sudhi credit apprasial

8/14/2019 Sudhi Credit Apprasial

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Credit Appraisal & Rating

1.Company Profile

About the corporation Bank:

Corporation Bank came into existence as Canara Banking Corporation (udupi)

Limited.

The Founding President of the bank was Khan Bahadur Haji Abdullah Haji

KasimSaheb Bahadur.

It started business on 12th March, 1906, in the temple town of udupi in [D.K].

The Bank started functioning with just Rs.5, 000/- as it capital.

It Opened First Branch at Kundapur in 1923 and the second branch at Mangalore

in1926.

Its Head Office is situated in Mangalore [D.K] Karnataka.

In 1939, the Banks name changed from Canara Banking Corporation (Udupi)

Limited, to Canara Banking Corporation Ltd and strongly put forth its vision with

motto Sarve Janah Sukhino Bhavanthu which means Prosperity to All

The second change in the name of the Bank occurred in 1972, from Canara Banking

Corporation Ltd to corporation Bank following its nationalisation on 15 th April

1980.

The Bank has its branches all over India and has overseas branches at Dubai &

Hongkong.

Now, presently the bank has a network 1078 fully automated CBS Branches & 1035

ATMs across the country.

Now, corporation bank has two co-operative banks in chickmangalur& in madikeri.

Vision and Mission:

Vision:

To emerge as the most preferred Bank with global standards in financials,efficiency, technology & product services.

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Mission:

To become a provider of world-class financial services.

To meet customer expectations through Innovations & technological initiatives

To emerge as a Role model and distinct cultural identity, ethical values, & good

corporate governance.

To enhance shareholders wealth by sustained, profitable & financial sound growth

with prudent risk management systems.

To fulfil national& social obligations as a responsible corporate citizen.

To create an environment, intellectually satisfying and professionally rewarding to

the employees.

Strength:

Bank has got many awards for their excellence under various parameters.

Bank maintains high standards of service to their customers.

Bank has innovative products and services.

The bank has maintained for the past decade continually good profitability when compare to

pear group of banks.

The bank has ensured that its EPS is always kept high.

The bank has maintained its net NPA lowest in the industry..

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2.Introduction to Credit Appraisal

Introduction to credit:

Credit, nowadays is pervasive and is a common feature of all global economics. Every

individual borrow credit to fulfil his needs. Companies/business borrow to facilitate expansion or to

meet working capital requirements. The concept of credit has existed from the early days of

civilization. Nowadays credit implies monetary transactions; it also includes non-monetary /[barter]

earlier days transactions.

Credit is a part of financial sector. In earlier days it was controlled by the RBI after liberalisation i.e.

1990-91 the RBI has given freedom to all banks to frame its own credit policy which has to be

approved by its Board to reviewed annually .however banks are bound to frame there policy on the

broad parameters and circulars issued by RBI from time to time.

Meaning of Credit:

A contractual agreement in which a borrower receives something of value now and agrees to

repay the lender at some later date. In other words A transaction between two parties in which one

lender/creditor supplies money, services etc. in return for a promise of future payment by the

borrower. Such transactions normally include the payment of interest to the lender.

Role of credit:

Idle economic resources can be effectively put to use through credit. Borrowers who donot

have enough resources to pursue an activity can borrow the resources, which can be returned to the

lender after having achieved the objective.

Broadly, banks and other financial intermediaries collect economic resources mainly, in the

form of deposits from public and engage in intelligent lending.

Financial intermediaries play a vital role in making credit available. Financial

institutions/banks roll their working capital[ funds mobilised in the form of deposits from the public]

by lending to various categories of borrowers and recycle the funds for further lending by prudent

and efficient credit delivery systems.

Major suppliers of credit are:

a. Commercial banks.

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b. Term lending Institutions such as IDBI, IFC and other state owned term lending institutions.

c. Non banking financial institutions.

Credit appraisal is done by the banker to know the creditworthiness of the prospective

borrower & analyse the credit risk.

Credit appraisal is important tool to the banker/financial institutions to mitigate credit risk

arising out of the credit delivery. of the borrower. Any financial institutions is bound to ensure that

proper appraisal of credit proposal is undertaken before taking a decision on the credit requirement

of a prospective borrower. This exercise is carried out by the banks/term lending institutions even

after the initial sanction of credit to corporate/borrowers on annual basis based on the performance

of the corporate/borrowers with reference to their audited financial statements and other statutory

returns, market conditions and risk perceptions of the bank.

Credit Riskis the process of finding and managing risk in a borrowers project.

While applying for the loan the borrower should submit a Project Report which highlights the

various aspects of the project including its financial implications accruing to the profitability of the

project. The banker/lender will be keen to ascertain that the projections and assumptions submitted

in the project report are realistic and thereby boost the economic development of the country.

Project Report:

The project report will give the full picture background of promoters, their experience,

technical ability initiative capacity to mobilise funds and risk taking ability and also furnishes a

complete picture of the project from implementation stage to marketing the produce. In essence, it is

a written document consisting of the following:

Product Demand:

Product selection plays a major role. Market survey should be done to know the

success of the product to be manufactured.

Market survey:

i. Market prospect for the product.

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ii. Position of the product vis-versa the competitors.

iii. Price structure.

iv. Marketing strategy.

v. Availability of raw materials.

Note:

It should be ensured that the product not reached the maximum required level.

Government consents:

It should verified that promoters are having required licences to start the

unit/business.

Locations:

Project report should furnish the suitability of the location of the industry/business

and also cover the following

a) Nearness to the source of raw materials and market for the product.

b) Availability of power, water & transport.

c) Arrangement for disposal of waste/drainage facility.

d) Any objection is thereby the neighbours.

e) Availability of manpower.

