether existing/ fresh
Valuer report
15.02.2 Existing 006 To be extende d
Valuer report
14.11.2 007
report 1. EM of land at mauza Kandedbera, Chandil,Serai kelakharsawan,th ana no. 327,Area 9.92 acre,khata no. 10, plot no.539,540,5 41,542,543,5 51.
M/s Bina 250 Krishi Udyog, Mr. Pranab Mukherjee & others
250
250
NA
96.57
96.57
2..EM of factory shed, M/s
Bina
Fresh
building & Metal way land of area pvt. Ltd. 2.078 Acre situated at Phase III, plot no.B/23,B/24 & B/25, Industrial area, 250 Adityapur.
3. EM of IP situated at 70,Rajendra Nagar, Sakchi, Jamshedpur.
250
250
Valuer report
Mr. Pranab Mukherjee & others.
ii) Personal /Corporate Guarantee Name of Guarantor
15.02.2 Existing 006 To be extende d
(Rs in lac)
Net Worth
Prev.
Present
Immovable property
Date of report
Prev. As at
Prev.
Present
As at As at 31.03.06 31.03.07 31.03.06
Present
confidential
As at 31.03.07
Mr. Pronab Mukherje
205
300
64
-
19.01.07
14.12.07
Mr.Probal Mukherjee
186
224
61
-
19.01.07
14.12.07
Mr.Pradip Mukherjee
111
147
60
-
19.01.07
14.12.07
Smt. Nandini Mukherje
22
22
01
01
19.01.07
14.12.07
Smt. Sampritee Mukherjee
73
77
10
10
19.01.07
14.12.07
Smt. Surita Mukherjee
72
83
13
13
19.01.07
14.12.07
Mr. Barun Mukherjee
-
73
-
-
-
12.01.08
Smt. Raka Mukherjee
-
20
-
-
-
12.01.08
M/s Bina Krishi Udyog Overall terms & Conditions:
07
02
1) The borrower will deal with us exclusively and will close all its accounts with all other banks and shall route all its income through their account with us for the Tube Unit. For Unit I the company will continue to bank with Canara Bank as per present arrangement. 2) The borrower will not create, lien or encumbrance over the assets and the properties of the firm to be charged to the bank in favour of any other bank, FI’s, firm or person.
3) The borrower shall arrange submission of complete papers for renewal of limits within 10 months from the date of sanction. 4) Processing fee at the time of renewal, commitment charges other charges for FB & NFB facilities and inspection charges will be recovered as per bank’s schedule of charges. 5) Borrower shall not under take expansion/ diversification/ modernization without obtaining prior permission of the bank and without period tie up of funds. Similarly, no investment shall be made in associate/allied/group concerns without period permission from the bank. 6) The company will undertake that the unsecured long-term loans shall not be withdrawn during the currency of the bank loan without prior permission of the bank. Monies bought in by principal shareholders/directors will not be allowed to be withdrawn without the Bank’s permission. 7) Bank or its authorized officials or other representatives will have the right to carry out periodical inspection or examine the books of accounts of the borrower and to have their factories/offices/assets inspected from time to time by officers of the Bank and / or outside consultants and the expenses incurred by the bank in this regard will be born by the borrower. 8) Bank shall have the right to withdraw or modify all/any of the sanctioned condition or stipulate fresh conditions, under intimation to the borrower. 9) Borrowers to submit QMS form I as per prescribed Performa within six weeks from the close of every quarter and QMS Form II within 2 months from the close of half year failing which penal interest, as prescribed by the bank from time to time, will be charged for delayed/nonsubmission of follow up forms. 10) Stock/receivable audit to be got carried out at borrowers cost if it is prescribed by the Bank in case of need. 11) The bank may at its sole discretion disclose any information to any institution(s) in connection with the credit facilities granted to the borrower.
12) During the currency of the Bank’s credit facilities, the borrower shall not, without the prior approval of the bank in writing. (a)
Effect any change in capital structure;
(b)
Formulate any scheme of amalgamation or reconstruction;
(c)
Undertake any new project or expansion or modernization schemes or make any capital expenditure other than those estimated / projected in the CMA data, without obtaining the Bank’s prior consent.
(d)
Enter into borrowing arrangements either on secured or unsecured basis with any other bank, financial institution, borrower or otherwise save and except the working capital facilities granted/ to be granted by other member banks, under consortium arrangement with the Bank and the term loans to be obtained from financial Institutions;
(e)
Undertake guarantee obligations on behalf of any other
(f)
Declare dividends for any year, if the account(s) of the borrower with the Bank is/are running irregular or if any of the terms and conditions of the sanction remains uncompiled with by the borrower.
(g)
Create any charge, lien or encumbrance over its undertaking or any part thereof in favour of any financial institution, bank, borrower, firm or persons;
(h)
Sell, assign, mortgage, alienate or otherwise dispose of any of the assets of the borrower charged to the Bank;
(i)
Enter into any contractual obligation of a long term nature affecting the borrower financially to a significant extent;
(j)
Undertake any activity other than those indicated in the Object clause of the Memorandum and Articles of the Association of the borrower;
Borrower / organization.
(k)
Permit any transfer of the controlling interest or make any drastic change in the management set up;
(l)
Divert/ utilize Bank’s fund to other sister/associate/group concerns or for purpose other than those for which the credit facilities have been sanctioned.
