A PROJECT REPORT ONSME FINANCEAtDENA BANK (VASHI)

TOWARDS FULFILLMENT OF THE REQUIREMENTS OF POST GRADUATE DEGREE IN MASTER OF MANAGEMENT STUDIES OF MUMBAI UNIVERSITY

SUBMITTED BYNIYATI R. CHAUDHARY

MMS- ROLL NO.: M1324BATCH 2013-2015

UNDER THE GUIDANCE OFPROF. V. NARAYANAN

FATHER C.RODRIGUES INSTITUTE OF MANAGEMENT STUDIESVASHI, NAVI MUMBAI

EXECUTIVE SUMMARY

I have undertaken a study on the topic SME Finance which deals with learning the importance of financing the SME Sector at Dena Bank.SME Financeis the funding of small and medium sized enterprises and represents a major function of the general business finance market in which capital for firms of types is supplied, acquired, and priced. In India, SME is the biggest provider of employment next only to Agriculture. The SMEs constitute 95% of total industrial units and constitute 40% of total industrial output. Small and medium enterprises (SMEs) are critical for the economic and social development of emerging markets. They play a major role in creating jobs and generating income for low income people. In many emerging markets, however, access to financial services for SMEs remains severely constrained.For financing SMEs, bank offers fund based and non-fund based limits for SME. Fund limits are those in which the banks funds are directly utilized, as for instance, in the case of limits against stocks or purchasing/discounting of bills. In short in Fund based bank places certain funds at the disposal of borrowers and borrowers avail these funds.Non-fund based facilities are such facilities extended by banks which do not involve outgo of funds from the bank when the customer avails the facilities but may at a later date crystallise into financial liability if the customer fails to honour the commitment made by availing these facilities.

INDEXSr. No.TopicsPage No.

1Dena Bank- Introduction.................................................................8

2Introduction to MSME....................................................................10

3SMEs in India.................................................................................12

4Definition of MSME.......................................................................13

5SME Policy.....................................................................................16

6Common Characteristics of SMEs..................................................17

7Problems of SMEs..........................................................................19

8Steps for SME loans.......................................................................21

9Overview of Advances...................................................................23

10Methods of Assessment..................................................................27

11Ratio Analysis.................................................................................28

12Lending Methods............................................................................32

13Analysis of SME Proposal............................................................34

14My comments on financial indicators...........................................38

15Learning Experience.......................................................................41

16Conclusion......................................................................................42

17Findings..........................................................................................43

18Bibliography...................................................................................44

DENA BANK- Introduction

Dena Bank is one of the earliest nationalized banks in India; headquartered in Mumbai. Dena Bank was founded by the family of Devkaran Nanjee under the name Devkaran Nanjee Banking Company Ltd. It found its new name,Dena Bank Ltd.(DevkaranNanjee) when it was incorporated as a Public Company in December 1939. The bank wasnationalised(and therefore dropped "Limited" from its name) in 1969 along with 13 other banks in India. The bank's head office is in Mumbai, with a network of 1464 branches (as on March 2013) across the country. The bank has a network of 1427 ATMs across India (as on March 2013).Dena Bank is one of the most prestigious banks of India having a good market share. The Bank is one among the few banks to receive the World Bank loan for technological upgradation and training. They are the first bank to introduce Minor Savings Scheme, Credit card in rural India known a Dena Krishi Sakh Patra, Drive-in ATM counter of Juhu, Mumbai and Customer rating system for rating Bank Services.Products and servicesDena bank provides its banking products and services in several categories like- Personal banking Priority and SME International banking Corporate banking Retail banking Mortgage loans Credit cards

MissionDENA BANK will provide its Customers - premier financial services of great value, Staff - positive work environment and opportunity for growth and achievement, Shareholders - superior financial returns, Community - economic growth

VisionDENA BANK will emerge as the most preferred Bank of customer choice in its area of operations, by its reputation and performance

Logo

The logo of Dena Bank depicts Goddess Lakshmi, the Goddess of Wealth, according to Hindu mythology.It was the desire of the founding fathers of the Bank that the Bank should be a symbol of prosperity for all its clients, and the logo represents this promise.The contemporary 'D' in the logo reflects the dynamism, dedication and the drive towards customer satisfaction.

INTRODUCTION TO MSME

Micro, Small and Medium Enterprises (MSME) sector has emerged as a highly vibrant and dynamic sector of the Indian economy over the last five decades. MSMEs not only play crucial role in providing large employment opportunities at comparatively lower capital cost than large industries but also help in industrialization of rural & backward areas, thereby, reducing regional imbalances, assuring more equitable distribution of national income and wealth. MSMEs are complementary to large industries as ancillary units and this sector contribute enormously to the socio- economic development of the country. The MSMEs constitute over 90% of total enterprises in most of the economies and are credited with generating the highest rates of employment growth and account for a major share of industrial production and exports.