Process of product:

This should contain the detail of process of production or whether any technology is

required. The reason for the choice of a particular process/technology should be

explained. If the promoters dont have the technical experiences, it should seen

whether alternate arrangements are made.

Credit appraisal typically involves micro-analysis of the key financial statements of the

borrower i.e. Income Statement, Balance Sheet and Cash flow Statement. The important parameters

that are to be looked while analysing liquidity are:

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Debt Equity Ratio.

Total Debt to Total Assets.

Current Ratio and Quick Ratio.

Sales to Working capital Ratio.

Inventory Turnover Ratio.

Fixed asset coverage ratio.

Profitability ratio.

Debt service coverage ratio.

Debt equity ratio:

This is the ratio b/w debt & equity It is determined to ascertain the soundness of the long

term financial policies of the company. This ratio indicates the proportion between the shareholders

funds and the total borrowed funds. Debt r Formula for calculating this is

Debt Equity Ratio: Debt

Equity

Debt: represents long term liability, debentures.

Equity: Share Capital & reserve& surplus. (net worth this ratio indicates in what portion term funds

have been made available by the shareholders. If a unit /borrowers has more debt & less capital it

may be a disadvantageous position as the servicing of loan may be a problem in the event of its

failure to earn sufficient profits.

Total Debt to total Assets:

This ratio is to measure a company's financial risk by determining how much of the company's assets

have been financed by debt. Calculated by adding short-term and long-term debt and then dividing

by the companys total assets.

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Current Ratio:

It indicates the relationship between current assets & current liabilities. It is liquidity ratio that

measures a companys ability to pay short term obligations. The formula for calculating this ratio is

as under

Current Ratio: Current assets

Current liabilities

If the current assets are more than the current liability it indicates a good liquidity position.

Quick Ratio:

To measure a companys liquidity and ability to meet its obligations. It is known as acid-test

ratio. Under this ratio while calculating current assets inventories will be excluded. The formula forcalculating this ratio is as under. .

Quick Ratio: current assets

Current liabilities

Inventory Ratio:

A ratio showing how many times a companys inventory is sold and replaced.

Higher the ratio connotes better profitability and efficient management of the inventory. At

present manufacturing industries are having a system called Supply Chain Management

and thereby reduce their overheads and increases profitability.

Inventory Ratio: Sales

Inventory

Fixed asset coverage ratio:(FACR)

A ratio shows to what extent do fixed assets provide protection for term creditors. It is

assessed by calculating this ratio is under

FACR: Net fixed assets

Long term debts

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Profitability ratio:

This ratio is the overall measure of the borrowers ability to turn each rupee of sales intoprofit.

Debt service coverage ratio: [DSCR]

This ratio indicates whether the earnings are adequate to meet the commitment of term

borrowings. Borrowers has to pay interest and instalment stipulated by the lender/banker as such he

should have sufficient earnings to meet these financial commitments

DSCR= Net profit+ depreciation+ interest on term loan

Interest on term loan+ principal repayment

Components of credit appraisal/analysis are 5 Cs. They are

Capacity.

Capital.

Collateral.

Conditions.

Character.

Capacity:

Capacity to repay is the most critical of the five factors: it is the primary source of

repayment-cash. The prospective lender will want to know exactly how the borrower intends to

repay the loan. The lender will consider the cash flow of the business, the timing of the repayment,

and the probability of successful repayment of the loan. Payment history of existing credit-

relationships-personal or commercial relation is considered an indicator of future payment

performance. Potential lenders also want to know about other possible sources of repayment.

Capital:

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Capital is the money invested by the promoters in the business borrower personally invested

in the business and is an indication of how much borrower has at risk should the business fail.

Interested lenders and investors will expect borrower to have contributed from your own assets and

to have undertaken personnel financial risks to establish the business asking them to commit any

funding.

Collateral:

Collateral or guarantees are additional forms of security borrower can provide the lender.

Giving lender collateral means that borrower pledge an asset borrower own, such as your home, to

the lender with the agreement that it will be the repayment source in case borrower cant repay the

loan. A guarantee on the other hand, is just that- someone else sign the guarantee document

promising to repay the loan if the borrower cant re[pay. Some lender may require such a guarantee

in addition to collateral as a security for a loan. To fully safeguard the lender interest.

Conditions:

Conditions describe the intended purpose of the loan. Will the money be the money used for

working capital additional equipment or inventory? The lender will also consider local economic

conditions and the overall climate, both within the borrower industry and in other industries that

could affect the borrowers business.

Character:

Character is the general impression to the borrower make on the prospective lender or

investor. The lender will form a subjective opinion as to whether borrower is sufficiently trustworthy

to repay the loan or generate a return on funds invested in the company. Educational experience in

the business and in exposure in the industry will be considered. Reference, and experience in the

business and the borrower industry will be considered. The quality of the borrower (references, the

background and experience levels of employees will also be reviewed for taking a decision by the

bank/lender.

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After the liberalisation process initiated by government of india keeping in consonance RBI has also

liberalised its credit policy guidelines whereby banks have been given free hand to frame its own

lending policy adopted by its Board to rreviewd annually and within the broad guidelines of RBI.

RBI announces its credit policy on quarterly basis and issues guidelines to banks/financial

institutions if any changes to be affected to the individual banks credit policy. Banks are obliged to

follow the guidelines/directions of RBI scrupulously.

There are two types of loans given by the banks to the borrower/clients. They will see credit

needs according to the requirement of the activity/unit industry and then consider need based credit

limits.

The credit requirement of the client may be short term or long term. Short term requirement

will be financed by way of working capital limits or short term loans repayable within 36 months.

Long term (term loan) is repayable over a period of 36 months.

During my internship i came to know that in corporation bank the sanctioning powers are

deligated to various authorities based on their grade/scale. They have the following sactioing

authorities in the hierarchy of the bank.