13) .The borrower will keep the bank informed of the happening at the event likely to have a substantial effect on their operations/production, sales, profits/disbursement etc. such as defaults/overdues, labour problem, lock-out, power cut etc, and the remedial steps proposed to be taken by the borrower. 14) Margins/rates of interest are subject to revision from time to time at the sole discretion of the Bank. 15) The Bank shall charge penal interest under the following circumstances: a) Default in repayment of Term Loan installments and Irregularities/over drawing in cash credit account(s).
(b)
Non-submission/delayed submission of stock statements after the 10 th of the following month.
(c)
Default in observance of borrowing convents/terms and conditions of the sanction.
(d)
Excess borrowing arising out of shortfall in minimum stipulated Net Working capital as reckoned in the PBF computation.
(e)
Any other eventuality/situation to be decided by the bank.
16)
The borrower shall execute necessary loan documents, as per bank’s guideline and as drafted by bank’s counsels at borrower cost.
17) Agreement/undertaking in terms of LA Cir. 91/2002 to be obtained.
20)
No commission to be paid by the borrower to the guarantors for guaranteeing the credit facilities sanctioned by the Bank to the borrowers. An undertaking to this effect to be obtained from the borrower as well as guarantors.
21) The borrower to furnish to the branch the required financial information, on the prescribed proforma, within 10 days/ or within the specified period, as specifically permitted, to enable the branch to submit quarterly review sheet or PMS to the ZO / HO.
22) Bank's charge over primary/collateral securities wherever applicable to be got registered/modified with ROC within the stipulated period of 30 days, as per requirements of Companies Act, and certificate of registration of charge to be obtained and kept on record cost in this respect to be borne by the company.
23) In case the company commits default in the repayment of loan/advance or in the payment of interest thereon or any of the agreed installments of the loan on due date, the bank, CIBIL and/or Reserve Bank of India will have an unqualified right to disclose or publish the names of the company and its directors as defaulters in such manner and through such medium as the bank/RBI in their absolute discretion may think fit. (Consent of borrowers and guarantors in terms of LA cir. No.100/2002 be obtained).
24) The borrower shall execute all necessary legally enforceable loan documents, as per bank’s guidelines. Documents will be drafted/vetted by banks’ counsels at borrower’s cost.
25) Common seal of the company shall require to be affixed on the documents to be executed in terms of the provisions of the Memorandum and Articles of Association of the company.
26) The branch to ensure the compliance of instructions in terms of LA Cir. No.87/2002 regarding Legal Compliance Certificate to be submitted to ZO.
27) The branch to obtain the draw down schedule of the Term Loan and supplementary agreement in CC as per HO guidelines in capital charges.
28) Borrower shall give acceptance of terms & conditions as per letter of sanction, which will form part of documentation and be placed on bank records.
Sr.Manager
Sr Manager ( Credit)
C
REDIT RISK MANAGEMENT
CREDIT RISK “Credit risk” is the possibility of loss associated with changes in the credit quality of the borrowers and counter parties. The counter parties may include an individual, small & medium enterprise, corporate, bank, financial institution, or a sovereign. In a bank’s portfolio, losses stem from outright default due to
inability or unwillingness of a borrower or counter party to honour commitments in relation to lending, settlement and other financial transactions. There are seven categories of credit risk: Lending Contingent Issuer Pre-settlement Settlement Country/transfer and Other
Understanding Credit Risk Decisions Most banks utilize some variation of “The Five C's of Credit" when making credit decisions Character, Capacity, Capital, Conditions, and Collateral.
Character Banks want to put their money with clients who have the best credentials and references. The way they treat their employees and customers, the way they take responsibility, their timeliness in fulfilling obligations defines the borrower’s character.
Capacity What is the company's borrowing history and track record of repayment? How much debt can the company handle? Will they be able to honor the obligation and repay the debt? There are numerous financial benchmarks such as debt and liquidity ratios that banks use before advancing funds.
Capital How well capitalized is the company? How much money have they invested in the business? Banks want to see that they have a financial commitment; that they have put themselves at risk in the company.
Conditions What are the current economic conditions and how does the company fit in? If the business is sensitive to economic downturns, the bank wants to know that they are good at managing productivity and expenses.
Collateral While cash flow will nearly always be the primary source of repayment of a loan, bankers look at what they call a secondary source of repayment. Collateral represents assets that the company pledges as an alternate repayment source for the loan. Hard assets. Most collateral is in the form of real estate and office or manufacturing equipment. Accounts receivable and inventory can also be pledged as collateral. Unless a business is with a proven payments track record, it will almost always be required to pledge collateral.
Credit Risk Management Structure in PNB The credit risk management framework consists of the following structures: 1.
Risk Management Division (RMD)
2.
Risk Management Committee (RMC)
3.
Credit Risk Management Committee (CRMC)
4.
Credit committee
5.
Credit Audit Review Division (CARD)
Risk Management Division (RMD) The RMD is headed by CGM and its different functions are Framing of policies related to market and credit risk, development of systems & models for identifying, measuring and managing credit risks and their implementation; Study and management of industry risk; Development of methodology for operational risk; Integrated risk management functions. Credit Risk Management Departments have also been formed at Zonal levels to facilitate speedy implementation of Risk management related policies of the bank.