In India, the Micro, Small & Medium Enterprises (MSMEs) play a pivotal role in the overall industrial economy of the country. Micro and Small Enterprises (MSEs) always represented the model of socio-economic policies of Government of India which emphasized judicious use of foreign exchange for import of capital goods and inputs; labour intensive mode of production; employment generation; non concentration of diffusion of economic power in the hands of few (as in the case of big houses); discouraging monopolistic practices of production and marketing; and finally effective contribution to foreign exchange earning of the nation with low import-intensive operations. It was also coupled with the policy of de-concentration of industrial activities in few geographical centers. In recent years the Micro, Small & Medium Enterprises (MSME) sector has consistently registered higher growth rate compared to the overall industrial sector. With its agility and dynamism, the sector has shown admirable innovativeness and adaptability to survive the recent economic downturn and recession.

As per available statistics (4th Census of MSME Sector), this sector employs an estimated 59.7 million persons spread over 26.1 million enterprises. It is estimated that in terms of value, MSME sector accounts for about 45% of the manufacturing output and around 40% of the total export of the country.MSMEs have been established in almost all-major sectors in the Indian industry such as: _ Food Processing _ Agricultural Inputs_ Chemicals & Pharmaceuticals_ Engineering; Electrical, Electronics_ Electro-medical equipment_ Textiles and Garments_ Leather and leather goods_ Meat products_ Bio-engineering_ Sports goods_ Plastics products_ Computer Software, etc.

Small and Medium Enterprises (SMEs) In India

The small and medium enterprises segment has been a topic of intense deliberation among banks, financial institutions, industry and academicians. In India, small and medium enterprises (SME) is a generic term used to describe small scale industrial (SSI) units and medium-scale industrial units. The Small and Medium Industries occupy a very important position in any economy. Traditionally they produce certain specialized items for which they enjoy virtual monopoly of skill and expertise developed over the years. Many items produced in the small scale sector are also used as raw materials in the large scale industry and thus small scale industries contribute to large scale production in no small measure.The SME sector produces a wide range of industrial products such as food products, beverages, tobacco and tobacco products, cotton textiles, wool, silk, synthetic products, jute, hemp & jute products, wood & wood products, furniture & fixtures, paper & paper products, printing publishing and allied industries, machinery, machines, apparatus, appliances and electrical machinery. SME sector also has a large number of service industries.In India, SME is the biggest provider of employment next only to Agriculture. The SMEs constitute 95% of total industrial units and constitute 40% of total industrial output.Formerly, both Government and RBI credit policy placed emphasis on manufacturing units from the Small Scale Sector. However, in order to make the size of the unit and the technology employed by firms to be globally competitive, the definition of Small Scale Sector was revisited. Keeping in view the same and the global practices, it was decided to broaden the concept of SSI Sector by inclusion of services within its ambit as also including the Medium Enterprises in a composite sector of Small & Medium Enterprises.Subsequently, MSMED Act was operationalised with effect from 2nd October 2006, which defines an enterprise instead of an industry to give recognition to service sector and also defines a medium enterprise to facilitate technology upgradation.Banks were advised to formulate comprehensive and more liberal policies than the existing policies in respect of loans to SME Sector.

DEFINITION OF MSMEMICRO:-Micro (manufacturing) EnterprisesEnterprises engaged in the manufacturing/production or preservation of goods and whose investment in plant and machinery (original cost excluding land and building) does not exceed Rs. 25 lakh, irrespective of the location of the unit.

Micro (service) EnterprisesEnterprises engaged in the providing/rendering of services and whose investment in equipment (original cost excluding land and building and furniture, fitting and such items as in 1.1.2) does not exceed Rs. 10 lakh.

SMALL:-Small (manufacturing) Enterprises:Enterprises engaged in the manufacture/production or preservation of goods & whose investment in plant and machinery (original cost excluding land and building & the items specified by the Ministry of Small Scale Industries vide its notification No.S.O.1722 (E) Dated October 5, 2006 as furnished in Annexure I) does not exceed Rs. 5 crores.

Small (service) EnterprisesEnterprises engaged in the providing/rendering of services and whose investment in equipment (original cost excluding land and building & furniture, fittings and other not directly related to the service rendered or as may be under the micro, Small and Medium Enterprises development, (MSMED), Act 2006) does not exceed Rs. 2 crore.

MEDIUM:-Medium (manufacturing) EnterprisesEnterprises engaged in the manufacture/production or preservation of goods and whose investment in plant and machinery (original cost excluding land and building and the items specified by the Ministry of Small Industries vide its notification No.S.O. 1722(E) dated October 5, 2006) is more than Rs. 5 crore but does not exceed Rs. 10 crore.