Board of Directors of the bank.

Chairman & managing Director.

Executive Director.

General Manager.

Deputy General Manager.

Assistant General Manager.

Chief Manager.

Manager of the branch who will be either senior manager/manager.

The powers of the above authorities are conferred expect to the board of directors by

the banks Board of Directors. The sanctions of Board of Directors of the bank are

conferred/ consented by RBI.

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Corporation Bank has put in place a very good a system of monitoring of sanctions made by

the various authorities and thereby ensured a healthy credit portfolio.

3. Working and methods of lending credit

Project finance:

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It is a term used to describe the financing of any capital investment that involves a longish

time horizon with long-run benefits. A significant part of the project finance is arranged through

credit. It is normally arranged either on consortium / multiple baking arrangement in rrespect of

fianciainng of big projects where heavy financial outflow is involved. This is being followed by

banks tp mitigate their credit risk.

Project finance is different from other types of financing. It is distinction that makes project

financing riskier, requiring specialist knowledge.

1. The source of repayment is from future internal cash generation. In contrast, working

capital finance/asset finance and similar financing arrangements rely on the

liquidation/inflows of cash generations to assess repayment.. Hence, it possible to ensure

repayment even in the absence of adequate internal cash generation. But project financedoes not emphasise on the value of the physical assets financed. However, the future

cash flows will be greater than the related costs.

2. Project finance often related to a new business venture. It does not have a track record to

be extrapolated into the future. Creditors are at a big disadvantage at this point because-

while an existing concern can be assessed for its management capability and industry

position from the historical data, a new project is entirely a new affair even it is started

by experienced.

Types of project finance:

Project financing is mainly of two types, they are:

a. Non-recourse.

b. Limited recourse.

Non-recourse:

The lender should obtain repayment of the principal and servicing of debt soley from the

project itself, without any other kind of support. This type of financing is attempted only when the

lender has utmost confidence in the project that is financed. This is normally extended by the banks

to corporates which are professionally run by the highly professional Board of Directors. Normally,

they are multi-national companies or Indian companies which have a very good track record.

Examples are L&T. Tata Group, Reliance Group, Mahindras, Birlas Group.

Limitedrecourse:

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It refers to cases where the lenders retain some form of support or recourse to the promoters

of the project. The nature of the recourse is clearly established at the outset itself, through

documentation. In the case of limited re-course apart from first charge on the securities created out

of the banks finance, the bank further insists for personal guarantee of the promoter and also charge

on his personal assets such as immovable properties, and other gilt edged securities.

Generally, lenders prefer the second type of financing, in the case of good projects, the

competitors in the market ought to be ready to offer non-recourse project finance.

Examples: individuals. Partnerships, private limited companies and public limited companieswhihc

are closely held and not having very good track record.

Term loan:

Term loan is given for long term that which falls beyond 12 months. These funds can be

used for purchasing of land, buildings, plant & machinery.

It is a single transaction loan where the loan amount is disbursed either in lump sum/ in

stages. It is repayable in instalments along with interest.

Term loan us considered for industrial and non industrial purpose. This loan is consideredfor acquiring land, building, machinery and vehicles

Working capital:

Working capital is the blood of business. No business can survive without adequate working

capital. For running an industry /business two types of capital required i.e. Fixed Capital & working

capital.

Fixed Capital:

Fixed capital is utilised for acquiring fixed assets required to start the industry/business.

These fixed assests would not produce /earn anything. They have to be run for production. This

requires enough liquid resources i.e. working capital

Working capital represents the money that required for purchase/stock of raw materials,payment of

salaries/wages, power charges etc. In other words working capital is the finance required to meet the

cost involved during the operating cycle.

The usual balance sheet definition of working capital as given under:

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Working Capital: Current Assets Current liabilities.

Working capital financing:

Banks and other short term credit institutions are the major suppliers of working capital

finance. Working capital financing constitutes a major part of the entire financial system of the

world. Banks compute working capital requirements with due diligence since there funds are in

stake. They take into account various risks attached to the financing of the proposal. While suppliers

extend credit as a corollary to their main business. Commercial banks and other financial institutions

which play a major role in working capital financing.

1. Working capital:

This is given for a short term i.e. 12 months. These funds can be used for purchasing of raw

materials, payment of salaries, wages, and electricity charges. In other words working capital is

required to meet the costs involved during the manufacturing process. Working capital is given

against receivables (i.e. book debts) goods in process and finished goods which are current assets.

Working capital funds shouldnt be utilised for long term requirements. Generally, working capital

limit is a running account limit by way of overdraft or packing credit limit for exporters. Borrowers

are excepted to get the limits renewed every year. The banker review the borrowers financial health

position by obtaining the audited financial statements of the corporate/firms and arrive at the

working capital to be sanctioned/renewed based on the assessment worked out as under:

2. Assessment of working capital:

Methods for assessing the working capital:

a. Projected Turnover Method.[PTM]

b. Permissible Bank Finance Method.[PBF]

c. Cash Budget Method.[CBM]

d. Net Owned Fund Method.[NOF]

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1. Projected Turnover Method:

This turnover method is applicable who are engaged in Manufacturing, Services and Tradingactivities with fund based working capital requirements up to Rs. 2 crores & Non-SSI units & for

SSI units up to 5 crores.

Extent of working capital requirements of the borrowers should be assessed based on the

projected annual turnover on the lines of the recommendations made by Sri P.R. Nayak committee

appointed by Reserve Bank of India.

The working capital requirements are assessed by the banks taking into considerations the

following data.

Collection of financial audited statements.

Analysis of financial data.

Computation of working capital finance.

Fixing of sub-limits.