Risk Management committee (RMC) It is a Sub-Committee of Board with overall responsibility of formulating policies/procedures and managing all the risks. It shall adopt integrated approach in managing all the risks. The RMC presently comprises of the following members:
Chairman and Managing Director Executive Director RBI Nominee Director GOI Nominee Director Two Director nominated by Board CGM-RMD (Convener), CGM-I&AD, GM-Treasury, two external experts
Credit Risk Management Committee (CRMC) It is a top level Committee headed by CMD and comprises of ED, GMs of Credit Department, Treasury, Risk Management, etc. as per the directives from RBI. Its specific responsibilities are as under:
Responsible for implementation of credit risk policy/ strategy approved by the board/ RMC. Monitor credit risk on a bank wide basis and ensure compliance of limits approved by the board/ RMC. Recommend to the Board for its approval, policies on standards for presentation of credit proposal, financial covenants, rating standards and benchmarks. Devise delegation of credit approving powers, prudential limits on large credit exposures, asset concentration, standards for loan collaterals, portfolio management, loan review mechanism, risk concentration, risk monitoring and evaluation, pricing of loans, provisioning, regulatory/ legal compliance, etc.
Formation of Credit Committees: The bank has introduced “Grid/Committee” system in credit sanction process wherein every loan proposal falling beyond a threshold limit is discussed in a credit committee, which, on the merit of the case, recommends the proposal to the sanctioning authority. Such committees have been formed both at HO and ZO levels. The credit committee includes members from Risk Management Division and Credit Administration Division. The committee deliberates upon the credit risk rating of the borrower, risk specific to the borrower, risk in the industry and suggests mitigation thereof.
Credit Audit Review Division (CARD) Bank has also set up a loan review/audit mechanism to be looked after independently by CARD. It reviews borrowal accounts having exposure of Rs. 5.00 crore and above (Rs.1 crore & above in case of weak accounts).
CREDIT RISK POLICY & STRATEGY The bank has devised a robust risk management strategy which: Aims to provide basic framework for implementation of sound credit risk management system in the bank Deals with various areas of credit risk, goals to be achieved, current practices and future strategies. Helps to implement the Standardized Approach of credit risk, as prescribed by Reserve Bank of India in its draft guidelines, yet the bank shall continue its journey towards adopting Internal Rating Based Approaches. As such, the credit policy deals with short term implementation as well as long term approach to credit risk management. The policy of the bank embodies in itself the areas of risk identification, risk
measurement, risk grading techniques, reporting and risk control systems /mitigation techniques, documentation practice and the system for management of problem loans. The standardized approach basically requires the banks to do the following:
a) Asset Classification As prescribed by RBI in its draft report, the exposure needs to be grouped under sub heads viz. domestic Sovereign, foreign Sovereign, Public Sector Enterprises (PSE), Multi Development Banks (MDB), Bank for International Settlement (BIS), IMF, Banks, Primary Dealers, Corporate, Regulatory Retail portfolio, secured by residential property, Secured by commercial real estate, Non performing assets, Other Assets, Off balance sheet items. Different risk weights shall be applied for above classifications depending upon ratings assigned by External Credit Assessment Institutions (ECAI). While 100% risk weight is to be provided to un-rated exposure, risk weight of 20% to 150% is to be applied to rated exposure based on rating by ECAI. However, flat risk weights shall be applied to certain categories like, regulatory retail, domestic sovereign, claims secured by residential mortgage, etc. The bank has taken steps in implementation of the standardized approach as prescribed by the RBI. The various interpretations, which are specifically not covered in the RBI documents, have been considered based on the Basel document and the discussion held with various RBI officials during the seminars and meetings. Finer changes, if any, in the final document may be incorporated as and when published by RBI. The bank is committed to implement the standardized approach as prescribed by the supervisor.
b) Credit Risk Mitigation Techniques New framework provides for Credit Risk Mitigation (CRM) techniques for calculation of capital requirements provided they have legal certainty and meet certain conditions. As per comprehensive approach for CRM techniques, fuller offsetting of collateral is allowed against exposure by effectively reducing the exposure amount by value ascribed to the collateral. Further, RBI has also prescribed list of eligible financial collateral, method for calculation of value of collaterals, haircut, etc. The bank has implemented software for capturing and working out the credit risk mitigation techniques provided by the Reserve Bank of India. This software together with our existing database (LADDER) shall provide the accurate information on the capital adequacy requirement of the bank for credit risk.
*Since knowledge of credit risk process and systems are important for understanding of credit policy and strategy the remaining part of the policy and strategy are dealt after this portion.
CREDIT RISK MANAGEMENT PROCESS AND SYSTEMS A comprehensive credit risk management process encompasses the following steps: (1) (2)
Credit Risk Identification and measurement Grading of Borrowers under the Rating System
(3)
Reporting and analysis of Credit Risk
(4)
Portfolio Management
(5)
Use of securities as Risk Mitigants
(6)
Use of Guarantees as Risk Mitigants
1. Credit Risk Identification and measurement Credit risk management process involves identification, measurement, monitoring and control. The bank has put in place strong credit risk management structure, which ensures continuous identification of possible areas, which may adversely affect the credit quality of a borrower and/ or portfolio. The process of identification of credit risk is done by: -
Identifying potentially good and weak industries to manage risk in portfolio through industry wise exposure ceiling model. Identifying potential credit risk in a new as well as existing borrower through various credit risk rating models.