Medium (service) EnterprisesEnterprises engaged in the providing/rendering of services and whose investment in equipment (original cost excluding land and building and furniture, fittings as such items as in 1.1.2) is more than Rs. 2 crore but does not exceed Rs. 5 crore.

Banks lending to medium enterprises will not be included for the purpose of reckoning under priority sector.Manufacturing SectorService Sector

Original Investmentin Plant & Machineryin Equipments

Micro EnterprisesUp to Rs.25 lacsUp to Rs. 10 lacs.

Small EnterprisesFrom Rs.25 lacs to Rs.500 lacsFrom Rs.10 lacs to Rs.200 lacs.

Medium EnterprisesFrom Rs.500 lacs to Rs.1000 lacsFrom Rs.200 lacs to Rs.500 lacs.

Tiny Unit would be Micro Enterprises. SSI would be Small Enterprises.

SMEs have been established in almost all-major sectors in the Indian industry such as:

1. Agriculture inputs2. Chemical & Pharmaceuticals3. Electrical, Electronics4. Bio-engineering5. Engineering6. Food Processing7. Electro-medical equipment8. Textiles and Garments9. Sports goods10. Plastics products11. Meat Products12. Computer software13. Leather and Leather goods etc.

SME Policy

Objectives The SME Loan Policy is framed with the following objectives: To improve flow of credit to SME sector. To formulate norms of lending to SME sector, to ensure availability of adequate and timely credit to the sector. To provide guidelines to the branches to dispense credit to SME sector. To devise an organizational structure at all levels for handing SME credit portfolio in a more focussed manner.

APPLICABILITY OF THE POLICY:

Our Banks loan policy document covers policy guidelines for sanctioning fund based credit facilities such as Working Capital Facilities, Term Loan facilities and all Non Fund Based facilities. In case of advances to Small and Micro units, being a Priority Sector Advance, RBI guidelines/Govt. of India guidelines are followed. Thus, the captioned policy shall always act as supplementary and not a substitute for our Banks Loan Policy.

COMMON CHARACTERISTICS OF SMEs

(a) Born out of individual initiatives & skillsSME startups tend to evolve along a single entrepreneur or a small group of entrepreneurs; in many cases; leveraging on a skill set. There are other SMEs being set up purely as a means of earning livelihood. These includes many trading and retail establishments while most countries continue SMEs to manufacturing services, others adopt a broader definition and include retailing as well.

(b)Greater operational flexibilityThe direct involvement of owner, coupled with flat hierarchical structures and less number of people ensure that there is greater operational flexibility. Decision making such as changes in price mix or product mix in response to market conditions is faster.

(c)Low cost of productionSMEs have lower overheads. This translates to lower cost of production, at least upto limited volumes.

(d)High propensity to adopt technologyTraditionally SMEs have shown a propensity of being able to adopt and internalize the technology being used by them.

(e)High employment orientationSMEs are usually the prime drives of jobs, in some cases creating upto 80%. Jobs SMEs tend to be labor intensive per se and are able to generate more jobs for every unit of investment, compared to their bigger counterparts.(f)Utilization of locally available human & material resourcesSMEs provide jobs locally and hence utilize manpower available locally. Since it is available for them to transport materials over long distances, they often improvise with materials which are available locally.

PROBLEMS OF SMES

Financial problems of SMEs: The financial problem of SMEs is the Root Cause for all the other problems faced by the SME sector. The small and medium industrialists are generally poor and there are no facilities for cheap credit. They fall into the clutches of money lender who charges very high rates of interest, or else they borrow from the dealers of their goods, who exploit them by completing them to sell their products at very low price. After the nationalization of 14 major Indian Banks in July, 1969, the Commercial banks were providing only a small proportion of SMEs financial requirements. Credit to the SME sector continues to be non-commensurate with its contribution to the total industrial output. As against the share of the village and SME at 40% in the industrial out, its share in total credit to the industrial sector is only about 30%.

Raw Material problem of SMEs: This difficulty is experienced in a very pronounced form. The quantity, quality and regularity of the supply of raw materials are not satisfactory. There are no quantity discounts, since they are purchased in small quantities and hence charged, higher prices by suppliers. Difficulty is also experienced in procuring semi-manufactured materials. Financial weakness stands in the way of securing raw materials in bulk in a competitive market.

Production problem of SMEs: SME units suffer from inadequate work space, power, lighting and ventilation, and safety measures etc. These short comings have tended to endanger the health of workmen and have adversely affected the rate of production. Many units are following primitive methods of production. Adoption of modern techniques is either disliked by the entrepreneurs is not feasible. Wage rates and service conditions of small industries are not attractive to skilled labor.Managerial problem of SMEs: Small scale industries in our country have suffered from the lack of entrepreneurial ability to develop initiative and undertake risks in the unexplored industrial fields. The inefficiency in management comes first among managerial problems. The entrepreneurial ability of promoters of cottage industries and SMEs are handicapped by technical knowhow in the areas of production, finance, accounting and marketing management.