Collection of financial data:

Banks have got their own set of forms for application of various credit limits to different

types of borrowers. They also collect the personnel data of the directors, partners. Proprietors/

individuals/guarantors to ascertain the competence and financial standing in the market.

Analysis of financial data:

The financial data collected as above should be analysed as under to assess the working

capital finance required by the borrowers and to evaluate the extent of credit risk.

- Scrutiny and verification of data to ascertain whether the projected turnover is realistic and

also is achievable.

- Analysis of Profit & loss a/c, Balance sheet and Fund flow statement etc, for the previous year

to examine the profitability, financial position, financial management.

[In this method bench mark current ratio should be 1.33 or 1.25 but not less than 1]

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Computation of working capital:

Gross working capital requirements are assessed at a minimum 25% of the annual projected

turnover. However, the borrower company/firm should bring as its margin for the limit which should

be a minimum of 5 % of the Gross working capital/ projected working capital whichever is higher.

Example:

If a company is manufacturing food products and has projected a sales turnover of Rs. 1 crore, the

net projected working capital requirement will be Rs. 20 lakhs, as per P.R Nayak committee

recommendation. This is calculated as under:

1 Projected turnover for the year. 1,00,00,000

2 Gross working capital [G.W.C]-----[25% of the projected turnover] 25,00,000

[-] Borrowers Margin------ [a minimum 5% of G.W.C/Projected net

working capital whichever is higher]

5,00,000

3 Bank finance (1-2) 20,00,000

2. Permissible Bank Finance Method:

This PBF method is applicable to all borrowers who are engaged in manufacturing ,services

and trading activities with fund based working capital requirements of above 2 crores for non SSI

units and for SSI units above 5 crores.

Assessment of working capital:

The working capital assessment should be made on the basis of borrowers projected current

assets and current liabilities and also profitability of the company for ensuring year.

Working capital requirements should be carried taking into account the following:

Collection of financial data.

Analysis of financial data.

Classification of current assets and current liabilities.

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Verification of projected levels of current assets & current liabilities with special

emphasis on inventory/receivables/sundry creditors.

Evaluation of liquidity in the business operation.

Validation of bank finance sought based on the projected balance sheet

Classification of current assets & current liabilities:

Current Assets:

Cash margin kept for letter of credit & bank guarantee.

Fixed deposits with banks/government and investment in mutual funds & also Cash

in hand/at bank.

A book debt all receivables up to180 days is treated as current assets beyond 180

days is treated as non- current asset.

Stock of Raw materials, good in process & finished goods.

Current liabilities:

Inter corporate deposits is a part of current liability. I.e. short term borrowings from

others.

Term loan instalments falling due for payment in the next 12 months not are treated

as current liability.

Sundry creditors for goods.

Any other payments due payable during the year.

In PBF method, the bench mark of current ratio is 1.25:1. If the projected current ratio falls

below the bench mark then the banker will not reject the proposal outright but would look into the

past performance of the borrower and reasons for fall in the current ratio below the benchmark. If

the current ratio phenomena is temporary nature due to certain external factors like delay in payment

of its bills drawn on well established public sector undertakings/ good corporate having a very sound

track record in their payments in the past with borrower. In such a situation the banker will

sanctioning /renewing of the limits. May insists for infusion of additional capital in the business.

Format for calculation of PBF is furnished below:

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For calculating the working capital gap they should get total current assets & total current liability

{i.e. working capital gap= Total current assets-Total current liability}

Projected turnover

Total current assets {TCA}

(-)Total current liability {TCL}

Working capital gap

(-) 20% of TCA or projected NWC

{Whichever is higher}

*****

*****

*****

*****

*****

Permissible bank Finance *****

3. Cash Budget Method:

This method is applicable to all borrowers who are mainly engaged in construction activities

{i.e. civil contractors/builders} with a fund based working capital above 10 crores.

Assessment of working capital:

It should be assessed on the basis of quantified monthly/quarterly cash inflows and outflow

in the business and not on the projected levels of assets & liabilities.

The following document should be given by the borrower to the banker:

Cash Flow Statement.

Projected Balance Sheet & Profitability statement.

Forms filled by the borrower according to bankers requirement.

Format Assessment of bank finance as per cash budget:

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Format:

Particulars Current year/Actual projection

1.Total cash outflows from business operations

2.(-) Total cash inflow form business operation.

3. Cash Gap in business operations. (working capital

requirement)

4.(- Amount brought/proposed to be brought in forms of

other sources.

5. Net cash gap for business operation.[3-4]

Q1 Q2 Q3 Q4

4. Net owned fund method:

This method is adopted for financing of NBFCs(Non-Banking Financial

companies)comprising of

Companies engaged in leasing & hire purchase activities.

Loans & investment companies.

In this method current ratio should be1.33:1

A chart showing the maximum ceilings stipulated by the RBI and presently followed by the

bank, while lending to different categories of NBFCs which should be followed while considering

proposals of NBFCs are furnished below:

Ceilings of banks lending to NBFCs

NBFC Category Eligible bank

finance

a. Companies with not less than 75% of their assets

in equipment leasing & hire purchase &75% of

Gross Income from these of activities as per last

3 times the NOF of

the company.

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year Balance Sheet.

b. Companies with not less than 51% of their assets

in EL, HP& Invt companies and 33% of their

Gross income from these types of activities as per

last audited Balance Sheet.

2 times the NOF of

the company.

c. Loan & Investment companies. 1 times the NOF of

the company.

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Computation of Net Owned Fund (NOF):

Particulars Amount

1. Paid-up equity capital

2. General Reserves

3. Share Premium

4. Capital Reserve

5. Debenture redemption reserve

6. Capital redemption reserve

7. Credit balance in P/L a/c

8. Any other reserves

9. Total [1 to 8]

10. Accumulated losses

11. Intangible Assets

12. Total [10to11]

13. Owned Fund[9-12]

14. Investment in shares of subsidiaries & companies in the same

group and all NBFCs

15. Outstanding loans & advances & deposits with subsidiaries

companies in the same group.