-
Identifying signals of weakness in an existing borrower though preventive monitoring system.
-
Identifying weak accounts having incipient sickness.
1.1 Industry Rating The RMD, H.O provides rating of various industries to be used in Credit Risk Rating on an on-going basis with the help of the rating Industry scenario. The industries not rated are treated as ‘BB’ denoting neutral so far as applicability of loaning power restrictions is concerned. In order to restrict the credit exposure in industries rated unfavourable, the sanctioning powers of the authorities have also been restricted for fresh loans/enhancements. Besides, other guidelines followed are 1.2 (a) Credit Risk Rating Models:
In order too measure the risk in an industry, the bank has developed a online comprehensive model which takes care of internal as well as external factors like rating of industry, present exposure level, quality of present exposure, level of impaired assets, etc.The system serves as a single point indicator of diverse risk factors of counter party and for taking credit decisions in a consistent manner. This model helps in setting up the internal exposure ceiling levels to an industry, which help the bank to manage the risk in portfolio. To measure risk in individual borrowal accounts, the bank has identified various segments viz. large corporate, mid corporate, small, NBFC, New projects, Banks, Retail, etc. Borrowers in these segments reflect similarity of potential credit risk factors and as such can be rated using the single model for the segment. All existing borrowers above a thresh hold limits are subjected to a continuous preventive monitoring system. This system helps in identifying accounts developing adverse signals to initiate corrective measures. The bank has system of identifying and monitoring weak accounts which develop incipient sickness. Experience gained through these systems is used in refining the various models. Further, it is also ensured that business unit while framing schemes of lending also identify potential new credit risk factors so as to analyze the impact of same and correspondingly provide for mitigation. The bank has developed the following models/tools: Credit Risk Rating Model
Applicability Total Limits
Sales
Large Corporate
Above Rs. 15 Crore (OR)
Above Rs.100 Crore
Mid Corporate
Above Rs.5 Cr and up to Rs.15 Cr. (OR)
Above Rs.25 Cr and up to Rs.100 Cr.
Small Loans
Above Rs.20 lakh & up to Rs.5 Cr (AND)
Up to Rs.25 Cr.
NBFC Borrowers Setting Up New projects
All Non Banking Financial Companies irrespective of Limit Above Rs. 5 Cr. (OR) Cost of Project above Rs.15 Cr.
Half Yearly Review of Rating
Applicable to Large and Mid Corporate account
Facility Rating Framework
Assigning rating to facility sanctioned to the borrower based on default rating and securities available
Exposure to undertakings of State
All states within Union of India
New Business Model
Borrower setting up new business and requiring finance above Rs 20 lakh upto Rs. 5 Cr AND Cost of Project upto Rs.15 Cr. However, all new trading business irrespective of limits shall be rated under this model
Credit Risk Rating models for All banks and Financial Institutions Banks/ FI Exposure Ceiling Model for various industries
All industries where the bank has substantial exposure
Categories of “Advances” exempted from Risk Rating Out of the total Credit portfolio of the bank covered under the purview of different rating models, the following categories of advances are presently exempted for rating purposes: I) II)
All accounts with sanctioned limits of Rs.20 lakhs and below. Advances against security of Bank's own deposits,
III)
Advances against Government securities including NSCs / KVPs / IVPs etc.,
IV)
Loans against shares and debentures,
V)
Staff loans
VI)
Advances to Central/State Govt. Departments. Undertakings/. Establishments, which are not running on commercial basis.
VII)
Advances under Retail Banking Segment (excluding Traders, Manufacturers, Contractors and Services) i.e. Housing Loans, Doctors, Education, Car, Personal, Pensioners, PNB Privilege Card, Lease Rental, Jewellery, Consumer, Loans to individuals against Mortgage of IP, Personal Loans etc. where repayment capacity is ascertained based on identifiable source of income.
VIII) Advances to INDIVIDUALS under Agriculture (Direct), Agriculture Sectors, Transport, Services, Artisan and Handicrafts.
(Indirect), Other Priority
1.2 (b) CREDIT DELIVERY A. Strengthening of Pre-Sanction Appraisal The bank has developed a useful credit appraisal methodology to ensure the quality of loan portfolio and special attention is given to pre-sanction appraisal. As regards retail loans the bank has been following the system of Rule based lending for housing, car & consumer loan schemes, which envisages assigning of scores to the prospective borrowers for the
purpose of deciding their eligibility for these loans. This process is aimed at healthy growth of the Retail loan portfolio of the bank.
i)
Adoption of Fair Practice Code
Based on the broad guidelines on the “Fair Practices Code for Lenders” advised by RBI, PNB has introduced Fair Practices Code in a bid to refine standard of customer services and transparency in the lending activities. The code contains various important declarations, which should be followed in letter and spirit. ii)
Valuation of Property, Plant & Machinery.