Sickness of SMEs: A serious problem which is hampering small and medium sector has been sickness. Many small units have fallen sick due to one problem or the other. Sickness is caused by two sets of factors, Internal and external factors. From among the various internal and external causes of sickness the important ones are bad management, high rate of capital gearing, inadequacy of finance, short of raw materials, outdated plant and machinery, low labor productivity etc., Besides these factors, some aggregate economic behavior of the country such as availability of credit, volume of money supply, capital market activity or level of investment and price level fluctuations, may have important bearing on industrial sickness in the country.

Steps for SME Loans

Application for loan by SME to branch Inspection/Survey of SME by the Executives of that branch. Sending the Documents of survey by Local branch to the zonal branch Preparing credentials of Promoters and firm by branch and investigating the same Estimating the amount of loan to be sanctioned and forwarding the documents for sanctioningdocuments for sanctioning. If the loan is been sanctioned then disbursement of the loan amount into account of the SMEdisbursement of the loan amount into account of the SME.The above figure shows the steps for availing finance through Bank using loans. Here is the brief description of the above shown procedure: First of all the SME who wants to avail loan has to visit the local branch office of the bank of their area, where by the loan application is been filled by the SME. After that the executives of that branch check whether all the necessary documents are provided by the SME or not, then if all necessary documents are submitted the next step comes whereby the officials of that local branch go to the premises of that SME and just have a brief survey of promoter as well as the premises. After they are satisfied they send the file of necessary documents to the zonal branch, where by the credit appraisal takes place, which consist of credit appraisal of promoter, financial appraisal, determining cost of project, understanding various means of finance used, profitability estimate, cash flow projections , marketing appraisal etc. This step brings out the clear picture whether the loan should be given to the SME or not? If the branch is satisfied with the details then it forward the request of granting loan to the sanctioning authority. And finally after the verification by sanctioning authority, the disbursement of loan amount takes place in the account of that SME This whole procedure right from application to disbursement of loan amount takes approximately 20-25 days as the procedure involves analysis of documents by various branches and thus the movement of documents amongst them, if all this procedure would have taken place at single place then it would take only 10-12 days for disbursement.

Overview of Advances: Credit Facilities

A. FUND BASEDFund limits are those in which the banks funds are directly utilized, as for instance, in the case of limits against stocks or purchasing/discounting of bills. In short in Fund based bank places certain funds at the disposal of borrowers and borrowers avail these funds.1. CASH CREDITCash credit/overdraft is a form of credit facility in which a borrower is sanctioned a pre- arranged limit with the freedom to borrow as much money as he requires. It is operated in exactly the same way as a current account on which an overdraft has been sanctioned. In case of flow of credit to the account, he can withdraw afresh subject to the limit sanctioned. Bank charges interest on the outstanding balances.The customer need not draw at once the whole of the credit limit sanctioned but can withdraw from his cash-credit account as and when he needs the funds and deposit the surplus cash/funds proceeds of sale etc., into the account. The various types of securities against which CC is allowed are pledge, hypothecation of goods or produce, pledge of documents of title to goods, mortgage of immovable property, book debts, trust securities, etc.In CC accounts borrower is allowed to draw on account within the prescribed limit, and when required.

2. TERM LOANTerm loans are sanctioned for acquisition of fixed assets like land, building, plant & machinery, office equipments, furniture & fixture, etc for purchase of transport vehicles, for purchase of agriculture equipments, machinery & other movable assets like tractors, pumps sets, cattle, etc.The term loan would be a loan, which is not a demand loan and is repayable in terms i.e. installments irrespective of period or the security cover.Term loans are normally granted for the period varying from 3 to 7 years and in exceptional cases beyond 7 yrs.B. NON FUND BASED Non-fund based facilities are such facilities extended by banks which do not involve outgo of funds from the bank when the customer avails the facilities but may at a later date crystallise into financial liability if the customer fails to honour the commitment made by availing these facilities. Non-fund limits are those in which the banks funds are not directly involved but where the banks funds would be involved in certain contingencies.Non-fund based facilities are generally extended in the form of Bank Guarantees, Acceptances and Letters of Credit.