16. Total [14 +15]

17. Amount of item no. 16 in excess of 10% of item no.13 above

18. NET OWNED FUND[13-17]

******

While computing working capital there are 2 types of credit limits. They are

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Fund Based.

Non-Fund Based.

Fund based credit limit involves use of banks funds for

companies/firms&individuals for day to day running of the business which is called

working capital whereas in the case of Non-Fund based limit there will not be any

flow of funds from the bank. it involves guarantying the performance of an act in

rupee terms at a future date for fulfilment of contractual obligations of the party by

the bank.

Fund Based limit

It is one of the line of credit for running of day to day operations of large corporate, business

which is in the following ways:

Cash Credit

Short/medium/long term loans.

Bills discounting.

Cash Credit:

It is given for a short term cash loan for a company/borrower. The banker will fix drawing

limit based on the security value, namely, stock in trade, semi finished goods , finished goods

normally on monthly basis. The borrower should furnish monthly statement which has to verify by

the banker by physical verification and also in books which is maintained by the borrower.

Book debts:

The amounts of money due or owed to a business or by customers. Accounts receivable

refers to the total amount due and is considered in calculating the value of a business or the business'

problems in paying its own debts. Evaluation of the chances of collecting based on history of

customers' payments, quality of customers and age of the accounts receivable and debts is important.

Banks normally, finance book debts within the age bracket of 6 months & below. It is treated as a

clean advance and hence they will be more careful will considering limits under book debts. It is

customary for the banks to insist certified list of book debts by chartered Accountant to get a true

picture of outstanding book debts on a particular date in the books of the borrower.

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Bills:

Bills is a post sales limit fixed by the banker. Borrowers will draw bills on his debtors which

shall be purchased/ discounted by the bank. By this borrower need not wait to get the bills realised at

a later date. This will help smooth running of business/unit. Bills limit generally consider outside the

purview of NBF.

Packing credit:

It is loan or advance granted by a bank to an exporter for financing the purchase,

processing, manufacturing or packing of goods prior to shipment, on the basis of letter of credit

opened in his favour or in favour of some other person, by an overseas buyer or a confirmed and

irrevocable order for the export of goods from the producing country or any other evidence of an

order for export from that country having been placed on the exporter or some other person, unless

lodgement of export orders or letter of credit with the bank has been waived.

It is given for a short period i.e. 12 months. The banker will give this type of credit that is

based on work order. The eligible advances for packing credit are as per the RBI guidelines. For this

type of credit interest is charged by the RBI.

If there is any change in packing credit limit & interest charged to borrower then the banker should

be informed to ECGC { Export Credit Guarantee corporation of India}

About ECGC:

ECGC was established in the year 1957 by the Government of India to strengthen the export

promotion drive by covering the risk of exporting on credit. It functions under the administrative

control of ministry of commerce & industry.

Functions of ECGC:

The functions of ECGC are:

Offers insurance protection to exporters against payment risks.

Provides guidance in export-related activities.

Makes available information on different countries with its own credit ratings.

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Makes it easy to obtain export finance from banks/financial institutions.

Assists exporters in recovering bad debts.

Provides information on credit-worthiness of overseas buyers.

Non-Fund Based limits

Letter of credit.(LC)

Bank Guarantees.(B G)

Solvency certificate.

Letter of Credit:

Assessment for letter of credit facility is done on the same lines of fund based facilities. In

the case of usance LC limit, the usance period shall exceed the assessed projected level of sundry

creditors for purchase of raw materials. Besides assessment of availability of back-up finance to

meet the LC liability on due dates shall be made to avoid devolvement of LCs.

There are various types of letter of credit. They are:

a. Irrecoverable & recoverable letter of credit.

b. Unconfirmed & confirmed letter of credit.

a. Irrecoverable & recoverable letter of credit:

Irrevocable letter of credit is one in which the issuing bank gives a lasting understanding to

accept and in due course to pay bills drawn upon it. The only condition is that the exporter fulfils the

terms and conditions stipulated in the letter relating to documents. The irrevocable letter of credit

gives a complete protection to the exporter as it is guaranteed not by a foreign bank.

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Revocable letter of credit: Revocable letter of credit as the same signifies is one which can

be modified or cancelled by the issuing bank at any time without any obligation on its part. As

revocable letters of credit are subject to cancellation without notification therefore they are not

usually acceptable to the banks.

b. Unconfirmed & confirmed letter of credit:

Unconfirmed Letter of credit:

A letter of credit which has not been guaranteed or confirmed by any bank other than the

bank that opened it. The advising bank merely informs the beneficiary of the letter of credit terms

and conditions.

Confirmed letter of credit is a international trade guaranteed by a second bank, in addition to

the bank originally issuing the credit. The confirming bank agrees to pay or accept drafts against the

credit even if the issuer refuses. A confirmed letter of credit also protects against unfavourable

exchange regulations and shortages of foreign currency in the importing country.

Bank Guarantees:

Bank Guarantees are considered based on need. It is absolutely essential to appraise the

proposal for bank guarantees also with same diligence and rigorous scrutiny as in the case of fund

based limits and obtain adequate cover by way of cash margin/security, so as to prevent the

constituents to develop a tendency of defaulting in payments when guarantees are invoked.

Solvency certificates:

A solvency certificate is used by banker stating that borrower is solvent.

Security against loan:

The banker/lender wish to have some kind of security to minimise the banker credit risk. If

the borrower keeps sufficient security to the bank then the banker will charge less rate of interest.