Valuation of Property In case of fresh borrowal accounts where aggregate credit limits are Rs.10 lakhs & above and value of immovable property to be mortgaged/charged is Rs.20 lakhs & above, branches get valuation of such immovable property done from the valuer on the Bank’s panel approved by Zonal Managers. Valuation of Plant & Machinery In cases where new plant and machinery is to be financed, the cost price indicated in the quotation/ supplier’s bill are reckoned as its value, which is verified by making enquiries through other vendors supplying such machinery. In fresh borrowal accounts where credit facility is to be considered against the principal/collateral security of existing plant & machinery are charged to the bank by way of hypothecation, mortgage, etc., valuation of such plant & machinery are done by branches from the valuer on the Bank’s panel approved by Zonal Managers. For other exceptions the bank issues regular circulars regarding them and those guide lines are followed. B. Methods of Lending i) Working Capital Following systems are followed for assessment of working capital requirements of the borrowers: Simplified method linked with turnover Simplified method based on turnover for assessing working capital finance upto Rs.2 crore (upto Rs. 5 crore in case of SSI units). MPBF System Existing MPBF system with flexible approach are followed for units requiring working capital finance exceeding the above-mentioned amount. Cash Budget System
Cash Budget System is followed in Sugar, Tea, Service Sector and Film Production accounts. It is the banks endeavour to introduce the same selectively in other areas also.
Loan System for Delivery of Bank Credit Borrowers are given freedom to decide the proportion of Cash Credit and Loan Component of working capital limits, period of such loans and renewal/roll over of loan component. To encourage availment in WCDL, branches allow concessions in the rate of interest to the extent of 0.25% to 0.75% in terms of extant guidelines provided the minimum availment under WCDL is of Rs.1 crore. Borrowers in whose favour Sub- BPLR rate has been approved will not be entitled to the above concessions. ii) Assessment of Non-fund based facilities Assessment of Non Fund based facilities are subjected to the same degree of appraisal, scrutiny as in the case of fund based limits, interalia, because outstanding in these facilities are reckoned at 100% for exposure purposes. Therefore, need based requirement of a borrower should be assessed after reckoning the lead time, credit period available, source of supply, proximity of supplier, etc. in case of LCs and industry practices and business requirements in case of LGs. The working of NFB assessment is to be incorporated in the appraisal note. Further, while assessing non-fund facilities, cash flow aspects should also be taken into account. iii) Term Loan In case of infrastructure/mega projects, proper appraisal is made by utilizing the services of specialized/Technical officers. The term loans with remaining maturity period of above 5 years shall not exceed 50% of the term deposits with remaining maturity period of above 5 years after taking into account the renewal of term deposits as per the past trend, as is being done for ALM. All proposals for infrastructure projects are sanctioned by GM & above at Head Office only except in case of following proposals i) Involving agro-processing and supply of inputs to agriculture is sanctioned by officials at various levels within their vested loaning powers. ii) Relating to construction for preservation and storage of processed agro products, perishable goods such as fruits, vegetables and flowers including testing facilities for quality are sanctioned by CM/RM & above within their vested loaning powers. iii) For construction of educational institutions and hospitals for running the same by their promoters is to be sanctioned by officials at various levels by exercising vested loaning powers. However, in case of construction of educational institutions and hospitals by companies/individuals engaged in construction or development of real estate projects are sanctioned by ZMs & above.
iv) Relating to Water Supply Project, Irrigation Project, Water Treatment System, Sanitation & Sewerage System or Solid Waste Management System, are considered at the level of ZMs & above within their vested loaning powers. v) For financing installation of wind mills for captive generation of power are sanctioned by various field functionaries within their vested loaning powers. However, advances for installation of Wind Mills for generation of wind energy for sale to other manufacturers would fall under the category of infrastructure projects and such proposals are considered at HO level. 1.3 (a) Monitoring of Weak/Irregular Accounts The bank has established systems for Inspection and control of its Lending activity so as to have a sound credit portfolio. These systems have stood the test of time. The Pre-sanction appraisal, Post sanction monitoring process for corporate, retail and priority sector loans, Systems for Restructuring of weak borrowal accounts, Recovery process to be adopted for problem loans, Compromise policy etc. are all well documented through various circulars issued from time to time. (b) Restructuring of Accounts/Corporate Debt Restructuring (CDR) Restructuring of accounts is one of the means available to restore an account back on rails. It is, therefore, essential to apply this prescription well in time as the delay may erode the basic viability of the account. In order to save the potential accounts from slippage to NPA category, bank will go for restructuring of these accounts within the framework of RBI guidelines. Quick decision should be taken within 90 days delinquency norms to avoid slippage to NPA category. Under CDR Mechanism, Zonal Managers and above shall consider proposals within their vested loaning powers for sanctions/restructuring of loans.
2. Grading of Borrowers under the Rating system In order to provide a standard definition and benchmarks under the credit risk rating system, following matrix has been adopted in all the risk rating models. Rating category
Signification
Description
PNB –AAA
Minimum Risk
Excellent Business Credit, Superior Asset Quality, Excellent debt capacity and coverage.
PNB-AA
Marginal Risk
Very good business credit, very good asset quality and liquidity, very good debt capacity and coverage.
PNB-A
Modest Risk
Good business credit, good asset quality and debt capacity & coverage.
PNB-BB
Average Risk
Average business credit with satisfactory asset quality and liquidity, good debt capacity and coverage.
PNB-B
Marginally
Acceptable business credit with average risk,
Rating category
Signification
Description
Acceptable Risk
acceptable asset quality, modest debt capacity.
PNB-C
High Risk
Not creditworthy, generally acceptable asset quality.
PNB-D
Caution
Unacceptable business credit, normal repayment in jeopardy, inadequate projected net worth and paying capacity.