1. BANK GUARANTEE Bank Guarantee is a promise by Bank on behalf of its customer to a third party to pay an amount specified in guarantee deed in case the customer fails to perform the obligation as stipulated in deed.Issuing of guarantees on the behalf of their customers to third parties is one of the services rendered by banks. Such guarantees are contracts to perform the promise or discharge the liability of the constituent on whose behalf they are given, in case of his default or failure to perform the contracts undertaken by him. The party in whose favor the guarantee is given is called the beneficiary, whereas the issuing bank is called the guarantor and the third party on whose behalf of guarantee is given is called the principal debtor. Every guarantee must specify the amount and period of the liability to be undertaken by the bank.Bank Guarantee can be financial guarantee or performance guarantee.2. LETTER OF CREDITLetter of Credit is a document issued by Bank which usually provides an irrevocable undertaking for payment to a beneficiary against submission of documents as stated in letter of credit.Letter of credit (LC) is issued by the bank at the request of its customer in favor of third party informing him that the bank undertakes to accept the bills drawn on its customers up to the amount stated in the Letter of credit subject to fulfillment of the conditions stipulated therein.Therefore, when bank issues Letter of credit, it assumes responsibility to pay its beneficiary on production of bills drawn in accordance with the terms and conditions of the Letter of credit.

WORKING CAPITAL FINANCEWorking Capital Finance (WCF) is extended for carrying out normal trading/ manufacturing activities. The working capital finance is provided for a relatively shorter period generally for a period of 1 year and renewed on yearly basis considering the performance of the borrower.The Working Capital Finance is considered only after project nearing completion and after full tie up of term loan requirement.The Working Capital limits of the borrower are assessed by adopting various methods such as Projected Turnover Method (Nayak Committee Recommendation), Permissible Bank Finance Method, Cash Budget Method etc. depending upon the aggregate working capital limit required / enjoyed from the banking system, nature of activity, production cycle etc.

Methods of assessment or lending methodsType of borrowerMethod of assessment

For credit limit up to Rs 2crore (Rs 5Crore in case of MSME)Turnover MethodBut in case when working capital cycle is higher, the borrower will have the choice to be assessed under Turnover method or Modified MPBF method.

For credit limit beyond Rs 2crore(Rs 5crore in case of MSME)

Modified MPBF method.

For industries where operations are seasonal or project based in nature like tea, sugar, software, contractors, builders & developers, etcIn case of software industryWorking capital upto Rs. 2crore - Turnover method with an option to borrower to be assessed under cash budget methodWorking capital above Rs. 2crore Cash Budget Method

Contractor/ Builder & DevelopersCash Budget method or Modified MPBF method as deemed fit on case to case basis.

Other Seasonal industries viz sugar, tea, jute, etcCash Budget Method

Ratio AnalysisThe performance of a unit is judged in the following parameters:-a) Growth in salesb) Margin of profitc) Utilization (i.e. turnover) of assetsd) Financial strength/healthFinancial ratios in respect of these parameters should be calculated and used as a measure of evaluation of performance. However, ratio by themselves cannot be good or bad but must be judged against ratio of previous years or against those of similar units in the same industry or of an entire industry. Reasons for an upward or downward trend in ratios have to be found and the ratios interpreted accordingly.

1. Growth in Sales:Growth in sales is an important indicator of progress of a unit. The growth may be either in terms of value or in terms of number of unit sold. Thus, although the figures may show an increase in sales, the increase may be due to an increase in the price per unit.

The ratio for evaluating growth in sales isPercentage increase = (Current years sales - Previous years sales) *100 Previous years sales

This ratio can be calculated in terms of amount or in terms of number of unit sold.

2. Margin of profit:Every concern would like to make profit. However, the margin of profit and the quantum have to be compared over the years. There are four ratios through which this can be done.

a) Gross margin ratio = Gross Profit * 100 Net Sales

b) Operating profit margin ratio = Operating profit * 100 Net Sales

c) PBIT ratio = Profit before interest & tax * 100 Net Sales

d) Net profit margin ratio = Net profit * 100 Net Sales

The higher the ratio, the higher is the operating efficiency of the unit.

3. Utilization of Assets:The efficiency of a concern is judged from the extent to which it utilizes its assets. If assets are not fully utilized, it would mean that the money invested in these assets is lying idle and this is a cost to the firm. The assets could be land and building, plant and machinery or inventory or debtors; each of these should be utilized in such a way that they contribute the maximum towards the profits of the firm. For a manufacturing concern, the use of assets is for achieving sales and hence ratios based on sales and assets are used to evaluate performance. The following ratios are useful:-a) Total assets turnover ratio = Gross Sales Total Tangible Assets

b) Current assets turnover = Gross Sales Current Assets

c) Fixed assets turnover ratio = Gross Sales Fixed Assets

Normally, a higher ratio means better utilization of assets. However, too high a ratio (especially Current Assets Turnover ratio) could mean inadequate investment for that levels of activity-in other words, over trading.