Otherwise bank will charge high rate of interest if there is no sufficient security. Security is of two

types. They are :

1. Tangible security.

2. Intangible security.

Tangible security:

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Tangible security are, as the name implies, tangible physical, real and in some kind of

material form. They are the material assets of the borrower held in the creditors name or possession.

Some of the tangible securities are as follows:

Deposits

Stock & shares.

Property/land.

Goods.

Gold.

Intangible security:

Intangible securities as the name implies, is that they are not physical assets but generally

represent the documented rights of action that are held by the creditor. They are

Mortgage.

Pledge.

Hypothecation.

Lien

4.Credit Risk and Rating

Risk broadly defined as threat that an event or occasion that will adversely affect

borrowers ability to achieve its business objectives& successfully execute his strategy.

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Credit Risk is also defined as the inability or unwillingness of the borrower to meet

commitment in relation to lending, trading, settlement & other financial risk.

Credit rating:

Rating provides an easy way to understand the credit risk and is being extensively used.

Credit rating is more importance for banks. The rating to companies is maximum 10.

Banks have a system which measures credit risk of borrowers with greater reliability and

sophistication which is credit risk rating. The banks have it own home software that is developed by

CRISL for this they will call as RAM model (Risk Assessment Model).

Credit risk rating is the statistical tool used by the lender to determine thecreditworthiness of the borrower. This credit risk rating of the borrower will be confidential. This

rating will not be given to the borrower. if people understood their appraisal criteria and ratings, they

would cheat by altering their profile thereby artificially jacking up their overall credit score.

The rating will vary from one lender to another lender. For different sectors they will do

different ratings /procedure will be different. The sectors like

Manufacturing /trading sector.

Service sector.

SSI units.( small scale industries).

Real Estate developers.

While applying for the loan/renewal of loan/extending the credit limit of the borrower the

lender checks the how much money he earn, & how much he credit owes & and his payment is

regular.

The points are distributed in various aspects of your profile such as :

- personal information : age, educational qualifications, number of dependents / children,

spouses income

- employment information : organization, designation, length of service, etc.

- income information : net income, instalment of other loans, other liabilities.

- net worth information : owning a house, vehicle, credit cards, telephone, etc.

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- previous relations with the lender : banking account, credit card, any other loan, etc from

the same lender.

Risk evaluation system depends on various data base and analytical tools for inference.

Credit risk of a borrower is a function of

Financial risk.

Industrial risk.

Business risk.

Management risk.

Financial Risk:

Risk is probability of unfavourable condition and any risks associated with any form of financing is

constituted as financial risk. This risk is also categorised as an important factor to know the ability of

the company to raise the debt form the financial institutions /banks and also to raise equity from its

own funds.

Industrial Risk:

This is type risk involves demand & supply gap in the market & also with competitors.

Business Risk:

Business risk is associated with the quality of work and satisfying the market with their

needs or requirements. Failing to follow the above said may hamper the business and driving it

towards the risk i.e. Business Risk

Management Risk:

Lack of borrowers familiarity with respect to the industry may incite risk towards the management.

This kind of risks can be overcome come using some of the steps like decision making with board of

experienced members, and by maintain track record & history to identify the ups and downs in the

past.

CORPORATION BANK BALANCE SHEET

31-03-2004 31-03-2005 31-03-2006 31-03-2007

SCHEDULE 1 CAPITAL

AUTHORISED CAPITAL

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150,00,00,000 Equity Shares ofRs.10 each

1500,00,00 1500,00,00 1500,00,00 1500,00,00

ISSUED & SUBSCRIBED CAPITAL

14,34,40,000 Equity Shares ofRs.10 each

Opening Balance143,44,0

0

143,44,00

143,44,00 143,44,00

Addition during the period 143,44,00 143,44,00 143,44,00 143,44,00

PAID-UP CAPITAL

a) Held by Central Govt. 82,00,00 82,00,00 82,00,00 82,00,00 82,00,00 82,00,00 82,00,00 82,00,00

b) Held by the Public & Others 61,44,00 61,44,00 61,44,00 61,44,00

Less : Allotment money due 34 61,43,66 24 61,43,76 23 61,43,77 22 61,43,78

Total 143,43,66 143,43,76 143,43,77 143,43,78

SCHEDULE 2 - RESERVES ANDSURPLUS

I. Statutory Reserves


2

658,42,10

759,42,10 879,42,10

Appropriation from profit 126,04,00 101,00,00 120,00,00 170,00,00

Appropriation from excessProvision of Depreciation onInvestments

57,58 Nil Nil Nil

Transfer from InvestmentFluctuation Reserve

Nil 658,42,10 Nil 759,42,10 Nil 879,42,10 Nil 1049,42,10

II. Special Reserves

Opening Balance Nil Nil Nil Nil

Additions during the year Nil Nil Nil 54,34,85

Transfer from Corp Home Nil Nil Nil 15,75,89

Deductions during the year Nil Nil Nil Nil Nil Nil Nil 70,10,74

III. Capital Reserves

Opening Balance 2,77 24,92,96 24,92,96 24,92,96

Additions during the period 24,90,19 Nil Nil 31,16,00

Deductions during the period Nil 24,92,96 Nil 24,92,96 Nil 24,92,96 Nil 56,08,96

IV. Share Premium


0

701,98,40

701,98,40 701,98,40

Additions during the period Nil Nil Nil Nil

Less : Calls in Arrears 2,34 701,96,06 1,72 701,96,68 1,61 701,96,79 1,54 701,96,86