Rating with AAA, AA, A and BB grade signify “Investment Grade”. B rating grade is known as “Marginally Acceptable Risk Grade” and C and D rating grade are called “High Risk Grade”. Steps taken to strengthen the rating exercise: a) Certain hurdle points have been incorporated in credit risk rating models so that the borrowal accounts below a particular benchmark are subject to detailed specific risk analysis. Based upon certain hurdle points risk rating is downgraded. b) In order to stabilize and create robust credit risk management system, bank has been continuously monitoring the ratings and their migration. Seminars, workshops, regular visits of senior officials and video conferences are conducted regularly to equip the Zonal CRMD officials to monitor the migration and reduce deviation. Notes on rating migrations are placed to CRMC for information.
3. Reporting and Analysis of Credit Risk The MIS in respect of risk rated accounts under all the models (based on the amount of the limits) is to be made available to the Risk Management Division. To ensure the quality and consistency of basic risk related data, the process of rating and vetting has been defined as under:
Loan Sanctioning Authority HO
Credit Risk Rating Authority
Vetting/Confirming Authority
i) Zonal CRMD in consultation with branches/ROs
GM (RMD), HO
ii) Large Corporate Branches ZO
i) ROs/ELBs/VLBs in case of Large Corporate Model, ii) In case of other Models, branches to rate the accounts. The assistance of Functional Manager (Credit) of RM Office may be taken in case of need.
Incharge, Zonal CRMD
RO
Branch with assistance of An officer designated by RM/SRM Functional Manager (Credit) of RM not connected with Office. processing/recommending of the concerned loan proposal
Branch
Officer/Manager, Credit Section
An official designated by the Incumbent not connected with processing / recommending of the concerned loan proposal.
Rating/vetting at BOs in accounts with limits of Rs. 50 lakhs and below: In such cases of accounts having aggregate sanctioned limits of Rs 50 lakhs and below in branches where there is no second officer available, the rating and vetting is done by the same authority. However in such cases in order to ensure the quality Credit risk rating, the same has to be submitted by the BO to the higher authority along with the limit-sanctioned statements regularly. Data is collected by RMD, HO for: -
Compilation of credit portfolio and its movement Validity of various ratings
-
Migration analysis
-
Default probabilities
-
Validations of the risk rating models output.
Validity of Credit Risk Rating The credit risk rating of a borrower becomes due for updation after the expiry of 12 months from the month of confirmation of rating or 18 months from the date of balance sheet on the basis of which credit risk rating was assigned, which ever is earlier. The rating is treated as ‘overdue’ after the expiry of 15 months from the month of confirmation of rating or 21 months from the date of Balance Sheet on the basis of which the credit risk rating was assigned, whichever is earlier. After the expiry of the above period, the rating is stated as ‘Due’ or ‘Overdue’ for renewal as the case may be and word ‘Due for renewal’ or ‘Overdue for renewal’ will be suffixed along-with the rating wherever it is quoted. In case a borrower has extended the accounting period, the vetting authority considers the extension of the validity of the earlier rating on the merit of each case.
Fresh rating is assigned to a borrowal account, irrespective of the validity period stated above, if any material development/information on the borrower comes to light, which may affect the rating adversely. In case rating is overdue for non-receipt of Balance Sheet, penal interest is charged in such accounts as per extant guidelines.
4. Portfolio Management The rated portfolio of the loan accounts is monitored by RMD periodically to ensure proper mix of various risk category accounts and thereby the asset quality of the portfolio. With this aim the bank has taken the following measures: Evaluation of rating wise distribution of borrowers in various industries is done to assess/appraise the quality of bank’s portfolio.
i)
Industry scenario analysis is being undertaken taking into consideration the changes in industrial and external environment e.g. changes in Economic/Fiscal/Monetary policies, general slowdown/boom in the economy etc.
ii)
All limits are to be renewed/reviewed at least once in 12 months. In order to have constant monitoring of the portfolio of the bank in the lower rating categories of “C” & “D” the bank has the system in place of having discriminatory time schedules for review of Credit limits in these categories of accounts. The review of such accounts is required to be done every 6 months.
iii)
The Bank has since appointed “Relationship Managers” in its Large Corporate branches with the aim of proper monitoring of bank’s exposure in high value accounts so as to ensure constant surveillance on the substantial share of the loan portfolio of the bank which can alter its risk profile.
5. Use of Securities as Risk Mitigants There are well-laid guidelines for definitions of primary and collateral securities and their valuations. The understanding of the field functionaries to use securities as risk mitigant is well established. The bank has issued detailed guidelines to be followed up for verification and valuation of securities charged to the bank. Primary Security –Verification & Valuation: Verification and valuation of primary security is to be done on regular basis so as to ensure the quality. There are prescribed guidelines in respect of the frequency of verification of securities/stocks & valuation thereof, methodology for computation of Drawing Power.
Collateral Security: Apart from primary security, bank takes collateral security in borrowal accounts to mitigate the risk. Detailed guidelines on creation of valid charge, valuation and verification of various types of collateral security are issued from time to time.
6. Use of Guarantees as Risk Mitigants: Appropriate acceptable guarantee is obtained as the risk mitigant in various borrowal accounts. The understanding of the field functionaries to use Guarantees as risk mitigant is also well established. Present, credit risk rating system evolved in the bank is aimed at measuring the Probability of Default of the borrower. To measure the impact of Credit Risk Mitigants, bank is implementing Facility Rating Model.