4. Financial Strength: There are two aspects of financial strength- liquidity and solvency.Liquidity is the ability of the firm to pay off current liabilities (normally) by the conversion of assets into cash through sales. Current Ratio = Current Assets Current Liabilities

According to the guidelines given to DENA BANK the ideal level is at 1.33:1 however the acceptable level is at 1.17:1.

Liquidity can also be measured through,Net Working Capital = Current assets Current liabilitiesThe higher the ratio, the higher is liquidity.

In order to judge whether the borrower will able to pay loan installments and interest periodically, the Debt Service Coverage Ratio (D.S.C.R.) is used. It is calculated thus:

Debt Service Coverage Ratio = Net profit (after tax) + interest on long term loan + depreciation Installment of long term loan + interest on long term loan

It is also important for the bank to assess the firms debt paying capacity over a period. Such capacity is derived by calculating ratio like Debt Service Coverage Ratio minimum acceptable level is 1.50.

Debt Equity Ratio It is a financial ratio indicating the relative proportion of equity and debt used to finance a company's assets. This ratio is also known as Risk, Gearing or Leverage. A high debt equity ratio is not preferable by an investor as the company already has acquired high amount of funds from market thereby reducing the investor share over the securities available, increasing the risk.

Interest coverage ratio:- Interest Coverage Ratio is an indicator as to the number of times the profit covers the interest liability of the company. This is a risk parameter and an indicator to the extent to which the interest liability will be serviced on the time. Interest for this purpose would mean gross interest payable by the borrower and profit would mean the gross profit before interest.

Interest Coverage Ratio = Net profit + Depreciation + Interest Interest

The more the number of times of coverage of interest the better it would be for the financial strength of the company. Interest coverage should be minimum 1.5 times.

LENDING METHODS1. Modified MPBF method2. Turnover method3. Cash budget method

Modified MPBF methodFor credit limit beyond Rs 2crore (Rs 5crore in case of MSME)Contractor/ Builder & Developers (Cash Budget method or Modified MPBF method as deemed fit on case to case basis.)

1. Total Current Assets

2. Other Current Liabilities (Other than bank borrowing)

3. Working Capital Gap (WCG) (1 - 2)

4. Min. stipulated Net Working Capital, i.e. 25% of ( WCG-export receivable)

5. Actual/Projected net working capital

6. Item 3 minus item 4

7. Item 3 minus item 5

8. Maximum Permissible Bank Finance (Item 6 or 7 whichever is lower)

9. Excess borrowings representing short fall in NWC (4 - 5)

Turnover methodFor credit limit up to Rs 2crore (Rs 5Crore in case of MSME)In case of software industry when working capital upto Rs. 2crore (Turnover method with an option to borrower to be assessed under cash budget method)

1. Projected annual Turnover/Gross sales

2. Working capital requirement @ 25 % of PAT

3. Bank borrowing @20% of PAT

4. Minimum NWC @ 5% of PAT

5. Actual NWC/Projected NWC

6. MPBF [2-3]

Cash Budget methodIn case of software industry when working capital above Rs. 2croreIn case of contractor/ Builder & Developers (Cash Budget method or Modified MPBF method as deemed fit on case to case basis.)Other Seasonal industries viz sugar, tea, jute, etc

Beginning Cash Balance

Expected Cash Receipts:

Cash sales

Collection of accounts receivable

Other income

Total Cash

Expected Cash Payments:

Raw materials (or inventory)

Payroll

Other direct expenses

Advertising

Selling expenses

Administrative expenses

Plant and equipment expenditures

Other payments

Total Cash Expenses

Ending Cash Balance

Analysis of SME Proposal (Case-study)Proposal forSanction of Fresh Cash Credit Hypothecation (Stock-cum- Book Debts) limit of Rs 67.50 lacs (Rupees Sixty Seven Lacs Fifty Thousands)

Name of Business entityM/S XYZ

Business AddressMumbai

Line of ActivityTraders in Building Material & CeramicsAuthorized Distributor of ABC

Banking HistoryM/S XYZ is proprietary concern established on 01.08.2007.The firm is engaged in the business of trading of Building materials & titles and is authorized distributor of MNO since 01.08.2008. The promoter is well experienced in this line of activity.At present firm is maintaining current accounts with IDBI Bank, Abhudaya Co-op Bank, etc.They are not enjoying any credit facilities with any bank.The Credit Opinion Report from IDBI Bank has been obtained and satisfactory operation observed without having any credit facility.Further to that, Branch has also obtained Credit Report from X Bank and Y Bank and found operation is satisfactory.Business of the firm is growing and to meet the increased working capital needs of the growing business firm has requested for working capital finance.The firm is presently operating from hired shop / goes down in Mumbai.The firm has offered immovable property situated at Mumbai having realizable value of Rs.67.50 lacs as collateral security which will cover 100% of the proposed limit.The limit requested falls within the norms lay down by our Bank under Trade Finance Scheme.