V. Revenue and Other Reserves

a) Investment Fluctuation Reserve


3

444,00,00

444,00,00 Nil

Transfer from Profit and Loss

Appropriation Account210,82,3

3Nil Nil Nil

442,27,26

444,00,0

0444,00,00 Nil

Transfer to Profit and Loss

Appropriation Account Nil Nil 444,00,00 Nil

Appropriation from excessprovision in

Depreciation on Investments 1,72,74 Nil Nil

Transfer to Statutory Reserve Nil

444,00,00 444,00,00 Nil Nil

b) General Reserves


7

795,90,04

981,16,601625,13,3

7

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Additions during the period

34,37,57185,26,5

6643,96,77 119,29,51

795,90,04

981,16,6

0

1625,13,37

1744,42,8

8

Deductions during the period Nil 795,90,04 Nil 981,16,60 Nil 1625,13,37 Nil 1744,42,88

VI.Balance in Profit & Loss A/c

Nil Nil Nil Nil

TOTAL (I+II+III+IV+V+VI) 2625,21,16 2911,48,34 3231,45,22 3622,01,54

SCHEDULE 3 DEPOSITS

A.I. Demand Deposits

i) From Banks 21,66,42 8,63,82 78,64,37 130,25,22

ii) From Others 3537,67,45 4084,29,62 4667,85,45 6647,07,51

II. Savings Bank Deposits 4323,80,68 5326,43,14 6539,59,53 7651,79,16

III. Term Deposits

i) From Banks 27,01,76 306,73,06 11,31,56 821,50,04

ii) From Others

15280,76,73

17507,06,16

21579,11,95

27106,27,43

Total (I, II

23190,93,04

27233,15,8

0

32876,52,85

42356,89,3

7

B.i) Deposits of Branches in India

23190,93,0

4

27233,15,80

32876,52,8

542356,89,37

ii)Deposits of Branches outsideIndia

Nil Nil Nil Nil

Total

23190,93,04

27233,15,8

0

32876,52,85

42356,89,3

7

SCHEDULE 4 BORROWINGS

I. Borrowings in India

i)Reserve Bank of India Nil Nil Nil 185,31,00

ii) Other Banks 7,29,95 65,14 Nil 699,79,94

iii) Other institutions & Agencies 41,06,83 525,47,27 779,82,14 785,20,90

Total 48,36,78 526,12,41 779,82,14 1670,31,84

II. i) Borrowings outside India 885,76,49 771,76,88 880,25,59 1350,68,88

Total (I& II 934,13,27 1297,89,29 1660,07,73 3021,00,72

SCHEDULE 5 - OTHERLIABILITIES & PROVISIONS

I. Bills Payable 1129,74,70 1139,80,97 881,00,30 1106,50,73

II. Inter-Office Adjustments (Net) Nil Nil Nil 47,09,61

III. Interest Accrued 54,05,46 84,14,78 99,54,47 157,11,74

IV.Unsecured Redeemable Bonds(Subordinated Debt for Tier IICapital)

300,00,00 300,00,00

V. Others (including provisions) 1076,17,99 1113,91,83 1314,58,77 1966,56,87

Total 2259,98,15 2337,87,58 2595,13,54 3577,28,95

SCHEDULE 6 - CASH ANDBALANCES WITH RESERVEBANK OF INDIA

I.Cash in hand (including foreigncurrency notes)

245,08,79 237,01,00 254,55,95 290,44,38

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II. Balances with the Reserve Bankof India in Current Accounts

1448,56,82 1681,06,17 1376,75,25 2691,57,84

III. Gold in hand

a) Own dealings Nil 93 8,48,11 24,12

b) Under Deposit Scheme 71,66 2,80,77 Nil 1,40,20

Total (I, II & III) 1694,37,27 1920,88,87 1639,79,31 2983,66,54

SCHEDULE 7 - BALANCESWITH BANKS AND MONEY ATCALL & SHORT NOTICE

I. In India

i) Balances with Banks

a) In Current Accounts 232,54,78 272,84,23 140,94,27 126,12,67

b) In other Deposit Accounts 503,56,96 588,07,34 457,42,83 1291,41,92

ii) Money at Call & Short Notice

a) with Banks Nil 175,00,00 350,00,00 50,00,00

b) with other institutions Nil Nil 55,00,00 35,00,00

Total (i + ii) 736,11,74 1035,91,57 1003,37,10 1502,54,59

Outside India

i) In Current Accounts 26,30,69 30,62,96 Nil 11,71,01

ii) In other Deposit Accounts 379,40,13 593,20,00 1445,52,60 2220,96,70

iii) Money at call and Short Notice Nil Nil Nil Nil

Total (i + ii) 405,70,82 623,82,96 1445,52,60 2232,67,71

GRAND TOTAL (I & II) 1141,82,56 1659,74,53 2448,89,70 3735,22,30

SCHEDULE 8 INVESTMENTS

I.Investment in India (Gross)

10694,32,4

0

10281,45,38

10714,17,0

614508,08,81

Less : Provision for Depreciation 9,28,54 20,34,79 62,17,09 90,59,90

Net Investment

10685,03,8

6

10261,10,59

10651,99,9

714417,48,91

i) Government Securities 8670,67,38 8317,59,27 8896,15,75 11571,97,86

ii) Other Approved Securities 181,21,17 148,14,28 122,05,90 119,72,79

iii) Shares 58,67,05 35,69,60 132,14,69 156,23,73

iv) Debentures and Bonds 1539,59,79 1313,45,49 1166,53,80 901,17,04

v) Joint venture / subsidiaries

a) Investments in R.R.B. 2,63,82 2,63,82 2,63,82 2,63,82

b) Investments in Subsidiaries 115,00,00 115,00,00 115,00,00 100,00,00

vi) Others

a) Certificate of Deposit Nil Nil Nil 1337,42,56

b) Commercial Paper 62,70,57 268,59,11 Nil 23,04,43

c) Units of Mutual Funds 54,48,17 59,93,11 190,50,00 97,41,71

Total

10684,97,95

10261,04,6

826,74,00 107,73,44

II. Investments outside India 5,91 5,91 22,02 11,53

Total (I & II)