OTHER ISSUES: a) Group Approach For identification of a group, the guiding principle is “Commonality of Management and Effective Control”. In case the accounts of any unit belonging to a Group become irregular and the concerned promoters do not co-operate with the Bank and Financial Institution to settle their dues, the Group will not be provided accommodation from the Bank. While dealing with cases involving extension of fresh facilities to such units belonging to a group, the under mentioned basic point is kept in view:“Financial support for setting up of new ventures or expansion should not be extended to unit belonging to a group which is willful defaulter or non co-operative so as to ensure that no amount lent to a healthier unit of a group for its Working Capital requirements is transferred to another unit within the group by reducing the Current Ratio of transferor unit. For identification of cases of Promoter Groups/Companies for deterrent action, a coordinated approach be taken with Banks and Financial Institutions. Industrial Units in Public Sector are to be kept out of the purview of Group Approach.”
b) Consortium Arrangement In case of borrowers enjoying aggregate fund-based limits of Rs. 50 crore and above from more than one bank, consortium arrangement is considered.
c) Multiple Banking Arrangement Under Multiple Banking Arrangement each Bank is free to negotiate terms and conditions, including margin, rate of interest etc. Based on the communication received from IBA, the common code for financing under Multiple Banking Arrangement particularly in respect of sharing of information as well as common securities has been adopted by the bank.
d) Syndication:
The improved performance of manufacturing sector; increased demand for infrastructure projects; restriction of term lending institutions for providing term lending finance has provided another window of opportunity for bank's fee-based income by performing the role of Debt Advisors, Arrangers and Syndicators in such a situation. A cell for this purpose has already been set up.
e) Validity of Credit Limit Sanctioned A sanction in respect of Working Capital and Term Loan facilities is valid for 6 months, from the date of sanction. Facilities not availed within the above period is treated as lapsed and borrower be advised accordingly. Unless a lapsed sanction is revalidated by the competent authority within a maximum period of 12 months from the date of sanction, no facility should be released. Following powers is applicable for re-validation of the sanctions: Sl. Sanctions made by
Competent authority to consider re-validation
Time period upto which revalidation can be considered from the date of sanction
1.
Sanctions upto ED/CMD level
Sanctioning Authority
12 months
3.
Sanctions made by MC
CMD/ED
12 months
No.
However, to safeguard the bank’s interest, while permitting revalidation, the competent authority obtains and studies the latest financials of the borrowers/units and also ensures that the projections submitted at the time of original sanction continue to hold good.
f) Selective Credit Control Based on the guidelines issued by RBI from time to time, credit limits are sanctioned to borrowers dealing in sensitive commodities.
g) Use of CIBIL data and RBI defaulters list With the aim of taking informed credit decisions, the bank has become a member of Credit Information Bureau of India, an institution set up for creation of the database in respect of the borrowers of banks/FIs and sharing the same with its member banks. Credit Information Report (CIR) is drawn while considering fresh/enhanced/renewal proposal. This initiative helps the bank in better credit decisions thereby resulting in lower NPAs. In cases where name of a company appears in the RBI list of defaulters and the Director(s) of such company are also Director(s) in another company seeking credit facilities from our bank, such case are not normally be considered.
h) Willful Defaulters and Action there-against No additional facilities are granted by bank to the listed willful defaulters. In addition, the entrepreneurs/promoters of companies where banks/FIs have identified siphoning/diversion of funds,
misrepresentation, falsification of accounts and fraudulent transactions, are debarred from institutional finance from the scheduled commercial banks, Development Financial Institutions, Government owned NBFCs, investment institutions etc. for floating new ventures for a period of 5 years from the date the name of willful defaulter appears in the list of willful defaulters of Rs.25 Lakh & above published by RBI on quarterly basis. Besides, the other guidelines issued in this regard are also be adhered to.
i) Exploring new avenues: In the changing scenario, where new innovative products are being increasingly used, to manage the various risks associated with the underlying assets such as concentration risk, market risk etc., it is endeavour of the bank to adopt new instruments such as derivatives /securitization, based upon the market scenario as well as the ALM position after gaining experience.
4. Sanction of proposals beyond the purview of Credit Management & Risk Policy Policy prescriptions mentioned herein are subject to review / modifications by the competent authority(ies) as per the powers delegated to them depending upon the changing market conditions & business exigencies. However, Management Committee may permit deviations beyond the purview of above policy and such deviations are reported to Board by the respective Division/Department at the end of every quarter. The Credit Management & Risk Policy formulated for 2006-07 are valid till further review.