The proposal Complies with the norms laid down are given here under: 1) The Firm is dealing with Commodities like Titles and building material.2) The proprietor is permanent residents of Mumbai.3) The Property offered as Collateral Security is also located within Mumbai.4) The Firm is to bank exclusively with Dena Bank for Business Purposes. All other accounts with other banks are proposed to be closed before release of the limit.5) The Firm is registered under Sales Tax.6) Sales Tax return for the current financial year 2012-13 has been obtained and verified.7) Appropriate License is issued by Competent Authority under Shop & Establishment Act.8) The limits are secured by more than 100% collateral security.9) The total DER is well within maximum permitted level as per Schemes guidelines

Details of existing facilities enjoyed / Current A/c with us, if any & conduct of accountFresh Limit Proposed.The account is newly canvassed by the Branch. The firm is not having any limit and now requested for fresh Cash Credit limit of Rs 80.00 lacs.

Details of existing limits enjoyed / Current A/c with Banks, present

1. IDBI Bank.2. Abhudaya Bank3. Kotak Mahindra Bank4. HDFC Bank5. Term Loan of Rs.38.00 lacs against Shop from Abhudaya Co-op Bank with present O/S of Rs.26.27 lacs.6. Housing Loan of Rs.9.49 lacs from Abhudaya Co-op Bank with present O/S of Rs.8.96 lacs.

Hence it is stipulated that all the above current accounts to be closed before release of Limit in compliance with Trade Finance Policy and firm to exclusively bank with us.Further, branch to obtain satisfactory credit report from the Abhyudaya Co-op Bank for loan accounts maintained with them before disbursement of proposed limit.

Key Financial Indicators(For borrowers with credit limit in excess of Rs.10 lacs or Turnover in excess of Rs.40 lacs, financial data from audited B/S to be taken)S/NDescription2010-11Audited2011-12Audited2012-13Estimated2013-14Projected

ATurnover (gross sales)341.48357.37470.00587.50

BNet Profits before Tax15.0016.7022.1525.83

CTotal Outside Liabilities115.3583.32143.77155.00

DNet Worth29.0239.3253.4770.29

EDebt Equity Ratio [c/d]3.972.122.692.20

FCurrent Ratio1.741.731.501.57

GInterest Coverage Ratio4.425.503.182.59

HCurrent Asset Turnover Ratio9.437.326.276.53

Security OfferedPrimary (1) Hypothecation of Stocks and Book debts.

Value of Primary Security(Stock + Book Debts)Stock- Rs 79.03 lacs (As per Stock Statement Nov 2011)Book debt- Rs 84.74 lacsTotal- Rs 163.77 lacs

Realizable Value of Collateral & Collateral CoverageRealizable Value : Rs 67.50 lacCoverage of collateral : 100.00%

Rate of InterestBase Rate+2.05=12.50%

Internal Credit RatingScore : 81 Grade : BBB

Computation of limits(Rs in lacs)S noParticularsAmount

AActual Turnover of previous yearRs 357.37

BProjected Turnover for current yearRs 470.00

C% change in turnover (B should not be more than 125% of A)31%

DAccepted Sales Turnover i.e. 125% of previous sales turnoverRs 446.71

EPermissible limit (20% of D)Rs 89.34

Margin requirement (5% of D)Rs 22.33

FAmount of limit RequestedRs 67.50

FMPBF (least of D & E)Rs 67.50

GOf which : Fund basedNon-Fund basedRs 67.50Nil

Actual Net Working Capital AS of 31.03.2012 against the minimum margin requirement of Rs.22.33 lacsRs.48.98

In view of the above and looking too good relationship and better business opportunity, branch has recommended for sanction of CCH Limit of Rs.67.50 lacs to the firm.My Comments on financial indicators

Sales Turnover: The sales turnover of the firm has increased from Rs.341.48 lacs as of 31.03.2011 to Rs.357.37 lacs as of 31.03.2012 representing a growth of 5%. The Firm has estimated Sales Turnover of Rs 470.00 lacs for the year 2012-13 representing a growth of 31% over the previous year, which they are confident to achieve as they have already reported a turnover of Rs.352.32 lacs for the period from April, 2012 to December,15 2012 which when amortized comes to 100%. Hence the estimated sales turnover of Rs. 470.00 lacs for 2012-13 can be considered as achievable and accepted. Similarly, for the year ending 31.03.2014 the firm has projected sales turnover of Rs.587.50 lacs representing a growth of around 25%, which is also considered as achievable looking to the past track record and availability of working capital.