10685,03,86

10261,10,5

9

10651,99,97

14417,48,9

1

SCHEDULE 9 ADVANCES

A. i) Bills Purchased and Discounted 1097,93,95 1206,29,20 1287,22,85 1320,11,42

ii) Cash Credits, Overdrafts &

Loans repayable on demand 6027,55,38 7118,34,31 8909,67,85 10585,67,53

iii) Term Loans

6764,22,84 10221,74,36

13765,52,16

18043,86,06

Total

13889,72,17

18546,37,8

7

23962,42,86

29949,65,0

1

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Bi)Secured by Tangible Assets

11549,17,9

7

14027,21,80

18861,30,7

123555,03,48

(includes Advances against bookdebts)

ii) Covered by Bank/GovernmentGuarantees

529,73,67 1348,95,82 1206,33,72 1102,42,07

iii) Unsecured 1810,80,53 3170,20,25 3894,78,43 5292,19,46

Total

13889,72,17

18546,37,8

7

23962,42,86

29949,65,0

1

C. I. Advances in India

i) Priority Sector 4979,41,66 6444,91,88 7972,46,81 10757,52,41

ii) Public Sector 1123,33,95 942,10,37 2113,01,44 1956,56,61

iii) Banks 230,05,33 900,00,00 324,80,00 799,10,36

iv) Others

7556,91,2310259,35,6

2

13552,14,61

16436,45,62

Total

13889,72,17

18546,37,8

7

23962,42,86

29949,65,0

1

II. Advances outside India Nil Nil Nil Nil

GRAND TOTAL ( C. I & C. II)

13889,72,17

18546,37,8

7

23962,42,86

29949,65,0

1

SCHEDULE 10 - FIXED ASSETS

I. Premises

At cost as on 31st March of thepreceding year

90,59,15 96,14,22 99,88,16 105,37,14

Additions during the period 6,02,84 3,79,75 5,83,92 20,76,22

96,61,99 99,93,97 105,72,08 126,13,36

Deductions during the period 47,78 1,53 30,44 14,98

96,14,21 99,92,44 105,41,64 125,98,38

Depreciation to date 23,27,59 72,86,62 27,14,88 72,77,56 31,74,10 73,67,54 36,29,40 89,68,98

II. Other Fixed Assets

including furniture & fixtures

At cost as on 31st March of thepreceding year

334,88,13

401,80,56

469,08,76 512,98,23

Additions during the period 77,66,40 77,71,72 54,86,76 73,03,36

412,54,53

479,52,2

8523,95,52 586,01,59

Deductions during the period 10,73,97 7,97,81 9,62,05 19,55,75

401,80,56

471,54,4

7514,33,47 566,45,84

Depreciation to date225,26,5

4176,54,02

288,11,70

183,42,77 332,15,78 182,17,69 375,11,08 191,34,76

Total (I & II) 249,40,64 256,20,33 255,85,23 281,03,74

SCHEDULE 11 - OTHER ASSETS

I Inter-Office Adjustments (Net) 324,19,54 395,26,22 562,11,79 NILII Interest Accrued 313,59,83 246,66,60 250,32,11 369,00,76

IIITax-paid in advance/tax deductedat source

497,21,86 242,15,45 446,54,67 455,85,79

IV Stationery and stamps 2,47,72 1,91,10 2,34,52 3,18,19

VNon-banking assets acquired insatisfaction of claims

16,87 16,87 16,87 16,87

VI Others 355,66,96 393,36,34 286,16,08 525,36,25

Total 1493,32,78 1279,52,58 1547,66,04 1353,57,86

SCHEDULE 12 - CONTINGENTLIABILITIES

I.Claims against the Bank notacknowledged as debts

44,31,22 39,07,70 42,83,02 51,28,08

II.Liability for partly paidinvestments

Nil Nil 138,26,00 67,27,00

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III.A. Liability on account ofoutstanding forward exchangecontracts

4266,75,30 9347,58,8810680,62,0

913016,39,92

B. Derivatives Nil 404,88,00 3207,66,70 2866,39,22

IV.Guarantees given on behalf ofconstituents

a) in India 1548,26,79 1872,70,47 2314,00,65 3496,80,71

b) outside India 61,76,97 81,03,36 287,86,55 460,35,44

V.Acceptances, endorsements andother obligations

1353,04,53 1634,02,55 2408,87,30 3135,73,38

VI.Other items for which the Bank iscontingently liable

46,05,14 27,55,35 142,56,41 11,75,19

Total 7320,19,95

13406,86,31

19222,68,7

2

23105,98,94

Profitability Ratio:

A comparison of two or more financial variables that provide a relative measure of a firm's income-

earning performance. Profitability ratios are of interest to creditors, managers, and especially owners.

Year 2004 2005 2006 2007

Profit 530.83 402.16 443.00 536.14

Non- performing Assets:

A loan or lease that is not meeting its stated principal and interest payments. Banks usually classify

as nonperforming assets any commercial loans which are more than 90 days overdue and any

consumer loans which are more than 180 days overdue. More generally, an asset which is not

producing income.

Year 2004 2005 2006 2007

Net NPA % 1.88% 1.12% 0.98% 0.47%

Earnings per share:

The term earnings per share (EPS) represents the portion of a company's earnings, net of taxes and

preferred stock dividends, that is allocated to each share of common stock

Year 2004 2005 2006 2007

Earnings 37.01 28.04 30.88 37.38

Capital Adequacy Ratio:

A ratio of total capital divided by risk-weighted assets and risk-weighted off-balance sheet items.

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Year 2004 2005 2006 2007

Ratio 22.06% 16.23% 14.66% 12.76%

sudhi credit apprasial

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