CREDIT RISK STRATEGIES The bank has since been implementing various techniques, relevant structure and processes for credit risk measurement but it may take some more time to quantify the entire credit risk in banking book. Based on the results of the risk measurement models developed by the bank, the bank has prescribed various risk strategies for credit portfolio, which involve the following: A. Identification of Target Market for the bank B. Decision on Risk Acceptance levels* C. Quantitative Exposure Ceilings*
*since the acceptance level and exposure ceilings of the bank are subjected to continual review so these are not added them in this project
A. Identification of Target Market for the bank An important aspect of targeted marketing is to have matching delivery channels. Bank has created proper credit delivery channels for building up of a sound credit portfolio. Bank has created specialized structure wherein relationship management concept has also been introduced. The purpose of creating specialized structure is to ensure prompt credit dispensation and improving credit risk management practices. The initiatives taken in this regard are: -
Large Corporate Branches
-
Mid Corporate Branches
-
SSI Branches
-
Trade Finance Branches
-
Signature branches
-
Retail loan hubs
-
New business group
THRUST AREAS In the year 2006-07, the thrust areas are as under: i. Retail Segment
ii. Priority Sector Credit
iii. Export Credit
OTHER STRATEGIES: i)
Non-Fund Based Business
Non-fund based business are increased so as to augment non-interest/fee based income. In consortium advances, efforts shall be to secure at least pro-rata business.
ii)
Take Over Of Accounts from Other Banks
-
Only borrowal accounts in "Standard Category" having Credit Risk Rating ‘BB’ or better can be taken over from other banks. Further, such borrowers should have earned net profit after tax in the immediate preceding three years and have sound financial position.
-
For accounts, which are in existence for less than three years, the unit should have earned cash profit during first year of commercial operation and from second year onward, the unit should have earned net profit after tax. However, in such cases, at least one audited balance sheet should be available before hand. Accounts where commercial production has not started or just started, takeover can be considered, if project is found technically feasible and economically viable subject to the fulfillment of certain conditions.
-
Borrowal account can be taken over from other banks on selective basis after obtaining prior approval from the next higher authority of the officialder whose powers the takeover of the account (entire fund based and non-fund based limits) is proposed.
-
Zonal Managers, GM (HO), ED and CMD may, however, permit takeover of borrowal accounts upto the extent of their vested loaning powers. In order to tap business potential, ZMs may permit incumbents of select branches to take over SSI/Trading accounts to the extent of 50% of their normal loaning powers.
iii)
Optimizing Credit Deposit Ratio During the current year, it is the bank’s endeavour to optimize the CD ratio.
RESEARCH METHOLODGY
Research is common parlance refer to search for knowledge, are can also define research as a scientific systematic search for pertinent information. It is a process of systematic and in depth study or search for any topic, subject area of investigation, backed by collection, compilation, presentation and interpretation of relevant details or data. Research methodology has following steps: Step: 1
To decide the objective of the study.
Step: 2
To design research design.
Step: 3
To determine the source of data.
Step: 4
To design data collection form.
Step: 5
To determine sample size and sample design.
Step: 6
To organize and conduct fieldwork.
Step: 7
To process and analyze the collected data.
Step: 8
To prepare the research report.
TYPE OF RESEARCH DESCRIPTIVE RESEARCH: The major purpose of the Descriptive research is description of state of affairs, as it exists at present. It includes surveys and fact finding inquiries of different kinds.
Research Design Research design is the conceptual structure with in which research is conducted; it’s a blue print of whole research.
Methods of Data Collection
Secondary Source: The data collected in this project are collected from the various secondary sources that I search various websites in internet, look into books, read journals, newspaper &magazines. Many useful information are collected from newspapers like The Economic Times, books are also used to get required data.
HYPOTHESIS
The Credit Management & Risk Policy formulated for 2006-07 are valid till further review.
For identification of cases of Promoter Groups/Companies for deterrent action, a coordinated approach is taken with Banks and Financial Institutions.
SUGGESTIONS
Since Credit dispensing is the major function of the bank, the bank must make an effective appraisal to determine the project success.
Sanctioning of any proposal a detailed appraisal is mandatory. An effective appraisal not only helps the bank to measure project techno economic viability and its success but also help the organization by presenting current position and future trend.
Promoter should also appraise his proposal in a similar way and then decide upon taking up the project for implementation.
FINDINGS AND CONCLUSION:-
Banking plays a very vital role in the development of the economy of any country. Credit Flow affects various macro level issues like Inflation, Industrial and Agricultural Growth, Purchasing power etc. RBI has the paramount responsibility to guide the banks for a vibrant as well as controlled credit flow. RBI also uses CRR, REPO and SLR to control the credit flow. The Credit Policies announced by the RBI is the source of credit policies of the individual banks. Presently many liberties have been given to the individual banks, but they have to function within the overall supervision of RBI. In the present day economy, even global factors affect the decision making. Keeping in view all this we found that PNB is having a very sound credit management policy, within the framework of RBI . To meet the global challenges and meet the prudential norm requirement as per the BASEL I & II, they have a organisational structure. PNB has got a sound credit policy and strategy for granting loans. It has developed indigenous software for risk rating. It has a credit risk management committee that overviews the work of the credit department and it also sanctions the proposal. To cater to the need of the customer and for speedy disposal of credit proposals they tailor made schemes, and delegation of loaning power. After going through the various steps of project appraisal, risk management and post sanction follow up it has been observed that for sanctioning of any proposal a detailed appraisal is mandatory. An effective appraisal not only helps the bank to measure project techno economic viability and its success but also help the organization by presenting current position and future trend. Since Credit dispensing is the major function of the bank, the bank must make an effective appraisal to determine the project success. It is also observed that even the promoter has to appraise his proposal in a similar way and then decide upon taking up the project for implementation.
BIBLIOGRAPHY
Reference: To obtain more information regarding present study and to subordinate it with theoretical proof following references were made:
Punjab national bank website
Google.com
Financial management books
Financial papers & magazines
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