Net Profit before Tax: The Net Profit of the firm shows an increasing trend over the past years. The profit margins are in the range of 3-4% which is considered as satisfactory looking to the bulk business module of the firm. The profits of the firm is at par with the Industry standards. The profits including margins are expected to improve during the current year ending 31.03.2013 and same trend is projected for 2014 and the same can be considered as achievable.

Current Ratio: The current ratio for the past two years as well as estimated/ projected for the next two years can be considered as satisfactory as the same are above the benchmark level of Policy guidelines.

Debt equity ratio: The Capital/ Net worth of the firm is strong and it is increasing due retention of retained earnings. More over the proprietor is retaining major portion of the profit in the business and hence current net worth of the firm is satisfactory.In view of the above the Debt Equity Ratio (DER) for the year 2011 & 2012 is comfortable at 3.97 and 2.12 respectively as against the maximum permissible level of 6:1 as required under Trade Finance scheme. Further the estimated/ projected DER for 31.03.2013 & 31.03.2014 is well within the maximum permissible level of 6:1 and can be considered as satisfactory.

Interest Service Coverage Ratio: The above ratios on actual basis for the last two years as well as estimated level for the current year ending 31.03.2013 are above the minimum required level and hence can be considered as satisfactory.The overall financial position of the firm is satisfactory and with the increase in business over the next years the financial position is expected to further improve.

Projected Turnover The Sales Turnover of the firm shows an increasing trend from Rs.341.48 lacs as of 31.03.2011 to Rs.357.37 lacs as of 31.03.2012 representing a growth of 5%.The Firm has estimated Sales Turnover of Rs 470.00 lacs for the 2012-13 representing a growth of 31% over the previous year, which they are confident to achieve as they have already reported a turnover of Rs.352.32 lacs for the period from April,2012 to December, 15 2012 which when they annualized comes to 105%. Hence the estimated sales turnover of Rs.470.00 lacs for 2012-13 can be considered as achievable and accepted. Similarly, for the year ending 31.03.2014 the firm has projected sales turnover of Rs.587.50 lacs representing a growth of around 25%, which is also considered as achievable looking to the past track record and availability of working capital.

Debt Equity RatioDebt Equity Ratio (DER) for the year 2011 & 2012 is comfortable at 3.97 and 2.12 respectively as against the maximum permissible level of 6:1 as required under Trade Finance Scheme. Further the estimated / projected DER for 31.03.2013 & 31.03.2014 is well within the maximum permissible level of 6:1 and can be considered as satisfactory.

Learning Experience

It was a great experience to join a Nationalized Bank for training and learning things. I learnt a lot in the Credit Department (SME) of Dena Bank. Here I worked on appraisals, which are beyond the scope of this project. The new day in the premises of the bank started with a new project report in the hands. After reading carefully the whole project report, I had to make proposals on a format of crediting appraisal of the bank. Various proposals were look after by me. After making the proposals, I handed over all the work done to my senior. He used to make necessary corrections in the work done and hence it was an opportunity for me to learn more and more.Hence the whole experience of working in such a place was amazing. I learnt to a great extent about the whole procedures to sanction a limit to the different borrowers.

Conclusions

The project gives the detailed knowledge of the whole process of sanction a limit which Dena Bank performs.Starting from the loan application from the borrower and compilation of Confidential Reports on him and the guarantor, the process continues till the disbursement of loan and after it the close monitoring till the adjustments of Banks Loan.The project was an attempt to understand and perform the work in the credit transaction and the credit appraisal which I had included in this project is just an example of it.I had worked on many such appraisals, which are beyond the scope of this project. Hence the whole experience of working in such a Nationalized Bank was amazing. I found lots of things to learn and understand here. Hence to conclude, I just state that it was a great job done in a Nationalized Bank with the experienced employees.

Findings

After undertaking the in depth theoretical study such as types of advances, SME policy of DENA BANK, CMA, working capital and various financial under SMEs, it was found that the several Industries are growing through credit/advances granted by banks and SMEs is a one of the fast growing Industries within all the sectors.

In India, the Micro and Small Enterprises (MSEs) sector plays a pivotal role in the overall industrial economy of the country. It is estimated that in terms of value, the sector accounts for about for 39% of the manufacturing output and around 33% of the total export of the country. Further, in recent years the MSE sector has consistently registered higher growth rate compared to the overall industrial sector. The major advantage of the sector is its employment potential at low capital cost. As per available statistics, this sector employs an estimated 31 million persons spread over 12.8 million enterprises and the labour intensity in the MSE sector is estimated to be almost 4 times higher than the large enterprises.

Thus SME plays a very significant role in the socio-economic development of the country.

Bibliographywww.denabank.comen.wikipedia.org/wiki/Dena_Bank

Circulars and Policy of Dena bankProposals of SME40